Prompted by a request for interpretive guidance, on April 1, 2014, the NYSE proposed to relax its bright line director independence tests in certain limited circumstances, so that “a director may be deemed independent of a company that has been the subject of a spin-off transaction regardless of the fact that such director or his employer had a relationship with the former parent of such spun-off company.” The new interpretation is reflected in a rule filing that the NYSE has submitted to the SEC for approval.[Read More]
09 Apr · Wed 2014
NYSE Proposes Relaxation of Independence Test For Directors Of Spin-Off Companies
14 Jan · Tue 2014
ISS Issues FAQs on Director Qualification/Compensation Bylaws
Yesterday, ISS issued FAQs explaining its views on director qualification/compensation bylaws. These types of bylaws disqualify from serving as directors persons who receive third-party compensation, typically from activist investors, for their service as directors. Such bylaws have been adopted since last spring by some companies to prevent arrangements similar to those proposed by activist shareholders running minority slates of directors for the boards of Hess Corp. and Agrium, Inc. in early 2013. See here.
In November 2013, ISS recommended that shareholders of Provident Financial Holding withhold their votes from three director candidates coming up for re-election who were serving on the company’s nominating and governance committee, because the Provident board had adopted a director qualification/compensation bylaw. See here. At the company’s annual meeting on November 26, 2013, the three candidates were re-elected by low margins, receiving withhold votes ranging from 33.4% to 34.1%. See here and Provident Financial’s November 27, 2013 Form 8-K.
According to the FAQs, ISS continues to view director qualification/compensation bylaws negatively, in particular if they have not been put to a shareholder vote. A board-adopted director qualification/compensation bylaw “may be considered a material failure of governance” and ISS “may, in such circumstances, recommend a vote against or withhold from director nominees for material failures of governance, stewardship, risk oversight, or fiduciary responsibilities.” If such a bylaw is put to a shareholder vote, “ISS will apply a case-by-case analytical framework, taking into consideration among other factors the board’s rationale for proposing the bylaw, whether the proposed bylaw materially impairs . . . shareholder rights, and any market-specific practices or views on the underlying issue.”
25 Aug · Sun 2013
Recent Federal Court Decisions Revitalize the Government's Civil Enforcement Power Under FIRREA
Our partner Marvin G. Pickholz recently co-authored Recent Federal Court Decisions Revitalize the Government's Civil Enforcement Power Under FIRREA, which appeared in the July/August issue of the Financial Fraud Law Report.
Marvin comments in the article that in its latest wave of civil actions, the Department of Justice has resurrected an old weapon to wield in a new way: the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA). Consistent with Congress’s tendency to pass ill-defined legislation and then leave it to the courts to later flush out and shape the law, FIRREA was passed in a sweeping flurry of legislation aimed at addressing a pressing issue, and then lay dormant for many years. Similar to the Foreign Corrupt Practices Act and the Racketeer Influenced and Corrupt Organizations Act, over two decades after its creation, FIRREA has now resurfaced in federal cases involving financial fraud and is likely to create more disincentives for a company or individual to litigate against the government. Click here to read the rest of the article.
While the article discusses FIRREA, the concepts therein potentially apply to cases brought by the SEC or DOJ in securities litigation.
25 Jul · Thu 2013
SEC Ends Losing Streak; Conflict Minerals Rule Upheld
The SEC scored a victory in the U.S. Court of Appeals for the District of Columbia Circuit in a case filed in October 2012 by the U.S. Chamber of Commerce, the Business Roundtable, and the National Association of Manufacturers. The plaintiffs challenged the SEC’s rule on disclosure of the use of conflict minerals on grounds that aspects of the rule were arbitrary and capricious under the Administrative Procedure Act and claiming that the disclosures required by the SEC and by Congress run afoul of the First Amendment. In a 63-page decision in favor of the SEC, the Court found no problems with the SEC’s rulemaking and disagreed that the “conflict minerals” disclosure scheme transgressed the First Amendment.
Our client alert discussing the adoption of the conflict minerals rule is available here. Issuers subject to the conflict minerals rule first became required to comply with the rule for the calendar year that began January 1, 2013 and must file their first reports on new Form SD by May 31, 2014. The calendar-year reporting requirement applies to all issuers no matter what their fiscal year may be.
For companies that were on the sidelines either hoping the case would lead to a delay or a de minimis reporting exception, a proactive approach to meet the fast approaching May 2014 reporting deadline is now advisable. That group is sizeable as The Wall Street Journal this week reported that two-thirds of respondents to a new survey say their companies are in the early stages or have not yet started compiling information needed to meet the SEC’s requirements for conflict minerals reporting. A copy of the article is available here.
