Developments in Securities Regulation, Corporate Governance, Capital Markets, M&A and Other Topics of Interest. MORE

A group comprised of parents whose children or spouses were victims in the Sandy Hook tragedy, together with the Law Center to Prevent Gun Violence, have filed a brief in support of Trinity Wall Street in a case where Wal-Mart is attempting to exclude a shareholder proposal.  Separately, a group of law professors have also filed a brief in support of Trinity Wal-Mart.  Finally, Wal-Mart filed its reply brief, concluding its briefing efforts.

The brief filed by the relatives of the Sandy Hook victims argues Wal-Mart and the various amici act as if the proposed resolution required Wal-Mart not to sell a specific product. The proponents believe it does not. Rather, it requires a specific board committee to do precisely what boards are supposed to do – oversee management in the development and implementation of policies.

The brief filed by 38 professors of corporate and securities law is persuasive, mostly restating and recovering Trinity Wall Street’s analysis. According to the professors, Trinity Wall Street’s proposal is the “perfect” illustration of the appropriate use of a shareholder precatory proposal to provide a company’s board with important information about shareholders’ financial and nonfinancial concerns, without limiting the board’s authority to exercise its business judgment or interfering with the day-to-day operations of the company.  The professors make the point that Wal-Mart seeks to stretch two Rule 14a-8 exemptions to such a degree that, together, they threaten to swallow the entirety of the rule. Under Wal-Mart’s expansive view of the two exemptions, any shareholder proposal will either be too specific (and thus infringe on “ordinary business operation”) or be too general (and thus “inherently vague and indefinite”).

When Keith Higgins, Director, SEC Division of Corporation Finance, gave his February 10 speech that touched on this case, I could see the litigants seizing upon it.  Wal-Mart, in its reply brief, believes Mr. Higgins is in their camp.  Wal-Mart notes that “the SEC staff has had no second thoughts about its analysis of Trinity’s Proposal” and highlights Mr. Higgins’ view that “the key is to consider whether the underlying subject matter of the committee involves an ordinary business matter.”  Wal-Mart also defends its gun sales policy by noting sales of the subject weapons are made in stores where there are “concentrations of hunters and sportsmen” and there is no “gap in the Company’s governance” or any “systematic failure of the board to exercise oversight.”

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The NYSE proposes to amend Section 402.05 of the Listed Company Manual to clarify that listed companies soliciting proxy material through brokers or other entities must comply with SEC Rule 14a-13.

Rule 14a-13 mandates that listed companies must inquire of the record holder whether other persons are beneficial owners of the subject shares and, if so, how many copies of the relevant proxy or other soliciting materials must be provided to supply such materials to the beneficial owners. SEC Rule 14a-13 further sets forth the timeline on which inquiry of the record holder must be made.

The Listed Company Manual, in addition to requiring compliance with Rule 14a-13, also separately states that a listed company’s inquiry of brokers must be made not less than 10 days in advance of a record date. The NYSE imposed this absolute 10 day minimum in recognition of the fact that the provisions of SEC Rule 14a-13 allow, in certain limited circumstances, for a listed company to inquire of brokers less than 20 days in advance of a record date for a special meeting (but not for an annual shareholders’ meeting).

The NYSE believes that the 10-day period presently described in Section 402.05 is in conflict with the requirements of Rule 14a-13. For example, although the NYSE makes specific reference to the SEC’s 20-day advance inquiry rule (i.e., SEC Rule 14a-13), the NYSE believes Section 402.05 could be read as requiring only a 10-day advance inquiry.

The NYSE proposes to revise Section 402.05 of the Listed Company Manual to clarify that listed companies soliciting proxy material through brokers or other entities must comply with the provisions of SEC Rule 14a-13 and that the NYSE does not impose any additional requirements with respect to the relevant inquiry of brokers. Further, the NYSE proposes to delete the requirement in Section 402.05 of the Listed Company Manual that listed companies immediately advise the NYSE if it becomes impossible for them to make an inquiry of brokers at least ten days before a record date. Given that listed companies are required to comply with SEC Rule 14a-13 and the NYSE has no authority to waive compliance with such rule, the NYSE believes that such notice requirement is unnecessary.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

SEC Commissioner Daniel M. Gallagher delivered a speech where he considered the role of bad actor disqualifications in the context of the SEC’s enforcement initiatives.  According to the Commissioner, the purpose of bad actor disqualifications can be viewed either as: (i) to reduce  the likelihood of future fraud, or (ii) to enhance the SEC’s ability to punish serious misconduct beyond the statutory and judicial limits otherwise imposed on the SEC’s enforcement remedies, which Commissioner Gallagher refers to as sanction enhancement.

