Shareholders Target DaimlerChrysler and Volkswagen
Submitted by: Roland Escher, International Research Analyst
At their upcoming annual meetings, DaimlerChrysler and Volkswagen will face a tough balancing act, trying to reconcile the demands of shareholders with labor union pressures, as senior executives at both companies face possible criminal charges.
The management and supervisory boards at the two car companies are no strangers to balancing the interests of shareholders and employees. Under the German Law on Employee Co-Determination, the so-called Mitbestimmungsgesetz, large companies are required to reserve half of their supervisory board seats for employee and labor representatives, with the other half being elected by shareholders. As a result, large German companies, notably those in the auto industry, have faced board-level resistance to cost-cutting measures, such as layoffs and factory closures.
At DaimlerChrysler's April 12 annual meeting, there are two shareholder proposals on the ballot calling for special audits of the Smart small car and the Maybach ultra-luxury sedan business units. Since their creation in the mid-1990s, the two divisions have racked up losses of several billion euros. Despite mounting calls from shareholders to shut down the two loss-making units, DaimlerChrysler has insisted on keeping them afloat.
According to the Financial Times, the Kuwait Investment Authority (KIA)--with a stake of 7.2 percent, DaimlerChrysler's largest shareholder--and several other large shareholders have publicly stated that they would like to see Smart on the auction block. "I don't think they have been successful in reforming the Smart operation, so the only solution is get rid of Smart," KIA managing director Mohammad Al-Saad, told Bloomberg News.
Nonetheless, DaimlerChrysler announced just this week that it would spend another 1 billion Euros ($1.2 billion) to restructure its Smart division.
In addition, DaimlerChrysler's supervisory board chairman, Hilmar Kopper, is facing potential insider-trading-related charges. While BaFin, the German capital markets regulator, dropped its investigation in November 2005 without filing suit, and the Stuttgart prosecutor did so March 29, the state attorneys' office in Frankfurt is still investigating whether to file charges.
Kopper is alleged to have tipped off Deutsche Bank CEO Joseph Ackermann shortly before DaimlerChrysler announced that then-CEO Juergen Schrempp would step down by the end of 2005. Following the public announcement on July 28, DaimlerChrysler's stock rose and Deutsche Bank, where Kopper was once chairman of the supervisory board, sold approximately 1.4 billion Euros ($1.66 billion) worth of DaimlerChrysler stock.
Deutsche Bank was a significant, long-term shareholder of DaimlerChrysler for many years. But when the company's shares rose after announcement of Schrempp's retirement, the bank sold most of its position. It is not clear whether the bank made money from the alleged tip. However, under German insider trading law, passing on insider knowledge may be punishable even if no illicit gains are derived from it.
The pressure from the automaker's shareholders has persisted despite aggressive steps by new CEO Dieter Zetsche to bring the company back on track, including the announcement that thousands of middle managers would be dismissed. It remains to be seen how DaimlerChrysler will reconcile shareholders' desire to cut losses quickly against the company's business judgment and the pressure by labor unions to keep Smart and Maybach running.
Meanwhile, at Volkswagen, actions by the company's two largest shareholders--Porsche and the state of Lower Saxony--are spurring opposition by other institutional investors, amid a criminal investigation involving labor representatives on the supervisory board.
As a result of Porsche's acquisition of an 18.5-percent stake in VW last year, the company has nominated Porsche's CEO and CFO to the VW supervisory board. This move has also been endorsed by Lower Saxony, which owns 18.1 percent of VW. At the company's May 3 annual meeting, shareholders are expected to oppose the nomination of these two candidates.
In addition, the company is bundling its supervisory board elections, which some shareholders have interpreted as an attempt to thwart opposition to the two Porsche executives. Since Volkswagen and Porsche have extensive transactional relationships, notably in the joint development and production of an SUV platform, some shareholders are concerned that the nomination of two Porsche executives to VW's supervisory board would create irreconcilable conflicts.
Moreover, VW has been embroiled in a scandal involving revelations that employee representatives on its supervisory board received lavish trips to Brazil and other far-flung places. This happened at company expense and at the behest of VW's head of human resources, Peter Hartz, in a long-running attempt to co-opt labor and employee representatives.
While some shareholders might appreciate VW's pragmatic approach to dealing with its worker representatives, these practices are under criminal investigation by German authorities. Due to the pending investigations, VW is proposing to postpone the discharge of liability for several of its supervisory and management board members. The so-called discharge absolves directors of liability for their performance in the preceding year.
While the discharge of the supervisory board's and the management board's actions in the past fiscal year is a routine item at German meetings, the postponement of this vote for some of the VW board members is highly unusual.
Some shareholders have interpreted this postponement as an attempt to deflect investor ire from board members who are not under direct investigation. As a result, a large number of shareholders is expected to vote against this selective discharge proposal.
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March 30, 2006 |
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ISS Supports the SEC's Efforts to Improve Compensation Disclosure
Submitted by: Dr. Martha Carter, ISS Senior Vice President and Managing Director
ISS' SEC Comment Letter on Compensation Disclosure
March 28, 2006
Ms. Nancy M. Morris
Secretary
U.S. Securities and Exchange Commission
100 F Street, NE
Washington DC 20549-9303
Re: File Number S7-03-06
Dear Ms. Morris:
Thank you for the opportunity to provide feedback on the proposed amendments to the SEC's disclosure rules for executive and director compensation. The comments and suggestions in this letter reflect the views of ISS and do not necessarily reflect the views of our clients.
ISS Supports the SEC's Efforts to Improve Compensation Disclosure
ISS supports improvements in executive compensation disclosure. Current requirements, which have been static during the past decade, are out of step with the growing complexities in executive pay packages. Shareholders' frustrations with the lack of disclosure on retirement plans, change-in-control arrangements, and many forms of stealth compensation have led to a growing compensation lexicon, such as "tally sheets" and "holy cow" meetings. The proliferation of multiple pay vehicles and the increase in shareholder concerns over compensation arrangements necessitate change to the current disclosure system. Overall, the SEC's proposed rules are a positive step to mandate improved disclosure, create clarity for shareholders, and underscore the accountability of directors to ensure that shareholders' assets are used wisely.
The spirit of the proposed rules is consistent with the philosophy embodied in ISS' proxy voting policies -- to enhance shareholder value, promote shareholder rights, and ensure director accountability. We commend the SEC staff for their efforts to ensure that shareholders obtain a clearer picture of executive compensation. Specifically, ISS supports the following proposed revisions to the SEC's disclosure rules:
- inclusion of a Compensation Discussion and Analysis (CD&A) section patterned after the Management's Discussion & Analysis (MD&A) disclosure;
- revision to the Summary Compensation Table to provide Total Compensation figures;
- inclusion of supplemental equity tables that disclose prior year awards as well as potential sources of future gains;
- disclosure of retirement and post-employment benefits; and
- tabular disclosure of director compensation.
ISS Recommends Several Enhancements to the Proposed Rules
While we generally support the Commission's proposed rules on executive compensation, we respectfully suggest that the SEC consider the following modifications:
Require the CD&A report over signatures of the compensation committee
Requiring the Compensation Discussion and Analysis to be "filed" and hence covered by the certification requirements of the Sarbanes-Oxley Act, is an excellent way to send a strong message of accountability to those approving compensation packages. The concept regarding the report being "furnished" rather than "filed" to allow for more robust discussion has not borne out. Rather than being robust, too much of the current disclosure is boilerplate, and the SEC has made clear in its current proposal that boilerplate disclosure is unacceptable. To increase accountability, we believe that the CD&A report should also be over the names and signatures of the compensation committee. Because the CD&A is intended as a principles-based document, the compensation committee would be signing off on the principles and practices that they utilize in creating pay packages. Their signatures reinforce the compensation committee's obligation and accountability to shareholders.
Require all companies, including small firms, to include the CD&A
The Commission indicates that the CD&A should focus on material principles underlying executive compensation policies and decisions. As such, the CD&A is key to ensuring that investors have a firm understanding of compensation decisions. Small companies should not be exempt from disclosing material information about compensation objectives and policies. Compensation arrangements in small businesses can be even more complex as a result of their limited cash flow situations, and we recommend that small businesses file CD&A disclosures.
Disclose performance targets or actual performance upon payouts
Companies should publicly disclose target levels for specific quantitative or qualitative performance-related factors considered by the compensation committee or the board of directors. Without disclosing the specifics of performance targets, shareholders cannot assess the rigor of the program or the difficulty of meeting those targets. Performance targets could be disclosed either at the beginning of the performance cycle or after the completion of the performance period. The disclosure of performance targets does not create adverse competitive effect, as evidenced by the growing number of companies that have voluntarily disclosed specific hurdles that the named executive officers must clear to profit from performance-based equity awards.
Remove the $10,000 minimum threshold for perquisites
We concur with the Commission's comments that the current perquisite exclusion of the lesser of $50,000 or 10 percent of the total of an executive's annual salary and bonus has resulted in material omissions. However, having a $10,000 minimum threshold would allow companies to continue to avoid disclosure of many executive perquisites. Often, the small monetary value of perquisites belies their significance. Inappropriate perquisites, even in small dollar amounts, may portend larger compensation problems. Therefore, we believe that having no minimum threshold would shed light on all types of perquisites provided to executives and would minimize any abuse in this area.
Remove the compensation disclosure of up to three non-officer employees
The disclosure of up to three employees who are not executive officers but earn more in total compensation than any of the named executive officers will provide little value to shareholders without the appropriate narrative disclosure and the supplemental figures to support the total compensation figure. Unlike the named executive officers, the three non-officer employees are generally not individuals who have the ultimate authority over the company's strategic imperatives or broad business activities. Furthermore, these three individuals may change each year depending on their total compensation figures. The lack of continuous and consistent disclosure further dilutes the need for such information.
Require disclosure of all related-person transactions
The Commission's proposal to increase the minimum threshold for reporting related- person transactions from $60,000 to $120,000 will exclude many smaller transactions that in aggregate may be material enough to warrant shareholder concern. Therefore, we urge the SEC to require disclosure of all related-person transactions and not set a minimum threshold. This approach would allow shareholders to view and evaluate all related-person transactions and make their own determinations about the materiality of specific transactions or in aggregate. Also, any related-person transaction could potentially be problematic, and therefore it is important for shareholders to know of such potential conflicts. To make it easy for investors to review this data, the transactions should be listed in tabular form and in descending order from highest to lowest.
Mandate certain standard assumptions on FAS 123R for executive pay
ISS supports FAS 123R as the appropriate approach for valuing equity-based awards. Stock-based and option-based awards should be valued in total on the grant date and should not be adjusted on the vesting date. We agree with the SEC's proposed method that subscribes to the measurement method of FAS 123R, but also provides for immediate disclosure of compensation, separate from the compensation expense for accounting purposes. To make the total compensation figure comparable across companies, the SEC should mandate some standard assumptions for stock-based compensation. Specifically, we advocate for the full term assumption rather than expected term assumption for calculations for named executive officers. Expected term assumption can vary widely from company to company due to such factors as age, tenure, and income bracket. The full term assumption is objective and consistent, and will ensure that investors have apples-to-apples comparisons across companies.
Require full disclosure on deferred compensation plans
Quantification and disclosure of the costs of deferred compensation, including forgone tax deductions and the costs of investments, present a full and complete picture to shareholders. Therefore, ISS recommends disclosure of cumulative contributions and earnings accrued on deferred compensation plans. We also recommend disclosing the cumulative dollar amount of contributions, the aggregate interest or other earnings accrued from inception of the executive's participation in the plan through the end of the company's last fiscal year, and the specific interest rate applied to cash-denominated deferral accounts for the last fiscal year's accruals.
Require quantitative and tabular disclosure on potential post-employment payments
To be consistent with the additional tabular disclosure in supplemental equity tables and post-retirement tables, ISS recommends tabular disclosure regarding payments upon termination or change in control. The tabular disclosure should include each potential termination event, severance upon termination, and severance upon change in control.
Require aggregate actuarial value of pensions
The estimated annual retirement payment does not present the magnitude and potential pension cost to shareholders. ISS recommends the quantification of the aggregate actuarial value of pension for all companies without regard to whether the plan permits a lump sum distribution. We believe that the present value of a pension paid for the life of an executive provides the complete picture of the potential cost implications.
Retain key information available to shareholders under current rules
The Commission indicates that the proposed disclosure rules will build on current requirements rather than replace them. As such, several useful disclosure items should remain to provide clarity and completeness to investors. Information that is helpful to shareholders and should remain as disclosed items include: the five-year performance graph, the ten-year option repricing table, and the percent of total options granted column in the Grants of All Other Equity Awards table.
Rule Changes Will Lead to a Positive Impact for Shareholders
The proposed rules on executive and director compensation will address the major deficiencies in the current disclosure system. ISS supports the Commission's work, and we suggest further enhancements to ensure that shareholders have complete quantitative and qualitative information to assess executive pay. The revisions to compensation disclosure will serve shareholders well, provided that they, in turn, do their part as advocates in this process. In conjunction with the SEC's proposal, we urge continued engagement and constructive dialogue between issuers and investors to promote better disclosure of executive compensation, as well as more consensus on other corporate governance matters.
Sincerely,
Martha L. Carter, Ph.D.
Senior Vice President and Managing Director, Corporate Governance
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March 28, 2006 |
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More Firms Adopt Majority Vote
Submitted by: Thaddeus C. Kopinski, Staff Writer
More U.S. companies are trying to head off shareholder proposals seeking majority board elections by changing their bylaws to require a majority of votes cast to elect a director.
The latest firms to embrace a full majority vote standard include Alaska Air Group, Altera, and Safeway. These changes bring to at least 18 the number of companies that have adopted a majority vote bylaw plus a resignation policy for incumbents who fail to gain the requisite vote, an approach commonly referred to as the "Intel model." Another seven companies have confirmed that they are in the process of doing so.
