Presentation on theme: "PREPARING FOR THE 2010 PROXY SEASON: SPOTLIGHT ON RISK October 8, 2009."— Presentation transcript:
PREPARING FOR THE 2010 PROXY SEASON: SPOTLIGHT ON RISK October 8, 2009
Davis Polk & Wardwell LLP PREPARING FOR THE 2010 PROXY SEASON: SPOTLIGHT ON RISK Presented by John K. Halvey Group Executive Vice President and General Counsel, NYSE Euronext James F. Duffy Interim CEO, NYSE Regulation Annette L. Nazareth Partner, Davis Polk & Wardwell LLP Joseph A. Hall Partner, Davis Polk & Wardwell LLP William M. Kelly Partner, Davis Polk & Wardwell LLP Ning Chiu Counsel, Davis Polk & Wardwell LLP October 8, 2009
2 Overview PREPARING FOR THE 2010 PROXY SEASON: SPOTLIGHT ON RISK Proxy Access – Proposed Rule 14a-11 Rule 14a-8 – Trouble Ahead? Rule 452 – Cutting It Close CD&A and the New Focus on Risk Time for a Risk Committee?
3 Proxy Access – Proposed Rule 14a-11 Proxy access reproposed by the SEC on May 20 Comment period ended August 17 with more than 500 individual comment letters submitted Two basic proposals – Rule 14a-11 – direct access to the proxy Rule 14a-8 – allow shareholders to create a proxy-access bylaw
4 Proxy Access – Proposed Rule 14a-11 (cont’d) No official word on what will be adopted, but at least 3 Commissioners appear to favor rule 14a-11 in some form Earlier in the summer, an expectation that there would be action on rule 14a-11 at SEC’s November 9 open meeting Two Commissioners have stated that there will not be action on rule 14a-11 in time for proxy season for calendar-year companies March 31 or June 30 companies could be the first Would SEC adopt rule 14a-8 amendment alone in November? “Shareowner community” opposed to bifurcation of the two rules – do not want to lose momentum on rule 14a-11, and so may prefer to push back action on both rules
5 Proxy Access – Proposed Rule 14a-11 (cont’d) Rule 14a-11 as proposed – Eligible shareholders – Individual or group owning a given percentage of voting securities: 1% for large accelerated filers 3% for accelerated filers 5% for non-accelerated filers Must have held stock for at least one year and continue to hold through annual meeting Must certify not holding stock for purpose of change of control or to gain more than 25% of the board
6 Proxy Access – Proposed Rule 14a-11 (cont’d) Shareholder nominations – Shareholders may nominate up to 25% of the board Must represent nominee meets objective NYSE independence tests Disclosure of both nominating shareholder and nominee required May be excluded through SEC process on specified grounds All nominees (company and shareholder) on one proxy card, listed individually
7 Proxy Access – Proposed Rule 14a-11 (cont’d) Issues to watch – Will the SEC permit companies to adopt alternative proxy access mechanisms? Will the SEC provide for a longer notice period? Will the SEC adopt a uniform percentage ownership threshold for all companies? Will the SEC remove disincentives for companies to negotiate with shareholder nominees? Will the SEC require more disclosure about the nominating group’s overall economic interest in the company? Will the SEC require the nominee to be independent of the nominating group? If the SEC is challenged in the DC Circuit, will the rule be stayed pending appeal?
