Dodd Warns on Access
Submitted by: Subodh Mishra, Managing Editor
Democratic Senate Banking Committee Chairman Christopher Dodd warned this morning that he will consider legislation to resolve the question of proxy access if the Securities and Exchange Commission fails to adopt a rule on director nominations.
"This is one area where I might express interest legislatively" if the commission cannot come to a decision,” Dodd said at a July 31 committee hearing at which SEC Chairman Christopher Cox testified on the state of the securities markets. "My hope is that the commission will be able to resolve this."
Cox, a former Republican Congressman from southern California, was questioned by Dodd on the likelihood that investors would be able to file a proposal calling for access, given the threshold of 5 percent could keep "even large institutional investors such as Calpers" from filing.
Cox defended the threshold, noting it aligns with the commission’s existing 13D/G regime, which requires investors to disclose holdings above the 5 percent level and whether or not they intend to exert control.
Cox also noted that groups could pool holdings to meet the threshold and questioned whether a group unable to meet the 5 percent requirement could muster 50 percent support to pass an access bylaw.
Echoing past assurances, Cox told committee members that the issue of access would be resolved, one way or another, within months. "There will be a rule in place this fall … so [investors filing proposals for the 2008 proxy season] will know how to conform their conduct to the law," Cox said.
The proposed rules are now available via the commission’s Web site.
More on this story will follow in Friday’s edition of Governance Weekly.
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July 30, 2007 |
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The SEC Splits on Proxy Access
Submitted by: Subodh Mishra, Managing Editor
The Securities and Exchange Commission this week unveiled a much-anticipated proposed rule on proxy access that is being criticized by some investors as too onerous and restrictive.
The proposed rule--one of two options floated by the SEC--was narrowly endorsed at a July 25 meeting of the five-member commission with Republican Chairman Christopher Cox joining Democratic Commissioners Annette Nazareth and Roel Campos in supporting the measure.
The draft rule would allow investors holding 5 percent of a company’s equity for one year to propose a bylaw allowing for access, agency officials said. The filer would be free to set the terms of director nominations, according to the commission, so long as that procedure complied with applicable state law and the company's charter and bylaws. The proponent also would need to file a Schedule 13G with expanded disclosures detailing past interactions with the company.
A second proposed rule, which would effectively bar access by allowing companies to omit the resolutions, was floated as a tradeoff to push the other proposal forward, sources said. That measure was supported by Republican Commissioners Paul Atkins and Kathleen Casey as well as Cox. Both draft rules will be subject to public comment after appearing in the Federal Register.
The commission's proposal allowing for access is problematic, given that the filing requirement of 5 percent ownership will limit the ability of most shareholders to push for access, some investors say.
"Five percent would be tantamount to overturning the AIG decision" said Richard Ferlauto, director of corporate governance and pension investment at the American Federation of State, County, and Municipal Employees (AFSCME), referring to an appellate court decision last year that opened the door to access resolutions. "Shareholders would not be able to bring proposals under this rule."
Echoing those concerns before endorsing the measure, Campos noted that the collective holding of members of the Council of Institutional Investors equates to less than 1 percent of outstanding equity at large U.S. firms.
"I have deep reservations that … the high threshold may make [the rule] useless," Campos said. "I want to encourage investors to make their views known." Campos suggested a scalable approach whereby holding thresholds for filing would be lower at larger companies and higher at small and mid-sized firms.
Mounting Pressure on the SEC
Pressure to act on proxy access has been building after an appellate court ruled in September that the agency erred in allowing insurer American International Group (AIG) to omit a 2005 AFSCME proposal calling for access.
The New York-based court faulted the agency’s inconsistent interpretations of SEC Rule 14a-8(i)(8), which allows companies to omit proposals that "relate to an election of directors." Since 1990, the SEC has applied that language broadly to exclude proposals that deal with election procedures generally, including the access resolutions from AFSCME and other investors. The court concluded that the SEC should have explained why it had changed its approach.
In January, the commission declined to rule on a similar omission request from Hewlett-Packard, thereby allowing investors to file access proposals this year.
Meeting attendees familiar with the text of the draft proposals told ISS that the second proposal was structured to potentially allow for a reversal of the AIG decision. The proposal's language reinforces and codifies the commission’s post-1990 approach to proposals dealing with election procedures, according to an agency statement.
At the meeting, Atkins unsuccessfully pressed SEC staff to confirm that adoption of the measure would in fact serve that purpose.
Business interests, who are supporting the second proposal, say they will oppose any effort to give investors a greater say in director nominations, arguing special interests will use it to "advance their agenda" at the expense of retail and other investors.
"With all the recent governance changes, boards of directors are already extremely responsive to shareholder interests," David Hirschmann, president of the U.S. Chamber of Commerce’s Center for Capital Markets Competitiveness, said in a statement. "Unions have long sought these expanded powers to leverage organizing concessions from boards that are not supported by a majority of workers or shareholders."
If the commission adopts the second proposal, which Nazareth dubbed "non-access," shareholders would have to mount a costly proxy fight to get their nominees on the ballot. Few institutional investors, except for some hedge funds and private equity firms, have the financial resources to mount a successful proxy challenge at an S&P 500 company.
So far this year, access proposals have fared well. A non-binding proposal received majority support at Cryo-Cell International on July 16, the company reported, while 45 percent and 43 percent of votes cast "for" and "against" supported similar measures earlier this year at UnitedHealth Group and Hewlett-Packard, respectively. Those proposals sought to enable shareholders holding at least 3 percent of equity over a period of two years to nominate directors. In April, Comverse Technology adopted a bylaw to allow investors with more than a 5 percent stake to nominate one candidate.