24 Jul · Wed 2013
Fifth Circuit to Dodd-Frank Whistleblowers: Call the SEC First
The U.S. Court of Appeals for the Fifth Circuit’s decision last week in Asadi v. G.E. Energy (USA) has been hailed as a triumph for employers because it requires whistleblowers who bring retaliation claims under the Dodd–Frank Wall Street Reform and Consumer Protection Act to show that they suffered retaliation because they reported potential violations to the U.S. Securities and Exchange Commission. The Fifth Circuit rejected the position adopted by the SEC in its regulations implementing Dodd-Frank and by the few district courts that have addressed the issue. That rejected approach interprets Section 922 of Dodd-Frank to apply its enhanced protections to certain whistleblowers even if they had not reported their concerns to the SEC. Although this decision narrows the category of employees who can seek the enhanced protections of Dodd-Frank, it will likely increase the number of whistleblowers who report their concerns to the SEC.
Our firm’s client alert regarding the case can be found here.
30 May · Thu 2013
July 1, 2013 – D-Day for Compensation Committee Approval of Independent Legal Counsel
In theory, a company could be delisted from a national stock exchange as a result of a chance meeting anywhere and a casual conversation, if a compensation committee member receives any legal advice from independent company counsel. Beginning on July 1, 2013, the listing standards of national securities exchanges and national securities associations mandated by Section 952 of the Dodd-Frank Act become effective. Under these standards, compensation committees of issuers listed on national securities exchanges will be required to consider specified independence factors prior to the committee’s retention of or obtaining advice from a compensation consultant, outside legal counsel or other advisor. If the compensation committee, or a committee member, chooses (or just happens) to discuss legal matters with the issuer’s current outside legal counsel, the exchange’s listing standards require the committee to have gone through the process of considering that firm’s independence prior to obtaining advice from such counsel; and neither the federal securities laws nor the exchanges’ listing standards afford a curative provision.[Read More]
03 Apr · Wed 2013
SEC Says Social Media Can Pass Muster for Regulation FD Disclosures
Yesterday, the Securities and Exchange Commission issued a release and report of investigation announcing that issuers can use social media outlets, such as Facebook and Twitter, to disclose material information in compliance with Regulation FD, so long as investors have been alerted in advance about which social media will be used by the issuer to disseminate such information.
In issuing the Release and Report, the SEC clarified its position regarding its investigation of whether Netflix, Inc. and its CEO, Reed Hastings, violated Regulation FD and Section 13(a) of the Exchange Act when Hastings used his personal Facebook page to announce that Netflix had streamed 1 billion hours of content in June 2012 – information that Netflix had not previously disclosed to the public. Neither Hastings nor Netflix had previously used Hastings’s personal Facebook page to announce company metrics, and Netflix had not previously informed shareholders that Hastings’ personal Facebook page would be used to disclose information about Netflix. The post was not accompanied by a press release, a post on Netflix’s own web site or Facebook page, or a Form 8-K. However, as noted in our prior blog post regarding the Wells notices issued to Hastings and Netflix, Hastings did have more than 200,000 Facebook subscribers, and many news outlets quickly reported on the Hastings’ Facebook post.[Read More]
06 Mar · Wed 2013
Nasdaq Proposes Internal Audit Function Requirement For Listed Companies
The NASDAQ Stock Market LLC (Nasdaq) recently proposed a rule change to require listed companies to establish and maintain an internal audit function. Of course, many listed companies already have an internal audit function as a matter of best practice. NYSE listed companies have been required to maintain an internal audit function since 2004.
The purpose of the internal audit function is to ensure that management and the audit committee receive information about their company’s risk management processes and internal control system. Companies would be permitted to outsource the internal audit function to a third party service provider other than their independent auditor. The audit committee would have sole, non-delegable responsibility to assist the board in overseeing the internal audit function.
If the rule change is approved by the SEC, companies listed on Nasdaq on or prior to June 30, 2013, would be required to have an internal audit function no later than December 31, 2013. Companies listing on Nasdaq after June 30, 2013, would be required to have an internal audit function prior to listing.
28 Feb · Thu 2013
Apple – Einhorn Dispute Shines Spotlight on SEC’s Unbundling Rules
Although the dispute between hedge fund manager David Einhorn and Apple, Inc. is about Apple’s capital allocation strategy, it has brought attention to the SEC rules on “unbundling” of proxy statement proposals. On Friday, the U.S. District Court for the Southern District of New York enjoined Apple from holding a shareholder vote at its February 27 annual meeting on a proposal (Proposal No. 2) to amend its articles of incorporation to “[(i)] eliminate certain language relating to the term of office of directors in order to facilitate the adoption of majority voting for the election of directors; [(ii)] eliminate ‘blank check’ preferred stock; [(iii)] establish a par value for the Company’s common stock of $0.00001 per share; and [(iv)] make other conforming changes . . ., including eliminating provisions in the Articles relating to preferred stock of the Company.”