Last year, Alaska Air faced eight investor resolutions seeking annual elections, a vote on "poison pill" plans, and other governance reforms, half of which got more than 70 percent of votes cast. Five shareholder proposals received a majority of votes cast in both 2004 and 2003. In response to these votes and another round of shareholder proposals this season, Alaska Air adopted a majority vote bylaw and is seeking shareholder approval to declassify the board and rescind supermajority requirements at the company's May 16 meeting.
At Altera, a majority vote resolution filed last year by the Sheet Metal Workers Union got 59.5 percent of votes cast. A similar proposal by the United Brotherhood of Carpenters and Joiners received 46.1 percent at Safeway.
In 2004, Safeway was the subject of a "vote no" campaign by four public pension funds, which generated withhold votes of 15 to 17 percent against CEO Steve Burd and two directors. In the face of the campaign, Safeway introduced a number of governance changes, including naming an independent lead director.
At Marriott International, management is supporting a majority vote proposal by the Carpenters at the company's April 28 annual meeting. Last year, a similar proposal by the union fund received 39.1 percent of votes cast.
"The company now believes that the clear trend in corporate governance is toward greater and greater adoption of the majority vote standard for uncontested elections," the company said in its proxy statement. "Corporate governance experts agree that the majority vote standard will likely become the norm over the next few years."
While Pfizer and some 80 other firms have adopted resignation guidelines while retaining plurality voting, the Carpenters and other proponents argue that only an explicit majority standard would provide shareholders with a meaningful vote in uncontested elections.
"The growing list of major companies whose boards have adopted a true majority standard combined with post-election resignation policies has set a new standard," Ed Durkin, the Carpenters union's corporate affairs director, told Governance Weekly. "I think we have turned the corner on the issue and the burden is now on those companies that do not have majority vote standard bylaws to justify their continued use of a plurality vote standard."
Of the 65 majority-vote proposals filed by the Carpenters' pension fund this year, three came to a vote earlier this month at Analog Devices, Ciena, and Hewlett-Packard. (For details, see the March 17, 2006, issue of Governance Weekly.) Fifty-one resolutions are still slated for a vote, while 11 have been withdrawn. Many of those firms have agreed to implement a majority standard.
A "Very Strong Vote"
Durkin said that the 45 percent support received at Hewlett-Packard, which adopted a resignation policy modeled after Pfizer's, was "a very strong vote." Pfizer was the first to introduce a director resignation policy last June.
"Despite action by the H-P board to adopt a director resignation policy and the company's strong advocacy against the proposal, nearly half the shareholders said that its director resignation policy combined with a continuation of the plurality vote standard do not go far enough," Durkin noted.
Richard Ferlauto, director of pension investment policy at the American Federation of State, County & Municipal Employees--which has a majority elections proposal at Morgan Stanley's April 4 annual meeting--has a similar view.
"I don't believe [the Pfizer model] is good policy. I think the momentum is there and most investors do understand the critical differences between a resignation policy and changing the voting standard itself," Ferlauto told Governance Weekly. "I expect that there will be strong and growing support for majority voting throughout the season."
In contrast, Martin Lipton, a founding partner of the law firm of Wachtell, Lipton, Rosen & Katz, which represents corporate clients, sees the vote results at H-P, Ciena (31 percent support), and Analog Devices (35 percent) as a vindication of the Pfizer approach. "We continue to believe that the corporate governance guideline is sufficient and should satisfy the desire of governance advocates for majority voting," Lipton said in a memorandum to clients.
The issue is also on the ballot April 6 at Novell. Majority vote proposals are being voted on April 18 at Sprint Nextel, Wachovia, Kaman, and Electronic Data Systems. Similar proposals are slated to go to a vote at Burlington Northern Santa Fe on April 19 and at Weyerhaeuser on April 20. Majority election proposals are on the agenda at more than 100 meetings this proxy season.
Research Editor Rosanna Landis Weaver contributed to this article.
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March 27, 2006 |
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Shareholders to Vote on Takeover Defenses in Japan
Submitted by: Marc Goldstein, Director of Research Services-Japan
As Japan's proxy season gets underway, "poison pill" plans and other takeover defenses are shaping up to be one of the major issues of 2006. Three companies have placed such measures on the ballot at their annual meetings next week, but a host of others have announced defenses that do not require a shareholder vote.
The three companies that are submitting their takeover defenses to a shareholder vote later this month are Lion, a manufacturer of home and pharmaceutical products; Torigoe, a flour milling company; and CAC, a computer systems developer.
Lion's plan is a so-called "trust-type" shareholder rights plan, of the kind adopted by a number of Japanese companies in 2005. Assuming the plan is approved by shareholders at the March 30 meeting, Lion plans to issue stock acquisition rights (warrants) for more than 600 million shares to Mitsubishi UFJ Trust and Banking, as the trustee of a new trust. The number of warrants represents 191 percent of the number of outstanding Lion shares as of the fiscal year-end. In the event the plan is triggered, Lion shareholders (other than the would-be acquirer) would be designated as beneficiaries of the trust, and the warrants would be transferred from Mitsubishi UFJ Trust to the beneficiaries. The warrants would be exchangeable for shares of Lion common stock at a one-for-one ratio.
The poison pill plan is designed to be triggered when a "specified large shareholder"-- defined as a party who holds or is attempting to acquire more than 20 percent of Lion shares--emerges, and the company deems the acquisition or attempted acquisition to be coercive or otherwise detrimental to shareholders. In making such a determination, the board would "assign maximum value to the recommendation" of a committee drawn from among the company's non-executive directors and statutory auditors. If the plan is triggered, Lion shareholders will have the right to exercise the warrants for JY 1 per share, thereby diluting the holdings of the potential acquirer. The exercise period for the warrants is set to expire on March 31, 2009, and if Lion decides to renew the plan, shareholder approval will again be required.
Lion's plan has positive features, including the absence of "dead-hand" provisions, an effective three-year sunset provision, and the fact that the independent committee will be able to hire legal and financial experts at the company's expense. Nonetheless, the ISS recommendation-research staff is advising shareholders to oppose the plan. First, Lion's 11-member board will have only two non-executives following this annual meeting. To ensure that the board remains responsive to shareholders after the introduction of a poison pill, ISS believes that independent directors should make up at least 20 percent of the board. Second, the poison pill is accompanied by another defense, namely an article amendment to eliminate all vacant seats on the board. This change will make it more difficult to elect shareholder candidates, as it will require management nominees to be defeated to make room for the shareholder nominees.
The takeover defenses proposed by Torigoe and CAC, both of which are holding their meetings on March 30, are what are known in Japan as "advance warning-type" defenses. These do not require a shareholder vote in Japan, and may be implemented with a board resolution; for this reason, those measures likely will far outnumber trust-type poison pills in 2006. However, Torigoe and CAC have chosen to present their plans to shareholders for a vote.
In both cases, any suitor that acquires 20 percent or more of the target company's issued share capital will be asked to explain the purpose of the bid, the method used to value the target's shares, the method used to raise funds, the identity of parties who offer those funds, and the bidder's strategic plan for the company if successful.
Once this information is obtained, the board would then ask the bidder to delay launching a tender offer until the board (or in the case of Torigoe, an independent committee) could study the information presented, and present an alternative plan where appropriate. The waiting period at Torigoe will be set at 60 days; at CAC, it will be 60 to 90 days, depending on whether the deal is an all-cash acquisition or involves a share exchange. However, if Torigoe's independent committee decides that it needs more time to make a recommendation, the committee can extend the waiting period.
If the would-be acquirer fails to comply with these rules, then the independent committee (at Torigoe), or the board acting on the advice of a special committee (at CAC) may act to dilute the holdings of the bidder by issuing warrants to all other shareholders. However, even if the bidder does comply with the rules, the companies may take such action if the board or the committee decides that the bid would clearly damage shareholder value (e.g., an attempt at "greenmail' or asset stripping). Should these plans be triggered, warrants would be issued to all shareholders other than the hostile bidder, and thus ordinary shareholders would not find their stakes diluted. However, those shareholders could potentially be denied the opportunity to receive a takeover premium for their shares.
Among the other companies which have announced "advance warning" takeover defenses in recent weeks are brewery and beverage holding company Sapporo Holdings, pharmaceutical maker Eisai, railway operators Hankyu Holdings and Keihan Electric Railway, biotechnology venture firm AnGes MG, and chemical manufacturer Tosoh. Many other companies are considering such measures, urged by law firms and investment banks, which see a huge business opportunity in designing such defenses and helping companies to implement them. In most of these cases, shareholders will not be able to vote on the adoption of the defense itself. If they decide that a plan is sufficiently objectionable, they may choose to vote against the re-election of directors. As shareholders evaluate these defenses, key issues will include the composition of the committee that will evaluate any bid, and the respective authorities of the committee and the full board.
Japanese companies that implement takeover defenses via a board resolution are required to note this fact in their proxy circulars. However, the quality as well as the timing of such disclosure varies considerably from company to company. Shareholders can expect to see takeover defenses announced--often at the last minute--by many of the companies that have problematic governance practices, such as insider-dominated boards, opaque capital strategies, or poor disclosure practices. Investors may conclude that it is precisely these companies whose shareholders have the most to lose from a takeover defense that insulates management from the threat of a hostile bid.
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March 23, 2006 |
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Update on French Poison Pills
Submitted by: Fassil Michael, Director of Custom Research
Update on French Poison Pills
The French parliament today adopted the much-anticipated legislation that allows companies to adopt poison pills to thwart hostile takeovers. Going forward, French companies, upon receiving shareholder approval at their annual general meetings, will be allowed to issue warrants to existing shareholders at deeply discounted prices to block hostile takeovers. Some have commented on the "timeliness" of this legislation, in light of the ongoing debate over the GDF-Suez takeover deal, as well as the Arcelor deal. The Associated Press in Paris is covering the story.
We invite your comments on this legislation.
France authorizes 'poison pills' to thwart hostile takeovers
227 words
23 March 2006
13:03
Associated Press Newswires
English
(c) 2006. The Associated Press. All Rights Reserved.
PARIS (AP) - French lawmakers Thursday adopted measures allowing companies to use so-called "poison pill" defenses to thwart hostile takeovers.
Under the new takeover law, approved in a final reading by the Senate, French companies will be allowed to issue warrants to shareholders to fend off a hostile bid.
Warrants allow existing shareholders to acquire newly issued stock at an advantageous price, diluting the value of a company's shares -- which can force a hostile bidder to withdraw its offer.
The amendment allowing warrant issues was introduced after Mittal Steel Co. launched a hostile bid for Arcelor SA, a Luxembourg-based steelmaker that is also quoted on the Paris stock exchange.
A second amendment -- introduced in the wake of unconfirmed reports last year that U.S. soft drinks and snack maker PepsiCo Inc. was mulling a bid for French food group Danone SA -- allows French market authorities to force potential bidders to state their intentions if rumors begin to affect share prices.
Laurence Parisot, the head of French employers' organization Medef, said the new measures would place French companies on an equal footing with foreign firms. Poison pill defenses have been used by U.S. companies for about two decades.
"It's a sign of pragmatism and good sense, at an opportune moment," Parisot said in a statement.
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Poison Pills-Issues in 2006 and Statistical Trends
Submitted by: Mark Saltzburg, Associate Counsel
Issues in 2006
In 2006, it appears that poison pills will continue to be an issue of focus for shareholder proponents although to a lesser extent than in the past two years.
ISS' Governance Research Services (GRS) is currently tracking 24 poison pill shareholder proposals submitted to companies. This number of proposals is considerably lower than the 101 proposals submitted to companies in 2004.
As in 2005, most of the proposals for the 2006 proxy season were submitted by individual shareholders (including the Chevedden and Rossi families) rather than by institutional investors or large funds. In at least one case, a proposal was submitted by a labor union pension fund. Unlike in 2005, it does not appear that any of the 2006 proposals were submitted by investment funds.
Statistical Trends
Company Action:
Newly Adopted or Extended Pills: GRS tracked 41 companies in its core research universe that adopted or extended shareholder rights plans in 2005.
Shareholder Proposals:
Volume of Shareholder Proposals in Past Years: Last year in 2005, there were 51 shareholder proposals related to poison pills. In 2004, shareholders submitted 101 such shareholder proposals. In 2003, there were 107 such shareholder proposals; in 2002, there were 81; in 2001, there were 37 proposals.
Voting Support for Shareholder Proposals in 2005: GRS has voting results for 25 poison pill proposals that came to a vote at the company's meeting. Seventeen of the 25 proposals (or 68 percent) received majority votes. Sixteen of these 25 proposals (or 64 percent) passed according the companies' own voting requirements.
Average Level of Voting Support: In 2005, poison pill shareholder proposals won an average approval of 60.1 percent of shares voted. (This figure is slightly lower than the average of 61.1 percent in 2004. Other averages in recent years were: 60.0 percent in 2003; 60.2 percent in 2002; and 57 percent in 2001.)
Shareholder Proposals in 2006: Currently, GRS is tracking 24 precatory (nonbinding) shareholder proposals on poison pills for 2006.
For Companies Receiving Shareholder Proposals on Poison Pills in Successive Years, Change in Level of Voting Support: In 2005, shareholders voted on proposals regarding poison pills at 14 companies at which similar proposals were also submitted and voted on in 2004. Support for the proposal increased at 7 of these companies.
Number of Companies with Pills:
Number of Companies with Poison Pills: As of the end of 2005, GRS tracked approximately 1,821 U.S. companies with active poison pills. Of GRS's core research universe of 1,917 companies, 953 have active pills.