The measure proposed this week differs from the draft access rule issued by the SEC in October 2003. That proposal was abandoned later amid opposition from business interests and Bush administration officials.
The 2003 rule, which would have applied to all companies, provided that proxy access would be triggered either by the receipt of withhold votes for one or more directors totaling at least 35 percent of the votes cast, or a majority vote on an access resolution submitted by a shareholder or group holding 1 percent of the company's stock. The company then would have been required to include in its proxy materials a nominee proposed by shareholders owning more than 5 percent of the company's stock for two years.
Non-Binding Proposals Targeted
The agency’s proposal calling for access includes questions on whether or not to allow companies to do away with non-binding proposals, Democratic commissioners said.
In questions to SEC staff, commissioners noted that the draft rule included text on whether or not to allow companies to adopt a bylaw--subject to applicable state law and, potentially, to a shareholder vote--allowing them to bar non-binding resolutions.
The SEC hinted at changes to the rules governing non-binding proposals when it noted in a pre-meeting press release that the draft rule allowing for access also "would revise the proxy rules to facilitate greater online interaction among shareholders and between shareholders and management … [and] clarify that any communication that may constitute a solicitation would be generally exempt from the proxy rules."
This language and the questions in the access rule suggest the commission could move to allow companies to replace non-binding proposals with electronic shareholder forums, an idea that was debated at a series of roundtables on the federal proxy rules in May.
But any attempt to do away with non-binding proposals would be met with stiff resistance, investors cautioned. In a statement issued on the heels of the commissioners' meeting, Social Investment Forum Chairman Tim Smith warned that any new limit on the “rights of investors to participate in the advisory resolution process would trigger a repeat of the contentious 1997-1998 battle in which more than 300 socially responsible investment, religious, labor, and other groups coalesced to oppose an SEC staff plan to gut the shareholder resolution process.”
"Same Spot As Last Year"
At the July 25 meeting, Campos asked SEC staff, including General Counsel Brian Cartwright and Corporation Finance Director John White, what would happen should commissioners fail to approve a final rule on access.
"We’re in the same spot as last year," White said, alluding to the commission’s January decision to take no position on access.
The discussion was indicative of worries among both SEC staff and commissioners over the possibility that consensus will not be reached and that a proposed rule would languish, much like the one proposed in 2003. This week's access proposal is the sixth time since 1976 that regulators have tried to change how directors are elected, according to The Washington Post.
"It’s a complicated issue," said Amy L. Goodman, a Washington-based partner at Gibson, Dunn & Crutcher, which represents corporations in their dealings with the SEC and shareholders. "There doesn’t seem to be consensus, and they’re determined to seek broad comment."
Cox has pledged to have an access rule in place before the 2008 proxy season, but he may well let public opinion determine which option to go with. "We won't be making any fateful decisions just yet," Cox said, "but instead we'll open up these topics for formal comment from the entire country."
The proposed rules are slated for publication in the Federal Register, though no date has been announced. The agency will then solicit comments for 60 days before deciding on any additional changes and a final rule.
Auditing Standards Approved
Also at the July 25 meeting, commissioners unanimously approved the Public Company Accounting Oversight Board’s (PCAOB) Auditing Standard No. 5. The standard, approved by the PCAOB in May, would replace an earlier auditing standard for internal control reporting under Section 404 of the Sarbanes-Oxley Act that, commission officials say, led to excessive costs and serious implementation problems. The new standard will be effective for fiscal years ending after Nov. 14, 2007, although the agency is encouraging earlier adoption.
In addition, commissioners voted to approve a "concept release" seeking public comment on the use by U.S. issuers of International Financial Reporting Standards in English. In June, the commission voted to allow non-U.S. issuers to file under IFRS and do away with reconciling accounts under U.S. Generally Accepted Accounting Practices.
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July 25, 2007 |
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Social Investment Forum Wary of SEC Shareholder Proposals Opening Door to Possible Curbs
Submitted by: Cheryl Gustitus, Head of Communications
Below is a statement the Social Investment Forum issued today on the Securities and Exchange Commission's (SEC) open meeting on proxy access. We welcome other views on the outcome from the SEC's open meeting today.
WASHINGTON. D.C.///July 25, 2007///Social Investment Forum Chair Tim Smith, who also is senior vice president of Walden Asset Management, and SIF CEO Lisa Woll issued the following joint statement today:
"While the Securities and Exchange Commission (SEC) did not explicitly endorse a proposal today that would limit the rights of shareholders to file advisory resolutions, we are concerned that one of the two proposals put out for public comment has opened the door for possible new curbs on such shareholder resolutions. We need to study the questions the SEC has put forward for public comments. As we noted in our news conference yesterday, we want to be very clear that we will vigorously oppose any step by the Commission to restrict the advisory resolution process.
At the same time, we share the concern of other shareholder advocates that the 5 percent threshold for director nomination is too high.
We are thus going to remain on 'high alert' until this whole situation is resolved in a way that makes it clear that the rights of shareholders have not been diminished.
The SEC needs to understand that any new limit on the rights of investors to participate in the advisory resolution process would trigger a repeat of the contentious 1997-1998 battle in which more than 300 socially responsible investment, religious, labor and other groups coalesced to oppose an SEC staff plan to gut the shareholder resolution process by increasing the threshold for reconsideration of resolutions in subsequent years.
Our members have been deeply involved in the process of shareholder advocacy through letters and dialogue with companies, sponsorship of shareholder resolutions and by voting proxies. For decades, this process has been a central means for formalizing communication between concerned investors and management on social, environmental and governance issues."
