ON Securities : Securities Lawyer & Attorney for Corporate Governance & Executive Compensation Matters

Early November finds us in a kind of limbo - those of us who advise public companies on governance and compensation matters are waiting for something big to happen. But there's plenty of smaller stuff to report on - although most of these items present more questions than answers:

Proxy Disclosure Rules. On November 4, SEC Chairman Schapiro gave a speech addressing current regulatory developments. She described the proxy disclosure rules but did not address when they would be adopted or considered. The Corporate Counsel Blog reports that the rules will not be adopted on November 9, as previously rumored. However, there is still a chance that the rules will apply for the 2010 proxy season. If so, there won't be much time to evaluate the rules, or to hold a compensation committee meeting to address the new disclosures. Stay tuned. . . .

Proxy Access. Rep. Maxine Waters has proposed an amendment to the Investor Protection Act of 2009 (the current provisions of the Act are described in the ON Securities Cheat Sheet). The amendment would require the SEC to adopt rules permitting large shareholders to nominate directors in the company's proxy statement (proxy access). If added to the Act and ultimately adopted, this provision would enhance the SEC's position in adopting its proposed Rule 14a-11 granting proxy access.

Say-On-Pay and Shareholder Surveys. Companies continue to conduct annual advisory votes on compensation on a voluntary basis. Meanwhile, as reported by the Corporate Counsel Blog, some companies, including Schering-Plough, have begun to survey their shareholders. This will provide more detailed data on shareholders' opinions about compensation practices and may emerge as an alternative or supplement to simple yes-or-no advisory votes.

New York Power of Attorney Law. You may have read about the amendments to the New York power of attorney laws, effective September 1, 2009. See this Forbes article. The amendments impose strict requirements (font size, notarization, etc.) for powers of attorney, particularly those signed in New York by New York residents. The amendments have prompted a flood of articles and analyses, including speculation that the requirements could affect the validity of powers of attorney for SEC registration statements, Section 16 filings, etc. I agree with this analysis, indicating that, even though there is no definitive guidance, the validity of powers of attorney for SEC filings should be governed by SEC rules and not state law.

I should get updates on some of these items next week - I'll be attending the NASPP Annual Conference in San Francisco. Of course, I can't wait to share the information with the ON Securities readers. There may even be a tweet or two, if you can't wait for the Blog.

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Wall Street Wealth

Just as lawmakers and regulators are preparing to consider compensation reform once again, a new report has surfaced that's likely to turn up the heat on the debate. The Wall Street Journal reported that the major financial institutions are on pace to pay their employees around $140 billion this year - a record level. The Journal's study is based on compensation amounts these firms have accrued to date this year. Therefore, the amounts might be inflated. However, it's clear that the amounts will be back to pre-crash levels.

For example, the Journal projects that Goldman Sachs will pay $20 billion in compensation and benefits ($743,000 per employee) this year. Of course, Goldman is having a great year so far. But, as reported in the New York Times DealBlog, there is still a lot of debate over how much Goldman's results were helped by the government's bailout of AIG, which resulted in significant payouts to Goldman on AIG-insured contracts.

As reported by the Journal, its findings come at a time when the Obama administration's pay czar is preparing to issue his findings on pay packages at many of the financial firms that received TARP money. More generally, Congress will be considering reforms such as Say-on-Pay for all publicly held companies. One way or another, numbers like we're seeing from Wall Street are sure to affect the debate.

Are the banks paying the best and the brightest what they deserve, or do you think Wall Street greed is being rewarded by paying out bonuses fueled by taxpayer bailouts? Comment below or send me an e-mail.

Change (to the Cheat Sheet) You Can Believe In

It's been easy to keep the ON Securities Cheat Sheet up-to-date since early August - nothing really changed. All of the various legislative and regulatory reforms were dormant for a couple of months. (Probably waiting for the Olympic Committee to select a host city for 2016 and the Nobel Committee to select a Peace Prize winner.)

At long last, this month there has been a new development worthy of changing the Cheat Sheet. As reported in Bloomberg and elsewhere, the SEC has decided not to take any action on the proposed shareholder access rules this year, as it evaluates the many public comments on the proposal. The Cheat Sheet has been updated to reflect this decision, and as always, the updated version is available on the Resources section of this Blog.

The changes should start coming more quickly in the next few weeks. Stay tuned.

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I just went through some of the hundreds of comment letters on the SEC's controversial proposal to adopt Rule 14a-11 on proxy access. The rule would grant large shareholders the ability to include director nominees in management's proxy statement - see the description at the end of the ON Securities Cheat Sheet. A companion rule, a proposed amendment to Rule 14a-8, would explicitly allow shareholders to include proposals in the proxy statement to approve various forms of proxy access.