The SEC adopted the unbundling rules in 1992 (SEC Release No. 34-31326 (Oct. 16, 1992)). Exchange Act Rule 14a-4(a)(3) requires that “[t]he form of proxy . . . [s]hall identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters.” Exchange Act Rule 14a-4(b)(1) requires that the proxy card provides shareholders with “an opportunity to specify by boxes a choice between approval or disapproval of, or abstention with respect to each separate matter referred to therein as intended to be acted upon.” In 1999, the U.S. Court of Appeals for the Second Circuit held that an implied private right of action exists under Rules 14a-4(a)(3) and 14a-4(b)(1) (Koppel v. 4987 Corp., 167 F.3d 125, 134-138 (2d Cir. 1999)).[Read More]
18 Jan · Fri 2013
Compliance Reminder: Smaller Reporting Companies Subject to Say-On-Pay Vote Requirements For 2013 Proxy Season
When preparing their proxy statements for the 2013 proxy season, smaller reporting companies should keep in mind that the temporary exemption from the say-on-pay vote requirements that applied to them during the last two proxy seasons is no longer available going forward. For shareholder meetings occurring on or after January 21, 2013, smaller reporting companies will be required to conduct non-binding say-on-pay and say-on-frequency votes in accordance with Rule 14a-21(a) and (b) under the Securities Exchange Act of 1934.
The non-binding say-on-pay vote is required at least once every three calendar years and covers only named executive officer compensation as disclosed pursuant to Item 402(m) through (q) of Regulation S-K. The Instruction to Rule 14a-21(a) includes a non-exclusive example of a say-on-pay resolution that would satisfy the requirements.
At least once every six years, a non-binding say-on-frequency vote is required as to whether the say-on-pay vote should be held every one, two or three years. The form of proxy must include four boxes, giving shareholders the ability to choose among one, two or three years for the say-on-frequency vote or to abstain. Other alternatives are not permitted.
A company has to disclose in an amendment to the Form 8-K disclosing the voting results of the last shareholder meeting its decision as to how frequently it will hold the say-on-pay votes. The Form 8-K amendment must be filed no later than 150 days after the end of the shareholder meeting at which the say-on-frequency vote occurred, but not later than 60 days before the Rule 14a-8 deadline for submitting shareholder proposals as disclosed in the company’s most recent proxy statement.
17 Jan · Thu 2013
SEC Approves Listing Standards Relating to Compensation Committees
On January 11, 2013, the SEC approved listing standards proposed by the NYSE and the NASDAQ Stock Market (Nasdaq) implementing the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers. Our client alerts on the NYSE’s and Nasdaq’s initial proposals can be found here and here, and our blog entries on amendments to the proposals can be found here and here.
Effective as of July 1, 2013, listed company compensation committees must have (i) authority to retain compensation consultants, legal counsel and other advisers, (ii) responsibility to appoint and oversee the work of such advisers, (iii) authority to fund such advisers and (iv) responsibility to consider certain independence factors before selecting such advisers. Both NYSE and Nasdaq-listed companies will be required to comply with the new listing standards on compensation committee member independence by the earlier of (a) the listed company’s first annual meeting after January 15, 2014 or (b) October 31, 2014. The same latter compliance dates apply to the new Nasdaq listing standard that will now require listed companies to have a standing compensation committee that is comprised of at least two independent directors and has a written charter.
The SEC orders approving the new listing standards include guidance on how frequently a compensation committee should conduct the required independence assessment with respect to compensation consultants, legal counsel and other advisers. The SEC states that it “anticipates that compensation committees will conduct such an independence assessment at least annually.”
11 Jan · Fri 2013
NYSE and NASDAQ Further Amend Proposed Listing Standards Relating to Compensation Committees
The NYSE and the NASDAQ Stock Market (Nasdaq) recently filed additional amendments to their proposed listing standards implementing the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers. Our client alerts on the NYSE’s and Nasdaq’s initial proposals can be found here and here, and our blog entry on an earlier amendment to Nasdaq’s proposal can be found here.
The proposed listing standards would require compensation committees to consider certain independence factors before selecting a compensation consultant, legal counsel or other adviser, other than in-house legal counsel. Under the additional amendments, an independence assessment would not be required for a compensation committee adviser whose role is limited to (i) consulting on any broad-based plan that does not discriminate in scope, terms or operation, in favor of executive officers or directors of the listed company, and that is available generally to all salaried employees or (ii) providing information that either is not customized for a particular issuer or that is customized based on parameters that are not developed by the adviser, and about which the adviser does not provide advice. This exception mirrors Item 407(e)(3)(iii) of Regulation S-K, which includes an exception from disclosure for the same types of compensation committee advisers.
In addition, the NYSE amendment also (i) modifies the start date of the six-month transition period for companies graduating from smaller reporting company status, which would now commence on the date on which the company actually ceases to be a smaller reporting company, and (ii) clarifies that a compensation committee would not be precluded from selecting, or receiving advice from, a compensation committee adviser that is not independent.
