Showdown Over Special Meetings
Submitted by Ted Allen, Publications
More than a dozen U.S. companies plan to offer management proposals this year to give shareholders the right to call special meetings. While one might expect that investors would welcome these reforms, shareholder activists are crying foul because these management bylaw (or charter amendment) proposals have higher ownership thresholds than those that many investors say they prefer.
In virtually all of these cases, the companies are acting in response to a recently filed shareholder proposal that requests a 10 percent (of outstanding shares) threshold, and/or a similar investor resolution that received majority support in 2009. Most of the companies are seeking a 25 percent threshold, although a few issuers have proposed different percentages such as Honeywell International (20 percent), and Medco Health Solutions (40 percent).
Companies have offered various arguments in support of a 25 percent threshold. Some issuers point out that 25 percent is more appropriate for their circumstances because there are several institutions that own more than 5 percent of their shares. They contend that a higher threshold would deter nuisance requests and force a hedge fund to seek broader support before requiring a company to incur the expense of holding a special meeting.
However, most shareholders won’t have an opportunity this year to choose between the competing thresholds because many issuers are obtaining permission from the staff of Securities and Exchange Commission’s Corporation Finance Division to omit the investor resolutions. In their no-action requests, the companies are successfully citing SEC Rule 14a-8 (i)(9), which bars a shareholder proposal that would directly conflict with a management resolution that the company plans to present at the same meeting.
Under that rule, an investor resolution may be excluded if it and the management agenda item present “alternative and conflicting decisions for shareholders.” In a 1998 rulemaking release, the SEC explained that the proposals don’t have to be “identical in scope or focus” for a company to exclude the shareholder resolution.
Among the companies that have successfully used the (i)(9) argument recently to exclude special meeting proposals are: CVS Caremark, Medco, Honeywell, NiSource, Baker Hughes, Becton Dickinson & Co., Eastman Chemical, and Safeway. In addition, Time Warner, Genzyme, Bristol-Myers Squibb, International Paper, Pinnacle West Capital, and Liz Claiborne Inc. have filed similar no-action requests to exclude proposals with a 10 percent threshold, according to investors.
Meanwhile, AT&T is trying to exclude a 10 percent special meeting resolution under a different SEC rule--14a-8(i)(10)--by arguing that it has “substantially implemented” that proposal. The company’s board approved a 15 percent bylaw on Dec. 18.
The special meeting proposals are part of a successful multi-year campaign by Nick Rossi, William Steiner, and other retail investors affiliated with John Chevedden, a long-time shareholder activist based in southern California. Overall, 31 special meeting proposals filed by investors received majority support in 2009, according to RiskMetrics Group data. Of the 14 companies that so far have sought to exclude proposals under Rule 14a-8 (i)(9), 10 had special meeting proposals that earned majority support last year.
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Submitted by Ted Allen, Publications" »
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Tuesday, January 19, 2010 |
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Apache Sues Activist John Chevedden
Submitted by Ted Allen, Publications
The battle between some issuers and shareholder activist John Chevedden rose to a new level recently when Apache Corp. filed suit against Chevedden in order to exclude his proposal asking the company to drop its supermajority voting hurdles in favor of a majority-of-votes cast standard.
Apache filed the lawsuit on Jan. 8 in federal court in Houston, where the oil-and-gas exploration company is based. The company contends that Chevedden failed to meet the proof-of-ownership requirements in SEC Rule 14a-8(b).
The case is especially unusual because the company did not first ask the SEC staff to issue a no-action letter, as issuers traditionally do when they seek to omit a shareholder proposal. Instead, Apache informed the commission staff in a Jan. 8 letter that the company intends to omit Chevedden’s resolution from its 2010 proxy statement unless a federal court rules that it must be included.
“It’s fairly unusual for a company to sue its own investors, and it’s even more unusual to sue an investor before an SEC staff ruling,” noted Cornish Hitchcock, a Washington-based attorney who represents labor funds in no-action matters. At the same time, Hitchcock said a company might want to file a lawsuit early to give a federal judge enough time to analyze the issues in the case before the firm’s proxy filing deadline.
