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Recently, in the second of the NYSE Governance and Proxy interview series, I discussed the events this season surrounding proxy disclosure, say-on-pay, activism and proxy advisory firms with Judy McLevey, Vice President, Corporate Action & Market Watch at the NYSE.

The NYSE publishes an informative proxy analytics alert that it updates weekly, summarizing the 2013 management and shareholder proposals. It reveals very few failed say-on-pay votes this season, especially among the S&P 500 companies, although more than 10% of those companies faced at least 30% opposition. Similar to past seasons, only a handful of directors received less than majority support for their elections.

As for shareholder proposals, declassification and majority voting requests are most likely to pass. Proposals to allow shareholders to call special meetings or act by written consent seem to be on the decline in terms of favorable support, and independent chair proposals continue to make waves at a few companies. The AFL-CIO submitted the most proposals from a prolific group of institutional investors, while no individual is close to John Chevedden's record, and the list of top five retail proponents will be familiar to many.

Last week, Starboard Value, which with nearly 15% of the shares of Office Depot is the company's largest shareholder, filed a complaint in the Delaware Court of Chancery to order the company to promptly hold an annual meeting to elect directors. On Monday, the company announced that it will hold an annual meeting on August 21.

Section 211 of the Delaware General Corporation Law allows shareholders to compel a meeting for the purpose of electing directors if such a meeting has not been held for 13 months. The company's last annual meeting was on April 29, 2012.

Office Depot has called a special meeting of shareholders for July 10 to vote on a proposed merger with OfficeMax. In its complaint, Starboard argued that the transaction is not a sufficient basis for Office Depot to avoid having an annual meeting.

Starboard has nominated a slate of six directors to Office Depot's board. The investor expressed support for the merger, but urged the company to change the board composition now in the event the merger is not consummated.

Since March, Starboard has pressed Office Depot, and filed notices, to schedule an annual meeting to take place prior to the merger with OfficeMax. The investor has undertaken a consent solicitation, still ongoing, to remove several existing directors in favor of Starboard's nominees.

Three whistleblowers were awarded a total of 15% of the money that the SEC will ultimately collect from its enforcement action against Locust Offshore Management LLC and its CEO, according to an order issued by the SEC on June 12.  No immediate payments were forthcoming since the SEC has not yet collected on any of the $7.5 million judgment in disgorgement and penalties. The whistleblowers are entitled to seek a portion of the $800,000 Justice Department has managed to collect so far on a related action. 

The award stems from a 2011 lawsuit against the hedge fund alleging fraud. Four claimants filed for whistleblower awards after a U.S. District Court entered final judgment in March 2012, and the SEC posted a Notice of Covered Action about the litigation a month later. The SEC Claims Review Staff recommended that the first three claimants each receive a whistleblower award of 5% because two of them voluntarily provided original information to the Commission that led to the successful enforcement, while another confirmed much of the information and identified key witnesses. 

The fourth claimant's request for an award, however, was denied. This claimant had originally submitted a tip about securities fraud involving naked shorting, which the Division of Enforcement did not act upon because it found the information to be vague or insubstantial. The Division also did not act on two additional tips the claimant later submitted. The SEC Order indicated that none of the tips contained information about the ultimate enforcement matter or even mentioned the same defendants, and the SEC action did not make allegations concerning naked short selling. In making its recommendation, the Claims Review Staff explained that this fourth claimant did not lead to the successful enforcement of the matter because the claimant's tips neither caused the Commission to open its investigation nor significantly contributed to the success of the enforcement action.
 
The SEC's first whistleblower award was announced in August 2012, as we discussed here, for the fairly nominal amount of $50,000. Compliance Week reports that last month Stephen Cohen, Associate Director of the SEC's Division of Enforcement, stated that there will likely be a change in the magnitude of some of these awards over the next 6 to 12 awards, as the program will begin to produce "extremely significant" awards.

Three whistleblowers were awarded a total of 15% of the money that the SEC will ultimately collect from its enforcement action against Locust Offshore Management LLC and its CEO, according to an order issued by the SEC on June 12.  No immediate payments were forthcoming since the SEC has not yet collected on any of the $7.5 million judgment in disgorgement and penalties. The whistleblowers are entitled to seek a portion of the $800,000 Justice Department has managed to collect so far on a related action. 