Percentages of Companies with Poison Pills: In 2005, the proportion of larger companies with shareholder rights plans fell below 50 percent. Among S&P 500 companies, 46 percent had a poison pill at the end of 2005. In previous recent years, this percentage had remained above 50 percent. In these prior years, the proportion of S&P 500 companies with poison pills was: 53.8 percent of companies at the end of 2004, 57.6 percent of companies at the end of 2003, 60.0 percent of companies at the end of 2002, and 59.6 percent of companies at the end of 2001.
Poison Pill Trigger Thresholds
Percentage Ownership of a Company's Equity that Triggers Its Pill: Of the approximately 1,776 companies for which GRS has trigger information, 437 companies (24.6 percent) have triggers of 20 percent, 1,201 companies (67.6 percent) have 15 percent triggers and 111 companies (6.3 percent) have 10 percent triggers.
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March 22, 2006 |
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Regulators to Hold May 10 Forum on Internal Control Rules
Submitted by: Ted Allen, Director of Publications
The Securities and Exchange Commission and the Public Company Accounting Oversight Board plan to hold a May 10 roundtable to seek comments on the internal control reporting requirements of Section 404 of the Sarbanes-Oxley Act.
The forum will be held at the SEC's headquarters in Washington. The agencies held a similar forum in April 2005 on Section 404, which requires companies to disclose and fix internal control deficiencies, including "material weaknesses" that could lead to a restatement of financial results.
Company officials have complained about higher-than-expected compliance costs and the distraction of management from other strategic concerns. Institutional investors have praised the increased focus on internal controls prompted by Section 404 and cautioned against easing or delaying its requirements.
"We look forward to an update on compliance efforts after year two," SEC Chairman Christopher Cox said in an agency press release. "We will carefully consider the facts presented to help develop policies to effectively and efficiently improve the reliability of financial statements for the benefit of investors."
To offer comments on Section 404, one may use a submission form available here or send an e-mail to rule-comments@sec.gov. One may also send a letter (in triplicate) to: Nancy M. Morris, Secretary, Securities and Exchange Commission, 100 F Street, N.E., Washington, D.C. 20549-1090. The deadline for comments is May 1, and all comments should refer to File Number 4-511.
We also invite your comments.
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March 20, 2006 |
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Global Roundup
Submitted by: Subodh Mishra, Staff Writer
Swiss Firms in Shareholders' Crosshairs As Proxy Season Commences
Swiss governance watchers are focusing this proxy season on developments at consumer goods giant Nestle and packaging materials manufacturer SIG Holding, albeit for different reasons.
The debate over Nestle's governance practices will be renewed at the firm's April 6 annual meeting following investors' demands last year for improvements. In 2005, the Ethos Investment Foundation filed three shareholder proposals that included calls to separate the chairman and CEO positions, loosen shareholder proposal submission requirements, and reduce board terms from five to three years.
All three resolutions failed to carry. However, the strong showing (36 percent) of Ethos' proposal to split the top two posts prompted Nestle to take steps to shore up its governance. In August, the company sent shareholders a survey to gauge ways to improve governance practices. With responses in hand, management is now asking shareholders to vote on a proposal to amend the company's bylaws to potentially allow for governance improvements. The changes would likely take place in 2007 or thereafter.
One key improvement is expected to be the dismantling of a long-standing takeover defense that limits voting rights to just 3 percent, regardless of the size of an investor's holding, according to a March 12 report in London-based The Independent. The bylaws overhaul will allow the board to remove the defense, the article reported.
Prior to Nestle's meeting, Swiss governance observers will be focused on the efforts of dissident shareholder Special Solutions to shake up the board at SIG Holding's March 30 annual meeting. Sterling Investment Group, which controls Special Solutions and holds roughly 8.6 percent of SIG's equity, originally sought the removal of four directors, but it is now backing the removal of just one (although proposals calling for the removal of all four directors will remain on the ballot).
Sterling says it took this step in response to the company's failure to disclose the terms of potential takeover bids for the Schaffhausen-based firm. SIG management contends the company was under no obligation to detail the nature of the bids because they were non-binding. In addition, management says the bids provided no strategic rationale and failed to offer long-term benefits.
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March 17, 2006 |
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Update: University of California Divests of Some Sudan-Related Investments
Submitted by: Jan Fetter-Degges,Senior Research Analyst, Social Issues Service
Yesterday, the University of California became the latest--and, as measured by the number of students in its system, the largest--educational institution to divest from companies doing business in Sudan. The university system's regents voted unanimously to divest of nine companies in various portfolios held by the university. These nine companies, all of which have equity invested in Sudan and two-thirds of which are involved in Sudan's oil industry, were "clearly shown to be providing monetary or military support to the government, while showing little or no interest in the situation in Darfur or in helping to improve the welfare of the Sudanese people," a statement by the Regents said.
Full divestment of these nine companies will take place over an 18-month period, beginning only after California's legislature has passed a bill that would free individual Regents and the university system as a whole for any liability resulting from divestment.
The Regents declined to divest of all companies in the system's portfolio with Sudan ties. Instead, they pledged to engage in continued dialogue with some companies whose presence in Sudan the Regents believe can benefit the Sudanese people as well as or instead of benefiting Sudan's government. A policy of limited divestment appears to be a trend in university divestments from Sudan: Harvard, Stanford and Yale have also adopted limited divestment strategies.
A new bill, mandating divestment by CalPERS and CalSTRS from Sudan, has been introduced in California's legislature. A similar bill was introduced last year, but was edited before passage, changing a divestment requirement to a recommendation.
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Majority Voting Gets Mixed Results
Submitted by: Thaddeus Kopinski, Staff Writer
Majority election proposals remain popular among investors, but the first vote results of the season suggest that those resolutions may not fare as well this year at U.S. companies that have adopted director resignation policies.
A proposal by the United Brotherhood of Carpenters and Joiners received 35 percent of votes cast at Analog Devices on March 14 and 31 percent at Ciena the next day. At Hewlett-Packard's March 15 meeting, the resolution received 45 percent support, close to the 44 percent averaged by 62 such proposals last year.
These were the first three annual meetings of 2006 where the issue of majority voting in board elections came to a vote; it was also the first time that majority vote proposals were on the ballot at these companies. Most significantly, the votes were the first test ever of whether investors are satisfied with the director resignation policies adopted by Pfizer and more than 80 other firms or would prefer that companies go further and adopt bylaws establishing a full majority standard, as Intel, Dell, and a dozen other firms have done.
Analog Devices, Ciena, and Hewlett-Packard, which opposed the proposal by the Carpenters' pension fund, all amended their corporate governance guidelines late last year to provide a director resignation policy while maintaining a plurality standard. H-P unsuccessfully tried to persuade the Securities and Exchange Commission to allow the company to omit the Carpenters' proposal, arguing that it had substantially implemented the resolution by adopting a resignation policy.
The three companies' policies call on director nominees who receive a majority of "withhold" votes to tender their resignation. Such votes are rare at U.S. companies; last year, just 14 out of more than 35,000 director nominees received a majority withhold vote. While the United Kingdom, Australia, and other nations have majority elections, most U.S. companies still have plurality voting. At those firms, management nominees are ensured of winning a board seat in uncontested elections, regardless of how many investors withhold their support. The Carpenters and other proponents argue that a full majority default standard is the only way to ensure that shareholders have a meaningful vote in uncontested elections.
With just three votes so far, it's too early to tell whether director resignation policies will suppress investor support for a full majority standard. Majority vote proposals will be on the ballot this season at two dozen other firms that have adopted resignation policies, including Morgan Stanley (April 4) and Novell (April 6). This issue may fare better later this season as more investors focus on it. Last year, a majority vote proposal did not receive majority support until the seventh meeting where it was on the ballot.
The most recent U.S. companies to adopt a resignation policy include General Dynamics, 3M, and Berkshire Hathaway. Of the almost 80 companies that have adopted director resignation policies, only two--Time Warner and Toro--have put these policies in their bylaws, as is being recommended in the latest proposal by the American Bar Association's Committee on Corporate Laws.
ABA Group Calls for Use of Bylaws
On March 13, the ABA committee released a series of proposed amendments to the Model Business Corporation Act to allow companies to adopt bylaws to provide for a modified plurality standard and more enforceable director resignation policies. The Model Act is used by most U.S. states to craft their corporate laws.
The ABA's proposed changes are consistent with a preliminary report issued in January by the lawyers' group, which disappointed the Carpenters and other investors by declining to support a majority default standard. In that preliminary report, the committee endorsed director resignation policies and other voluntary initiatives and pledged to work out language that would make these policies enforceable. Pfizer's corporate secretary, Margaret M. Foran, along with A. Gilchrist Sparks III of the Delaware law firm of Morris, Nichols, Arsht & Tunnell, co-chaired the task force that wrote the report.
In its latest report, the ABA committee seeks to address investor concerns about the enforceability of resignation policies by calling for the use of bylaw amendments, rather than corporate governance guidelines. Some investors have argued that adopting a resignation policy through a governance guideline is not sufficient, because those guidelines can be changed at any time by the board without shareholder approval.
These investors have cited the example of News Corp. to illustrate their concern. In 2004, the company stated that it would seek investor approval for future poison pills as it sought shareholder permission to reincorporate from Australia to Delaware. The company later adopted a pill and then extended it by another two years in August 2005 without seeking shareholder approval. Twelve U.S., Australian, and European institutional investors then sued the board. The company argued that it had the right to change governance policies without shareholder approval, but a Delaware court refused to dismiss the case in December. A trial in the case is set for April 28.
Meanwhile, state lawmakers in California are considering legislation to establish a default majority standard for uncontested director elections. On March 13, CalPERS, the country's largest public pension fund, publicly endorsed the bill introduced by Senator Richard Alarcon. If passed, the legislation would affect 23 public companies incorporated in the state. (For details, see the Feb. 10, 2006, issue of Governance Weekly.)
Holdover Directors
The ABA proposes to change the Model Act to allow either the board or shareholders to unilaterally adopt a director resignation policy for uncontested elections through a bylaw amendment (but only at companies that do not have cumulative voting).
The proposal also includes stronger language to force off nominees who receive majority opposition. The ABA calls on nominees who receive more votes cast against than for their election to serve an abbreviated term of either 90 days or until the date a replacement is selected, whichever comes first.
The Model Act now allows companies to opt out of the default plurality standard only by amending the articles of incorporation; this has to be done at the initiative of the board of directors and endorsed by shareholders. More than 30 states have adopted the plurality default provisions of the Model Act. In contrast, current corporation law in Delaware, where more than half of all public companies in the U.S. are incorporated, allows shareholders to opt out of the default standard by amending the bylaws. If the company's voting rules are in the certificate of incorporation, the change has to be made by the board of directors. Delaware is not a Model Act jurisdiction.
The current Model Act (as well as Delaware law) contains a provision known as the "holdover rule," which says that an incumbent director may stay in office until a successor is chosen and qualified. The report notes that the rule is prescriptive and does not expressly give the corporation the authority to change its provisions.
The ABA proposes to amend the Model Act to expressly allow changes in the articles of incorporation, initiated by the board and endorsed by shareholders to either eliminate the holdover rule altogether or adopt variations of it. "Such a change will permit corporations to strike an appropriate balance between the risks associated with failed elections and the goal of attaining greater director accountability," the report notes.
Investors Express Disappointment
Keith L. Johnson, who represents a group of 17 institutional investors from the Netherlands, the U.K., Australia, and the U.S. that have lobbied the ABA to support a majority default standard, expressed disappointment over the committee's proposals.
"Given the growing support that majority vote standard resolutions have received, the ABA committee's recommendation would create an inefficient process that forces companies and shareholders to deal with thousands of shareholder resolutions that will be eventually adopted," Johnson, a lawyer with the firm of Reinhart Boerner Van Deuren, told Governance Weekly. "However, it does challenge institutional investors to get their act together and seek self-help, which may be a good thing."
The proposal by the ABA committee is being published in late April in The Business Lawyer. Public comments can be sent until May 30 to E. Norman Veasey, Committee Chair, Weil Gotshal & Manges, 767 Fifth Ave., New York, N.Y. 10153, or by e-mail to e.normanveasey@weil.com. The document can be downloaded from the ABA Web site here.
Proposed amendments to the Model Act must be reviewed three times by the ABA committee before they are adopted. State legislatures then will decide whether to change their laws to reflect the Model Act amendments.
"We are a long way from that end in this matter," E. Norman Veasey, the former Delaware chief justice who heads the committee, told Governance Weekly.
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March 15, 2006 |
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Commentary: Two for the Price of One
Submitted by: Bruce Carton, Vice President, Securities Class Action Services
Filing Claims in Securities Class Action Cases can Help Investors Also Get a Share of SEC Settlements
On Feb. 24, the Securities and Exchange Commission filed a motion with the court handling its case against Qwest Communications International requesting approval of a plan to distribute a $250 million settlement in a way that reflects an important and growing practice at the SEC.
The plan calls for the money to be distributed through the claims administration process that is underway in a completely separate securities class action settlement involving Qwest. Under this proposal, by filing a single proof of claim in the $400 million Qwest securities class action settlement (deadline: May 2, 2006), an institutional investor will also be able to recover its share of the $250 million SEC settlement. No part of the $250 million will be used to pay fees or expenses of counsel in the securities class action.
I realize that I am likely preaching to the choir here since SCAS clients reading this probably already understand the importance of filing claims in securities class action settlements. The SEC proposal in the Qwest case, however, is worth highlighting because it the latest reminder that the economic cost of failing to file claims in securities class actions can and does go beyond the amount at stake in the class action itself.
There have been numerous other examples over the last 18 months of the SEC and even the U.S. prosecutors dumping settlement money from their own cases into the securities class settlement distribution process:
--September 2004: The SEC announced court approval of its plan to distribute the proceeds of its $150 million settlement with Bristol-Myers Squibb via the claims administrator appointed in a parallel securities class action against the company. This $150 million recovery was in addition to the $300 million recovered by the plaintiffs in the class action settlement.