The lawsuit appears to an attempt by Apache to get around the SEC staff’s no-action ruling in October 2008 that rejected a similar 8(b) challenge by Hain Celestial to a North Dakota reincorporation proposal. In that case, Hain argued that a letter from the proponent’s broker-dealer that confirmed ownership failed to cure inadequacies in a proof-of-ownership letter initially provided by the filer’s custodian. In rejecting the petition, however, the SEC staff said that a written statement from an “introducing broker-dealer constitutes a written statement from the ‘record’ holder of securities,” as required under the federal proxy rules.
Before the Hain decision, companies were able to omit dozens of proposals because of inadequate information provided by proponents’ custodian banks. During the 2008 spring proxy season, roughly 30 percent of shareholder resolutions were omitted for failure to meet eligibility requirements, up from 26 percent in 2007, according to RiskMetrics data.
The federal judge who hears Apache's lawsuit won't have to follow the staff's Hain ruling. As Apache points out, the staff has acknowledged many times that its no-action letters reflect only informal views and that only a federal court can decide whether a company is obligated to include a resolution in its proxy materials.
Apache’s decision to sue Chevedden appears to be a reaction to his successful activism in recent years. The California-based activist and his network of retail investors have submitted dozens of proposals each year that seek board declassification, the right of shareholders to call special meetings, to rescind supermajority rules, to adopt cumulative voting, and institute other reforms. Many of their proposals have won majority support.
Chevedden's investor network has angered corporate officials by sometimes filing more than one proposal on different topics at the same company. In response, more than a dozen issuers filed no-action requests last season that alleged that he violated the proxy rule that limits proponents to one proposal per meeting, but the SEC staff rejected those arguments.
Apache previously had success in the Texas federal courts during litigation with investors. In April 2008, the company obtained a declaratory ruling from U.S. District Judge Gray Miller that it didn’t have to include a proposal from New York City’s pension funds that sought an employment policy to prohibit sexual orientation discrimination. In that case, Apache went to court when it learned that the fund planned to file suit in New York after the SEC staff allowed Apache to omit the proposal.
Apache executives have expressed concern about shareholder proposals in the past. In comments in response to a 2007 SEC rulemaking, G. Steven Farris, the energy company’s CEO, argued that non-binding resolutions should be banned outright, or absent that, resubmission thresholds should be raised to 33, 40, and 45 percent. Prior to the 2007 meeting season, Apache unsuccessfully sought permission from the SEC to omit a proxy solicitation reimbursement proposal filed by the American Federation of State, County, and Municipal Employees.
It remains to be seen whether other companies will decide to bypass the SEC staff--and bear the expense of going directly to federal court--in the event Apache is successful in its suit against Chevedden. It’s notable that Apache is also seeking reimbursement of its attorneys’ fees and other expenses in the event that it prevails in the suit. Such tactics could have a chilling effect on activism by individual investors, who often lack the resources to hire an attorney to fight a lawsuit.
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Monday, January 4, 2010 |
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The SEC Provides Guidance on Proxy Disclosures
Submitted by Ted Allen, Publications
In response to various inquiries from companies and their advisers, the U.S. Securities and Exchange Commission has issued guidance on when issuers will be required to comply with the SEC’s new proxy disclosure rules.
The SEC’s commissioners voted 4-1 on Dec. 16 to finalize the new rules, which will require disclosure on board candidates’ qualifications, the rationale for the company’s board leadership structure, and whether diversity was considered in the selection of director nominees.
If a company’s fiscal year ended on or after Dec. 20, its Form 10-K and proxy statements must comply with the new requirements if filed on or after Feb. 28, the SEC explained in its Dec. 22 “Proxy Disclosure Enhancements Transition” guidance. If such an issuer files a preliminary proxy statement (or a 10K) before Feb. 28, the company still must comply with the new disclosure rules if it plans to file a definitive proxy statement after that date. If a company’s fiscal year ended before Dec. 20, it doesn’t need to comply with the new rules, but may voluntarily do so.
However, the SEC said a new mandate to report proxy vote results in a Form 8-K filing within four business days of a shareholder meeting will apply to any meetings held after Feb. 28, even for those issuers that mail their proxy statements before that date.