The award stems from a 2011 lawsuit against the hedge fund alleging fraud. Four claimants filed for whistleblower awards after a U.S. District Court entered final judgment in March 2012, and the SEC posted a Notice of Covered Action about the litigation a month later. The SEC Claims Review Staff recommended that the first three claimants each receive a whistleblower award of 5% because two of them voluntarily provided original information to the Commission that led to the successful enforcement, while another confirmed much of the information and identified key witnesses. 

The fourth claimant's request for an award, however, was denied. This claimant had originally submitted a tip about securities fraud involving naked shorting, which the Division of Enforcement did not act upon because it found the information to be vague or insubstantial. The Division also did not act on two additional tips the claimant later submitted. The SEC Order indicated that none of the tips contained information about the ultimate enforcement matter or even mentioned the same defendants, and the SEC action did not make allegations concerning naked short selling. In making its recommendation, the Claims Review Staff explained that this fourth claimant did not lead to the successful enforcement of the matter because the claimant's tips neither caused the Commission to open its investigation nor significantly contributed to the success of the enforcement action.
 
The SEC's first whistleblower award was announced in August 2012, as we discussed here, for the fairly nominal amount of $50,000. Compliance Week reports that last month Stephen Cohen, Associate Director of the SEC's Division of Enforcement, stated that there will likely be a change in the magnitude of some of these awards over the next 6 to 12 awards, as the program will begin to produce "extremely significant" awards.

Governance surveys indicate that the S&P 500 companies have largely dismantled their takeover defenses and have established so-called “good” governance practices, but that is not the case for all of the large-cap companies. Netflix recently held its annual meeting where a nearly unprecedented five governance shareholder proposals were on the ballot. While none of the proposals’ sponsors actively campaigned, not even filing any notices of exempt solicitations, almost all of the proposals won by a vast majority that was far above the average vote results. The outcomes were particularly high given that insiders own more than 9% of the company.

A proposal to declassify the board received 89% in support. A proposal asking the board to adopt majority voting in director elections won 81%, while another seeking a simple majority vote as the criteria for shareholder approval was favored by 81% of shareholders. In what may be the strongest vote on this proposal, 73% of shareholders endorsed having an independent chair. Only a retail version of a proxy access proposal failed to garner majority support. In addition, likely in response to putting in place a poison pill last year without shareholder approval, 2 directors barely received a majority of votes for their election while one director received a little over 49%.

These results may be somewhat surprising in light of the well-publicized acquisition of Netflix shares by Carl Icahn in the fall, which led the company to adopt the poison pill and presumably argues for maintaining its available defenses. In addition, more than an 80% increase in the company’s stock performance since the beginning of the year did not seem to persuade shareholders to vote with the board’s recommendations.

As the company has faced similar results before without making changes, it is not clear that it will be following the majority of S&P 500 companies after this meeting. In 2011 a majority vote proposal received 73% support, while in 2012 both a proposal to declassify the board and give shareholders the right to call special meetings passed. According to SharkRepellent, Netflix is among only 7% of S&P 500 companies with a poison pill in force, 15% with a classified board, and 8% that have not adopted a majority or plurality-plus vote standard to elect directors. It is also in the minority in not giving shareholders the right to call special meetings and requiring a supermajority vote to amend certain charter and bylaw provisions.

The Administrative Review Board of the Department of Labor concluded that Lockheed Martin had violated Section 806 of the Sarbanes-Oxley Act after an employee alleged that the company retaliated against her for reporting suspicions that a supervisor was improperly using corporate assets. The company then appealed to the Court of Appeals for the Tenth Circuit.

The whistleblower protection provision of Section 806 provides that employees of public companies must not suffer retaliation for reporting conduct that they believe constitute mail fraud, wire fraud, bank fraud, securities fraud, any violation of SEC rules or any provision of federal law relating to fraud against shareholders. The Review Board established that the Lockheed employee reasonably believed that her supervisor had committed mail or wire fraud and communicated that belief to the company. The company argued that there was no fraud against shareholders, which it claimed was a necessary element of the violation in question in order to seek protection under Section 806. The Court disagreed.

The Court determined that the statute provides whistleblower protection for reporting any of six categories of employer conduct, and rejected the notion that the statutory language regarding "relating to fraud against shareholders" modifies each of the enumerated activities. The Court decided that since the other provisions are all clearly elements of federal law, the company's reading of the statute would render their enumeration superfluous. Therefore, in this case, the employee did not need to allege that the violation also constituted a fraud against shareholders.