--February 2005: The SEC filed a motion seeking to have its $25 million settlement with Lucent Technologies transferred to the account established by the claims administrator in the securities class action settlement involving Lucent. The SEC proposed that the claims administrator would distribute the funds to the class members who had already filed claims in that settlement (the claims deadline in the class action was March 2004).
--March 2005: A federal court overseeing the SEC's $1,450,000 settlement with a company called Measurement Specialties approved the SEC's plan to distribute all of this money on a pro rata basis to the class members who had already filed claims and qualified to receive funds under the allocation plan approved by the court in a securities class action against the company (the claim deadline in the class action was August 2004).
--July 2005: The U.S. Attorney's office handling the prosecution of former WorldCom CEO Bernie Ebbers announced that approximately $25 million to $33 million in restitution expected to be recovered from Ebbers would go to the victims of WorldCom via the securities class action settlement fund.
The past few years have seen an explosion in the dollar amounts of SEC civil penalties, to the point where settlements in the hundreds of millions of dollars are now almost routine. Following the enactment of the Fair Funds provision of Sarbanes-Oxley in 2002, these penalties are being distributed for the first time to investors (rather than to the U.S. Treasury). The SEC's distribution plan in the Qwest settlement, and all of the other cases above, demonstrate that in this new era, filing claims in securities class action settlements may be the only way for an investor to recover its rightful share of many significant SEC settlements.
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March 14, 2006 |
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Update on French Poison Pills
Submitted by: Fassil Michael, Director of Custom Research
In response to recent high profile foreign hostile tender offers in France, the French National Assembly last week began debating the new takeover law that would give French companies the prerogative to use poison pills to thwart hostile tender offers.
A key point in the debates was whether the law should require a simple or a two-thirds majority vote of shareholders to adopt a poison pill. Finance Minister Thierry Breton reminded the Senate that, in the United States, shareholder approval of poison pills is not required and that the new takeover rule would simply give French companies the ability to defend themselves on equal terms.
However, many investors question whether such defense mechanisms would ultimately be in shareholders' best interests. Because poison pills alter the balance of power between shareholders and management, most believe that shareholders should at least be allowed to make independent evaluations of the provisions contained in poison pills.
Pills that do not contain shareholder friendly features, especially when coupled with other takeover defenses, insulate management from the threat of a change in control. They provide a target's board with veto power over takeover bids that may be in shareholders' best interests. As such, while many investors believe that the proposed law does not go far enough in protecting shareholder interests, most feel requiring an 'up or down' vote of shareholders is indeed a very important provision that should be preserved.
ISS, for its part, believes that features such as a three-year sunset provision (allowing shareholders to periodically affirm or redeem the pill) and a qualifying offer clause (which gives shareholders the ability to redeem the pill when faced with a bona fide tender offer) would make poison pills more palatable to shareholders. When evaluating the merits of a poison pill, shareholders should also take into account whether or not the company has brought acquisition offers to shareholders or has adopted other takeover defenses in the past.
The French National Assembly is scheduled to reconvene on March 16, 2006 to hammer out the final amendments before the new takeover rules come into law. But no matter what final form French poison pills take, the law should require companies to include in their annual reports to shareholders detailed descriptions of any takeover defenses they may institute. Such disclosures would surely allow shareholders to take action against underperforming boards who may use this newfound power to entrench themselves.
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March 13, 2006 |
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Sudan Divestment Campaign Continues
Submitted by: Jan Fetter-Degges, Social Issues Service Senior Research Analyst
Pending Legislation
The Sudan divestment campaign, which included the consideration of divestment bills in one-fifth of U.S. state legislatures in 2005, shows no signs of tiring in 2006. Bills introduced in 2005 in New York, North Carolina and Vermont are still pending, and new bills could be introduced in Maryland (where a bill died in committee in 2005) and Massachusetts. In 2005, Illinois and New Jersey enacted laws mandating divestment of state funds from companies doing business in Sudan, while Arizona, Louisiana and Oregon passed laws encouraging divestment, and the California legislature passed a resolution encouraging the state's public pension systems to encourage companies doing business in Sudan to work to safeguard human rights. California's Public Employee Retirement System (CalPERS) has been studying the issue, meeting this winter with representatives from several companies with major investments in Sudan.
University Update
In the past four weeks alone, Yale and Brown have agreed to divest of some of their assets in Sudan, with Brown pledging total divestment and Yale divesting from seven oil companies and Sudanese government bonds (but retaining the possibility of holding stock in other companies with business in Sudan). Later this month, the University of California regents will meet to discuss Sudan divestment. Schools including Harvard, Stanford, Amherst and Dartmouth have already enacted divestment policies (in many cases choosing to divest of only a handful of companies that are major players in Sudan's oil industry), and students are pressuring the administrations of many other schools to consider divestment.
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March 10, 2006 |
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E-Proxies Examined at This Year's SEC Speaks
Submitted by: Mark Saltzburg, Associate Counsel
Securities and Exchange Commission staff and commissioners gathered on March 3 and 4 for the Practicing Law Institute's annual "SEC Speaks" conference to detail a host of ongoing commission initiatives.
Speakers focused on topics including the commission's efforts to tackle accounting fraud, fairness opinions, enforcement actions, and its proposed Internet proxy rule. Staff members also provided some 2005 shareholder proposal statistics. Division of Corporation Finance Chief Counsel David Lynn noted that companies sought no-action on 337 companies, which is fewer than in past years, while the commission averaged roughly 42 days to respond to no-action requests.
SEC Focus on Accounting Fraud
This year's conference, held against the backdrop of the trial of former executives of failed energy giant Enron, included a panel examining the commission's work to identify accounting irregularities and how companies were "cooking the books."
SEC Division of Enforcement Chief Accountant Susan Markel described numerous instances of accounting violations the SEC found in 2005. She noted that frauds typically were committed at companies where management had financial incentives to do so, or was under pressure to produce results.
Markel also said it was common for management involved in frauds to rationalize the conduct. Typical reasons cited were the need to make projections; pressure from a superior; potential for a pending acquisition to fall through; and reliance that the company would make up next quarter fictitious revenue that had been booked.
Markel noted the SEC took actions with respect to 185 cases of accounting violations in 2005. She said 44 of those action actions, or 24 percent, involved Fortune 300 companies. Typically, the SEC discovered the violations through news reports, self-reporting by the company, auditor reports, or from the Public Company Accounting Oversight Board, she noted.
Markel also indicated that there were several common methods used in such cases. One such method was improper revenue recognition, whereby a company books revenue in a chosen accounting period rather than in the period in which the revenue was actually earned. This, she noted, occurred at companies such as Peregrine Systems, SafeScript, eFunds, and Cutter & Buck. While revenue recognition issues may be hard to detect, Markel commented that a common problem for companies improperly recognizing revenue is that companies never collect the fictitious cash they claim to have earned. Thus, accountants may note items such as the companies' accounts receivable growing at a suspicious rate.
Frequently, the SEC found that, when companies engaged in accounting fraud, companies looked to use further improper accounting to cover up the initial deception, Markel said. Two strategies include the use of restructuring charges and merger accounting. When a company incurs restructuring charges, such as the cost of a plant closing or employee severance, such charges may be inflated to cover past overstatements of earnings.
In merger accounting, where the "purchase method" of accounting is used, the merged company adjusts the value of assets carried on its balance sheet. By deliberately adjusting the value of assets to a value other than true market value, companies may be able to cover up improper accounting from earlier periods.
Internet Posting of Proxy Statements to Improve Shareholder Access
Many panelists at this year's conference spoke about the commission's ongoing efforts to allow for Internet posting of proxy statements. SEC Commissioner Roel Campos argued that permitting shareholders to play a greater role in the governance of companies is one benefit of the ""Internet proxy" rule, the public comment period for which closed on Feb. 13. The proposed rule would permit companies to post their proxy statement on the Internet rather than to require companies to mail the proxy statement to shareholders.
Campos indicated that the proposal would reduce costs both for companies and for dissident shareholders seeking to wage a proxy contest. He noted that currently the combination of prohibitively expensive proxy fights and state law default rules providing for director election by a plurality of votes effectively give shareholders no alternative in most cases other than to vote for management nominees.
Currently, SEC interpretive guidance permits electronic delivery of proxy statements to shareholders consenting to such delivery. Thus, for shareholders who have already "opted-in," the process is already completely electronic and mailing costs are not incurred with respect to those shareholders. The number of shareholders opting-in, however, is estimated to be low at many companies.
The new proposal would require shareholders to "opt-out" in order to continue to receive paper proxy statements. When shareholders do not opt-out, mailing costs still would not be completely eliminated unless shareholders also opted to receive a post-card type meeting notice in electronic form.
Where shareholders do not opt-in to receive electronic notices, the cost savings produced by the proposed rule would be the difference between the mailing cost of the postcard type notice (potentially accompanied by the proxy card) and the mailing cost of weightier proxy statements. Also, the company may incur fees imposed by intermediaries, such as Automatic Data Processing (ADP), to whom brokers have contracted out responsibility to forward proxy materials to beneficial owners (who hold shares in "street name" rather than as record owners).
Betsy Murphy, chief of the Division of Corporation Finance's Office of Rulemaking, outlined key elements of the complex proposal.
Companies would post their proxy statement on an Internet site other than the SEC's EDGAR site and would send a meeting notice to shareholders 30 days before a shareholder meeting, she noted. The meeting notice could be used to satisfy state law shareholder meeting notice requirements, said Murphy, and the notice would state where the proxy materials are located on the Internet. She also noted that other soliciting materials could not accompany the notice and that the company's proxy card would be sent either with the notice or with the proxy statement.
According to Murphy, shareholders may request a paper proxy statement, and companies have two days to respond to requests received under the proposed rule. Delivery of proxy statements to beneficial owners of shares will occur by intermediaries forwarding the notice to beneficial owners. Proxy statements proposing that shareholders approve business combinations are excluded from the rule.
Commissioner Campos noted that, despite the cost-efficiencies the rule would create, he has concerns over two potential adverse consequences of the proposal. First, he indicated that separating the proxy card from the proxy statement might encourage retail shareholders to vote blindly without reading proxy materials. Second, Campos said the rule could disproportionately affect elderly people who may not have Internet access.
However, it is not clear whether the proposed rule would permit a shareholder to conduct a completely online proxy contest that is effective. Shareholders at Alaska Airlines in 2005 experienced frustration in their efforts to do this. In that contest, the Alaska Airlines dissidents relied on existing exceptions to the proxy rules that permit communication with other shareholders and conducted an Internet campaign.
But because the dissidents had not mailed materials to a sufficient number of shareholders, the New York Stock Exchange ruled that the matter did not constitute a contested election under its rules. Thus, brokers retained discretionary authority to vote the shares of beneficial owners holding in "street name" for management's slate, making success more difficult for the dissidents.
Nevertheless, the dissidents were successful in obtaining support for their proposals that the company had included on its proxy statement and card. They did this by gaining the support of the company's largest shareholders by contacting them directly.
The dissidents were frustrated, however, in their solicitation in favor of other proposals that did not appear on the company ballot. For these proposals, the dissidents did not mail their own proxy cards but posted their card on the Internet. Alternatively, they suggested shareholders scratch out the company's proxy card and write in votes in favor of the dissidents. Regarding the proposals not on the company proxy card, the dissidents ran into problems, however, because ADP (as voting agent) refused to vote the proxy card of the dissidents, and the dissidents balked at paying fees to ADP to forward the proxy card to street name holders.
It is not clear whether these issues of broker discretionary votes and acceptance of proxy cards by intermediaries such as ADP that arise when dissidents are required to do a mailing of any sort would be solved by the Internet proxy rule. The SEC may ultimately decide that, in the case of an annual meeting, dissidents are not required to mail a notice, because, presumably, the company would have mailed its own notice to shareholders already informing them of the upcoming event.
If dissidents are required to mail a notice, however, and if a significant number of shareholders did not consent to electronic delivery, dissidents reluctant to incur even the mailing costs of the postcard-type notice might continue to face obstacles to conducting an effective solicitation.
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March 9, 2006 |
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Interesting Article on Whole Foods Annual Meeting
Submitted by: Doug Cogan, Social Issues Services Deputy Director
An interesting article by Phyllis Plitch of Dow Jones Newswires caught my eye. The piece, which ran a few days ago, talks about Whole Foods Market's recent annual meeting. We invite comments...
5 Mar 200610:11 ET
Stakeholders Irked By Whole Foods' Stance On Presentations
By Phyllis Plitch
Of DOW JONES NEWSWIRES
NEW YORK (Dow Jones)--With its focus on natural and organic foods and giving back to the community, Whole Foods Market Inc. (WFMI) has developed a reputation as a green, progressive company.
How it conducts its annual meetings is another story. In recent days the company has irked so-called socially responsible investors with a warning that they can't formally present shareholder resolutions during Monday's
annual meeting.
"Given the brand image that Whole Foods' espouses, their current stance is especially surprising," said Mark Orlowski, a member of the board of New England Yearly Meeting of Friends Pooled Funds, which filed one of three
shareholder resolutions on Whole Foods' ballot this year, urging the company to report to shareholders its energy efficiency efforts.
"Silencing the presentation of shareholder proposals is out of step with good corporate governance practices and is disappointing to investors," he said.
According to an e-mail sent by Erica Goldbloom, executive assistant in shareholder services, to an official at the Sierra Club Mutual Funds, the proposal's co-filer, the clampdown during the formal business portion of the meeting was "to improve the efficiency" of the meeting. She wrote that the meetings "enjoy high attendance and we have a lot of business to cover in a short period of time."
Investors would, she said, be allowed to make a brief statement and ask questions during a Q&A session after formal business is completed.
