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2011 Proxy Planning Alert

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2.02.11

2011 Proxy Planning Alert

On the heels of the significant “proxy disclosure enhancements” adopted by the Securities and Exchange Commission for the 2010 proxy season1 come a panoply of additional disclosures mandated by Congress under the Dodd-Frank Wall Street Reform and Consumer Protection Act for the 2011 season relating to corporate governance and executive compensation. Most notably, these changes include mandatory shareholder advisory votes on executive compensation and say on pay frequency. On the other hand, the SEC’s new proxy access rules have been stayed pending resolution of a court challenge, and therefore will not impact director nominations for the 2011 proxy season.

For your convenience, key issues for the upcoming proxy season and annual report preparation, as well as other developments of interest, are summarized below. Please contact any of the Dykema attorneys listed on the last page for further information or assistance.

Say On Pay

As most public companies are aware, Section 951 of the Dodd-Frank Act of 2010 requires all public companies subject to the SEC’s proxy rules to include in their annual meeting proxy statements at least once every three years a nonbinding resolution asking shareholders to approve the compensation of executives disclosed pursuant to Item 402 of Regulation S-K (a “say on pay,” or “SOP,” vote). At least once every six years, each public company must also include in its annual meeting proxy statement a nonbinding resolution asking shareholders to determine whether to have the say on pay vote every one, two or three years (a “say when on pay,” or “SWOP,” vote). As a result, each public company subject to the proxy rules, other than smaller reporting companies,2 is required to include in its 2011 annual meeting proxy statement for shareholder approval nonbinding SOP and SWOP resolutions.3 Although the statute does not require the SEC to adopt rules implementing these requirements, it raises a number of interpretive issues that the SEC has worked to resolve with  rules that were adopted on January 25, 2011. The new rules become effective 60 days after they are published in the Federal Register, although the SEC has indicated as a transitional matter that issuers, in effect, may immediately avail themselves of certain provisions in the new rules, as discussed below. The following is a brief summary of these rules.

SOP Proposal. New Rule 14a-21 contains the requirements for the SOP proposal and makes clear that the resolution must cover the compensation of the named executive officers and not merely the issuer’s compensation policies and procedures. This position is consistent with the SEC’s position in Rule 14a-20 regarding say on pay proposals by bank holding companies with outstanding investments by the U.S Treasury under TARP. Although there is no specific form prescribed for the SOP resolution, an instruction added to the final rule provides a form of resolution that will be considered acceptable. Rule 14a-21 also clarifies that the say on pay advisory vote does not cover director compensation or the specific disclosures required under Regulation S-K Item 402(s) regarding the relationship between compensation policies and risk management, unless included in the Compensation Discussion and Analysis (“CD&A”).

CD&A Change. A change to Item 402(b) of Regulation S-K requires disclosure in the CD&A regarding whether and how the issuer’s compensation policies and decisions have taken into account the results of the most recent SOP vote required by Dodd-Frank or TARP in determining compensation policies and decisions and, if so, how that consideration has affected compensation policies and decisions. A discussion of earlier votes would only be required if material. While not specifically required by the statute, the SEC, believes such disclosure will facilitate a better understanding of the issuer’s compensation decisions. For smaller reporting companies, which are not required to provide a CD&A this disclosure need only be addressed in other narrative accompanying the compensation disclosure to the extent it is material to an understanding of the compensation disclosures.

Effect of SOP Vote. It remains to be seen whether more than a few SOP proposals will be voted down. Bank holding companies that received TARP investments and others have included such proposals in their proxy statements during the past couple of years, and only a handful have been disapproved by shareholders. However, with the changes to uninstructed broker voting discussed elsewhere in this Alert, a higher percentage of these proposals could be disapproved in coming years, which will likely pressure those companies to reexamine their executive compensation  policies and reduce executive pay in the short term in some cases. Anecdotal evidence suggests that institutional shareholders are likely to support most SOP proposals, but will use a screening process to focus on outliers where there is a disconnect between pay and performance.