The company also argued that the Review Board's interpretation did not warrant deference by the Court because it reflects a change in the agency's previously expressed position. The Court held, however, that since the Review Board's interpretation is based on a permissible construction of the statute, deference is appropriate and an employee complaint need not specifically relate to shareholder fraud to be protected.

The controversy surrounding proxy advisory firms has reached Congress, as the House Capital Markets and Government Sponsored Enterprises Subcommittee held a hearing yesterday to examine the role proxy advisory firms play in corporate governance. In its press release, the House Subcommittee indicated that the two largest firms control 97% of the market. Subcommittee Chairman Scott Garrett (R-NJ) expressed concern that proxy advisory firms were aligned with “special interest agendas” and have “increasingly teamed up with unions, pension funds, and other activist shareholders to push a variety of social, political, and environmental proposals that are generally immaterial to investors and often reduce shareholder value.” In an interview, he questioned whether ISS has empirical data to justify its promotion of annual say-on-pay votes, because “Congress wanted to create some flexibility in this issue and raised the point that all companies are not created the same, but apparently they think they know better than Congress does here.”

ISS and Glass Lewis were not on the witness list. According to news reports, it appears they were not invited to participate. Instead, those giving testimony included representatives from the Chamber of Commerce, the Center on Executive Compensation, the Shareholder Communications Coalition, the Florida State Board of Administration, the National Investor Relations Institute, the Society of Corporate Secretaries & Governance Professionals, the Council of Institutional Investors and the Public Employees’ Retirement Association of Colorado.

Witnesses debated the influence of the firms on proxy voting. NIRI claimed that the firms’ recommendations can lead to a 15 to 30 percentage point differential and that small and medium-sized investors without separate governance staffs tend to follow the firms’ advice in particular. Darla Stuckey from the Society stated that some investment managers openly admit to companies that they follow proxy advisory firm recommendations without questioning them, and for that reason see no point in engaging with companies on issues. Lynn Turner, a former chief accountant at the SEC and also a former head of research at Glass Lewis, agreed that not all investors are able to examine every proxy, but argued that most are using advisory firm recommendations as one factor in their decisions.  CII believed that their importance has greatly declined in recent years, as investors have developed their own expertise in light of increased interest in proxy voting. 

Almost everyone agreed, however, that the firms need to be more transparent in providing rationales for their policy decisions as well as methodologies for voting recommendations. Many also expressed concerns about errors in the reports, and potential conflicts of interests involving companies, proponents of shareholder proposals and activists who instigate “vote no” campaigns, who may be clients of the advisory firms while those firms are providing recommendations about matters in which those clients have an interest. Criticisms were also lobbed at the SEC for failing to provide any oversight of the advisory firms, while the regulatory agency itself has acknowledged the firms’ significant influence on the proxy voting system.  Witnesses disagreed as to the level of SEC involvement, and whether regulatory intervention is necessary at all. 

Commissioner Gallagher recently lamented that the SEC has played a "significant role" in the rising influence of proxy advisory firms and the increasing willingness of investors to rely on them.  He blamed the rules adopted in 2003 under the Investment Advisers Act, which focused on an investment adviser's fiduciary obligation to its clients when the adviser has the authority to vote its clients' proxies. 

Those rules address the SEC's concerns about potential conflicts when an adviser votes a client's securities on matters that affect its own interests.  For example, if a broker-dealer that is affiliated with an adviser provides investment banking services to an issuer that is soliciting proxies, the SEC believes that relationship could influence the adviser to vote its clients' proxies in its affiliate's interest, rather than in the best interests of its clients.  As a result, Rule 206(4)-6 under the Advisers Act requires registered investment advisers to adopt and implement policies and procedures designed to ensure that their clients' proxies are properly voted.

An investment adviser can demonstrate the absence of a conflict if the adviser voted the proxies in accordance with a policy based on the recommendations of an independent third party, even though the recommendations may be consistent with the adviser's own interests.  The SEC staff later issued two no-action letters, one to Egan-Jones and another to ISS , affirming that "the recommendations of a third party that is in fact independent of an investment adviser may cleanse the vote of the adviser's conflict."  The Staff also indicated that a proxy advisory firm could be considered independent even if it was paid fees by issuers for other services.