Commissioner Gallagher  was referring to the practice recently followed by the SEC Enforcement Division of not allowing respondents to condition settlements on the granting of waivers for bad actor disqualifications.  The Commissioner disagrees with the practice because automatic disqualifications are, in fact, blunt tools that were intended to serve a purpose distinct from enforcement sanctions.  He believes, as do I, that automatic disqualifications are not, and were never intended to be, either remedial or punitive in nature, and therefore historically have been handled outside of the sanctioning process.  Treating the waiver consideration process like the enforcement sanctioning process effectively, and inappropriately, conflates automatic disqualifications with remedial and punitive sanctions.

The Commissioner noted if a disqualification is now a sanction, then the waivers for bad actor disqualifications must be part of the settlement negotiations.  Settlement should bring finality, and he cannot fulfill his duty as a Commissioner to cast a vote in favor of a recommendation without the ability to accurately assess what punishments will be meted out to a respondent as a consequence of his action, and whether those punishments are just given the nature of the violation.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

ISS has published Industry Group US TSR Medians for Performance-Related Policies.  The publication was solely for informational purposes.

Company performance relative to industry medians is incorporated into ISS’ evaluation of shareholder proposals seeking an independent chair and for ISS’ evaluation of director performance. However, the TSR sector medians in ISS’ reports are updated monthly and align with the subject company’s fiscal year end.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

On January 16, 2015, the Commodity Futures Trading Commission (CFTC) fined an asset manager, using financial instruments to hedge its clients’ risk, for failing to register as a Commodity Trading Advisor (CTA).  See Summit Energy Services Inc., CFTC Docket No. 15-12.  Without admitting or denying any finding or conclusions, the asset manager agreed to pay $140,000 and register as a CTA.

The asset manager assisted commercial clients in purchasing the physical natural gas and electricity needed for their commercial needs. As part of that assistance, the asset manager provided hedging strategies and specifically the value of or the advisability of trading in natural gas OTC swaps and futures for hedging purposes.

The Commodity Exchange Act (CEA) defines a CTA as any person (individuals, partnerships, corporations or trusts) who, for compensation or profit, engages in the business of advising others, either directly or through publications, writings or electronic media, as to the advisability of trading in, inter alia, futures or swaps.  Section 4m(l) of the CEA requires a person acting as a CTA and using the mail or other means of instrumentality of interstate commerce in connection with the person’s business as such a CTA to register with the CFTC unless such person provides such commodity trading advice to fewer than 15 persons in the preceding 12 months and does not hold themselves out generally to the public as a CTA.

The asset manager ran afoul of these requirements when it held itself out as offering risk management services including commodity trading advice concerning natural gas futures and OTC swaps in its website and in its sales brochures and then providing such services to more than 15 clients.

GE has voluntarily adopted a proxy access by-law proposal.  The by-law permits a shareowner, or a group of up to 20 shareowners, owning 3% or more of the Company’s outstanding common stock continuously for at least three years to nominate and include in the Company’s proxy materials directors constituting up to 20% of the board, provided that the shareowner(s) and the nominee(s) satisfy certain requirements.  As near as I can tell, GE did not submit a no-action letter to exclude a similar shareholder proposal, but that doesn’t mean they didn’t get one.

HCP, Inc. has also adopted a voluntary proxy access by-law.  HCP was on the “list” targeted by the New York City Comptroller.  HCP’s by-law permit any stockholder or group of up to ten stockholders who have maintained continuous qualifying ownership of 5% or more of HCP’s outstanding common stock for at least the previous three years to include a specified number of director nominees in the Company’s proxy materials for an annual meeting of stockholders. A nominating stockholder is considered to own only the shares for which the stockholder possesses the full voting and investment rights and the full economic interest (including the opportunity for profit and risk of loss). Under this provision, borrowed or hedged shares do not count as “owned” shares. Further, to the extent not otherwise excluded pursuant to this definition of ownership, a nominating stockholder’s “short position” as defined in Rule 14e-4 under the Securities Exchange Act of 1934, as amended, is deducted from the shares otherwise “owned.” If a group of stockholders is aggregating its shareholdings in order to meet the 5% ownership requirement, the ownership of the group will be determined by aggregating the lowest number of shares continuously owned by each member during the three-year holding period.

A third issuer, also on the NYC “list,” has also adopted a proxy access by-law.  The by-law permits any stockholder or group of up to 20 stockholders who have maintained continuous qualifying ownership of 5% or more of the issuer’s outstanding common stock for at least the previous three years to include a specified number of director nominees in the Company’s proxy materials for the annual meeting of stockholders. A nominating stockholder is considered to own only the shares for which the stockholder possesses the full voting and investment rights and the full economic interest (including the opportunity for profit and risk of loss). Under this provision, borrowed or hedged shares do not count as “owned” shares.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

Two former CFOs have agreed to return nearly a half-million dollars in bonuses and stock sale profits they received while their Silicon Valley software company, Saba Software,  was committing accounting fraud.