SWOP Proposal and Vote. Rule 14a-21 and a change to Rule 14a-4 resolve the issue of how to frame the SWOP proposal by requiring issuers to include four choices on their proxy cards: (1) every year, (2) every two years, (3) every three years and (4) abstain. Prior to the effective date of the final rules, the SEC has indicated that it will not object if the SWOP proposal is framed in this manner. If an issuer’s proxy service provider’s system cannot accommodate four choices, the SEC will not object if the proxy card for the 2011 meeting includes the one-year, two-year and three-year choices, and provides no discretionary voting of proxy cards not indicating a choice.

An issuer’s board would be permitted (though not required) to make a recommendation, as is customary on other proposals, but the proxy statement must be clear that shareholders are not voting to approve or disapprove the board’s recommendation. Anecdotal evidence suggests that institutional shareholder preferences on the frequency issue vary. Institutional Shareholder Services (“ISS”) and several other institutional shareholders have indicated their preference for an annual vote, while others appear to favor a triennial vote, at least in part due to the administrative burden of having to do an annual analysis of the executive compensation of each public company in which they have an interest.

Exception for TARP Issuers. Issuers that have outstanding obligations arising from financial assistance provided under TARP (such as certain bank holding companies) are exempt from Rule 14a-21 until the first annual meeting after their TARP obligations have been repaid, and should instead comply with their annual SOP obligations under Rule 14a-20. The SEC will not object if these issuers comply with this position prior to the new rules becoming effective.

Effect on Rule 14a-8 Shareholder Proposals. Because SOP and SWOP votes are now mandated by statute, the SEC has added an instruction to Rule 14a-8(i)(10) to provide relief to issuers receiving shareholder proposals relating to say on pay. The instruction allows an issuer to treat a shareholder proposal as “substantially implemented” under paragraph (i)(10) and to exclude the proposal from its proxy statement if the proposal relates to the approval of executive compensation as disclosed pursuant to S-K Item 402 or the frequency of such a vote and the issuer has adopted a policy on SWOP votes that is consistent with the choice of the majority of the votes cast by shareholders on the most recent SWOP proposal.Where none of the three choices received a majority of the votes cast, the instruction would not apply. Also, where the scope of a shareholder proposal is different than the say on pay proposal required under Rule 14a-21, such as focusing on only one aspect of compensation, the SEC staff will consider requests to exclude such shareholder proposals on a case-by-case basis.

Disclosure Regarding the Vote. New Item 24 of Schedule 14A would require proxy disclosure that the SOP and SWOP proposals are being provided as required by Section 14A of the Exchange Act, as well as disclosure as to the general effect of the vote, including that it is nonbinding and, when applicable, the current frequency of SOP votes and when the next SOP vote will occur. In addition, the recent Form 8-K Item 5.07 requirement to disclose the results of shareholder meetings within four business days has been further revised to require specific disclosure of the results of the voting on all four of the SWOP choices, and to require disclosure by subsequent amendment to the Form 8-K of the issuer’s decision on how often to have the SOP vote in light of the results of the SWOP vote. The Form 8-K amendment will be due within 150 days after the end of the shareholder meeting and in no event later than 60 days prior to the deadline under Rule 14a-8 for shareholder proposals to be included in the next annual meeting proxy statement.

Even though the resolutions are nonbinding, issuers that ignore a vote against the SOP or SWOP resolutions do so at their own peril. Ignoring the wishes of the shareholders could lead to a recommendation by proxy advisors like ISS to vote against directors in the next election, and could even lead to disgruntled shareholders making shareholder proposals, withholding votes from or voting against directors in the next election, and even proposing an alternate slate of directors.