Commissioner Gallagher stated that the SEC may find it difficult to ensure that fiduciaries are conducting proper due diligence with respect to proxy votes unless these no-action letters are reviewed and possibly revisited.  He raised a number of questions that he believes should be asked about the advisory firms, including whether they should be subject to proxy solicitation rules and how they can be held accountable for their recommendations.

The no-action letters, in fact, already contain certain requirements regarding an adviser’s reliance on a proxy voting firm, including ascertaining that the firm has both the capacity and competency to adequately analyze proxy issues and make such recommendations in an impartial manner.  This may involve obtaining information about the firm's relationship with an Issuer, such as the amount of compensation the firm has received or will receive from an Issuer.  An adviser’s procedures should address the use of third parties to make proxy voting recommendations if material.  After a request for clarification from ISS, the SEC Staff noted that the steps an investment adviser takes in evaluating a proxy voting firm depends on the facts and circumstances, and need not always be done on a case-by-case basis.

Commissioner Gallagher also blamed the SEC disclosure requirements for turning proxy statements into “law school text books," and therefore, “who can blame an investor for not voting when reading a proxy and voting a proxy card evoke memories of studying for a final exam?”

While we wait for the SEC to act on the Dodd-Frank mandate on recoupment of executive compensation, Walmart will be facing an unusual shareholder proposal on the topic this coming week.

The proposal asks that the board adopt a policy to disclose annually whether the company in the previous fiscal year recouped compensation from any senior executive or caused a senior executive to forfeit an outstanding award, after determining that the senior executive breached a company policy or engaged in conduct “inimical to the interests of or detrimental to Walmart.” Walmart has an existing policy that is fairly broad in covering possibilities of recoupment if employees violate company policies or otherwise engage in actions that are not in Walmart’s best interest. As nearly 87% of Fortune 100 companies have reportedly already adopted clawback policies, it is a reflection of the evolution of these policies that the Walmart proposal focuses on disclosure of recoupment actions actually taken.    

Even the eight proponents, in several notices of exempt solicitations, acknowledge that Walmart’s policy is “relatively strong,” but they argue that the disclosure being sought would further reinforce the policy and communicate “concrete consequences for misconduct.” The proponents are clearly seeking to discover whether the company’s policies have been applied, given recent controversies surrounding Walmart. The company argues that the proposal is unnecessary since it believes that existing SEC rules require disclosure of when compensation has been recouped from NEOs, including the amount, as well as the reasons for the recoupment if material. Both ISS and Glass Lewis are supporting the proposal. 

The SEC in April rejected McKesson's attempt to exclude a proposal similar to Walmart's, finding that it is neither vague nor constitutes ordinary business. That proposal also attempts to strengthen the aspect of the company's existing policy which differs from Walmart's, by removing the requirement that a clawback is triggered only by intentional misconduct that causes a restatement or material impact on financial results. Only 25% of the policies of the Fortune 100 companies contain triggers not associated with financial restatements, according to a 2012 Equilar study.

It has been a busy year for activists interested in clawback policies. Earlier this proxy season, a group of six pharmaceutical companies agreed to adopt a set of recoupment principles after discussions with 13 investors led by UWA Retiree Medical Benefits Trust, the lead proponent of the Walmart proposal. Unlike most policies that are only triggered when there is a financial restatement and seek to recover compensation already paid, these principles give the compensation committee the discretion to recoup compensation that has not been awarded or vested and can also be triggered upon a material violation of company policy related to the sale, manufacture or marketing of health care services that causes significant financial harm. The persons targeted extends beyond the responsible individuals to potentially include supervisors. The principles include public disclosure concerning decisions to recoup compensation, but only in compliance with SEC rules. 

As a result of separate discussions, Capital One agreed with the New York City Comptroller's office to disclose how much it recoups under its clawback policy, provided that the underlying event has already been publicly disclosed. Wells Fargo and Citigroup also committed to consider disclosure of their clawbacks on a case-by-case basis. 

The recent PCAOB reproposed auditing standards on related parties and significant unusual transactions also include a modification to Auditing Standard No. 12, Identifying and Assessing Risks of Material Misstatement, focused on executive compensation. 