While there's nothing in Whole Foods' bylaws that directly addresses whether shareholders can present their shareholder proposals, Goldbloom cited a section of the governing document enacted last year, which states that the meetings' presiding officer can determine "the circumstances in which any person may make a statement or ask questions at any meeting of the shareholders."
Investor relations and media representatives at the Austin, Texas, company didn't return e-mails or calls for comment Friday to confirm the policy or discuss how the meeting would be handled.
As news spread among activists in governance and social investing circles, though, investors questioned whether they were being muzzled.
"Speaking to the question after the vote is an abridgement of the democratic process," said John Chevedden, a shareholder activist floating a proposal calling for majority voting on issues subject to a shareholder
vote.
"Throwing a ballot-item discussion into the Q&A," he added, doesn't recognize the significance of the topic - as distinguished from "any idle curiosity expressed by a casual shareholder."
What also has some securities lawyers baffled is that Whole Foods' policy seems to be out of sync with federal securities regulations. Under the Securities and Exchange Commission's proxy rules, the proponent of a shareholder proposal or a representative "must attend the meeting to present the proposal."
Con Hitchcock, a Washington lawyer who often represents shareholder activists, has witnessed firsthand the difficulty getting the floor during Whole Foods' post-meeting question and answer period - at least for
animal-rights advocates. Hitchcock was on hand to present a proposal for a client in 2003 and watched as company officials walked to the back of the room for coffee as a member of People For the Ethical Treatment of Animals spoke.
Hitchcock also was surprised by the company's policy, given its "counterculture" reputation going back to its early days as a fledgling natural foods market in the Texas college town back in the early 1980s.
"Glasnost hasn't come to Whole Foods yet," he said.
-By Phyllis Plitch, Dow Jones Newswires; 201-938-2357; phyllis.plitch@dowjones.com
(END) Dow Jones Newswires
March 05, 2006 10:11 ET (15:11 GMT)
Copyright (c) 2006 Dow Jones & Company, Inc.
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Impact of SOX on Private Companies
Submitted by: Kristen Griffin, GreenTarget Global Group
An interesting article appeared today on the Dow Jones Newswires by Judith Burns. It references a study completed by law firm Foley & Lardner measuring "The Impact of Sarbanes-Oxley on Private Companies." Judith Burns cites some compelling statistics. We invite comments.
Most Non-Profits, Pvt Cos Abide By Sarbanes-Oxley -Survey
By Judith Burns
Of DOW JONES NEWSWIRES
592 words
9 March 2006
00:01
Dow Jones News Service
English
(c) 2006 Dow Jones & Company, Inc.
WASHINGTON (Dow Jones)--Non-profit organizations and private firms are choosing to abide by a 2002 law intended to clean up corporate accounting and governance, according to a survey to be released Thursday.
Although only public companies are subject to strict new requirements adopted by Congress to curb corporate scandals, the survey found fully 86% of the private companies and non-profits are complying with it.
The survey, sponsored by the law firm of Foley & Lardner LLP, found a majority of non-profits and private firms have made or plan to make changes to comply with the 2002 Sarbanes-Oxley Act. The law requires that executives certify the accuracy of financial results, that outside auditors examine clients' internal controls and that directors oversee outside auditors and approve any non-audit services they provide. It also calls for firms to adopt ethical codes and establish procedures to protect whistleblowers.
According to the survey, 80% of non-profits and 64% of private firms have acted on their own to meet such standards - a gap the survey called logical given that non-profits tend to answer to more people than private firms, which typically are closely held.
Auditors are exerting pressure in some cases. More than half of the larger private firms surveyed said they are complying with the Sarbanes-Oxley law because their outside auditors recommended doing so. The study suggested auditors may pressure larger clients to comply because they perceive them to pose greater risks than smaller companies.
Some private companies simply are looking ahead, saying they want to be "SOX-ready" in case they decide to go public, seek outside investors, or merge with or be acquired by a public company.
Others said complying with a law they could ignore bolsters their reputation with potential customers.
"While they're ridiculous requirements for a closely held corporation, compliance helps us to be competitive," said one survey participant.
For others, the requirements set by the Sarbanes-Oxley Act represent a new standard for best management practices, making compliance a smart business decision.
"It's the right thing to do," a survey participant commented.
Costs for voluntary compliance with the law added around $120,000 of annual expenses at private companies that took part in the survey, a 26% increase from outlays before the 2002 law, the survey said. Non-profits reported additional annual costs of $75,000, up 21%.
Survey participants were split on the subject of whether compliance costs are too high relative to the benefits. About 32% said the benefits outweigh the costs, while 29% said the costs outweigh the benefits. Another 38% termed the costs and benefits about equal.
Grousing drops dramatically when compliance with the law is voluntary, the survey found. About 84% of private organizations said they believe their corporate governance reforms are "about right," in contrast to 82% of public company officials surveyed last year, who called them "too strict." The survey attributes that to the fact that private firms were able to pick and choose the reforms that made sense for their organization, while public companies had no such choice.
The survey was conducted in January and is based on responses from corporate executives, compliance officers, directors and other corporate officials at 36 private, for-profit companies and 20 non-profit organizations. No margin of error was assigned to the results.
-By Judith Burns, Dow Jones Newswires; 202-862-6692; Judith.Burns@dowjones.com [ 03-09-06 0001ET ]
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Contested Election Reimbursement Proposal Clears SEC Hurdle
Submitted by: Rosanna Weaver, ISS Governance Research Services Analyst
Should dissidents get reimbursed for running proxy contests even if they lose? That's the premise of a new proposal filed by the American Federation of State, County and Municipal Employees (AFSCME) now expected to go to a vote at three companies. The proposal calls on American Express, Citigroup and Bank of New York, to amend their bylaws to allow "for reimbursement of expenses in proxy contests where a dissident shareholder seeks to elect less than a majority of the board." Under the proposal dissidents who actually succeed would be fully reimbursed, but even some losers could receive partial reimbursement under a complex sliding scale, though only if the vote exceeds a certain threshold. AFSCME argues that proxy contests have been rare because the costs for drafting and mailing proxies, and for hiring advisors, are high.
Both American Express and the Bank of New York attempted to exclude the proposals on several grounds including that it was in contrast to commission rules requiring security holders to bear the mailing costs associated with proxy solicitations. The companies also sought to exclude the proposal by citing SEC Rule 14a-8, which allows for omission if a shareholder resolution relates to director elections, or deals with matters related to the company's ordinary business. The SEC rejected the companies' assertions, so the proposals will now appear on proxy statements beginning next month.
Rich Ferlauto, director of pension and benefit policy at AFSCME, says that, "In lieu of proxy access, reimbursement for solicitation expenses will give shareholders a needed leg up in the board room when it comes to confronting unresponsive and unaccountable boards."
If the proposal passes--a long shot at best given it's a first-year proposal, analysts say--will the number of such contests increase?
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March 8, 2006 |
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Update on Shareholder Resolutions on Climate Change
Submitted by: Doug Cogan, Social Issues Services Deputy Director
Faced with record warmth, unprecedented hurricane activity and rapid shrinking of polar ice caps, investor and industry attitudes about confronting climate change are shifting. Skeptics no longer question whether human activity is warming the globe, but how fast. Companies at the vanguard no longer question how costly it will be reduce greenhouse gas emissions, but how much money they can make doing it. Financial markets are starting to identify companies that are moving ahead on climate change, while those lagging behind are being assigned more risk.
In line with these changing attitudes, more shareholder resolutions on climate change are resulting in withdrawal agreements, whereby companies agree to disclose information on the financial risks and opportunities they face from climate change. Last year, 16 of the record 33 climate change resolutions filed ended in withdrawals. Already in 2006, eight companies have agreed to issue reports or expand dislosure on ways to reduce their greenhouse gas emissions and increase energy efficiency. Another dozen or so resolutions remain pending for the 2006 proxy season. (The eight companies with 2006 withdrawal agreements are Alliant Energy, Anadarko Petroleum, Great Plains Energy, Home Depot, Lowes, MGE Energy, Simpon Property Group and WPS Resources.)
The launch of the Kyoto Protocol in 2005 has made managing greenhouse gas emissions a fact of life for American companies doing business in key markets abroad, like Europe, Canada and Japan. As the United States moves to join this international effort in the years ahead, climate governance practices will assume an increasingly central role in corporate and investment planning. How effective companies are in managing these new risks and opportunities will also have a growing impact on shareholder value and the bottom line -- two things that matter to all investors.
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March 7, 2006 |
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More Nations Open the Door to Securities Lawsuits
Submitted by: Ted Allen, Director of Publications
While there have been few significant securities class-action settlements outside the United States, a growing number of countries have enacted legislation in the past few years to allow shareholders to join together to bring claims over investment losses.
Among those nations are South Korea, Israel, Sweden, Germany, Italy, and the Netherlands. While there have been no billion-dollar settlements, investors have obtained settlements reaching $100 million in Canada and Australia.
"Securities class actions historically have been a U.S. phenomenon," noted Bruce Carton, vice president for Securities Class Action Services, during an ISS panel on international securities litigation on Feb. 16. "But last year, there was a surge in interest among global institutional investors in non-U.S. securities class actions."
However, many obstacles to investors remain, such as "loser pays" rules on attorneys' fees, bans on contingency fee arrangements, and limited pre-trial "discovery," that don't exist in the United States.
Nevertheless, these legislative developments are part of the growing globalization of securities litigation. In 2004, a record 29 foreign-registered companies were hit with securities class actions in U.S. courts, according to a study by PricewaterhouseCoopers. Meanwhile, more international institutions are serving as lead plaintiffs in American securities cases and are filing claims for shares of those settlements. These trends also reflect the increasing cooperation among shareholders across national borders. For instance, a coalition of international investors is suing News Corp. in Delaware over its decision to extend its poison pill without seeking shareholder approval.
Australia
Compared to other nations, Australia has a relatively long history of securities class actions. Those suits have been available since 1992 in Australia's federal courts. The number of lawsuits has been small but is growing, according to Ben Slade, a principal with the Maurice Blackburn Cashman law firm in Sydney.
In 2003, a court approved a $97 million settlement (plus legal costs) for investors in GIO Australia Holdings. Overall, GIO investors recovered about 60 cents on the dollar for their claimed losses.
Among the ongoing cases in Australia are those involving MediaWorld and Concept Sports, where investors sued over prospectus statements, and Aristocrat Leisure Limited (alleged failure to disclose information).
On Jan. 20, investors filed a class action lawsuit against Telstra, Australia's largest telecommunications company. The suit contends that Telstra violated listing rules when it gave a secret briefing about its financial woes to ministers in the federal government, which owns a 50 percent stake in the company, and then waited until the following month to disclose that same information to investors. Lawyers for investors warn that the potential damages in the case could total "hundreds of millions."
Like other British Commonwealth nations, Australia has a "loser pays" rule for attorneys' fees. In other words, investors face the potential liability of having to pay millions of dollars in corporate legal fees if their lawsuit is unsuccessful. In addition, there are less financial incentives for plaintiffs' lawyers to assume the risk of litigating these cases than in the United States. Contingency fee arrangements, a common American practice where plaintiffs agree to give their lawyers a certain percentage (e.g., 33 percent) of their total recovery, are prohibited.
However, lawyers may enter into "conditional fee" arrangements where no fee is owed unless the client prevails. Conditional fees can be set at the lawyers' usual hourly rates, but some Australian jurisdictions allow lawyers to recover an "uplift" of as much as 25 percent more than their usual rates. That increase is still substantially less than what American lawyers typically receive when they obtain a securities class settlement.
Another significant barrier is that Australian courts have not yet accepted the "fraud on the market" theory. That concept, which presumes that the market price of a security reflects all the publicly available information about a company, has been accepted in the U.S. for decades and spares investors from having to prove that they relied on particular misstatements or omissions by a company.
Canada
In Canada, most of the securities litigation has been in the province of Ontario, which is home to the Toronto Stock Exchange and most major Canadian companies.
On Jan. 1, new securities legislation took effect in Ontario. Most significantly, the law extended the right to sue for damages to secondary-market purchasers (i.e., any investors who bought shares from other investors, rather than through an initial public offering or takeover).
The amended law includes a "deemed reliance" provision for corporate misrepresentations made to the secondary market. In the past, Canadian courts have refused to accept the U.S. "fraud on the market" theory.
Prior to this year, there had been a few settlements ranging from $5 million to $100 million, said John Chapman, a partner with the Miller Thompson law firm in Toronto. There was one significant trial decision, in which the investors prevailed. However, that decision was reversed on appeal in December and may discourage other investors from filing lawsuits unless the original verdict is revived, Chapman noted.
The new Ontario legislation is similar to U.S. law, but it does include damage caps and various limits to discourage a proliferation of secondary market claims, Chapman said. For instance, officers and directors are protected by a damage cap (awards are limited to 50 percent of the defendant's compensation last year) unless there is a showing of fraud. Companies, even in cases of fraud, can only be ordered to pay as much as 5 percent of their market capitalization.
The law imposes a mandatory "loser pays" rule on secondary market claims, which will deter some investors from filing lawsuits unless they have a strong claim. At the same time, other factors will encourage more litigation. Contingency fees are permitted, class certification requirements are not onerous, and there is a group of increasingly active institutional investors that are willing to bring securities claims and use lawsuits to seek corporate governance changes.
At the ISS panel on Feb. 16, Chapman said he expects the new law will lead to "some significant amount of securities litigation in Canada," but notes that any increase will be limited because many large-cap Canadian companies are also listed on U.S. exchanges.
Those companies most likely will still face lawsuits in the U.S. courts, where the securities laws remain more favorable to investors. One recent example is Brampton, Ontario-based Nortel Networks, which was sued in federal court in New York by the Ontario Teachers' Pension Plan and other investors. Last month, the company agreed to a $2.47 billion settlement (in cash and stock).