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Wednesday, September 24, 2008 |
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More Institutions Limit Securities Lending
Submitted by: Ted Allen, Publications
As the global credit crisis continues, several European pension funds have temporarily stopped lending shares of financial companies to discourage short selling, while two U.S. mutual fund groups have halted any new share loans.
The asset managers for the BT Pension Scheme, the largest U.K. pension fund, and Dutch pension giant ADP have stopped loaning shares of U.S. and European banks, according to Global Pensions, a London-based magazine. Paul Lee, a director at Hermes Equity Ownership Services, which manages assets for the BT fund, told the magazine that Hermes decided to take this action before the U.K.’s Financial Services Authority and the Securities and Exchange Commission acted last week to temporarily bar all short-selling of financial stocks. Regulators in Australia, the Netherlands, Belgium, France, Ireland, Germany, Canada, and Switzerland also have acted to curb short selling.
On Sept. 19, the Investment Management Association, which represents the U.K. asset managers, urged its members “to consider carefully the implications of any participation in the lending of stock in U.K. banks, so long as current conditions prevail.” Dutch asset manager PGGM also said it would stop lending shares in financial firms, according IPE.com, a pension fund news site.
In the United States, two mutual fund groups, Vanguard Group, and Bank of America’s Columbia Management said they have suspended new loans of shares in all public companies, the Boston Globe reported. “We have decided to stop new lending activity for now, until such time investors regain confidence in the market and the volatility abates,” a Vanguard spokesman said, according to the Globe.
In Australia, the Equipsuper pension fund suspended its share lending program in March, citing concerns about short selling, according to The Australian newspaper. The fund said it would resume lending if regulators acted to require more transparency.
The California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System, the New York State Common Retirement Fund, and Maryland’s state pension fund have acted recently to limit the lending of financial stocks. The New Jersey Division of Investment stopped loaning shares to short sellers in July, according to the Reuters news service. The number of stocks excluded from share-lending programs varies by institution; CalPERS pulled four stocks, while the New York fund removed 19 companies.
In a Sept. 22 memo, the corporate law firm of Wachtell Lipton Rosen & Katz called on the SEC to encourage institutions and asset managers to refrain from lending the shares of financial firms or banks for 90 days. The law firm said the agency should also “examine whether there is a potential conflict of interest” for a mutual fund or a pension fund to lend securities to a short seller whose trading activities may decrease the net asset value of the fund’s portfolio.
These voluntarily steps by institutions and asset managers to limit securities lending come as the lucrative practice has expanded in recent years. Share lending generated almost $1.7 billion in revenue for U.S. pension and mutual funds in 2006, according to the ASTEC Consulting Group.
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Monday, May 19, 2008 |
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E-Proxy: Retail Voting Still Low
Submitted by: L. Reed Walton, Publications
U.S. companies using online proxies and mailed notices--also known as “notice and access”--continue to see sharp declines in voting by individual investors, but some shareholder advocates are re-examining their previously pessimistic views on e-proxy.
Since July, when firms could begin electronic distribution of their proxy materials, 92 companies have held annual meetings, according to Broadridge Financial, which processes proxy votes for most of the issuers that have adopted notice and access. At those 92 firms, retail shareholder participation dropped more than 75 percent from the previous year. Only 4.5 percent of individual investors voted at e-proxy firms in late 2007 and early 2008, down from 19.2 percent participation in late 2006 and early 2007, according to Broadridge.
According the latest statistics from Broadridge, 283 public companies adopted electronic proxy material delivery as of March 31. In July 2007, the Securities and Exchange Commission adopted a rule allowing public firms an alternative to sending full packets of proxy materials to each shareholder--the “notice and access” model--whereby issuers would mail a notice to shareholders telling them that proxy materials are available via a Web site other than the SEC’s EDGAR site. By January, large companies were required to post proxy materials online, though they could still choose to send full packets of voting materials in advance of their annual meetings. Small companies will have until 2009 to post proxy information online.
