by Cydney Posner
Below are some highlights (from my notes) of the PLI Securities Regulation Institute panel discussions Thursday and Friday with the Corp Fin staff (Keith Higgins, Shelley Parratt, David Fredrickson, Michele Anderson, Karen Garnett) as well as a number of some former staffers, plus some additional discussion from the M&A panel (which the moderator likened to Wednesday night’s contentious Republican debate).
- Shareholder proposals – After summarizing the recent SLB 14H (see this PubCo post) providing guidance on the Rule 14a-8(i)(9) exclusion for conflicting proposals and the Rule 14a-8(i)(7) exclusion for ordinary business in light of Trinity Wall Street v. Wal-Mart Stores, Inc., the staff took the opportunity to reiterate the contents of footnote 15 to the SLB. In that footnote, the staff reminded companies to provide a complete copy of the company’s proposal to facilitate the staff’s evaluation of its no-action request under Rules 14a-8(i)(9) and 14a-8(i)(10). Without inclusion of the complete copy with the company’s no-action request, the “staff may not be able to agree that the company has met its burden of demonstrating that a shareholder proposal is excludable.”
- Universal proxy – a rulemaking petition was submitted by the Council of Institutional Investors in 2014 requesting amendments to facilitate the use of universal proxies in proxy contests. (See this news brief.) A universal proxy is a proxy card that would include a complete list of board candidates, allowing shareholders in contested elections to vote for their preferred combination of shareholder and management nominees on a single proxy card. The purpose is to allow investors voting by proxy to have the same ability to vote for their preferred mix of nominees as if they had attended a meeting in person. The staff is considering the possibility, including issues such as whether it should be voluntary or mandatory and whether its use should be available in change-in-control situations or be limited to short slates.
- Imprecise descriptions of voting standards – Rulemaking petitions were also submitted by CII (see this PubCo post) and the United Brotherhood of Carpenters requesting that the SEC enhance some of its disclosure requirements in connection with proxy solicitations, particularly the descriptions of the voting requirements in director elections. Both petitions contended that these descriptions are sometimes stated incorrectly or ambiguously in proxy statements (for example, describing “plurality plus” voting standards — a standard under which a nominee who receives more votes “withheld” than votes “for” is required to tender his or her resignation for consideration by the board — as a type of majority voting). In response to the petitions, the SEC’s Division of Economic and Risk Analysis conducted a study of 150 companies in the Russell 3000. DERA found that there were indeed a number of companies that were “imprecise” in their descriptions. In some cases, voting standards described as majority voting in the proxy statement provided on the proxy card for votes “For” and “Withhold,” but not for “Against” votes as would be expected in majority voting. In some cases, companies did mischaracterize “plurality plus” standards as majority voting standards. The staff is continuing to monitor the situation, but it appears that, instead of providing written guidance, at least initially, Corp Fin is attempting to get the word out through public presentations.
- Dodd-Frank proposals — There are three Dodd-Frank rulemaking proposals that await final approval. With regard to the pay-for-performance proposal, a frequent comment the staff is considering concerned the timing mismatch between pay and performance, for example, where the compensation is paid in year two for performance in year one. (See this Cooley Alert.) The question the staff is considering in connection with the hedging proposal is whether, in addition to management and the board, employees should be covered. (See this PubCo post.) With regard to the pending clawback policy proposal, public comments related principally to the extent of discretion that the board may exercise consistent with its fiduciary duty and the extension of the scope of “incentive compensation” to TSR and stock-price metrics. (See this Cooley Alert. (In a later panel, former staffers suggested that, even though the rule still at the proposal stage, companies review their compensation plans and agreements now to be sure they will have the ability to claw back if necessary. In addition, comments sought to reduce the scope of the application of these proposals to exclude smaller companies.
- Conflict minerals — In light of the most recent decision of the three-judge panel of the D.C. Circuit regarding the conflict minerals rules (see this PubCo post ), the staff confirmed that the April 2014 statement by the Director of Corp Fin continues to be operative. (See this PubCo post.) In essence, the statement provides that “[n]o company is required to describe its products as ‘DRC conflict free,’ having ‘not been found to be ‘DRC conflict free,’ or ‘DRC conflict undeterminable.’ If a company voluntarily elects to describe any of its products as ‘DRC conflict free’ in its Conflict Minerals Report, it would be permitted to do so provided it had obtained an independent private sector audit (IPSA) as required by the rule. Pending further action, an IPSA will not be required unless a company voluntarily elects to describe a product as ‘DRC conflict free’ in its Conflict Minerals Report.” [emphasis added] Companies may label their products as “conflict undeterminable” if they choose to do so. The staff warned that companies should be cautious to avoid accidentally labelling their products as “conflict free” just using different words, unless they also include an IPSA.