The amendment broadens the current standard that requires auditors to consider performing procedures to achieve an understanding of compensation arrangements with a company's senior management. The revised standard, which the PCAOB calls an “incremental expansion,” mandate that the auditor perform procedures in order to understand the potential risks of material misstatements posed by incentives and pressures arising from a company's financial relationships and transactions with its executive officers, including executive compensation arrangements.  Perks are specifically mentioned as being part of the arrangements to be examined.

In response to comments critical of the original proposal from February claiming that the performance of these procedures by the auditor could ultimately affect the design of compensation arrangements, the reproposed amendment clarify that the auditor's procedures in this area would be performed as part of the auditor’s risk assessment process. It would not require the auditor to make any determination regarding the reasonableness of compensation arrangements or recommendations regarding those arrangements. However, the procedures are designed to increase the auditor’s focus on incentives for and pressure on the company to achieve a particular financial position or operating result, given the role that a company's executive officers may play in the company's accounting decisions or financial reporting. For example, the auditor could consider whether the company’s internal control over financial reporting is designed and operating to address risks that management might seek accounting results solely to boost certain executive officers’ compensation.

The audit procedures would include reading employment contracts, proxy statements and filings with the SEC and other regulatory agencies. The auditor can also consider asking the compensation committee chair and the compensation consultant about the executive compensation structure as well as obtain an understanding of the policies and procedures for the authorization and approval of executive officer expense reimbursements. 

The comment period ends on July 8th, and no comments have been received to date. If the reproposed standards are approved by the SEC, they would apply to audits of financial statements for fiscal years beginning on or after December 15, 2013.

Seeking injunctive relief, shareholders of Groupon complained that the company improperly aggregated separate and distinct amendments to Groupon's 2011 incentive plan to be voted on at its annual meeting on June 13, 2013. In the initial proxy statement, a proposal on the company's ballot asks shareholders to approve amending the plan to increase the total number of shares currently authorized as well as the amount that could be granted to any individual. 

After plaintiffs filed a demand letter seeking supplemental disclosures, the company amended its proxy statement to inform shareholders that the board has already granted its chief operating officer an amount of shares in excess of the individual limit back in January. The plaintiffs' letter asked the company to rescind the award, but the company instead asked shareholders under the same proposal to ratify the previous board action by making the effective date of the plan amendment, if approved, January 2013.

The plaintiffs argue that the company improperly bundled distinct actions, and in fact is asking for three separate approvals in one proposal. The proposal intends to amend the total amount allowed under the plan, a general increase of the limits permitted for each plan participant, and also seeks approval of the ratification of an existing award already made to an executive. The plaintiffs allege that shareholders must accept all amendments even if they favor the general increases but do not want to ratify the prior award.

It is unclear whether the unique circumstances related to the previous executive grant motivated the plaintiffs' actions, as the complaint indicates that the plaintiffs agree with the overall increase to the total amount of shares, but not with any of the increases being sought for individuals, either generally or for the specific award being ratified. Some have been concerned that the Apple action early in the proxy season will inspire a wave of unbundling lawsuits for annual meetings.   

President Obama has named Kara Stein, Democrat, and Michael Piwowar, Republican as nominees for SEC Commissioners.  Both are currently Senate aides. 

Ms. Stein is currently legal counsel and senior policy advisor to Senator Jack Reed, who is a senior member of the Senate Banking Committee, and would replace Commissioner Elisse Walter.  If confirmed, her term would expire in June 2017. 

Mr. Piwowar is an aide to Senator Mike Crapo and the Banking Committee’s Republican chief economist.  He is being nominated to replace Commissioner Troy Paredes with a term to expire in June 2018 if confirmed. 

The Council of Institutional Investors is urging the SEC to take action in response to news reports that Broadridge will discontinue its practice of providing voting tallies to proponents of shareholder proposals. It is unclear whether many were even aware that Broadridge was providing this information to shareholder proponents who used the company to distribute materials to investors.

Its letter urges the SEC to immediately end the “patently unfair and arbitrary change in practice” as well as to determine whether regulatory reform is necessary.  The letter indicates that Broadridge’s decision, the timing in particular, “raises deeply troubling questions about the fairness and impartiality of the proxy system,” a repeated theme throughout the brief communication. 