The possibility of a drop in retail shareholder participation was raised by many of the investors who commented on the SEC’s notice and access rule. During the first comment period in 2006, shareholders Nick and Emil Rossi warned in a letter to the SEC that electronic proxy delivery “is another attempt to disenfranchise small individual shareholders.” A survey conducted by Forrester Research--on behalf of Broadridge and included in the proxy processing company’s comments to the SEC--indicated that 38 percent of shareholders who vote would be less likely to look at proxy materials online and less likely to vote under a notice and access model.
At the time, investor groups expressed concern that older or less technologically savvy shareholders would be reluctant to use the computer technology required to view e-proxies. The Association of BellTel Retirees wrote in its letter that it was “premature” of the SEC to expect that retirees and other shareholders over the age of 65 are comfortable enough with the Internet to access corporate proxy disclosures.
The initial decline in retail voting appears to bear out these warnings. But the dip may be temporary, some advocates say. Richard Clayton, research director for the CtW Investment Group, told Risk & Governance Weekly that a number of factors could be contributing to the drop in retail participation--including frustration with a flagging economy and a declining real estate market. Trouble using the new online proxy voting applications could contribute to a temporary drop in participation, as well. “With a lot of online services, there tends to be a learning curve,” Clayton said.
Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County, and Municipal Employees, agreed. Ferlauto told R&GW that it would probably take at least five years for some retail shareholders to become familiar with the technology, have the broadband network access necessary to download large files, and cope with the hassle and expense of printing out long proxy forms. “These are significant barriers that will be overcome with time,” Ferlauto said.
Ferlauto also noted that notice and access may have dampened support levels for “say and pay” and other shareholder proposals this year. However, CtW’s Richard Clayton told R&GW that because it’s difficult to measure how many retail investors are voting for shareholder resolutions, it’s too early to tell whether the e-proxy rules are having a real effect on proposal support.
A number of early-adopter companies reported shareholder complaints over the mailed notice cards. A few shareholders wrote their votes on the notice cards and sent those back to the company, Gail Smith, director of corporate development for pharmaceutical firm Pharmos, said in a January interview on e-proxies with Broadridge.
Dominic Jones, editor of the IR Web Report, wrote about problems he had accessing online proxy materials for Applied Micro Circuits in July of last year. Mistyping the Web address for Broadridge’s proxy voting site, Investor E-Connect, brought up a “spam” advertising site he suspected preyed on people who accidentally visited the wrong Web page, Jones wrote. Other investors complained about the mailed notice that Broadridge used to alert shareholders to online availability. The notice form was too small and not very “user-friendly,” Helen Kaminski, assistant general counsel for food company Sara Lee told Broadridge.
Broadridge has no plans now to redesign its mailed notice, Chuck Callan, the company’s senior vice president of regulatory affairs, told Risk & Governance Weekly. This is partly because the SEC requires that certain text be printed on the notice of online proxy material availability. “You get the notice, but it’s not in and of itself a ballot,” Callan said.
He contends that the new, unfamiliar proxy delivery method is causing retail shareholder participation to drop. According to Broadridge statistics, in cases in which e-proxy companies sent certain shareholders a “full set” of proxy materials, and among the 0.5 percent of shareholders who “opted in” for full paper copies, voting was much higher. For retail shareholders receiving the full set of proxy materials this year, the voting rate was approximately 66.5 percent. “The basic conclusion is that opt-in rates are low, opt-out rates are low, and if there is a change in the default, people tend to take no action,” Callan told R&GW.
Two new initiatives may also help individual investors become more informed about governance matters and vote their shares. A new Web site, ProxyDemocracy.org allows shareholders to see how institutional investors plan to vote at upcoming meetings. The California Public Employees’ Retirement System, Calvert Funds, Christian Brothers Investment Services, and Domini Social Investments are among the investors that have signed up to make their vote recommendations available on the site. Investors can also assign their voting rights to a third party, such as an environmental or social group, through the Investor Suffrage Movement. The proxy exchange, currently in trial phase, will help members transfer ballot rights to other members online.