For more on the Social Investment Forum, please visit here.
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July 24, 2007 |
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SEC To Discuss Proxy Rules
Submitted by: L. Reed Walton, Staff Writer
The commissioners will consider possible amendments to the proxy rules dealing with shareholder proposals--and will also discuss whether to approve new auditing standards--at their open meeting on July 25.
The agency did not detail the potential rule changes in a meeting notice issued July 18, but the SEC said the commissioners plan to discuss the right of shareholders to file non-binding proposals, investor-company communications, disclosure about shareholder proponents, and "related matters." It is unclear whether the contentious issue of proxy access will come up. Earlier this month, The Wall Street Journal reported that the SEC was considering raising the minimum ownership stake for filing access bylaw proposals to 5 percent, causing an outcry among some institutional investors.
Also on the agenda are proposed audit standard changes by the Public Company Accounting Oversight Board (PCAOB). The PCAOB's revised standards, if approved, will function as companion regulation to the new management guidelines adopted by the SEC in May. The amended regulations are aimed at making the process of complying with the internal control requirements of Section 404 of the Sarbanes-Oxley Act less costly and burdensome on public companies.
During the meeting, commissioners also plan to address the possibility of allowing foreign companies listed in the U.S. to file their financial statements according to the International Financial Reporting Standards rather than requiring them to reconcile with the U.S. Generally Accepted Accounting Principles.
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July 23, 2007 |
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Analysis: The Role of Investors in Black's Downfall
Submitted by: Ted Allen, Director of Publications
After the conviction of media tycoon Conrad Black, it is worth recalling that it was investors who first questioned "non-compete" payments received by Black and other Hollinger International executives. His case can also be seen as a cautionary tale about what can happen to CEOs who fail to respond to shareholder concerns.
On July 13, a federal court jury in Chicago found Black guilty of obstruction of justice and three fraud charges. Prosecutors accused Black and three other officers of using non-compete agreements to illegally pocket millions of dollars from buyers of Hollinger newspapers from 1998 to 2001. Prosecutors claimed the payments were a "money grab" and said the funds should have gone to Hollinger shareholders.
The former Hollinger CEO and chairman faces up to 20 years when he is sentenced in November, but his lawyers plan to file an appeal. Black, who bought his first newspaper in 1969, rose to become one of Canada's most prominent businessmen and was named a British lord. At its peak, Hollinger was the world's third-largest publisher of English-language newspapers; its holdings included the Chicago Sun-Times, Canada's National Post, and the Jerusalem Post. The company is now known as the Sun-Times Media Group.
Black was acquitted of racketeering, tax fraud, and five other fraud charges, including those based on prosecutors' claims that he defrauded investors by taking the corporate jet to Bora Bora for a family vacation and using Hollinger funds to renovate his home on New York's Park Avenue.
During Black's trial, prosecutors presented various recordings and e-mails that shed light on how he dealt with Hollinger's investors and directors.
Black's troubles began when investment manager Tweedy, Browne Co. raised concerns about the non-compete payments before Hollinger's 2002 annual meeting. At trial, prosecutors presented an e-mail from Black to Paul Healy, the company's investor relations chief, in which the CEO dismissed investor concerns as part of an "epidemic of shareholder idiocy," according to Bloomberg News. "Much as I would just like to blow [investors] off, I don't want a sour atmosphere at the shareholders' meeting," Black also wrote in that e-mail.
During the trial, jurors heard a tape from the 2002 meeting, which became contentious when shareholders criticized the non-compete payments, as well as Hollinger's ownership structure and share performance. In response to a question from Omega Advisors, Black said, "You're not dealing with greed here and you're not dealing with sneakiness."
As Healy recalled at trial, Black failed to pass along the investors' complaints when he met with the board after the annual meeting and reprimanded Healy when he suggested that those concerns should be relayed to James Thompson, a former Illinois governor who served as Hollinger's audit committee chair, Bloomberg reported.
"This is my company. I'm the controlling shareholder and I'll decide what the governor needs to know and when," Black said, according to Healy.
The investors, including Cardinal Capital Management, continued to pressure Hollinger. Before the 2003 annual meeting, Black tried to appease shareholders by offering to name three new board members. However, Black wrote in an e-mail to Christopher Browne of Tweedy, Browne that the new directors would not have authority to "rummage through the past" to review Hollinger's transaction history. Browne declined Black's offer and called for an independent board investigation, Bloomberg News reported. Tweedy, Browne also demanded an investigation in a filing with the Securities and Exchange Commission.
At Hollinger's annual meeting in May 2003, Black announced he would name an independent special committee and would give up his direct control of the company. At trial, prosecutors played a tape from that meeting, where Black called corporate governance a "fad" and warned against "inadvertently throwing the baby out with the bathwater."
"Sell Your Shares and Get Out"
U.S. District Judge Amy St. Eve prohibited prosecutors from playing for jurors another recording of an exchange between Black and money manager Edward Shufro about investor concerns. In that recording, Shufro said, "They consider you a thief, and I can't say that I have any disagreement with that whatsoever."
"Sell your shares and get out," Black said on the recording, according to Bloomberg News. "If you think I'm a thief, go. I'm not going anywhere."
After shareholders complained about the Bora Bora trip, Black wrote in a memo: "I'm not prepared to reenact the French revolutionary renunciation of the rights of the nobility," according to the Associated Press.
In November 2003, Hollinger's board ousted Black as CEO after an internal investigation concluded that he and other executives had paid themselves $15.6 million without board approval. Two months later, the board stripped Black of his chairman's title and sued him for $200 million.