CII expands its outrage with respect to the availability of vote tallies by complaining generally about Broadridge’s near monopoly over proxy distribution, advocating for additional time to further consider proposed changes to the NYSE rules related to fees charged for distributing proxy materials. These are fees that issuers ultimately pay, and represent a highly expensive burden for many companies.

CII complains that, given its broad coverage, Broadridge should be obligated to, on its own or as required by regulators, demonstrate “fairness” to all interested parties. CII also cites the prior Broadridge practice of having a “vote all items with management” button, which was removed after involvement by the SEC staff, and its belief that Broadridge processes shareholder communications to investors more slowly, as further evidence that Broadridge is biased toward issuers. Ultimately, CII wants the SEC to prioritize a review of the role of proxy distributors and “lack of impartiality in the proxy process.”

Apparently a spokesman for Broadridge has indicated that they would like the SEC to settle the issue, so there may be additional interest in having the SEC weigh in.   

The events at CF Industries' annual meeting last week set several records for shareholder proposals. All four shareholder proposals on its ballot passed. That alone is fairly unusual, but three of them were focused on social issues. 
  
A proposal seeking disclosure of corporate political contributions won 66% of the votes, a marked difference from the prior record of 53% for the same proposal at Sprint two years ago. Another proposal asking the company to provide a sustainability report on ESG issues resulted in the highest support any socially oriented proposal has ever received, with 67%. Finally, a proposal seeking board diversity passed with 51% of the shareholders in voting in favor, even though Glass Lewis recommended against it. Glass Lewis supported the other two proposals. ISS favored all three.

The success of these social proposals is surprising, while the overwhelming support received on the fourth proposal asking the board to eliminate supermajority voting standards is consistent with how these types of proposals have fared at other companies. 

There were no obvious signs of any active campaigns against the company. At this year's meeting, the company also included its own proposal to move to annual elections for directors after two consecutive years of shareholder proposals seeking declassification were supported by more than 90% of votes cast each time. The company action may have been prompted by the strong opposition the lead director encountered last year, winning only 44% in favor of his election, for not acting on the proposal.

It appears that prior to the lone declassification proposal in 2011, the company traditionally did not receive shareholder proposals. After not responding, in 2012 the company faced the declassification proposal again, as well as a majority voting proposal, both of which passed handily. The results this year continue the rare tendency of every shareholder proposal obtaining a majority of votes. 

According to several news outlets, Chairman White declared during her testimony before the House Financial Services Committee on Thursday that "no one is working on a proposed rule," in response to questions about whether the SEC will require companies to disclose political contributions. The Chairman indicated that the SEC's review of the rulemaking petition soliciting this disclosure is "not completed."

The Washington Post reports that House Republicans were disturbed to learn that the SEC is considering such a petition, believing the initiative to be "highly partisan" in light of the controversy surrounding the IRS' examination of certain groups. Representative Scott Garrett of New Jersey pressed Chairman White to commit that the SEC will not be "bullied by these outside radical groups." However, Chairman White declined to take a position. The petition has gained more than 500,000 comments, largely in support, much of which are signed form letters.

Chairman White has also responded to an April letter from Senate Commerce Committee Chairman Jay Rockefeller about cybersecurity disclosure. Senator Rockefeller previously asked the SEC to elevate its existing SEC staff guidance on disclosure obligations regarding cybersecurity risks and incidents to a Commission level. In his view, the disclosures remain insufficient for investors to determine the costs and benefits of companies' cybersecurity practices.  

Chairman White's letter stated that after undertaking a review of compliance with its guidance beginning in 2012, the SEC staff has issued comments to about 50 public companies. The staff is evaluating the impact of the guidance and Chairman White has asked them to provide her with a briefing on the current disclosure practices, compliance and any recommendations for future actions.

When we wrote that Rule 10b5-1 plans were back in the news in our January memo, it turns out that this continues to be accurate even now as the Wall Street Journal recently reported on the Council of Institutional Investors’ follow-up letter urging the SEC to regulate these trading plans. Richard Sandler in our capital markets practice discusses some of the main issues surrounding these plans and the CII proposal. 

• Initial adoption of plans.  What should companies consider in terms of allowing executives to adopt these plans?
  