As noted previously, the deadline for the SEC to take action on proposed stock exchange listing standards relating to compensation committees and their advisers is January 13, 2013.
FTC Revises Hart-Scott-Rodino Thresholds
The Federal Trade Commission announced yesterday that it has made its annual adjustments to the thresholds for determining whether a transaction is reportable under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 and the amount of the related filing fee. The new thresholds were published today in the Federal Register. Under HSR, certain transactions may not be completed until a waiting period (generally 30 days unless extended by a request for additional information or terminated early upon request) has expired after the required notifications are filed.
The new thresholds, which will apply to any transaction closing on or after February 11, 2013, are as follows:
- $283.6 million: must report if transaction value exceeds
- $70.9 million: no report required if transaction value does not exceed
- $14.2 million/$141.8 million: size of parties tests
While the amount of the filing fees will not change, the revised thresholds will change the transaction values to which the fees apply:
- $45,000: transactions with value less than $141.8 million
- $280,000: transactions with value of at least $709.1 million
- $125,000: all other transactions
If you are involved in a transaction that is or may be subject to HSR reporting, the new thresholds present two timing issues for you to consider:
- If your transaction value is more than $68.2 million but less than $70.9 million and the size of parties test will be met, delaying closing until on or after February 11, 2013 will eliminate the HSR reporting requirement.
- If your transaction value is more than $136.4 million but less than $141.8 million, or more than $682.1 million but less than $709.1 million, delaying your HSR notification filing until on or after February 11, 2013 will decrease your filing fee.
New York Comptroller Seeks Qualcomm’s Records on Political Giving; SEC Contemplating Political Contribution Disclosure Rules
A “books and records” action brought by New York’s comptroller to determine how Qualcomm Incorporated “is spending corporate funds in the political arena” may create a precedent for shareholders seeking to force corporate disclosure of political contributions.
The suit was brought last week in Delaware Chancery Court by Comptroller Thomas DiNapoli as trustee of the New York State Common Retirement Fund, a shareholder of Qualcomm. The complaint cites to recent studies concluding that “corporate political spending is negatively correlated with enterprise value” and may indicate “more widespread control and governance deficiencies.”
The Retirement Fund’s action comes at a time when the Securities and Exchange Commission may be considering rules to require public companies to disclose political spending. The Harvard Law School Forum on Corporate Governance and Financial Regulation reported in a January 9, 2013, entry that the Securities and Exchange Commission has indicated in an “entry in the Office of Management and Budget’s Unified Agenda … that, by April, it plans to issue a Notice of Proposed Rulemaking on requiring public companies to disclose their spending on politics.”[Read More]
19 Dec · Wed 2012
NASDAQ Amends Proposed Listing Rules Relating to Compensation Committees
The NASDAQ Stock Market (Nasdaq) recently filed an amendment to its proposed listing rules implementing the requirements of Rule 10C-1 under the Securities Exchange Act of 1934 relating to compensation committee member independence and compensation committee advisers. Our client alert on Nasdaq’s initial listing rule proposal can be found here.
The amendment makes changes in three areas: First, it changes the effective and compliance dates of the proposed listing rules. The rules requiring that the compensation committee have (i) authority to retain compensation consultants, legal counsel and other advisers, (ii) responsibility to appoint and oversee the work of such advisers, (iii) authority to fund such advisers and (iv) responsibility to consider certain independence factors before selecting such advisers, other than in-house legal counsel, would now become effective July 1, 2013. The initial rule proposal provided for immediate effectiveness upon SEC approval. Listed companies would be required to comply with the remaining rules, which would require a standing compensation committee and compensation committee member independence, by the earlier of (i) the listed company’s first annual meeting after January 15, 2014 or (ii) October 31, 2014. The initial rule proposal contemplated compliance by the earlier of the listed company’s second annual meeting after SEC approval or December 31, 2014. The proposed new effective and compliance dates are consistent with those proposed by the NYSE in its proposed listing standards relating to compensation committees, which we have discussed here.
Second, the amendment removes the word “independent” prior to “legal counsel” to clarify further that the compensation committee would be required to conduct an independence assessment with respect to any compensation consultant, legal counsel or other adviser to the compensation committee, other than in-house legal counsel, for which no such assessment is required.
Third, the amendment extends the phase-in schedule for companies graduating from smaller reporting company status.
Finally, the amendment includes a form of compensation committee certification that a listed company would have to use when certifying to Nasdaq its compliance with the new compensation committee listing rules, no later than 30 days after the final implementation deadline applicable to it.
As we noted previously, the SEC has extended the deadline for taking action on proposed stock exchange listing rules relating to compensation committees and their advisers to January 13, 2013.