In August 2004, a special board committee led by former SEC Chairman Richard Breeden produced a 500-page report that accused Black of running a "corporate kleptocracy" and stealing hundreds of millions of dollars from Hollinger. Black responded by filing a defamation lawsuit against Breeden. That report helped formed the basis of the criminal case against Black.
Prosecutors also were aided by F. David Radler, a former Hollinger executive who pleaded guilty to fraud and testified against Black in exchange for a more lenient jail sentence.
Black is the latest high-profile CEO to be convicted of criminal charges since Enron's collapse in 2001. The others include Bernard Ebbers of WorldCom, Jeffrey Skilling of Enron, John Rigas of Adelphia Communications, L. Dennis Kozlowski of Tyco International, and Joseph Nacchio of Qwest Communications International. Kenneth Lay of Enron also was found guilty, but his conviction was voided after he died while his case was on appeal. Richard Scrushy of HealthSouth was acquitted of accounting fraud charges, but he later was convicted on bribery charges.
In a July 15 commentary in Britain's Daily Telegraph, another former Hollinger newspaper, editor-at-large Jeff Randall traced Black's downfall to his failure to heed shareholder concerns.
"He treated his master company, Hollinger, a publicly-owned business, as if it were a private bauble," Randall wrote. "And, perhaps the biggest error of all, he failed to spot a tide of shareholder activism, turning powerfully against tycoons who enriched themselves with other people's resources."
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July 20, 2007 |
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Strong Support for Defense Limits
Submitted by: L. Reed Walton, Staff Writer
The following is the second of two articles on the 2007 U.S. proxy season. Shareholder proposals on executive pay and board elections were covered in the July 13, 2007, issue of Governance Weekly.
U.S. investors provided strong support this season for shareholder proposals that target takeover defenses, such as "poison pills," classified boards, supermajority requirements, and dual-class equity structures. In addition, proposals seeking the right to call special meetings did well.
A bylaw proposal by investor Nick Rossi that sought a shareholder vote on future poison pills won 73.4 percent at Hewlett-Packard, according to company filings. There was a 79.3 percent vote at MeadWestvaco for investor William Steiner's proposal asking the company to redeem its poison pill or put it to a shareholder vote, according to the company.
At Walt Disney, investors gave 58 percent support to a novel bylaw proposal by Harvard University Professor Lucian Bebchuk that called for a 75 percent vote by independent directors to adopt or amend a pill plan. The company adopted a modified version of Bebchuk's proposal in late June.
However, due to low support at companies such as Praxair and Home Depot, pill-related proposals received 47.8 percent support across eight meetings where results are known. In 2006, pill proposals averaged 55.6 percent support.
Meanwhile, shareholders expressed greater support for proposals asking companies to abolish classified boards and hold annual elections for all directors. About 40 requests for a declassified board structure were voted on this year, and the measure averaged 67 percent support over 19 meetings where results are known, including 90.4 percent at restaurant chain O'Charley's, which may be a new record for a management-opposed resolution. (Last year, board declassification proposals averaged 66.8 percent support.)
Investors withdrew 14 proposals on this topic, while management at 62 companies filed proposals to declassify their boards. These management resolutions reflect the growing number of firms that are dropping these defenses. Only 45 percent of S&P 500 firms now have classified boards, down from 56 percent in 2004, according to ISS' Board Practices/Board Pay 2007 study.
Investor support remained high for proposals that ask companies to eliminate supermajority requirements to approve bylaw changes and other matters. These resolutions have averaged 67.2 percent across 21 meetings, about the same as the 2006 average of 67.8 percent. The average this year was bolstered by high support for a resolution voted at Dollar Tree Stores' annual meeting on June 21, which proponents say won 83 percent support--the highest this season. In addition, management at 28 companies asked shareholders to approve bylaw or charter changes to remove these requirements.
Individual investors filed a series of new proposals that ask for the right of holders of a 10 to 25 percent stake to call special meetings. At the 13 companies where preliminary or final results have been released, those proposals averaged 57 percent support, according to ISS data. The highest vote known, 72.4 percent, occurred at Honeywell. The lowest vote, 19.3 percent, came in at Ford Motor, where a significant portion of the stock is insider-owned.
This season also saw increased investor scrutiny of companies with dual-class stock, which can be an insurmountable takeover defense. Shareholders targeted companies with "A" and "B" class stock that give multiple votes per share to one share class, which is often controlled by the founder's family. Seven proposals aimed at eliminating dual-class stock were voted on, but most of the companies declined to release vote totals in advance of their quarterly reports.
Shareholder proposals seeking to end dual-class structures won significant support from outside investors at Hovnanian Enterprises and Ford Motor, proponents said. A LongView resolution won 14 percent at Hovnanian, where insiders control 75 percent of the voting power. At Ford, a similar proposal received 27 percent support. With the Ford family controlling 40 percent of the voting power, proponent John Chevedden estimates that about 45 percent of non-family investors supported the measure.
Morgan Stanley Investment Management filed a dual-class proposal at the New York Times Co., but the SEC allowed the company to exclude the resolution from its proxy. Instead, the Morgan Stanley fund and other investors protested the company's equity structure by withholding 42 percent support from the four directors who are elected by outside stockholders.
Proposals that advocate a separation of the roles of chairman and CEO--through the adoption of an independent board chair--did less well this year. At the 23 meetings where results are known, these proposals averaged 25.4 percent, compared with 30.2 percent last year.
Of the 40 such proposals voted on, only two received majority support--52.7 percent at CVS/Caremark, according to company filings. The other, at Newmont Mining, received over 50 percent, according to investor John Chevedden, but the company declined to release exact vote totals until its next regulatory filing.