  Since the benefits of Rule 10b5-1 are only available if an insider adopts a plan while not in possession of any material nonpublic information, the window period immediately after the company announces earnings would be the best time for executives to adopt plans. CII asks that the SEC permit insiders to adopt plans only during open trading windows. In addition, CII would like the SEC to ban the ability to adopt multiple, overlapping plans. 
  
  
  
• Waiting period before first trade. Is a waiting period before the first trade under the plan recommended?
  
  While a delay is not required, a waiting period after adoption, and before the first trade, is viewed as a good risk management strategy. The purpose of the waiting period is to help support a conclusion that no trading took place based on inside information. 
  
  There is some debate as to how long the waiting period needs to be. While the CII recommendation is for three months or more, this is a longer time period than most practitioners would employ. Current practice varies from 10 days to the next open window.
  
  
  
• Modifications to the plans. What are the concerns with permitting modifications or amendments to the plan?
  
  The CII proposal would prohibit frequent modifications or cancellations of 10b5-1 plans.  It is hard to argue that a constant pattern of plan amendments and modification may not be problematic. If the amendments are extensive, consideration should be given as to whether it becomes akin to adopting a new plan that should have the same safeguards discussed above.
  
  
  
• Termination or cancellation of the plans. What if an executive changes his or her mind and would like to terminate a plan?
  
  A plan can be terminated or suspended at any time, even if an insider has material nonpublic information. In our experience, an executive may wish to terminate a plan before impending bad news to avoid looking like his sales were affected by the news, even if his plan was put into place way before. In the event of a termination, companies need to give careful thought as to when it would be appropriate to put another plan in place.   
  
  
  
• Disclosure of the plans.  Should companies disclose that their executives have entered into 10b5-1 plans?
  
  CII would like companies to disclose adoptions, amendments, terminations and transactions. Currently, companies take different approaches as to announcing the initial adoptions of plans. We suggest that Form 4s disclosing sales under the plans indicate that those sales are made pursuant to a 10b5-1 plan.
  
  
  
• Oversight by the company.  What kind of oversight mechanisms should companies have in place?
  
  We believe that at a minimum, most companies require pre-approval of an executive’s entry into a plan, if not pre-approval of the plan itself. Some companies consider imposing certain limits regarding the percentage of holdings that can be subject to the plan, establishing rules for setting price floors, or disallowing certain types of plans that give brokers the ability to determine whether, how and when to make purchases. Not surprisingly, CII is seeking expansive board involvement, including having boards adopt policies covering plan practices, monitor plan transactions and ensure that the policies are consistent with any hedging, holding and ownership requirements.

The resignation of Occidental’s chairman at the company’s annual meeting, which has been widely reported, was subject to an unusual majority vote provision. 76% of the votes cast opposed Mr. Irani’s election to the board. As is fairly common with majority voting, the company’s bylaws require any nominee who receives a greater number of votes against his election than in support of such election to tender his resignation. However, rather than having the board consider whether to accept the director’s resignation and publicly announce its decision within 90 days, Occidental’s bylaws provide that the resignation becomes effective upon the earlier of acceptance by the board or October 31 in the year of election. In other words, the bylaws do not allow the board to reject the resignation, for any reason.

The majority vote bylaw was adopted in 2011 following the outcry over the compensation paid to Mr. Irani, who was then CEO of the company. As a result of the most recent controversy, Occidental made additional governance changes. Some of the more unconventional reforms the board adopted include the rotation of the positions of independent chairman and committee chairs every five years, prohibiting former CEOs of the company from sitting on its board and having the mandatory retirement age for CEOs set at 68. Both executive and director compensation, which had been subject to criticism, were also decreased, with the CEO promising to forego any bonus and certain other compensation during his remaining tenure. In addition, the company pledged to have an independent chairman elected from among the independent directors and create a committee focused on management succession.

In an unusual collaboration, Relational Investors and CalSTRS succeeded this week in having a majority of shareholders support CalSTRS’ shareholder proposal recommending that the board and management "act expeditiously" to engage an investment bank to effectuate a spinoff of Timken's steel business. CalSTRS’ precatory resolution was favored by 53% of the votes cast.  Given that insiders and affiliates own about 15% to 17% of the company, the activists claimed that at least 65% of non-affiliates supported the proposal. 

Timken indicated that its board would evaluate the results and announce its next steps within 45 days. Relational and CalSTRS are threatening a proxy contest if the company does not follow through with the proposal’s request. The two investors reportedly own 7% of the company together, although the company disclosed that CalSTRS’ share ownership represents less than 1%.