Germany
In the past, investors had no class-action remedy and were required to bring individual claims against companies. This system has proved to be cumbersome and disadvantageous to investors. One prominent example is Deutsche Telekom, which was sued by investors over statements by executives about company assets before a 2000 share offering. The company resolved a U.S. class action for $120 million, but it has refused to settle with German shareholders, who are bringing more than 2,100 separate lawsuits.
In November, new legislation took effect that allows for investors or corporate defendants to seek the creation of a model case to resolve common legal and factual questions in various shareholder lawsuits. If more than nine applications for a model case in the same matter are received within four months, than a Higher Regional Court will convene a model case proceeding. After this court issues a ruling on common issues, then lower courts will then decide damages on an individual basis, according to Martin Heinsius and Markus Muller-Dott, who are attorneys in the Frankfurt office of DLA Piper Rudnick Gray Cary.
However, Germany has other provisions that discourage securities litigation. Contingent fees are prohibited, and the losing party is responsible for all the costs of the proceedings.
Israel
Investors can bring a securities class action in Israel if they can convince a judge that they have a "likelihood of prevailing." This provision "allows judges a significant filter" to limit the cases that go forward, noted Avi Wagner, a lawyer with Glancy Binkow & Goldberg.
More than three dozen Israel companies also have U.S. listings. Consequently, some of those firms have faced securities lawsuits in the courts of both nations. For example, NICE Systems was sued by investors after it restated revenue for 1999 and the first three quarters of 2000. The company eventually reached a $10 million settlement to resolve U.S. class claims and also agreed to pay $4 million to resolve an Israeli class action.
The use of such parallel proceedings may increase in the future. In August, the Israeli Knesset agreed to expand dual-listing rules to allow Israel companies that trade on the Nasdaq SmallCap market or the London Stock Exchange to also trade on the Tel Aviv Stock Exchange with no additional regulatory requirements.
In Israel, the statute of limitations (i.e., the required period for filing suit) is seven years, longer than U.S. law provides, so "it is possible that you will see some more class actions in Israel as lawsuits work their way through U.S. courts," Wagner said during the Feb. 16 panel.
Italy
U.S.-style securities class actions don't exist in Italy, but the nation does have a 1998 law that allows national consumer associations to demand that companies cease unlawful conduct. These associations can't claim damages on behalf of individual consumers, but they can seek a court order requiring corrective action by the company.
On Dec. 21, 2005, the Italian Parliament issued the "Decreto Risparmio," which calls on the government to establish within 18 months a set of mediation and arbitration procedures to compensate non-professional investors. Stefano Modenesi and Maria Silvia Casano, lawyers with DLA Piper Rudnick Gray Cary in Rome, said the implementation of this decree will depend on the results of the next national election in April.
Netherlands
Investors can't bring class actions under Dutch law, but they can join together to bring a collective action, typically through an association or a foundation, said Ellen Soerjatin, a partner with DLA Piper Rudnick Gray Cary in Amsterdam. Traditionally, monetary damages have not been available, but such a group can seek a court order to bring about change at a company.
However, new legislation took effect last June that allows for the creation of classes for settlement purposes.
South Korea
In 2004, South Korea adopted securities class-action legislation that was modeled after U.S. law, but the Korean law includes several significant requirements that have deterred lawsuits.
For instance, investors must assemble a class of at least 50 plaintiffs. In addition, those investors collectively must hold at least .01 percent of the defendant corporation's securities, which "might really be a big hurdle for potential claimants," said Y.J. Cho, a lawyer with Bae, Kim & Lee. The law also established a two-year grace period for companies to disclose accounting irregularities, and exempted firms with less than 2 trillion Korean won ($2 billion) in assets from liability for conduct before Jan. 1, 2007. Finally, the right of discovery is limited in Korea. Accordingly, some investors won't be able to obtain the corporate documents they need to build their cases.
So far, no class lawsuits have been filed successfully under the new law. As Cho noted, "the outcome in Korea may be explained as an overreaction to U.S. trends," noting the efforts by U.S. lawmakers in 1995 and 1998 to limit securities lawsuits.
However, individual investors in Korea have been filing an increasing number of lawsuits, which rose from 18 in 2000 to 326 cases in 2004.
Sweden
Sweden adopted class action legislation in 2003. Some observers predicted that it would lead to a flood of litigation, but that hasn't happened, noted Claes Rainer and Kennedi Akdogan of DLA Piper Rudnick Gray Cary.
So far, just one securities class action has been filed--by investors/policy-holders in Skandia Livs Asset Management, a provider of long-term savings and pension accounts. That company was acquired by Den Norse Bank in 2002, and the payment went to the firm's parent, Skandia. About 15,000 Skandia Livs investors sued in 2004, arguing they should have received that payment. That case is now in arbitration, and the investors have said that they may revive the class action if they don't fare well in arbitration.
Like other nations, Sweden has various legal rules that deter securities class actions. Contingency fees are banned and unsuccessful plaintiffs may be ordered to pay the defendant's legal costs. While the class action certification rules are similar to those in the U.S., Swedish law requires investors to "opt in" to join a class lawsuit. By contrast, the U.S. has "opt out" rules, which makes it far easier for lawyers and lead plaintiffs to assemble large groups of investors to seek damages for.
This article is derived from a Feb. 16 ISS panel, "Securities Class Action Litigation Moves Beyond U.S. Borders." The panel was hosted by ISS Vice President Bruce Carton and featured lawyers from around the world. To view of an online replay of this panel, please go here.
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March 6, 2006 |
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Linking Pay to Performance: A Best Practice Example
Submitted by: Cheryl Gustitus, ISS Senior Vice President of Marketing and Communications
When GE's Jeff Immelt delivered his keynote speech at ISS' 2005 corporate governance conference, he talked about his strong belief in tying a CEO's pay to company performance. As Chairman and CEO, he was talking about tying his own pay to his company's performance.
In GE's recent proxy filing, we learned that Mr. Immelt put his money where his mouth is by requesting that his bonus be paid in performance shares tied to GE's financial and stock-market results. His ensuing share grant of 180,000 shares is valued at $6 million, but GE's cash flow from operations must increase by 10% annually the next two years for Mr. Immelt to keep half the shares, and must outperform the Standard & Poor's 500-stock index over the same period to retain the other half. Of course, this is nothing new to Mr. Immelt as his pay has been directly tied to performance since he took the helm of General Electric in 2001.
In GE's recently released annual report, Mr. Immelt said that he asked for the performance shares in lieu of cash to be "totally aligned" with shareholders. How refreshing.
Many of us at ISS sit across the table from America's CEOs on a regular basis. In representing over 1600 institutional investors, we understand that the level of a CEO's integrity has a direct and tangible impact on the way in which investors interact and support a company through good performance and bad.
As chairman and CEO, Jeff Immelt runs GE externally, the same way he runs it internally and that's why shareholders trust him and investors believe in him. He doesn't say one thing in speeches and annual shareholder meetings and another thing behind boardroom doors. We applaud you, Mr.Immelt, for embracing not just the letter of good corporate governance, but the spirit.
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2006 Season Preview: Social Issues
Submitted by: Carolyn Mathiasen, Social Issues Service Editor
Shareholders concerned about social and environmental issues have filed more than 300 proposals so far for U.S. companies' annual meetings in 2006---down slightly from the 330 social issues proposals tracked at this point last year.
Environmental concerns again generated the largest single category of social issues proposals, with 75 filed so far. Almost half of these proposals question companies about their efforts to reduce greenhouse gas emissions or otherwise prepare for global climate change. And approximately 20 firms are being asked to review or reduce the toxins they produce; most of those proposals are new and specific to the target companies' products or operations.
For a third year, a diverse coalition of investors is asking companies to report in detail on their political contributions; at least 38 proposals have been filed on these and other corporate political issues.
Animal Welfare
The People for the Ethical Treatment of Animals (PETA) have filed resolutions at 3M, Altria, Chevron, DuPont, and Wyeth, asking the companies to adopt a policy to reduce the use of animals and ensure "superior standards of care." Another PETA proposal asks Abbott Laboratories, Bristol-Myers Squibb, General Electric, Eli Lilly, Merck, and Pfizer to report on the feasibility of amending their animal care standards to ensure that those policies apply to contract and outside laboratories.
Eight PETA proposals call for companies to phase in "controlled atmosphere killing" (CAK), which proponents say is a more humane method for slaughtering chickens. CAK resolutions are pending at McDonald's, Applebee's, Outback Steakhouse, Safeway, Wal-Mart, and Wendy's International. Proposals at Hormel, Pilgrim Pride, Tyson Foods, and Yum Brands ask for reports on the feasibility of the CAK method.
Banking Issues
Church groups and the Calvert Group are asking Bank of America to "develop higher standards for the securitization of sub-prime loans" to avoid those that involve predatory practices. NorthStar Asset Management is asking Wells Fargo to provide information on the costs of its loans broken down by racial and ethnic groups. A resolution at Wells Fargo by the Community Reinvestment Association of North Carolina discouraging "payday lending" has been omitted.
Board Diversity
Activist investors continue to press companies to add women or minorities to their boards. This year, church groups have filed board diversity resolutions at Bed, Bath & Beyond; Overseas Shipholding; and Torchmark, asking each to "publicly commit itself to a policy of board inclusiveness." The resolution is a repeat at Torchmark, where it received 11.6 percent support last year. It was filed and withdrawn at CBS because the proponents held the wrong class of stock. Domini Social Investments has filed the same resolution at Monster Worldwide. Calvert's social investment funds, along with the Connecticut Retirement Plans and Trust Funds, have filed diversity resolutions at Ameritrade, Astoria Financial, Cheesecake Factory, Commerce Bancorp, Panera Bread, and Renal Care. The proponents negotiated a withdrawal agreement at Danaher.
Charitable Contributions
Trillium Asset Management is asking Avon Products to provide more information about its support for breast cancer research. Conservative groups concerned about corporate support for Planned Parenthood have filed resolutions seeking more disclosure on charitable donations. Shareholders associated with Human Life International have filed resolutions with Johnson & Johnson, Northern Trust, and Textron, asking each company "to implement a policy listing all charitable contributions on the company website." The resolution has been omitted at Cigna and Nationwide Financial Services on technical grounds.
Environmental Proposals
Environmental concerns continue to inspire the most resolutions and the greatest variety. For 2006, fewer resolutions focus on climate change—a reflection of the increased negotiation by companies rather than a diminution of the issue's importance for activist shareholders. Twenty-five proposals have been filed. There is a significant increase in company-specific proposals on hazardous chemicals.
New York City's pension funds, Trillium Asset Management, the Nathan Cummings Foundation, and other investors are filing a resolution asking for a report on greenhouse gas emissions, which are blamed for contributing to global warming. This year, the proposal was filed at Devon Energy, Dominion Resources, Peabody Energy, Vintage Petroleum, and Xcel Energy. The proposal was withdrawn at Alliant Energy, Anadarko Petroleum, MGE Energy, WPS Resources and Great Plains Energy after the companies agreed to prepare reports, and was omitted at Sempra Energy.
Four climate-change resolutions were filed at ExxonMobil, one of the longest-running recipients of greenhouse gas proposals. A new resolution from the Capuchins asks the company to become the market leader in low-carbon emissions. Two resubmissions from 2005, both calling for reports on the company's greenhouse gas emissions, were withdrawn after the company released a report in February giving information on those emissions. The shareholder proponents were not entirely pleased with the report issued by the company, but they believed that their resolutions were now vulnerable to challenge at the Securities and Exchange Commission. The fourth resolution, also calling for a report on greenhouse gas emissions, has been challenged at the SEC and is vulnerable to omission.
Church groups have resubmitted a resolution at General Motors on auto emissions. A revised proposal at Ford Motor asks for a report on the automaker's lobbying efforts to influence fuel economy standards.
In the new toxics campaign, Domini is asking Avon Products to prepare a report on the company's policy on using substitutes for "chemicals that are known or suspected carcinogens, mutagens, and reproductive toxicants." Boston Common Asset Management has asked CVS to report on its use of chemicals that have been banned by the European Union. Citizens Funds worked out a withdrawal of a similar proposal at Johnson & Johnson. A new proposal by Green Century Funds asks Whole Foods Market to report on its procedures for "monitoring and reducing consumer and environmental exposure to endocrine-disrupting chemicals." Green Century filed a similar proposal at Wal-Mart Stores and is asking ServiceMaster to report on the feasibility of discontinuing the use of synthetic pesticides.
The LongView Collective Fund fund has filed a resolution at DuPont over its use of chemicals to make Teflon and other products. Green Century has asked Dow Chemical and DuPont to report on the feasibility of increasing plant security and other steps to reduce the chance of catastrophic chemical releases. The Episcopal Church is asking the board of California-based Chevron to apply the state's stringent environmental standards to all of its worldwide operations. Green Century again is asking ExxonMobil and Chevron for reports on the potential environmental damage from drilling in protected areas, such as the Arctic National Wildlife Refuge.
Calvert is asking Weyerhaeuser to assess "the feasibility of earning Forest Stewardship Council (FSC) certification for its forest lands and forest products manufacturing facilities." Domini and other investors are asking Kimberly-Clark, International Paper, and Limited Brands to report on the feasibility of phasing out the use "of non-FSC certified fiber within 10 years."
As church groups continue to press old issues, two resolutions ask Dow and DuPont for reports on the potential adverse impacts of genetically engineered organisms. Resolutions at McDonald's, Safeway, Yum Brands, and Wendy's International ask the companies to label all genetically modified food products.
Equal Opportunity Issues
Prohibition of workplace discrimination based on sexual orientation again is a major issue. The New York City pension funds and SRI funds filed 20 resolutions, but many of these are not likely to come to a vote. In 2005, 20 of 26 proposals were withdrawn after companies agreed to change their written EEO policies to outlaw discrimination because of sexual orientation.