Overall, individual shareholders had significant success in attracting support from other investors this season. Chevedden, who filed about 30 proposals this season and represents other individual shareholders at annual meetings, reports that 42 governance proposals filed by individuals received more than 50 percent support this year. Chevedden said these majority votes are the best showing ever by individual investors with whom he is in contact.
In addition, shareholders at 20 firms approved management proposals this year to implement governance changes sought by individual investors' resolutions, according to Chevedden.
Environmental and Social Proposals
About 40 proposals filed this year asked companies to report on their environmental sustainability efforts. Twenty-one resolutions were withdrawn, while 17 went to a vote. As of June 30, support for the measure averaged 24.4 percent at 13 meetings where final or preliminary vote tallies are known. A few notable votes contributed to this average--including 45 percent support at Comerica and 44.8 percent at Hasbro, according to company filings.
Most social and environmental proposals historically have received less than 15 percent support, so this year's results suggest that investors are becoming more concerned about companies' ongoing environmental footprint.
By far the largest number of social proposals filed this year--over 50 resolutions in all--requested that companies disclose or report on their political contributions. More than 25 were voted on as of June 30, with some winning more than 40 percent support. At 21 meetings where preliminary or final results are known, political contribution proposals averaged 22.8 percent support.
A proposal at Unisys won a majority of votes cast, according to proponents. The company had not released vote results as of July 18. Other notable results include 37.9 percent at McGraw-Hill, according to proponents, and 34.2 percent support at Entergy.
A similar initiative filed by shareholder activist Evelyn Davis, which would require companies to disclose their political contributions in local newspapers, averaged about 4.4 percent over two meetings, however.
Several other social and environmental proposals fared as well or better than those on political contributions and sustainability. Efforts to get companies to adopt anti-discrimination policies on the basis of sexual orientation averaged 35.7 percent support at three meetings where results are available. Proposals on reducing or reporting greenhouse gas emissions averaged 23.2 percent support across four meetings this year.
Proposals asking companies to implement international labor standards averaged about 11 percent support at three meetings. Proposals concerning animal testing and animal welfare--mostly filed by People for the Ethical Treatment of Animals--averaged 6.3 percent over 11 meetings.
Director of Publications Ted Allen contributed to this article. Portions of this article also appear in the June 2007 issue of the ISS Corporate Governance Bulletin. For details on notable "withhold" votes against directors during the 2007 season, please see the June 22, 2007, issue of Governance Weekly.
Editor's note: ISS reports vote percentages based on "for" and "against" votes cast and doesn't include abstentions or broker votes. This is the same approach the SEC uses under Rule 14a-8(i)(12) to evaluate the support received by proposals in previous years. Please also note that some results are preliminary and do not include all 2007 meetings, because some companies have declined to release vote totals on shareholder resolutions until their next quarterly regulatory filing. Finally, the 2006 averages include only those meetings that occurred from Jan. 1 through June 30 of that year.
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July 17, 2007 |
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Sea Change in Patent Law Landscape - Significant Inflection Point Will Impact Companies with Intellectual Property
Submitted by: Nick Rodelli, CFRA Legal Edge Team
Over the past year, the patent law landscape has changed significantly. In fact, three recent U.S. Supreme Court cases underscore the shift in the patent law environment and how it now favors patent challengers.
The outcome from KSR v. Teleflex (4/07) is likely to lead to more challenges to patent validity on grounds of obviousness, and a higher proportion of those challenges will likely succeed. In Medimmune v. Genentech (1/07), future revenue streams from existing patent licensing agreements are put at increased risk, as it allows licensees in good standing to challenge the validity of licensed patents. The case of eBay v. MercExchange (5/06) reduces the threat of an injunction as a remedy for infringement, particularly where the patent owner merely collects royalties as opposed to practicing its own patents. As a result, eBay may meaningfully diminish the negotiating leverage of patent owners that do not practice their patents.
Yet, changes in the patent law landscape are not just a matter of shifting outcomes in litigated cases. Rather, these changes will carry over to the negotiating table. In many cases, this may result in reduced "bids" by potential licensees and possibly wider "bid/ask" spreads between potential licensees and patent owners. While the impact of these changes will take some time to fully discern, we are already seeing impacts in company-specific situations.
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July 13, 2007 |
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Preliminary Postseason Report
Submitted by: L. Reed Walton
The following is the first of two articles on the 2007 U.S. proxy season. Shareholder proposals on takeover defenses and social issues will be covered in the July 20, 2007, edition of Governance Weekly.
Looking back at the 2007 U.S. proxy season, two themes come to mind: accountability and engagement.
Shareholders gave strong support for proposals that seek greater board accountability, such as those seeking annual investor votes on executive pay and majority voting in director elections.
At the same time, investors withdrew more than half of their proposals on majority voting and stock option reforms after negotiations with companies. These withdrawals suggest that companies are becoming willing to engage with shareholders on certain issues.
Pay-related proposals received the most attention this season; more than 40 proposals that request an annual advisory vote on compensation--or "say on pay"--were voted on. Investors withdrew six resolutions; most of those withdrawals were at firms that agreed to join a new investor-issuer working group on pay votes.
As of June 30, support for pay vote proposals averaged 42.4 percent at 29 meetings where preliminary or final results are available. The topic averaged 40 percent at seven meetings in 2006, the first year it appeared on U.S. ballots.
Four "say on pay" proposals received majority backing--the most recent winning 57 percent of votes cast at Ingersoll Rand on June 6, according to the proponent, the American Federation of State, County, and Municipal Employees (AFSCME). At least 10 proposals received greater than 45 percent support, according to ISS data.