Preliminary Proxy Filing Relief. Finally, a change to Rule 14a-6 provides that inclusion of the required SOP and SWOP proposals, and any other shareholder advisory vote proposal on compensation, in a proxy statement will not necessitate the filing of a preliminary proxy statement with the SEC. This change provides relief to issuers, so that proxy preparation schedules need not be accelerated to account for potential SEC review prior to mailing. The SEC has indicated that, pending the effective date of the new rules, it will not object if issuers in effect treat the exemption for these proposals as if it has been adopted.

Recommendations:

  • Issuers should consider obtaining feedback from their major shareholders and reexamining proxy advisor voting guidelines regarding executive compensation policies and practices, to make sure policies and practices align with shareholder expectations and to improve the chances of a favorable vote. However, if engaging in discussions with  shareholders in advance of a shareholder meeting, issuers will need to avoid conduct that could be considered proxy solicitation. As a result, during this time frame, issuers should simply be listening to shareholder comments and should refrain from any defense of their compensation practices other than in compliance with the proxy rules.
  • Issuers should review the structure of their Compensation Discussion and Analysito make sure it makes the best cases possible for a link between pay and performance, as this will likely be an important factor for shareholders in determining whether to approve the SOP proposal. Issuers should consider developing quantitative analyses that can be included in the CD&As to demonstrate the link and support the issuers’ assertions. Also, many commentators are suggesting the inclusion of an executive summary to help make their cases, as readers are unlikely to read the entire CD&As.
  • Issuers should have the board consider the frequency of the SOP vote and should include the board’s recommendation in the proxy statement, as it will provide guidance to shareholders and should permit management to vote proxies not specifying a choice for the board’s recommendation. Nearly all of the proxies filed to date include a board recommendation. A majority of these recommendations are for a triennial vote, with most of the rest recommending an annual vote. There are valid reasons for both of these choices, so issuers and their boards should consider carefully what is best for them and their shareholders.
  • After the final rules are adopted, issuers should consider whether to include in their proxy statements the expanded “golden parachute” disclosure required by Reg. S-K Item 402(t). Doing so will deem the “say on parachute pay” vote to have been included in the annual meeting SOP proposal, allowing the issuer potentially to avoid a separate vote in the event of a later change in control transaction. Published surveys suggest, however, that most issuers are not planning to combine the parachute pay and annual meeting say on pay votes in 2011. This is probably because parachute arrangements are often modified just prior to a change in control transaction, which would likely necessitate a separate say on parachute pay vote in connection with the change in control. Also, issuers that include the additional parachute disclosure in their annual meeting proxy statements could be viewed by the market as signaling that they are contemplating a sale.

E-Proxy Rule 2010 Changes

In 2007, the SEC adopted Rule 14a-16, referred to as the “E-Proxy Rules,” which provides that a proxy statement, a proxy card, the “"glossy”" annual report and any other soliciting materials may be made available to shareholders free of charge via a publicly accessible Internet website, other than the SEC’s website, in lieu of physical delivery. The E-Proxy Rules were revised in 2010 by the SEC with respect to the content of the required Internet notice and to permit the inclusion of certain limited explanatory materials. All public companies must now post proxy materials on the Internet and choose among the different delivery options under the E-Proxy Rules: the “"notice and access option,”" the “"full set delivery option”" or a hybrid of these options, as discussed below.

Notice and Access. Under the notice and access option,” an issuer can satisfy the proxy delivery requirements by delivering a Notice of Internet Availability of Proxy Materials (the “"Notice”") to shareholders at least 40 calendar days before the annual meeting date, and posting the complete proxy materials on an Internet website. To enhance the readability of the Notice, an issuer must use plain English principles in the organization, language and design of the Notice, and the Notice may not be accompanied by a proxy card or any other information. Further, even though proxy materials are deemed electronically delivered under the notice and access option, issuers must deliver paper proxy materials to any shareholder upon request.