Continue reading "E-Proxy: Retail Voting Still Low
Submitted by: L. Reed Walton, Publications" »
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Thursday, March 6, 2008 |
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Finnish Market Removes Barrier to Proxy Voting
Submitted by: Gary Hewitt, Marketing
The necessity for multiple copies of a Power of Attorney (POA) signed by the beneficial owner is seen by many to be a deterrent to vote, given the additional complexity, cost and administrative burden – particularly for cross border votes. We're pleased to announce some positive developments in this area in Finland.
On 27 February 2008 the major Finnish sub-custodians announced that power of attorneys (POAs) signed by the beneficial owner will no longer be required to vote at shareholder meetings in Finland. This positive market practice change, which is effective immediately, is the result of discussions between market participants that have been ongoing for several months. These discussions culminated in several sub-custodian banks obtaining a legal opinion confirming that there was no legal obstacle for removing the requirement for PoAs.
While we agree that this is a great step forward for corporate governance, there remains a possibility that an Issuer will not accept the new practice with immediate effect and will demand to see a signed POA. All participants will be monitoring the situation to ensure that the Issuers accept the new process.
About 15% of markets, many of them European, still require that beneficial owners sign a power of attorney (POA) in order to be eligible to vote. It remains to be seen if other markets will follow the Finnish example and remove existing barriers to cross-border proxy voting.
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Thursday, April 12, 2007 |
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ISS to Hold Second Share Lending Webcast April 17
Submitted by: Sarah Cohn, Director of Communications
ISS will hold a special second Governance Forum webcast, Share Lending Practices and Share Recall Challenges, on Tuesday, April 17 at 11 a.m. Eastern Daylight Time.
Due to overwhelming demand for more information on the topic of securities lending, ISS is offering webcast participants the opportunity to engage directly with panelists Chris Kunkle, Vice President of JP Morgan Chase; Ed Blount, Founder and Executive Director of Astec Consulting Group; Henry Hu, University of Texas Law School; and W. Tredick McIntire of Goldman Sachs and Chair of the Risk Management Association's Committee on Securities Lending. Diana Bourke, ISS' Executive Vice President of Global Voting and Transaction Services, will moderate the discussion.
Panelists will share their views on proxy voting and securities lending, including: existing regulations and law, institutional investor best practices, and challenges related to foreign markets. Additionally, panelists will discuss what steps the industry is taking to support securities lending best practices.
To register for the forum, please visit here.
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Thursday, March 15, 2007 |
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ISS to Hold March 21 Webcast on Share Lending
Submitted by: Sarah Cohn, Director of Communications
ISS will hold a special Governance Forum webcast, Share Lending Practices and Share Recall Challenges, on Wednesday, March 21 at 1 p.m. Eastern Daylight Time.
Securities lending and its impact on proxy voting policies and practices are gaining significant attention in the corporate governance industry since potentially market participants can acquire voting rights in a company without an accompanying financial stake. This separation of economic from voting interest in a company bends one of the basic assumptions behind the one-share, one-vote principle, and places investors who retain the economic interest in a challenging position. Yet, share lending has become a lucrative practice for many institutions.
Panelists Chris Kunkle, Vice President of JP Morgan Chase, and Ed Blount, Founder and Executive Director of Astec Consulting Group, will share their views on the challenges share lending creates for investors. Diana Bourke, ISS' Executive Vice President of Global Voting and Transaction Services, will moderate the panel and also discuss the findings from ISS' recent Share Lending Survey. To register for the webcast, please visit here.
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Tuesday, February 27, 2007 |
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Moving Ahead with the Action Plan: Cross-Border Voting in European Member States
Submitted by: Christel Dumas, Marketing and Communications Manager, ISS Europe
On February 15, 2007, the European parliament approved the "Proposal for a Directive on Shareholder Voting Rights." This directive comes after the European Commission's consultation in July 2005, on "Fostering an Appropriate Regime for Shareholders' Rights," which ISS had responded to along with many other concerned parties.
The objective of the directive is for foreign shareholders to vote as easily as national shareholders do in European listed companies. This is to be achieved via a variety of measures described in the directive. These include:
* Complete and timely disclosure 21 days before a meeting (Article 5)
* Procedures to add agenda items and ask questions (Articles 6 & 9)
* End of block voting in favor of record dates (Article 7)
* Electronic voting (Article 8)
* Role of proxy holders (Article 10)
* Publication of outcome of votes (Article 14).