Proponents also received a boost in February when Aflac announced it would start holding shareholder votes on pay in 2009. The U.S. House of Representatives approved pay vote legislation in April, and similar legislation is pending in the Senate.
Investors also voted on over 60 proposals requesting that firms more closely link executive pay with the corporate performance. General pay-for-performance proposals averaged 35.1 percent support over 22 meetings where results are known, a slight decrease from last year's average of 36.1 percent.
In addition, 14 proposals were withdrawn, which suggests that companies have become more willing to engage with stockholders in drawing up performance metrics for calculating executive pay. At least one company, Progressive, has committed to adopting pay-for-performance metrics this season.
Proposals asking for a specific link between equity incentives and shareholder returns--or a performance threshold for option grant vesting--fared about the same as general pay-for-performance measures, averaging 35 percent across 17 meetings. A majority of shareholders at KB Home and Hewlett-Packard backed a performance-based stock proposal this year, with 54.6 percent support at KB Home, and 53.8 percent at HP, according to regulatory filings.
Meanwhile, "clawback" proposals averaged 35.5 percent support at six firms where voting results have been released, significantly higher than the 2006 season average of 23.6 percent. These proposals call for recouping bonus payments to executives if a later investigation or restatement determines that their incentive goals weren’t met. Two proposals obtained majority support; the best showing was a 59.2 percent vote at Motorola.
Many of this year's pay-related proposals reflect a continued shareholder backlash against what the AFL-CIO has called "pay for failure." Executive retirement and severance payments have come under scrutiny in recent years as corporate exit packages, sometimes totaling in the hundreds of millions of dollars, make headlines nationwide.
A set of proposals asked companies to disclose, limit the amount of, or let shareholders vote on Supplemental Executive Retirement Plans--or SERPs--which are benefits given to top management in addition to the company-sponsored pension plan. SERP proposals won an average of 33.8 percent support over 12 meetings where results are known; the best showing was a 51.7 percent vote at Goodyear.
Investors also were more receptive to resolutions that ask for a shareholder vote on future "golden parachute" packages for outgoing executives. The proposal averaged 55.9 percent support at seven meetings, up from 50 percent support at 11 firms last year. A total of 13 such proposals were voted on this season. One golden parachute resolution won 68.7 percent at PPG Industries, according to regulatory filings, while a Bricklayers & Trowel Trades proposal got 85.6 percent support at KB Home, the company reported.
In response to the stock options backdating scandal, many firms have adopted new option grant policies. The Amalgamated Bank's LongView Fund submitted nine proposals asking companies to fix grant dates before the fiscal year begins and to price options at an average of the stock’s opening and closing price on the grant date. According to Cornish Hitchcock, an attorney for LongView, most of the proposals were withdrawn following constructive talks with the companies.
The proposal won 47 percent at Apple, Hitchcock said. At CVS/Caremark's first annual meeting as a single corporation, a similar proposal received a 48.4 percent vote, a strong showing for a first-year resolution. Another proposal was filed at McAfee, but the software company could not hold an annual meeting because it has been unable to file timely financial reports due to options-related adjustments.
Another new proposal seeks information that relates to the independence of the executive pay consultants hired by boards, such as on other work that the consultant may be doing for the company. Only three of these proposals were voted on, averaging 40 percent support.
Director Elections
Proposals seeking majority threshold voting in director elections continued to do well this year. Support for a majority standard averaged 49.3 percent at 29 meetings where results are known, up from 47.7 percent in 2006.
This season, there was notably high support at International Paper (85 percent, according to news reports) and Praxair (76.3 percent, according to the company). More than 50 majority vote proposals had been voted as of June 30.
The number of majority vote resolutions continues to be high, even after many companies followed the example of Intel in adopting a majority voting bylaw and director resignation policies.
While investors filed about 140 proposals, what is notable this year is the significant number of withdrawals. More than 70 proposals slated for meetings in January through June were withdrawn by proponents following discussions with companies, up from 35 withdrawals in 2006. As was the case last year, many firms have agreed to introduce the measure at the next meeting or to change their bylaws or certificates of incorporation to provide for a majority vote. In addition, there were about 30 management proposals this season that sought investor approval to adopt majority voting bylaws or charter amendments.
A novel approach to majority voting were proposals that asked firms to reincorporate in Delaware. This season, the United Brotherhood of Carpenters and Joiners and the Sheet Metal Workers International Association filed reincorporation proposals at 13 Ohio companies to prod them to support legislation to repeal the state's plurality vote requirement for board elections. Ten proposals were withdrawn. One of the three proposals voted on earned majority support--59.5 percent at Convergys. A similar resolution won 34.9 percent support at FirstEnergy.
Proposals on cumulative voting, which averaged 39.8 percent last year, did not fare as well this year, with an average of 34.8 percent support over 17 meetings. Average support for cumulative voting proposals has remained around 40 percent since 2005.
The board election issue that received the most attention this season was proxy access. After investors won a court ruling last September, the Securities and Exchange Commission did not allow companies to omit access proposals this year. Two proposals went to a vote before June 30; both called for management proxy statements to include director nominations by shareholders with at least a 3 percent stake. A non-binding proposal filed by the California Public Employees' Retirement System received 45.3 percent at UnitedHealth Group, according to a company filing. Earlier, a binding proxy access proposal filed by AFSCME and three state pension funds won 43 percent support at Hewlett-Packard.
Director of Publications Ted Allen contributed to this article.