A form of the Notice must be filed with the SEC no later than the date that an issuer first sends the Notice to shareholders. The information that can be included in the Notice is specifically limited under Rule 14a-16(d) to the following:

  • A prominent legend in boldface type that states “Important Notice Regarding the Availability of Proxy Materials for the Shareholder Meeting To Be Held on [insert meeting date]”;
  • An indication that the communication is not a form for voting and presents only an overview of the more-complete proxy materials, which contain important information and are available on the Internet or by mail, and a statement encouraging a security holder to access and review the proxy materials before voting;
  • The Internet website address where the proxy materials are available;
  • Instructions regarding how a security holder may request a paper or e-mail copy of the proxy materials at no charge, including the date by which the security holder should make the request to facilitate timely delivery, and an indication that a paper copy or e-mail will not otherwise be received;
  • The date, time and location of the meeting, or if corporate action is to be taken by written consent, the earliest date on which the corporate action may be effected;
  • A clear and impartial identification of each separate matter intended to be acted on and the soliciting person’s recommendations, if any, regarding those matters, but no supporting statements;
  • A list of the materials being made available at the specified website;
  • A toll-free telephone number, an e-mail address and an Internet website where the shareholder can request a copy of the proxy statement, annual report to security holders and form of proxy, relating to all the issuer’s future shareholder meetings and for the particular meeting to which the proxy materials being furnished relate;
  • Any control/identification numbers that the shareholder needs to access his or her form of proxy;
  • Instructions on how to access the form of proxy, provided that such instructions do not enable a shareholder to execute a proxy without having access to the proxy statement and the annual report;  and
  • Information on how to obtain directions to be able to attend the meeting and vote in person.

Unless an issuer chooses to follow the full set delivery option in the ordinary course, it must provide all nominee record holders with the information listed above in sufficient time for the record holders to prepare, print and send a similar Notice of Internet Availability of Proxy Materials to beneficial owners at least 40 calendar days before the meeting date.

In designing the Notice, an issuer may include pictures, logos or similar design elements, so long as the design is not misleading and the required information is clear. Notwithstanding the prohibition of including other materials with the Notice, however, an issuer may accompany the Notice with (i) a preaddressed, postage-paid reply card for requesting a copy of the proxy materials; (ii) a copy of any notice of shareholder meeting required under state law if that state law notice is not combined with the Notice; and (iii) an explanation of the reasons for an issuer’s use of the E-Proxy Rules and the process of receiving and reviewing the proxy materials and voting.

Finally, an issuer may send a form of proxy to shareholders if (a) at least 10 or more calendar days have passed since the date it first sent the Notice to shareholders and the form of proxy is accompanied by a copy of the Notice, or (b) the form of proxy is accompanied or preceded by a copy, via the same medium, of the proxy statement and any annual report that is required by the general proxy rules.

Full Set Delivery. Under the full set delivery option, issuers can use existing methods to deliver copies of proxy materials in paper or electronic form; however, they must also post a copy of such materials on the Internet. The delivery must include all proxy materials., i.e., proxy statement, proxy card and glossy annual report. In addition, the proxy materials must either be accompanied with a Notice or incorporate the information required in a Notice in the proxy statement and the form of proxy. When using this delivery method, issuers need not comply with the 40-day notice period required under the notice and access option.

Quorum and Voting; Hybrid Approach. It has been widely reported that the numbers of retail votes declined significantly for issuers using the notice and access option, in some cases creating a risk of failure to achieve sufficient support for a proposal being voted upon or possibly even achieving a quorum necessary for the annual meeting. To counteract this problem, some companies adopt a hybrid approach using the full set delivery option for some or all of their retail shareholders and, in some cases, for international shareholders. Also, to facilitate voting, some issuers send out a second Notice 10 days after sending out the first Notice, along with a proxy card and return envelope.

