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Presentation on theme: "PREPARING FOR THE 2010 PROXY SEASON: SPOTLIGHT ON RISK October 8, 2009."— Presentation transcript:


2 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

3 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?

4 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

5 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

6 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

7 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

8 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?

9 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

10 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

11 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

12 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”

13 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

14 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

15 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

16 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

17 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

18 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)

19 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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