- New “unbundling” CDIs – The staff recently issued two new CDIs regarding “unbundling” of proxy proposals in connection with M&A transactions. (See this PubCo post.) Among the most controversial aspects of the CDIs was the guidance that (with some exceptions), if a change to the organizational documents must be presented as a separate proposal on the acquiror’s proxy submitted to its shareholders, then a separate vote would also be required of the target shareholders, even if the target’s organizational documents already included the provision that is a material change for the acquiror and even though a vote of the target shareholders would not be required under state law. Several practitioner panelists contended that the CDI was an overreach by the SEC, indirectly creating a federally mandated right to vote on a matter – “big-footing” the state of Delaware, as one panelist expressed it. The question then was what would be the result if the acquiring company’s shareholders approved the charter changes, but the target’s shareholders did not – is the target shareholders’ vote precatory or binding? The panelists advocated that the vote should be precatory only. Associate Director and M&A Chief Michele Anderson’s off-the-cuff response was that, if the acquiror’s board believes it has the authority to close without a favorable vote on that matter, then that’s the answer.
- Proxy access – Former Corp Fin Chief Counsel Marty Dunn viewed the staff’s change in its guidance with respect to the Rule 14a-8(i)(9) exclusion for conflicting proposals (see this PubCo post ), as a complete reversal of prior staff policy. The result is that the exclusion that had been relied on to exclude shareholder proposals for proxy access, calling special meetings and other matters will essentially not be available in most cases. The question then is what approach are companies taking to proxy access this season? Both Dunn and former Corp Fin Director Meredith Cross believe that, although some companies are taking a wait-and-see approach, the most current trend is proactive adoption of proxy access in advance of receipt of a shareholder proposal. Many companies have concluded that, given the thresholds typically employed, proxy access is unlikely to be used so why not get ahead of the curve. The issues then center on what ownership thresholds and other terms will be acceptable; there does not appear to be a clear consensus at this point. ISS and CII have indicated their views on which terms they would consider to be problematic, such as certain limits on aggregation of shareholders, restrictions on compensation of access nominees by nominating shareholders and the terms surrounding whether loaned shares are deemed to be “owned.” If a proxy access shareholder proposal is nevertheless still submitted and the proposal already adopted by the company is not on all fours with the shareholder proposal, it is unclear the extent to which the company will be able to rely on 14a-8(i)(10), the exclusion for proposals that have been substantially implemented. In a no-action letter to GE, the staff did allow exclusion as “substantially implements” of a 3%/3 year/20% of the board proposal that did not address aggregation of shares, when the board had implemented proxy a 3/3/20 proxy access provision that limited the number of persons and groups whose shares could be aggregated. Whether the staff would still issue that letter this year or would take a no-action position where there are other differences – particularly differences that relate to issues enumerated by ISS or CII – is not known.
- Disclosure effectiveness project – Cross observed that “disclosure effectiveness” is precisely the type of project that is often back-burnered. Associate Director Karen Garnett explained that the staff is focused on three issues in connection with periodic reporting: duplication between Reg S-K and GAAP, prescriptive versus principles-based reporting and elimination of outdated disclosure requirements. The staff was also looking at structural issues, including the use of cross-references. Cross cautioned that, because analysts tend to object to elimination of information – under the theory that Cross called “those jeans will fit someday” — not to expect very much in the way of elimination of disclosure requirements by the staff. Garnett advocated that companies be proactive in reviewing their own filings for this purpose, noting that the staff does not run redlines from year to year to ferret out eliminated disclosures; if there were any serious questions about eliminating disclosures, she suggested advance discussions with the staff.
- Cybersecurity – There is no specific line item for cybersecurity disclosure, but the topic may be appropriately discussed in risk factors, MD&A, business or legal proceedings, depending on the circumstances and whether an attack or breach has actually occurred. Former staff member Keir Gumbs cautioned that there are reports that the SEC is pursuing theories that, as a result of failure to adequately disclose cybersecurity breaches, companies violated their disclosure obligations and had weaknesses in their disclosure controls, and that, if unauthorized persons were able to improperly access system information, that could reflect weaknesses in internal control over financial reporting
- Exxon Capital exchanges – Garnett observed that it used to be a condition to conducting an Exxon Capital exchange offer that the company submit a specific representation letter to the staff. However, if the required representations are set forth in the prospectus, the staff is no longer requiring submission of a separate rep letter.
- Certifications – Originally, the language used in the various executive certifications could not vary one iota from the language required in the rules. Now, Garnett stated, the staff is no longer likely to comment if there are minor variations in the language that do not change the meaning.
- Super 10-K – Previously, in order to submit a “super 10-K,” a comprehensive catch-up filing for delinquent filers, companies had to request staff permission. Permission is no longer required. Filing a super 10-K does not absolve the filer from any liability for its filing delinquencies, does not make the filer “current” for purposes of Reg S, Rule 144 or Form S-8, nor does it make the filer eligible to use Form S-3. (See this PubCo post. ) As Cross noted, this new practice may be even more useful in the context of restatements.
- Pay ratio – The advice from Former Corp Fin Chief Counsel Thomas Kim is to begin some “dry runs” on pay-ratio information, even though the information will not appear in proxy statements until 2018. Companies will want to test whether the privacy or other exclusions and adjustments have any impact. Companies will also want to consider whether supplemental disclosures will be useful, depending on the constituencies addressed (e.g., press or employees below the median compensation level).