This directive is a welcome step, moving forward the Commission's Action Plan. However, it could be years before it takes effect since EU states now have to inscribe this into national law. The provisions in the EU directive set minimum expectations of the information and procedures that should be available to shareholders. Although, EU member states may go beyond the EU directive to advance shareholder rights even further. Going forward, ISS hopes the EU will consider adopting ways to guarantee issuers' adherence to the measures that will ultimately be implemented.
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Thursday, December 21, 2006 |
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Examining the Practice of Empty Voting
Submitted by: Pete Friz, Vice President of Global Voting and Transaction Services
Reuters ran an article today titled "MergerTalk: Hedge Funds Find New Ways to Sway Votes," which looks at the practice of empty voting. The practice of "empty voting" entails borrowing shares prior to a record date, which then gives the borrower the voting rights. Once the record date has passed, the borrower returns the shares and effectively controls a large number of votes without a continuing economic interest. Some critics say this creative share borrowing is being done to manipulate voting outcomes and seriously undermines corporate governance transparency for large shareholdings.
The story specifically cited hedge fund's ability to purchase over-the-counter (OTC) equity swaps, obtaining large blocks of shares for voting without any true ownership. Holders are also not required to disclose their current assets in OTC swaps, nor are the banks that structure the swaps. Henry Hu, a University of Texas Law Professor, recently came out with a study on the practice of share lending and empty voting and is advocating fixing the disclosure system to make this practice more transparent.
Industry and academic focus is growing on instances where manipulating the vote is the objective, but similar problems can exist through normal sharelending, even if the motivation is benign. What are your thoughts on the practice of share lending and its impact on voting as well as the practice of "empty voting"...widespread problem or an anomaly to be watched? We welcome your comments.
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Tuesday, September 19, 2006 |
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Asian Corporate Governance Association Announces Asian Proxy Voting Survey 2006
Submitted by: Sarah Cohn, Director of Communications
The WSJ has an interesting article today titled, "Proxy-Voting Systems Improve, But Investors Still Face Hurdles." The piece discusses the Asian Corporate Governance Association's (ACGA) Asian Proxy Voting Survey 2006, which addresses the obstacles shareholders face when voting in Asia.
According to the WSJ's summary of the report, often times institutions in Asia don't bother to vote due to cumbersome procedures and out of apathy. The ACGA estimates that no more than 20% to 30% of minority investors vote, however this is expected to change as foreign holdings in Asia rise.
What are your thoughts on proxy voting in Asia? We welcome your comments.
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Friday, 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.
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Monday, February 27, 2006 |
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2006 Preview: Continental Europe
Submitted by: Thaddeus C. Kopinski, International Editor
Efforts to facilitate proxy voting, improve executive compensation disclosure, and to limit the use of takeover defenses will likely dominate continental Europe's corporate governance debate this proxy season.
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Wednesday, February 22, 2006 |
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SEC Comment Letter on e-Proxy
Submitted by: John M. Connolly, President and CEO
ISS' SEC Comment Letter Regarding the Internet Availability of Proxy Materials
Dear Mr. Katz:
Institutional Shareholder Services Inc. ("ISS") is pleased to submit these comments on the Commission's proposed amendments to the proxy rules under the Securities Exchange Act of 1934. We commend the Commission both for its consideration of widely adopted technical advances and for the range of questions asked in an attempt to improve the proxy materials distribution process for investors and issuers. Institutional Shareholder Services generally endorses the proposed amendments with the expectation that these changes will facilitate wider access to, and review of, proxy materials helping investors to make more informed investment decisions, increase investor participation in the proxy voting process, save money for issuers (ultimately benefiting their stockholders) and allow for additional "low cost" communication between investors and issuers as well as between dissident shareholders. Finally, these proposed changes will accelerate the ongoing movement of proxy voting in the United States from a paper based process to a electronic, data based process which should increase timeliness, accuracy and consistency.
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Submitted by: John M. Connolly, President and CEO" »
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