Limited Explanatory Materials Can Now Accompany the Notice. In its 2010 revisions to Rule 14a-16, the SEC permitted issuers to include certain explanatory materials along with the Notice. These materials may explain the process of receiving and reviewing the proxy materials and the voting process under the E-Proxy Rules, as well as the reasons the issuer is distributing its proxy materials using the E-Proxy Rules. The content of the explanatory materials, however, cannot extend beyond these topics. Moreover, issuers and soliciting persons cannot include any discussion in the explanatory materials that is intended to influence the vote of shareholders or change the method of delivery of the proxy materials. It does not appear under the rule’s revisions that the explanatory materials have to be filed with the SEC.

Proxy Disclosure Enhancements Revisited

Proxy materials prepared for the 2011 proxy season may benefit from the numerous comments of the SEC staff relating to disclosures in response to the “proxy disclosure enhancements” adopted in December 2009. There are lessons to be learned from the staff’s comments that should be considered as the preparation of the 2011 proxy materials gets under way. Summarized below are some of the staff’s comments on these areas during 2010.

Qualifications of Directors. Item 401(e) of Regulation S-K requires companies to “briefly discuss” in a proxy statement for each director, whether standing for election or not, and each nominee for election “the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as a director for the registrant at the time that the disclosure is made, in light of the registrant’s business and structure.” A common theme in the staff’s comment letters during 2010 was that it was not looking for a narrative disclosure of a director’s resume, but rather a specific enumeration of the aspects of the individual’s experience, qualifications, attributes or skills that led to the conclusion that the person should serve on the board at the time that a filing containing the disclosure is made:

We note your disclosure that outlines the “experience, qualifications, attributes and skills” the Board considered in nominating these individuals as directors of the Company. However, your disclosure identifies the principal occupations and employment of each of your directors and the skills of only some of the individuals.

In future filings, please expand your disclosure with respect to each director to specifically discuss what aspects of the individual’s experience led the board to conclude that the person should serve as a director for the Company, as well as any other relevant qualifications, attributes or skills that were considered by the board. See Item 401(e) of Regulation S-K.

In future filings, please disclose for all nominees and directors, even those not up for re-election in a particular year, the specific experience, qualifications, attributes or skills that led to the conclusion that the person should serve as your director at the time that the disclosure is made, in light of your business and structure.

Accordingly, it would not be sufficient to disclose simply that a person should serve as a director because he or she is an audit committee financial expert or some other relevant expert. Instead, a company should describe the specific experience, qualifications, attributes or skills that led the board to conclude that this particular person should serve as a director at the time that a filing containing the disclosure is made. In this regard the SEC has commented on a few egregious examples of inadequate disclosure, mentioning a company that cited the “integrity” of each director as the sole qualification.

Diversity. Item 407(c)(2)(vi) of Regulation S-K requires a company to disclose in its proxy statement whether and, if so how, the nominating committee or the board (if there is no nominating committee) considers diversity in identifying director nominees. Neither the rule nor the adopting release include any definition of diversity, nor do they limit diversity to simply racial, gender, ethnic or nationality criteria. Comments on 2010 proxy statements emphasized that the SEC staff is not satisfied with a mere statement that diversity is considered by the nominating committee or the board when recommending director nominees.

Please expand your disclosure on page 7, or elsewhere as appropriate, to address whether, and if so how, your Corporate Governance Committee considers diversity in identifying nominees for director. We note your statement in the fourth paragraph on page 7 that diversity is a factor in Board nominee selection, but you do not address how this factor is considered. Refer to Item 407(c)(2)(vi) of Regulation S-K.

We note your disclosure that the committee may consider many specified factors in its evaluation of candidates for board membership, as well as “other relevant factors including diversity.” In future filings, please discuss how the nominating committee (or the board) considers diversity in identifying nominees for directors. If the nominating committee has a policy with regard to the consideration of diversity in identifying director nominees, describe how this policy is implemented, as well as how the nominating committee (or the board) assesses the effectiveness of its policy. Please refer to Item 407(c )(2)(vi) of Regulation S-K. Please show us supplementally what your disclosure would have looked like in this proxy statement in response to this comment.