These proposals ask each company "to explicitly prohibit discrimination based on sexual orientation and to substantially implement that policy." Those proposals are pending at AmSouth, Expeditors International, ExxonMobil, Robert Half International, and Leggett & Platt. The resolution was withdrawn at Baldor Electric, Convergys, Cooper Tire & Rubber, Emerson Electric, Fortune Brands, GenCorp, General Dynamics, Halliburton, Paccar, Sherwin-Williams, and Strayer Education after the companies agreed to amend their policies.
Several anti-gay rights resolutions are also pending. Members of Human Life International are asking American Express, Bank of America, Ford, and IBM to amend their EEO policies "to explicitly exclude reference to any matters related to sexual interests, activities or orientation."
Health Issues
The Minnesota State Board of Investment resubmitted high-scoring 2005 proposals to Eli Lilly, Merck, and Pfizer, asking the companies to assess their policies of limiting the availability of their products to Canadian wholesalers or pharmacies that allow purchase of products by U.S. residents. The pension fund also filed that proposal at Wyeth, where it did not come to a vote last year.
The companies didn't try to get those resolutions omitted on substantive grounds last year, but this year Lilly, Merck, and Pfizer challenged them based on SEC Staff Legal Bulletin No. 14C (June 28, 2005). That bulletin concluded that companies should be able to exclude resolutions on environmental or public health issues as ordinary business if they "focus on the company engaging in an internal assessment of the risks or liabilities that the company faces as a result of its operations." Those resolutions fell into that category, the companies maintained, and the SEC staff agreed.
Staff Bulletin 14C also led to the demise of a resolution seeking reports on the economic effects of the HIV/AIDS, tuberculosis and malaria pandemics at ConocoPhilips, Marathon Oil, and Pfizer. The resolution is still pending at Gilead Sciences, which did not challenge the resolution. The resolution has been withdrawn at Anheuser-Busch and Abbott because the proponent believed omission was inevitable. The proposal also was withdrawn at Chevron.
Human Rights
Religious groups have filed new proposals at Halliburton and Visteon, asking the companies to review their human rights policies. The Catholic Equity Fund is also asking Chevron to "adopt a comprehensive, transparent, verifiable human rights policy." The Capuchins have resubmitted a high-scoring fourth-year proposal to Boeing, asking the board "to develop and adopt a comprehensive human rights policy."
New York City resubmitted a resolution at ExxonMobil that asks for a report on the company's security arrangements with the Indonesian government and private security forces. The city pension funds resubmitted a similar proposal at Freeport-McMoRan Copper & Gold. Both resolutions received about 7 percent support last year. Harrington Investments is continuing its campaign to get companies to agree to an 11-point China principles code and is filing again at 3M, Cummins, Illinois Tool Works, and IBM.
For the 22nd year, the New York City pension funds are asking firms to implement the MacBride principles against religious discrimination in employment in Northern Ireland. The city funds refiled at Claire's Stores, Crane, and Yum Brands and filed for the first time at Berkshire Hathaway, Dollar Thrifty, Manpower, and Henry Schein. That proposal was withdrawn at Dollar Thrifty and Berkshire Hathaway.
Labor Standards
The New York City pension funds are asking companies again to adopt labor standards based on the standards of the International Labor Organization (ILO) and United Nations and agree to outside monitoring. For 2006, the city funds have filed proposals at Altria, C.R. Bard, Chico Fas, Cooper Industries, DuPont, Goodyear Tire & Rubber, Hasbro, Kimberly-Clark, Lear, Limited, Mattel, Primus Telecommunications, Timberland, and Walt Disney. The resolution was withdrawn at Avon and Ford Motor after agreements with the companies.
Domini has refiled a resolution asking Apple Computer to amend its contracts and supplier code, based on the ILO standards, and establish a monitoring process. A new AFL-CIO resolution asks Peabody Energy to adopt labor practices based on the ILO conventions.
Global Exchange, inspired by concerns about the use of child labor on cocoa farms in West Africa, asks Hershey Foods to report on all sources for the cocoa used in the candy-maker's products. As You Sow asks Wal-Mart's board to amend the company's policies "to bar intimidation of company employees exercising their right to freedom of association."
Military and Security Issues
For 2006, church shareholders are asking Lockheed Martin and Textron to report on their "depleted uranium and other nuclear weapons-related involvement." The Sisters of Mercy have filed a proposal at United Technologies seeking a report on foreign weapon sales, and the School Sisters of Notre Dame are asking Boeing to develop critera for accepting military contracts. For the last four years, New York City has asked companies to establish board committees to review operations in states that allegedly sponsor terrorism. The proposal has been aimed at operations in Iran, and the city has been able to withdraw it after target companies agreed to fulfill the request.
Political Contributions
For the third year, shareholders are seeking more information on corporate political contributions. The proposals ask companies to issue semi-annual reports on all political contributions and disclose the guidelines for those contributions. Most of the resolutions also ask for identification of the persons involved in making contribution decisions. The resolutions include a request for information on contributions to so-called "527 committees." While these committees cannot overtly support or oppose specific candidates, their actions during the 2004 elections prompted concerns about their influence.
The shareholder campaign has been spearheaded by labor unions, but SRI funds, church groups, and New York City are also filing. Church groups have focused on drug companies, while Domini has filed with AT&T, BellSouth, and Verizon Communications.
So far, more than 30 resolutions have been filed. Resolutions were submitted at Abbott Laboratories, Amgen, AmSouth Bancorporation, AT&T, BellSouth, Bristol-Myers Squibb, Caremark, Chevron, Cinergy, Citigroup, Clear Channel Communications, ExxonMobil, General Dynamics, Home Depot, IBM, JPMorgan Chase, Marsh & McLennan, Pfizer, St. Paul Travelers, Charles Schwab, Southern, Staples, SunTrust Banks, Union Pacific, Verizon Communications, Wachovia, Wal-Mart, Washington Mutual, and Wyeth.
Senior Research Analyst Jan Fetter-Degges contributed to this article. A longer version of this article appeared in the January 2006 issue of Corporate Social Issues Reporter, a publication of ISS' Social Issues Service unit.
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March 3, 2006 |
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Will Investors Choose Majority Vote or Pfizer?
Submitted by: Thaddeus C. Kopinski, Staff Writer
In mid-March, majority election proposals will come to a vote for the first time at three companies that have adopted director resignation policies.
Shareholders at Analog Devices on March 14, and at Hewlett-Packard and Ciena the next day, will have the first chance in the 2006 U.S. proxy season to vote on majority election proposals by the United Brotherhood of Carpenters and Joiners. More significantly, these investors will also be first to decide whether a director resignation policy obviates the need for a full majority standard.
"My guess is that if these companies had not adopted the director resignation policy there would be a stronger vote in favor of the shareholder resolution," Charles Elson, a law professor at the University of Delaware, told Governance Weekly. "The availability of this middle-of-the-road approach [between a simple plurality and a majority standard] will bring the numbers down somewhat, but given the general appeal of majority vote, it will still get strong support."
The proponents are more optimistic. Ed Durkin, the Carpenters' corporate affairs director, predicts that the resolutions will fare well because mutual funds are more inclined to support majority voting this year, and the union has targeted more broadly held companies.
"I think we will pick up right where we left off and probably just do better than last year," Durkin told Governance Weekly. Even at companies that have a director resignation policy, "shareholders want a majority vote standard," he said.
The three companies adopted director resignation policies last year in response to a strong showing by majority vote proposals filed by the Carpenters and other building trade unions. Those proposals averaged 44 percent of votes cast at more than 60 companies, more than triple the support that similar resolutions received in 2004.
So far, more than 50 companies, starting with Pfizer last June, have adopted director resignation policies while retaining plurality voting. Under those policies, directors are asked to tender their resignation if they receive more "withhold" votes than "for" votes.
Hewlett-Packard sought to exclude the Carpenters' proposal from its proxy on the grounds that it had substantially implemented a majority standard with its resignation policy. On Jan. 5, the Securities and Exchange Commission refused to allow the company to omit the proposal. All three companies referred to their resignation policies in urging shareholders to reject the majority standard proposal.
The Carpenters contend that a resignation policy does not go far enough and that only an explicit majority standard in uncontested elections would provide shareholders with a meaningful vote.
ISS Supports Majority Vote Proposals
The ISS recommendation research staff is advising investors to support the Carpenters' proposals at all three companies. Last year, ISS supported all non-binding resolutions on majority elections, but recommended against a binding proposal by the American Federation of State, County & Municipal Employees (AFSCME) at Paychex, primarily because the resolution did not provide an exception for contested elections.
Under its policies for recommendation research clients, ISS will generally recommend voting in favor of shareholder proposals calling for directors to be elected in uncontested elections with an affirmative majority of votes cast, including binding resolutions requesting that the board amend the company's bylaws to adopt a majority standard. However, the policy leaves the door open for recommending against such proposals, if the company adopts an alternative policy and meets three requirements:
-The company adopts and discloses in detail formal corporate governance principles that present a meaningful alternative to a majority standard and provide an adequate response regarding both new nominees and incumbent nominees who fail to receive a majority of votes cast.
-The company articulates to shareholders why this alternative to a full majority standard is the best structure at this time for demonstrating accountability to shareholders.
-The company has a history of accountability to shareholders, e.g., it has responded to majority supported shareholder proposals in the past and holds annual elections for all directors.
For more details on this ISS policy, please visit here.
In the case of Analog Devices, ISS noted that the company did not explain why its new director resignation policy is preferable. The company still has a classified board and last year paid a $3 million SEC penalty over its stock-option practices. ISS also faulted Hewlett-Packard for not providing sufficient details on the director resignation process and timelines, as well as not explaining adequately why the policy was most appropriate.
Likewise, ISS concluded that Ciena failed to make the case for its director resignation policy. The company also has a classified board, a poison pill that was adopted without investor approval, restrictions on shareholders' ability to act by written consent, and supermajority voting requirements, ISS noted in its vote recommendation.
Upcoming Votes
The Carpenters, which account for submitting more than half of the roughly 140 majority election proposals filed this proxy season, continue to press for election changes at almost a dozen other companies that have adopted director resignation policies, including Borders, Capital One, Chubb, Eli Lilly, General Electric, Mack-Cali Realty, Marsh & McLennan, MeadWestvaco, Raytheon, Safeway, and Wells Fargo.
Another Carpenters' majority vote proposal will be on the ballot on April 6 at Novell, which has not adopted a director resignation policy. A non-binding majority elections proposal, filed by AFSCME, is on the ballot April 4 at Morgan Stanley. AFSCME has filed binding proposals at Honeywell, Qwest Communications International, and Wells Fargo, and withdrew one from United Technologies, which has adopted a majority standard.
The Carpenters' union has withdrawn its non-binding proposals at companies that have adopted a majority election bylaw and a director resignation policy, including Pepco, Dell, Gannett, and Supervalu, and Motorola. The union also withdrew its proposal at Texas Instruments, which adopted a majority standard without a director resignation policy.
Intel's Approach
In January, Intel became one of the first major companies to adopt a "pure" majority vote standard. The computer-chip maker was part of a corporate-labor work group organized by the Carpenters last year to study director elections. Another company that has recently adopted this ""Intel" model is Career Education. Last year, management's three nominees each received a record withhold vote--roughly 70 percent of votes cast.
Ameren adopted a similar director resignation policy and switched to a majority standard last August when the utility company abolished cumulative voting, in keeping with the corporate laws of Missouri, its state of incorporation, said Ronald Evans, the company's deputy general counsel.
Under the Intel model, new nominees (who haven't served for a single day at the time of the election) and do not get a majority of votes cast would not be legally elected, and thus would not be protected by the so-called "holdover rule." The holdover rule, applied both under Delaware law and in states that follow the Model Business Corporation Act, states that an incumbent director even if opposed by a majority of shareholders, remains on the board until a replacement is elected and qualified.
However, that may be a moot point at many companies where it is standard practice for boards to appoint new directors to office before the annual meeting, which would give those new nominees incumbent status, according to Patrick McGurn, ISS senior vice president. Neither the Intel nor Pfizer policies require the immediate exit/ouster of an incumbent director who fails to get the requisite support level. State law holdover director rules, by and large, keep the final decision on the continuation of directors in the hands of the board (or a subset of the directors).
The Carpenters' union said it has also withdrawn proposals at Advanced Micro Devices, Federal Realty Investment Trust, Hartford Financial Services, ProLogis, Temple-Inland, and UnumProvident after these companies agreed to institute a majority standard. Durkin predicted that another half a dozen companies will adopt a majority standard in the coming weeks and that the total may reach "a few dozen."
"In the aftermath of another strong season this year, we are going to see more companies moving," Durkin said. "The strong momentum is not lost on too many of these companies."
There is another set of more than 40 companies, including Abbott Laboratories, Automatic Data Processing, Dillard's, Emerson Electric, U.S. Bancorp, and Viacom that have adopted a majority standard without a resignation policy, because of the jurisdiction where they are incorporated (e.g., Illinois, Missouri, or Puerto Rico), as a result of a litigation settlement, or voluntarily. Most of these companies changed their election standards before the 2005 proxy season.
Looking Ahead
Charles Elson, who also is director of the John L. Weinberg Center for Corporate Governance at the University of Delaware, predicts that progress will continue to be made toward some form of a majority standard, but he said the emerging issue will be facilitating more contested elections.
"I don't think majority voting is the answer to the whole problem; the real answer is creating more vibrant elections," Elson told Governance Weekly. "To me, the long-term solution is some kind of a proportional reimbursement provision for a short-slate successful proxy contest."
Research Editor Rosanna Landis Weaver and Director of Publications Ted Allen contributed to this article.