While not personally charged with the company’s misconduct, the SEC’s position is the two CFOs are still required under Section 304 of the Sarbanes-Oxley Act to reimburse the company for bonuses and stock sale profits received while the fraud occurred.

Senior employees responsible for the fraud were told on multiple occasions by the finance department that the company’s accountants and auditors needed to understand exactly how many hours were being worked and when (regardless of whether or not they were billed to the customer) in order to ensure that revenue was recognized accurately, and they understood that inaccurate time-keeping would lead to misstatements in Saba’s reported professional services revenue and violate the Company’s policies regarding financial reporting.

The two CFOs each consented to the entry of the SEC’s order without admitting or denying the finding that they violated Section 304 of the Sarbanes-Oxley Act.

Last year, the SEC charged Saba Software and two former executives responsible for the accounting fraud in which timesheets were falsified to hit quarterly financial targets.  As part of that settlement, the SEC similarly reached an agreement with the former CEO to reimburse the company $2.5 million in bonuses and stock profits that he received while the accounting fraud was occurring, even though he was not charged with misconduct.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

ISS has posted new FAQs on U.S. compensation policies. There are 104 FAQs spanning 43 pages. Given their breadth, they are difficult to summarize. But they cover topics ranging from say-on-pay, pay-for-performance, defining peer companies, problematic pay practices, equity plans, change of control matters and the like.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The Delaware Court of Chancery explained the operation of recently adopted Sections 204 and 205 of the Delaware General Corporation Law, or DGCL, in a case captioned In Re Numoda Corporation.  DGCL Sections 204 and 205 provide that no defective corporate act or putative stock shall be void or voidable solely as a result of a failure of authorization if ratified or validated pursuant to the statute, and that the Court of Chancery may determine the validity of any corporate act or transaction and any stock, rights or options to acquire stock.

The Court noted the statutory language appears to confer substantial discretion on the Court and, absent obvious procedural requirements, does not set a rigid outer boundary on the Court’s power to validate defective corporate acts.  In analyzing the operation of the provisions, the Court cited an article which stated “[e]mbedded within the definition of defective corporate act is the premise that an act, albeit defective, had occurred. Thus, Section 204 implicitly preserves the common law rule that ratification operates to give original authority to an act that was taken without proper authorization, but may not be used to authorize retroactively an act that was never taken but that the corporation now wishes had occurred, or to “backdate” an act that did occur but that the corporation wishes had occurred as of an earlier date.”

The facts of In Re Numoda are extremely complex.  In the case, the Court refused to validate one issuance of stock because the evidence of the requested share issuance consisted only of testimony and sundry documents.  The court stated none of the evidence replaced official stock ledgers or effective resolutions. The proponent was unable to establish when any board approved the issuance.

The Court did validate other issuances of stock, however.   In validating an issuance the Court noted that the evidence supported the conclusion that there was a board meeting attended by two persons in their capacity as directors where the issuance was approved.  Although the directors did not hold formal meetings, take minutes, or issue certificates, the court found this was not “a case of a passing conversation at the water cooler.” The directors met with an intent to discuss board business.  All of the representations made prior to the litigation show the parties accepted (and did not question the validity of) the capital structure reflecting the share issuance.  The Court noted the share recipient would be hurt significantly if the issuance was not validated.  Further, the contesting parties would be put in a position consistent with the ownership levels long represented by such parties.  According to the Court, the equities will not permit the parties contesting the issuance to renege on a prior commitment in order to enhance their personal interests.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.

The SEC has proposed  rules to implement Section 955 of the Dodd-Frank Wall Street Reform and Consumer Protection Act, as codified in Section 14(j) of the Exchange Act, which requires annual meeting proxy statement disclosure of whether employees or members of the board of directors are permitted to engage in transactions to hedge or offset any decrease in the market value of equity securities granted to the employee or board member as compensation, or held directly or indirectly by the employee or board member.

In connection with the proposed rule, Commissioners Daniel M. Gallagher and Michael S. Piwowar issued a joint statement.  In the statement they note “While we ultimately voted to support the issuance of this proposal, our position should not be taken as unqualified support of the proposal in the form it was issued.  Indeed, we remain quite concerned by several aspects of the proposal, and we hope to receive robust public comment on them.”

Text of Rule

On its face the proposed rule to be included in Item 407(i) of Regulation S-K seems straightforward:

In proxy or information statements with respect to the election of directors, disclose whether the registrant permits any employees (including officers) or directors of the registrant, or any of their designees, to purchase financial instruments (including prepaid variable forward contracts, equity swaps, collars, and exchange funds) or otherwise engage in transactions that are designed to or have the effect of hedging or offsetting any decrease in the market value of equity securities—

(1) Granted to the employee or director by the registrant as part of the compensation of the employee or director; or

(2) Held, directly or indirectly, by the employee or director.