Editor's note: ISS reports vote percentages based on "for" and "against" votes cast and doesn't include abstentions or broker votes. This is the same approach the SEC uses under Rule 14a-8(i)(12) to evaluate the support received by proposals in previous years. Please also note that some of these results are preliminary as of June 30 and do not include all 2007 meetings, because some companies have declined to release vote totals on shareholder resolutions until their next quarterly regulatory filing. Finally, the 2006 averages include only those meetings that occurred from Jan. 1 through June 30 of that year.
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July 10, 2007 |
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U.S. Supreme Court Tightens Pleading Standards
Submitted by: Ted Allen, Director of Publications
In a partial victory for companies, the U.S. Supreme Court tightened the pleading standards for shareholders who file securities class-action lawsuits over corporate fraud.
While the high court ruled for the defendants in Tellabs v. Makor Issues & Rights, most legal observers concluded that the justices took a balanced approach because they did not erect a higher barrier to investor plaintiffs, as industry groups and the Securities and Exchange Commission had asked the court to do.
"This ruling will make the lives of plaintiffs’ lawyers incrementally more difficult, but not impossible. Clearly, this was not a ringing victory for the defense side," James D. Cox, a securities law professor at Duke University, told the SCAS Alert. "All the plaintiffs' lawyers I have talked to are breathing a sigh of relief."
The Supreme Court, in an 8-1 decision on June 21, directed the U.S. Court of Appeals for the Seventh Circuit to reconsider a ruling that allowed shareholders to sue Tellabs, an Illinois-based telecommunications equipment maker. Investors allege that the chief executive misled investors and analysts in 2001 about the prospects for the firm's best-selling product.
The Supreme Court was asked to decide what type of inferences a federal court may consider in determining whether an investor's allegations can meet the requirement of the Private Securities Litigation Reform Act of 1995 (PSLRA) to plead facts "giving rise to a strong inference that the defendant acted" with fraudulent intent.
This case is significant because investor plaintiffs must meet the law’s pleading standards to survive a defendant's motion to dismiss. If investors overcome this hurdle, they can gather pre-trial testimony from executives and force companies to turn over documents. In such cases, companies often will agree to a significant settlement to avoid additional litigation costs and the risk of trial.
Writing for the majority, Justice Ruth Bader Ginsburg noted that private securities litigation is an "indispensable tool" to help defrauded investors and is "crucial to the integrity of domestic capital markets." She also observed that the intent of the PSLRA was "to curb frivolous, lawyer-driven litigation, while preserving investors’ ability to recover on meritorious claims."
Ginsburg said plaintiffs can avoid having their claims dismissed by presenting facts that support an inference of fraudulent intent that is "cogent and at least as compelling as any opposing inference that one could draw from the facts alleged." In other words, an investor must show facts that support an inference of wrongful intent that is at least as likely as inferences that would show that corporate officers did not intend to defraud shareholders.
The case attracted a flurry of supporting briefs on both sides. The Tellab shareholders were supported by the Council of Institutional Investors, the University of California, the New York State Retirement Fund, the labor-affiliated Amalgamated Bank, the National Conference on Public Employee Retirement Systems, and state officials from Ohio and 23 states and territories.
Various industry groups backed Tellabs, including the Securities Industry and Financial Markets Association, the Washington Legal Foundation, the American Institute of Certified Public Accountants, and TechNet, which represents technology executives.
Reaction to the Ruling
Lawyers for both investors and companies found reasons to be encouraged by the Supreme Court's Tellabs decision.
"By rejecting the extreme positions advocated by defendants and [their supporters] that would have required plaintiffs to essentially prove their entire case at the pleading stage, the court struck a reasonable balance between preserving investors’ ability to recover on meritorious claims and curbing frivolous litigation," Stanley Bernstein, a lawyer with Bernstein Liebhard & Lifshitz who represents investors, told The Wall Street Journal.
Christopher Keller, a partner at Labaton Sucharow & Rudoff, a law firm that represents investors, told the SCAS Alert that the Tellabs ruling is “generally good” for investors because the justices did not adopt a more demanding standard, like that applied previously by the Sixth Circuit. In 2001, that court required plaintiffs to show that inferences that illustrate fraudulent intent are “the most plausible of competitive inferences.”
Likewise, Keller noted, the majority was not swayed by Justice Antonin Scalia's argument in a concurring opinion that the inference of wrongful intent must be “more plausible than the inference of innocence.”
Alston & Bird, a firm that represents corporate defendants, said in a client advisory that the ruling "preserves both the letter and the spirit of the reforms instituted by Congress" in the 1995 legislation. The firm emphasized the justices' ruling that courts must consider all "plausible nonculpable explanations for the defendant's conduct . . ."
Carter Phillips, a Sidley Austin partner who represented Tellabs, told Bloomberg News that the ruling was "about as good a standard as we could have gotten."
Thomas Gorman, a former SEC lawyer who is a partner with the firm of Porter, Wright, Morris & Arthur, said "the decision should not be viewed as a clear victory for either side." In a posting for his SEC Actions Web log, Gorman wrote that the ruling "reflects a balance between the competing interests Justice Ginsburg sought to reflect in her opinion, permitting meritorious [class actions] to proceed, while weeding out those that lack merit."
Joseph Grundfest, a securities law professor at Stanford Law School, expressed concern that lower courts may interpret the Tellabs standard as "the equivalent of baseball's rule of 'a tie goes to the runner.'"
"This approach would ignore the court's admonition that the inference of [intent] must be more than merely 'reasonable' or 'permissible'--it must be cogent and compelling, thus strong in light of other explanations. It is therefore unfortunately predictable that we will have a new series of lower court splits over the proper interpretation of Tellabs' pleading standard," Grundfest told the Journal.