Several comment letters, including the letter from the U.S. Chamber of Commerce, describe explicit theories about why the proposed rule should be struck down by the courts if adopted. Generally, these letters claim that the rule exceeds the SEC's authority or preempts state law. One of the most interesting letters is from Stanford Professor Joseph Grundfest, a former SEC Commissioner. Grundfest focuses on the major contradictions he perceives between the SEC's stated goals in its proposing release and the provisions of the rule itself:

. . . Like Charles Barkley's claim that he was misquoted in his autobiography, contradictions spawn skepticism as to the credibility of an entire enterprise.

Professor Grundfest then describes how these inconsistencies could be the basis of a legal challenge to the rule.

It seems apparent that, if the SEC adopts Rule 14a-11, the enforcement of the rule will be tied up in court, and the rule could eventually be struck down. This leads to a couple of likely scenarios involving Rule 14a-8:

The SEC could adopt both Rule 14a-11 (with the same 3-2 vote as for the proposal) and the amended Rule 14a-8, risking a legal challenge. The amended Rule 14a-8 will serve as a backup that will almost certainly not be subject to a legal challenge. As described in this post, Delaware law was recently amended to specifically permit such bylaw amendments.

On the other hand, the SEC could back down and just adopt the proposed amendment to Rule 14a-8 (possibly with a 5-0 vote). This is the compromise suggested by the National Association of Corporate Directors, which opposes Rule 14a-11 but supports the amendment to Rule 14a-8.

Either way, the amendment to 14a-8 is likely to be effective long before Rule 14a-11. This will give activist shareholders an avenue to start the process of demanding shareholder access through shareholder proposals at annual meetings to amend company bylaws. One way or another, it won't be long before we hear the big shareholders "knock-knock-knockin' on the boardroom door".

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There have been several recent articles on the SEC's proposed proxy access rule, Rule 14a-11. If adopted, this rule would allow large shareholders to nominate director candidates and have the candidates included in management's proxy statement for the company's annual meeting.

A Wall Street Journal article last week (subscription required for full article) reported that ". . . the measure looks like it will be passed by the Securities and Exchange Commission in November." The article describes efforts by the U.S. Chamber of Commerce and others to block the measure, but reports that ". . . most opponents expect the measure to pass." The article states that many corporate comment letters are suggesting a weakened version of the measure rather than opposing it altogether.

However, this post by Dave Lynn in the Corporate Counsel blog last Friday puts the proposal's status in perspective and raises doubts that shareholder access is a "done deal". Lynn refers to several interesting comment letters, including this comment letter from several prominent former SEC staff members, urging the Commission to focus on other, more pressing regulatory matters. The Corporate Counsel post points out that "this is a road that we have all been down before", basically stating that it's too soon to know where this will end up. We all need to stay tuned.

As always, you can refer to the ON Securities Cheat Sheet for information on this and other proposals before the SEC, as well as pending legislation.

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ABA Releases Exposure Draft of Model Bylaw for Shareholder Access

TheCorporateCounsel.net Blog reports that the ABA's Task Force on Shareholder Proposals has released an exposure draft of a model bylaw for Delaware corporations to grant shareholder access - giving significant shareholders the ability to nominate one or more director candidates and have the candidates included in management's proxy statement. The model bylaw provides a company with flexibility in its provisions, including the percentage of the company's outstanding stock the stockholder must hold, and the length of time the stockholder must have owned the shares. The Task Force has asked for comments on the model bylaw.

It's not clear how many companies will voluntarily adopt the Task Force's model bylaw without being required to do so. The Delaware General Corporation Law was amended in April 2009 to add a new Section 112 to facilitate bylaws such as the model bylaw. Before 2007, numerous companies faced shareholder proposals supporting shareholder access. The SEC in 2007 determined that management could refuse to include these shareholder proposals in their annual meeting proxy statements. However, there may still be pressure on public company boards to allow shareholder access.

The SEC's proposed rules on shareholder access, if adopted, will make shareholder access mandatory and will eliminate much of the flexibility incorporated into the model bylaw. The Task Force clarified that the model bylaw does not take the SEC's proposed rules into account. However, assuming the SEC's rules become effective, public companies will move to adopt bylaws to clarify the procedures and standards for shareholder access, and the Task Force's draft will be a useful starting point.

The King of Pop - and IP

Working with companies and entrepreneurs gives you an appreciation for innovative business leaders. And whatever you think about Michael Jackson, the guy was a genius within the entertainment business. Some of his business ventures are well known - like his purchase of most of the Beatles' music catalog in the mid-1980s. But until I read his Wikipedia profile, I didn't realize that he was the named inventor on an issued patent. Michael developed an illusion for dancers performing "Smooth Criminal" to lean far forward, as if defying gravity. The trick was originally done with wires, but the Gloved One helped develop special shoes for the trick, and in 1992 he and two co-inventors were granted U.S. Patent 5,255,452: "Method and Means For Creating Anti-Gravity Illusion". Unbelievable - see the video in this article.

If only he had survived long enough to develop "Method and Means for Creating an Economic Comeback."

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