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March 2, 2006 |
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Golden parachute proposals reaching new heights
Submitted by: Rosanna Weaver, ISS Governance Research Services Analyst
Shareholder focus on severance packages continues to grow, and companies are listening. In 2000, only seven such proposals came to a vote and received average support of 30.8 percent; 2005 saw 22 such proposals and average support grew to 54.9 percent. (Support levels reached a high in 2003 when an average of 57 percent of votes cast were cast in favor of the proposals.) ISS' Governance Research Services (GRS) is currently tracking 30 proposals filed for 2006, but don't expect to see them all on proxy statements: four have already been withdrawn and proponents report that they are in negotiations with a number of other companies.
GRS counts over 15 companies that have adopted policies in the past three years including Lucent Technologies (available here and here) and The Kroger Company (available here). Increasingly, however, boards are discovering that not just any policy will placate shareholders. Withdrawals in 2006 often involved extended negotiations on such topics as how to define the term "benefits."
Some companies were unable to persuade shareholders that new policies were adequate. After it failed to convince the Amalgamated Bank's LongView to withdraw its binding by-law proposal at the company this year, Halliburton announced that it would put its own policy on the ballot, and sought a no-action to exclude the fund's binding proposal on the grounds that it conflicts with a company proposal on the same topic. LongView counsel Cornish Hitchcock wrote the SEC to counter that argument: "The company's proposal omits key provisions and adds loopholes that undercut the policy approved by shareholders, with the result that the resemblances between the Fund's 2005 proposal and the Company's proposal are largely linguistic."
In 2005, Borders was able to exclude a proposal as already implemented, even though the proponent felt the policy didn't go far enough. Said proponent John Chevedden's, "The SEC gave Borders a free pass in exchange for a fig leaf."
Will the SEC reach the same decision for Halliburton? Stay tuned.
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March 1, 2006 |
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Banner Year for M&A Activity
Submitted by: Chris Young, M&A Research Director
Interesting AP article out today, in which investment bankers predict a banner year for M&A in 2006, with one of the main catalysts being the efforts of activist investors.
Wall Street's investment bankers expect record year in mergers and acquisitions
By ALEKSANDRS ROZENS
AP Business Writer
1050 words
1 March 2006
00:00
Associated Press Newswires
English
(c) 2006. The Associated Press. All Rights Reserved.
NEW YORK (AP) - The corporate mergers and acquisitions business has been so strong during the first two months of 2006 that investment bankers are predicting a record year for deals.
The year has already brought Boston Scientific Corp.'s $27.2 billion acquisition of Guidant Corp. and The Walt Disney Co.'s $7.4 billion purchase of Pixar Animation Studios Inc.
Analysts attribute the increase in deals in part to heightened activism among investors such as hedge funds that are pushing companies to sell off unprofitable business units. Another factor is the long-held belief that buying a competitor is the fastest way to expand a company.
"It is easier to buy something than build it from scratch," said Andrea Pericli a portfolio manager with Euclid Financial Group, a Washington, D.C.-based hedge fund.
During the first eight weeks of the year, 4,037 deals worth $473 billion were announced, compared with 4,971 totaling $378 billion in early 2005, according to Thomson Financial, a business information company that tracks merger activity. That's the second most active start for Wall Street since early 2000, when AOL bought Time Warner in a deal then worth $182 billion and there were 6,061 transactions worth $728 billion.
Last year, bankers put together $2.7 trillion worth of announced mergers and acquisitions or about 32,900 deals, far above the 31,300 worth $1.96 trillion announced in 2004, Thomson Financial said.
The record for mergers was set in 2000, during the high-tech bubble, when bankers assembled 38,468 deals worth $3.6 trillion.
"We're very optimistic about 2006. The trends driving the markets all seem to have a fair amount of wind at their back," said Michael Boublik, a senior mergers and acquisitions investment banker at Morgan Stanley.
One of the more notable deals so far this year was Boston Scientific's bid for Guidant. Boston Scientific beat out Johnson & Johnson for the medical device maker during a two-month bidding war that illustrates companie's drive to buy other businesses as a way to increase earnings. Boston Scientific saw Guidant as an opening to the $10.3 billion cardiac device market.
Home Depot Inc.'s purchase of Hughes Supply Co., meanwhile, doubled its presence in a $410 billion market focused on business customers such as homebuilders, professional contractors and municipalities. And Disney snapped up Pixar -- the studio behind hits like "Toy Story" and "Monster's Inc." -- to help bolster its library of animated characters that could find their way into theme parks.
"Disney significantly enhances the quality of its film slate," a Merrill Lynch & Co. report said, adding that the deal allows Disney to regain its position "as the leader in animated films."
But many of this year's mergers may result from increased activism by investors such as hedge funds and private equity funds.
Hedge funds, investment vehicles for the wealthy, and private equity funds that manage money for endowments and pensions are always sifting through the marketplace for undervalued or overlooked companies. Managers of both types of funds are under enormous pressure to produce generous returns for their investors; if they own stock in a company that's underperforming in some way, they'll agitate for a sale of all or part of the company's assets.
That's also the strategy of billionaire financier Carl Icahn, who recently pushed Time Warner Inc. management to improve the company's worth by splitting it up into four separate businesses.
There are about 8,000 hedge funds worldwide controlling about $1 trillion in assets and their annual returns dropped from double digit levels just a few years ago to between 6 percent and 8 percent last year, according to Jim Stynes, head of mergers and acquisitions at Deutsche Bank.
"They (hedge funds) have found that being activist will help them get more returns," Stynes said.
This year is likely to see a continuation of the trend toward private equity funds and other investors banding together to bid on a company. In February, The Blackstone Group International, a global investment and advisory firm, and Lion Capital LLP, a London based private equity firm, joined up to buy the European beverages division of Cadbury Schweppes.
Teaming up allows investors to buy larger corporations, and also reduces the number of rivals angling for a company. So there's less likelihood of a bidding war that drives prices higher than a solo buyer is willing to pay.
"We'll see more club deals this year with a number of private equity firms getting together as a consortium," said Iain McMurdo partner at Walkers Global, an international law firm specializing in investment funds.
The pairing of private equity funds has some Wall Streeters returning to a favorite parlor game: Who can assemble a leveraged buyout -- a deal financed with borrowed money -- that surpasses Kohlberg Kravis Roberts & Co.'s purchase of RJR Nabisco Inc. in 1989? That deal, worth $25 billion, has become the stuff of legend, spawning a best seller and movie chronicling the deal, "Barbarians at the Gate."
"It is certainly possible" that the RJR deal could be eclipsed in 2006, said Morton Pierce, head of mergers at Dewey Ballantine LLP, a law firm active in mergers advisory work.
Bankers have put together some high-profile leveraged buyouts since the late 1980s, but none has surpassed the RJR deal. Last year, the top LBO was Ford Motor Co.'s sale of its car rental business, Hertz Corp., to an investor group for $15 billion.
Investment bankers believe mergers and acquisitions will be seen in a wide range of industries this year. Energy companies may buy competitors for their natural gas fields, while rural telephone exchange operators may band together to be more competitive. Within health care, professional staffing companies and medical device makers could be targets, while the auto industry is expected to see activity among auto parts manufacturers.
Gregg Smith, head of mergers and acquisitions at CIT, said so much of the nation's gross domestic product is spent on health care that bankers are sure to keep an eye on that industry. "Deals follow the money," he said.
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MarketWatch Interview: "Proxy Season: In the Hedge Fund Crosshairs"
Submitted by: Sarah Cohn, Director of Communications
On Tuesday, February 28, ISS' Pat McGurn appeared in a MarketWatch segment titled "Proxy Season: In the Hedge Fund CrossHairs." The discussed centered around what's on the horizon for hedge fund activism and executive compensation in the 2006 proxy season. To watch the interview, please click here.
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The Governance Characteristics of Vonage
Submitted by: Paul Wanner, Ratings Manager
Vonage IPO to raise $250 million
In tandem with this month's review of governance practices in the Telecommunications industry, CGQ View studies the corporate governance characteristics of Vonage Holdings Corp. (Vonage). Vonage, a leading provider of Voice over Internet Protocol (VoIP) phone services, recently filed an IPO registration statement with the Securities and Exchange Commission (SEC). The IPO is expected to raise $250 million.
In examining Vonage's governance practices, we rate the company using our standard CGQ rating criteria. Because Vonage's publicly available information is limited to only a few SEC filings--and minimal Web site disclosure--we are not able to determine some of Vonage's governance characteristics. In instances where the lack of disclosure prevents us from classifying Vonage's practices, we give Vonage the benefit of the doubt and rate it with the maximum number of points for the CGQ factors in question. The company's charter and bylaws are to be filed in an S-1 amendment: We also assume that immediately following its IPO, Vonage would be classified as an S&P 600 company. Vonage earned a pro forma Index CGQ of 18.2 (in the lowest quintile) and a pro forma Industry CGQ of 62.3, slightly above average for telecommunications companies.
A red flag has already been raised in the press regarding this offering. The S-1 registration statement filed with the SEC discloses that the founder of the company, Jeffrey Citron, paid $22.5 million in 2003 to settle with the SEC over civil charges that he engaged in improper trading while employed at Datek. The past background of Mr. Citron is listed as one of the risk factors in the registration statement. The preliminary prospectus states, "There is a risk that some third parties will not do business with us, that some prospective investors will not purchase our securities or that some customers may be wary of signing up for service with us as a result of allegations against Mr. Citron and his past SEC and NASD settlements." (These allegations dealt with accusations of improper use of the Nasdaq SOES trading system by Mr. Citron, Sheldon Maschler (a Datek principal, large shareholder, and family friend of Mr. Citron), and others during the period 1993 to 1998.) In early February, Vonage named a new CEO, Michael Snyder, to take over for Mr. Citron, who will remain with Vonage in the capacity of Chairman and Chief Strategist. From all appearances, one surmises that Vonage is attempting to name a CEO that is more palatable to investors. If that is the case, Vonage did not take into account the fact that Mr. Snyder was president of ADT, a division of Tyco, at a time when Tyco took $600 million in charges for accounting problems at ADT.
A review of the officer and director biographies in the IPO filings raises additional questions about the potential effectiveness of the management and oversight team in place at Vonage:
-John Rego, the CFO at Vonage, served in a number of positions at Winstar Communications from 1998 to 2000. In April of 2001, Winstar filed for bankruptcy and laid off 44% of its workforce.
-Morton David, Director, served on the board of the aforementioned Datek Online Holdings from 1998 to 2002. From 1998 to June 2001--Mr. David was a director of Datek during this time--the SEC alleges that the abuse of the Nasdaq SOES system continued after Datek was sold to Heartland Securities. Mr. David will serve on the Vonage Audit Committee.
-Hugh Panero, Director, joined the Vonage board in January 2005, and served as President and CEO of XM Satellite Radio. He continues to serve on XM's board. XM announced a lost of $270 million for the fourth quarter of 2005. XM's loss for the 2005 fiscal year was $ 675.3 million.
As prudent analysts of governance issues, we wrestle with the question of how to best measure the effectiveness of current and prospective board members. As part of the evaluation process, we logically examine the track record of officers and directors when deciding if they succeed, or will succeed, in aligning the interests of management with the interests of shareholders.
Overall, Vonage scores well on independent director composition on both its board and committees, but has a mixed rating on antitakeover rating factors. Mr. Citron owns 41% of the stock (the ownership levels after the IPO have yet to be determined), thus the threat of a hostile takeover is lower than in companies with more dispersed shareholdings. The company also has authorized the issuance of blank check preferred stock, another deterrent to shareholder action. The combination of these factors with the mixed track records of the board and executive team warrant close examination by shareholders.
Board Practices
Vonage has a board controlled by a majority of between 75% and 90% independent outsiders. The nominating, compensation, and audit committees are fully independent. The company has not yet disclosed whether its directors will stand for annual elections or if the board will be classified. To date the company has not disclosed governance guidelines-- the only disclosure on the company Web site related to corporate governance is the leadership team summary biographies.
Two positive aspects of Vonage's governance practices are:
-The board has a performance review process in place
-There are no related-party transactions involving the CEO.
Three negative aspects of Vonage's board practices are:
-There is a related-party transaction with an officer or director other than the CEO
-There is a former CEO on the board
-Though the positions of Chairman and CEO are separate, the Chairman is an inside director.
Compensation and Ownership Practices
A number of factors related to compensation and ownership have yet to be disclosed. In all fairness to Vonage, it will not be possible to assess these factors until additional SEC filings have been made.
All officers and directors as a group beneficially own 74% of the company's shares outstanding--however this figure will change after the public offering. This number will be of interest to investors, as it will determine if Vonage will be a "controlled entity" under SEC rules.
Academic research suggests that the optimal level of officer and director ownership is between one and 30 percent of shares outstanding. The CGQ methodology incorporates these conclusions into its weighting system.
From the progressive governance perspective of the CGQ model, Vonage's compensation and ownership practices reflect some positive attributes:
-Directors receive all or a portion of their fees in company stock
-All directors with more than one year of service own stock
-Vonage does not have compensation committee interlocks
Anti-takeover Defenses
The aggregate level of officer and director ownership combined with the authorization of blank check preferred creates formidable takeover defenses. Though the company has a number of practices in place that would normally be considered progressive (shareholders may call special meetings or act by written consent, no poison pill), the high level of stock ownership by officers and directors trumps the other shareholder friendly measures.
Audit-related Issues
Because so little information was disclosed regarding audit-related issues, we give Vonage the benefit of the doubt in the calculation of the CGQ score. Vonage's audit fees are assumed to be reasonable, and we assume that its auditors will be ratified at the annual meeting. Vonage does have a fully independent audit committee and has at least one financial expert on the audit committee, as required by Sarbanes-Oxley.
Conclusions
While CGQ can measure certain aspects of a company's board and its governance practices, the real test for Vonage will be how its governance practices are implemented and whether the checks and balances of an independent board and committees serve their intended purpose in aligning the interests of management with those of shareholders.
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