While being far short of a proxy contest, the activist campaign was intense, as evidenced by the number of exempt solicitations filed by Relational and CalSTRS beginning in November, and additional soliciting materials submitted by the company in response. Each side also used social media, with dueling websites devoted to its version of the debate (Unlocktimken.com from the activists and TimkenDrivesValue.com by the company.) 

ISS and Glass Lewis both supported the shareholder proposal. CalSTRS also took issue with the election of several director nominees, including the cousin of a founder serving as an independent director of the audit committee. In another example of how the activists’ collaboration shifted the usual allegiances, a union of steelworkers strongly opposed the proposal.

Relational Investors argued that since the proposal is non-binding, a “yes” vote carries “no downside,” but a “no” vote could send share price lower. Since the proposal was announced in November, the stock price has increased by 38%. 

Shareholder proposals on major business strategies is uncommon. According to the Wall Street Journal, only 10 other such proposals to break up a company or divest assets have been made since 2005. Other companies also received proposals calling for board review of major transactions this year, but many were excluded on grounds of vagueness or under the ordinary business exception when the proposals combined both non-extraordinary and extraordinary transactions. The success of this one, however, could inspire other examples that withstand SEC challenge, and generate active campaigns.

A key question under the new standards taking effect July 1 (described in our client memo here) is whether a particular firm or person should be deemed to be serving as an “adviser to the compensation committee” and therefore subject to the requirement that the committee make a prior determination as to independence. Advisers retained directly by the committee are of course covered by this term, but what about advisers to the company who also provide advice to the committee? We think that a company adviser who regularly presents to the committee should be deemed an adviser to the committee, and therefore should be subject to an independence determination now. Companies should also consider making a predetermination as to other advisers who have been retained by the company and who may be called on to provide advice to the committee. The reason to consider predetermining independence now is that the determination should be made prior to the committee receiving the advice. If you would like company advisers to be able to provide advice to the committee if an unplanned situation develops during the year, predetermining independence now could avoid a scramble later.

Remember that the new rules merely require compensation committees to consider the independence of their advisers. They do not provide or imply that committees must or should retain independent advisers. Thus a finding that an adviser is not independent should not of itself impair the committee’s ability to rely upon the advice. Nor is any aspect of the mandated independence review required to be disclosed publicly, other than proxy disclosure concerning compensation consultants. This disclosure requirement does not apply to other advisers such as legal counsel. 

We previously discussed the requirements for NYSE companies here. Today, Cindy Akard talks about the required changes to committee charters for Nasdaq companies.

• Are any charter amendments required by July 1?
  
  No. Compensation committees have additional responsibilities by July 1 related to compensation committee advisers, but they can reflect these in a committee charter, committee resolution or other board action. However, some Nasdaq companies might want to go ahead and amend their charters by this July 1 deadline, because they will eventually have to include these additional responsibilities in the charters by the later deadline in 2014.
  
  
• Can you summarize the resolution, action or the amendments to the charter that are required by July 1?
  
  In a charter, resolution or other board action, Nasdaq-listed companies must provide the compensation committee with the authorization to engage their own advisers and be directly responsible for the appointment, compensation and oversight of their work. The committees must have appropriate funding to pay the advisers. Before engaging these advisers directly, or even receiving advice from any other advisers, the committees must take into account specific independence factors.
  
  
• Are there additional changes to the charter required in the future?
  
  Yes. By the earlier of October 31, 2014, or their first annual meeting after January 15, 2014, Nasdaq rules state that compensation committee charters “must specify” the adviser requirements noted above, as well as the scope of responsibility of the compensation committee and how it is carried out, the committee or board’s responsibility for determining CEO and executive officer compensation and that the CEO may not be present during voting or deliberations on his or her compensation.
  In addition, if a committee charter addresses committee member independence, companies may want to reflect the requirement to evaluate and determine membership under the new independence standards.
  
  
• When is certification to Nasdaq required?
  
  A certification is required within 30 days after the final implementation deadline in 2014. We understand Nasdaq is planning to provide a form of certification.
  
  
• Where can we find these rules?
  
  Nasdaq has updated its Marketplace Rule 5605(d), with the effective dates listed in Rule 5605(d)(6).