The rule includes five instructions clarifying its application.

Transactions Covered

The proposed rule goes beyond what is required by the Dodd-Frank Act and Section 14(j) of the Exchange Act.  The SEC believes in order for the disclosure to be complete and to avoid discouraging or promoting the use of particular hedging transactions, the proposed amendment  must require disclosure of whether an issuer permits other types of transactions that have the same hedging effect as the purchase of the instruments specifically identified in Section 14(j). The proposed amendment covers all transactions that establish downside price protection – whether by purchasing or selling a security or derivative security or otherwise, consistent with the statutory purpose and providing more complete disclosure.

A proposed instruction clarifies that the company must disclose which categories of transactions it permits and which categories of transactions it prohibits.  The SEC believes disclosure of both the categories prohibited and those permitted conveys a complete understanding of the scope of hedging at the company. However, the SEC recognizes that where a company only prohibits specified hedging transactions, potentially limitless disclosure of each specific category otherwise permitted may not be meaningful. Accordingly, if a company specifically prohibits certain hedging transactions, it would disclose the categories of transactions it specifically prohibits, and could, if true, disclose that it permits all other hedging transactions in lieu of listing all of the specific categories that are permitted.

Conversely, where a company specifies only the hedging transactions that it permits, in addition to disclosing the particular categories of transactions permitted, it may, if true, disclose that it prohibits all other hedging transactions in lieu of listing all of the specific categories that are prohibited.

If a company does not permit any hedging transactions, or permits all hedging transactions, it should so state and would not need to describe them by category. An additional instruction would require a company that permits hedging transactions to disclose sufficient detail to explain the scope of such permitted transactions.

If a company permits some, but not all, of the categories of persons covered by the proposed amendment to engage in hedging transactions, the company would disclose both the categories of persons who are permitted to hedge and those who are not.

Equity Securities

The proposed rule includes an instruction to specify that the term “equity securities,” as used in proposed Item 407(i), means any equity securities (as defined in Exchange Act Section 3(a)(11) and Exchange Act Rule 3a11-1) issued by the company, any parent of the company, any subsidiary of the company or any subsidiary of any parent of the company that are registered under Section 12 of the Exchange Act.   As proposed, the disclosure requirement would apply to the equity securities issued by the company and its parents, subsidiaries or subsidiaries of the company’s parents that are registered on a national securities exchange or registered under Exchange Act Section 12(g).

Employees and Directors Subject to the Disclosure Requirements

Section 14(j) of the Exchange Act covers hedging transactions conducted by any employee or member of the board of directors or any of their designees. The SEC believes the term “employee” should be interpreted to include everyone employed by an issuer, including its officers. According to the SEC it is just as relevant for shareholders to know if officers are allowed to effectively avoid restrictions on long-term compensation as it is for directors and other employees of the company.

Relationship to CD&A

One of the non-exclusive examples currently listed in the Item 402(b) requirement for CD&A disclosure calls, in part, for disclosure of any registrant policies regarding hedging the economic risk of company securities ownership, to the extent material. The CD&A applies only to named executive officers.

To reduce potentially duplicative disclosure in proxy and information statements, the release also proposes to amend Item 402(b) of Regulation S-K to add an instruction providing that a company may satisfy its CD&A obligation to disclose material policies on hedging by named executive officers by cross referencing the information disclosed pursuant to proposed Item 407(i) to the extent that the information disclosed there satisfies this CD&A disclosure requirement.

Issuers Subject to the Rule

The SEC does not propose to exempt smaller reporting companies or emerging growth companies from Item 407(i) disclosure. The SEC stated it is  not aware of any reason why information about whether a company has policies affecting the alignment of shareholder interests with those of employees and directors would be less relevant to shareholders of an emerging growth company or a smaller reporting company than to shareholders of any other company.

ABOUT STINSON LEONARD STREET

Stinson Leonard Street LLP provides sophisticated transactional and litigation legal services to clients ranging from individuals and privately held enterprises to national and international public companies. As one of the 75 largest firms in the U.S., Stinson Leonard Street has more than 520 attorneys and offices in 14 cities, including Minneapolis, Mankato and St. Cloud, Minn.; Kansas City, St. Louis and Jefferson City, Mo.; Phoenix, Ariz.; Denver, Colo.; Washington, D.C.; Decatur, Ill.; Wichita and Overland Park, Kan.; Omaha, Neb.; and Bismarck, N.D.

The views expressed herein are the views of the blogger and not those of Stinson Leonard Street or any client.