"Holistic" Approach
Keller said the Tellabs ruling also is noteworthy because the majority made clear that courts should "consider the complaint in its entirety, as well as other sources courts ordinarily examine" when assessing whether investors have met the "strong inference" requirement.
"The inquiry . . . is whether all of the facts alleged, taken collectively, give rise to a strong inference of [fraudulent intent], not whether any individual allegation, scrutinized in isolation, meets that standard," Ginsburg wrote.
While this broader inquiry may help plaintiffs survive a motion to dismiss in some cases, Professor Cox said: "My guess is that a more holistic approach is more likely to help defendants."
According to Alston & Bird, a defendant's ability to rely on other source materials is "very important in these cases," particularly to help establish more favorable inferences. For instance, the firm noted that a defendant could present evidence of a lack of stock sales to show there was no financial motive to commit the alleged fraud.
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July 9, 2007 |
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CVS/Caremark Director Resigns Amid Investor Opposition
Submitted by: L. Reed Walton, Staff Writer, and Ted Allen, Director of Publications
Director Roger Headrick retired from CVS/Caremark’s board after a labor pension fund called for his ouster and complained that he would not been elected without the help of undirected "broker" votes.
The drugstore company reported that Headrick received 56 percent support in early May, but the CtW Investment Group, the investment arm of the Change to Win labor federation, argued that he would have failed to get majority support had broker votes not been counted. CtW targeted Headrick and another former Caremark Rx director over their role in approving a $27.2 billion sale to CVS earlier this year. Headrick, who chaired the company's audit committee, also was criticized over past stock option grants at Caremark.
The close vote at CVS/Caremark was particularly noteworthy, because the Rhode Island-based company recently adopted a bylaw that requires board candidates to receive majority support in uncontested elections.
CVS/Caremark did not address the reasons for Headrick's retirement in a July 2 regulatory filing, but Chairman Mac Crawford said Headrick "helped guide Caremark through a series of large and successful transactions that rewarded Caremark shareholders…" Headrick told Bloomberg News that the investor complaints were not a factor in his decision to step down. "I have a lot of other things to do that I’m involved in and want to pursue," he said.
In a July 3 press release, CtW said, "CVS/Caremark shareholders succeeded in removing embattled director Roger Headrick [and] ... holding him accountable for his past failures to protect Caremark shareholders." The labor fund noted that its campaign was aided by communications from the California Public Employees' Retirement System, New York City's comptroller, and North Carolina's state treasurer.
In addition, the vote at CVS/Caremark has been cited by CtW, the Council of Institutional Investors (CII), and other investor groups that are lobbying for a New York Stock Exchange (NYSE) proposal to bar broker votes from board elections. CII and CtW contend that broker votes are routinely cast for management nominees and thus undermine the integrity of director elections. Corporate advocates point out that some small and mid-size companies need to count broker votes so they can meet quorum requirements. The proposed NYSE rule is now under consideration by the Securities and Exchange Commission.
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July 3, 2007 |
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Divestment Legislation Gaining Momentum
Submitted by: Alex Gallimore, ESG Team Leader
Developments in the Sudan divestment movement, approximately a year and half old now, continue to gain momentum, particularly in the last several months. This trend is due in large part to the success that the Sudan Divestment Task Force (SDTF), the primary Sudan divestment advocacy group, has had in getting divestment legislation passed. In April, Colorado and Iowa passed Sudan divestment legislation based on the SDTF model, followed by Kansas, Minnesota and Indiana in May, and Florida, Texas and Hawaii in June. These states join California and Vermont, both of which previously passed divestment legislation based on the SDTF model. Not waiting for legislative action, New York State Comptroller, Thomas DiNapoli, announced on June 11th, 2007, that the New York State Common Retirement Fund would implement an investment policy, also consistent with the SDTF model, that would apply to companies with business ties to Sudan.
Other states that have enacted legislation addressing Sudan and the investment of state retirement funds include Maryland, New Jersey and Oregon. Illinois has revamped Sudan legislation under consideration to replace the previous Illinois Sudan Act that was struck down in Feb. 2007 after the National Foreign Trade Council filed suit.
Arizona requires managers to report on holdings in US companies with business ties to Sudan, as well as Iran, North Korea and Syria. Louisiana’s legislation requires reporting on holdings of foreign companies with ties to Sudan, Iran, North Korea, Syria, and Libya. Louisiana is considering legislation that would change the reporting requirement to a divestment requirement and expand the scope of the current legislation from foreign companies only to both foreign and domestic companies.
There has also been action at the municipal and educational institution level with a number of cities and colleges/universities (San Francisco, Philadelphia, Yale University and Dartmouth College among others) implementing policies or regulations that address the investment of endowment/retirement assets in companies with ties to Sudan.
The latest trend that we are seeing in the divestment movement is legislation addressing companies with operations in Iran, either through legislation aimed specifically at Iran or through hybrid Sudan/Iran legislation. This tends to target companies that are invested in Iran's Oil & Gas sector and/or Mining & Metals sector, that supply arms to Iran, that supply goods/services to Iran’s nuclear development program, or that that do business with Iranian organizations that have been labeled as terrorist organizations by the U.S. government. Currently, Florida is the only state that has such legislation passed and signed. However, similar legislation is under consideration in California, Ohio and Illinois.
As the trend in divestment legislation continues to gather steam, the implications for asset managers handling assets for state public funds is significant – ranging from new reporting requirements to actually dealing with divestment and ongoing compliance monitoring. These challenges are multiplied when managing assets for numerous states that have enacted legislation, which may differ somewhat from state to state. At the moment, this trend shows no sign of letting up.
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