8 Proxy Access – Proposed Rule 14a-11 (cont’d) Action plan – Majority voting Approximately half of S&P 500 companies now have majority voting for director elections Conventional majority voting provisions allow for a return to plurality voting in the case of a contested election But these laws have not been drafted with 14a-11 in mind, and a 14a-11 election may not be “contested” under some companies’ bylaws Review your majority voting bylaws or policy to ensure that 14a-11-nominated candidates will trigger the “contest” exception
9 Proxy Access – Proposed Rule 14a-11 (cont’d) Action plan – Advance notice bylaws The 120-day advance notice requirement under 14a-11 is an alternative to company advance notice bylaws, not a minimum notice period Companies with shorter advance notice periods may be disadvantaged: Shareholder’s 14-day cure period may overrun company’s deadline to submit a no-action request (80 days before filing definitive proxy materials) For example, under a 90-day advance notice period, if a nomination were filed at the deadline the cure period would run beyond the company’s deadline to file a no-action request even if the company mailed a notice of deficiency on the same day that it received the nomination Note also that 14a-11 creates a deadline for notice, but not a window In the absence of a company bylaw to the contrary, there is no limit as to how far in advance of an annual meeting a shareholder may notify a company of its intent to nominate a candidate for inclusion in the company’s proxy materials Review your current notice provisions Prepare revised provision that would create 120-150 day window
10 Rule 14a-8 – Trouble Ahead? Shareholder proposals under rule 14a-8 Expect more activity here beyond opening up rule 14a-8 to proxy access proposals Staff has indicated that they will try to provide more of a rationale for their decisions this season, but Staff is under considerable pressure from “shareowner community” to chip away at the “ordinary business operations” basis for exclusion Coupled with clear support for the “shareowner community” in the Chairman’s office Expect the staff to permit fewer exclusions in 2010
11 Rule 14a-8 – Trouble Ahead? (cont’d) Ordinary business operations – excludable under rule 14a-8(i)(7), but Staff has indicated that they will take a fresh look at proposals that focus on internal risk assessment, possibly cutting back this exclusion basis Staff has offered to keep an open mind on proposals that would affect compensation below the director and executive officer level, again cutting back Dovetails with proposal to expand CD&A to cover how compensation impacts a company’s risk profile “Shareowner community” insistent that any issue they identify is a significant social policy Substantially implemented – excludable under rule 14a-8(i)(10), but Staff increasingly taking the position that “substantially” means “completely”
12 Rule 452 – Cutting It Close NYSE Rule 452 amended on July 1 to make uncontested director elections “non-routine matters” for shareholder meetings held on or after January 1, 2010 Brokers holding shares in street name will no longer be able to vote uninstructed shares in proportion to votes of instructed shares Approximately 85% of exchange-traded securities are held in street name Absence of reform of “objecting beneficial owner” (OBO) / “non- objecting beneficial owner” (NOBO) rules continues to impede direct communication with beneficial owners
13 Rule 452 – Cutting It Close (cont’d) Consequences – Withhold campaigns not offset by broker discretionary votes Companies with majority vote requirements may be particularly at risk Approximately half of S&P 500 now have majority vote requirements Potential difficulty of achieving quorum if no “routine” items are on the agenda Increasing influence of institutional votes means increasing importance of proxy advisory firms and their hot buttons – Failure to implement a shareholder proposal that received majority vote Gross-ups and golden parachutes Overboarding or missing meetings RiskMetrics’ own “independence” criteria
14 Rule 452 – Cutting It Close (cont’d) Action items – Review recent election results to determine impact of broker discretionary voting If necessary, add a “routine” matter to the agenda, such as approval of auditors, to ensure quorum Consider lowering quorum threshold if possible DGCL § 216 permits one-third quorum, but default is one-half Identify the institutions that own your stock, ascertain their views, meet with them Early consultation with proxy solicitor to maximize turnout Consider abandoning “notice & access” and return to “full set delivery” Or use notice & access for institutions only Will SEC permit more aggressive solicitation efforts around e-proxy? Analyze proxy advisory policies to determine likelihood of a withhold recommendation
15 CD&A and the New Focus on Risk On July 10 the SEC issued proposed amendments to the CD&A and other proxy disclosure rules A new section in CD&A discussing and analyzing if and how risks arising from a company’s employee compensation programs may have a material effect on the company Disclosure of services unrelated to executive or director compensation provided by compensation consultants and their affiliates and fees paid for such services Enhanced background disclosure relating to directors Including information about the individual’s risk assessment skills Would also require disclosure regarding the board’s role in the company’s risk management process Comment period ended September 15
16 CD&A and the New Focus on Risk (cont’d) CD&A required to discuss and analyze situations in which a company’s compensation programs may “create incentives that can affect the company’s risk and management of that risk” Requirement would apply to all employee compensation programs and not merely to those in which executives participate However, discussion would be required only if the risks arising from such programs may have a material effect on the company
17 CD&A and the New Focus on Risk (cont’d) Proposed rule details examples of situations that could trigger the need to provide such discussion – e.g., programs – at a business unit that carries a significant portion of a company’s risk profile at a business unit with compensation that is structured significantly differently from that of other units at a business unit that is significantly more profitable than other units at a business unit whose compensation expense constitutes a significant percentage of the unit’s revenues that vary from the company’s overall risk and reward structure (e.g., if bonuses are awarded for accomplishing short-term tasks, whereas the income and risk to the company from the tasks extends over longer periods)
18 CD&A and the New Focus on Risk (cont’d) Additional compensation consultant disclosure – SEC believes that shareholders are concerned about conflicts of interest that arise when compensation consultants provide additional services Proposed rule would require disclosure of – nature and extent of all additional services provided to the company and its affiliates by consultant and its affiliates aggregate fees paid for all additional services aggregate fees paid for services used to determine or recommend the amount or form of executive and director compensation whether management decided, or otherwise participated in the decision, to engage such consultant and its affiliates for such additional services whether the board of directors or compensation committee approved such additional services
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