As the foregoing comments illustrate, the staff expects to see more detailed disclosure with respect to how diversity is considered when identifying nominees for director. Additionally, there should be disclosure regarding whether or not the company has a policy with regard to the consideration of diversity in identifying director nominees, and a description of how the policy is implemented and how the effectiveness of the policy is assessed.

Board Leadership Structure. Item 407(h) of Regulation S-K requires a company to “[b]riefly describe the leadership structure of the registrant’s board, such as whether the same person serves as both principal executive officer and chairman of the board, or whether two individuals serve in those positions; specific information disclosure about the company’s board leadership structure, such as whether the company has chosen to combine or separate the chairman of the board and chief executive officer positions; and why the company believes the leadership structure of its board is the most appropriate for the company at the time of the filing.” The staff’s comments on leadership structure disclosure consistently requested that companies explain why the leadership structure it has is in the best interest of stockholders, given the company’s specific characteristics or circumstances:

We note your statement that "[your] board of directors believes its leadership structure is appropriate for a controlled company under the NYSE listing standards." With a view towards future disclosure, please tell us why the board holds this belief. Please refer to Item 407(h) of Regulation S-K.

With a view toward disclosure in future filings, please explain to us the reasons you determined that your leadership structure (i.e., separating the roles of chairman and chief executive officer) is appropriate given your specific characteristics or circumstances. In addition, please describe the services your chairman provides and the role he performs in his position as an employee with the company.

Compensation Risk Management. Item 402(s) of Regulation S-K requires a company to “discuss” in its proxy statement “the registrant’s policies and practices of compensating its employees, including nonexecutive officers, as they relate to risk-management practices and risk-taking incentives.” Companies must also discuss and analyze their broader compensation policies and overall actual compensation practices for all employees generally, including nonexecutive officers, if risks arising from those compensation policies or practices are reasonably likely to have a material adverse effect on the company. While no disclosure is required if the company does not believe its compensation policies are reasonably likely to have a material adverse effect on the company, the staff frequently requested information from companies regarding the process undertaken to reach their conclusion, especially when there was no disclosure:

We note that you do not have any disclosure indicating that your compensation policies and practices for its employees are reasonably likely to have a material adverse effect on you. Please advise us of the basis for your conclusion under Item 402(s) of Regulation S-K that disclosure is not necessary and describe for us the process you undertook to reach that conclusion.

We note that you have elected to provide negative disclosure in response to Item 402(s) of Regulation S-K. In future filings, if you continue to provide this disclosure please follow the standards provided in the Item. For example you discuss whether the “design and operation of your incentive compensation arrangements” “might encourage inappropriate risk-taking that could have a material adverse effect on the company.” Item 402(s) contemplates a different analysis, discussing the extent that risks arising from a registrant’s compensation policies and practices for its employees are reasonably likely to have a material adverse effect on the registrant.

The impact of these comments may be to drive companies to include a description of the process undertaken by the compensation committee in assessing the need for disclosure regarding this item.

Further Limits On Uninstructed Broker Voting

Section 957 of the Dodd-Frank Act requires all national securities exchanges to modify their rules governing member brokers so that brokers may not vote shares that they do not beneficially own without instructions from the beneficial owner on (1) all director elections (including uncontested elections), (2) compensation-related matters and (3) “other significant matters” as determined by the SEC. The prohibition on uninstructed voting in uncontested elections codifies the change to NYSE’s Rule 452 that became effective prior to the 2010 proxy season, as described in our January 2010 Public Company Alert. In response to the Dodd-Frank requirement, the NYSE has further modified Rule 452 to eliminate uninstructed broker voting on all compensation-related matters, including the three “say on pay” matters in the Act described elsewhere in this Alert. Similarly, the NASDAQ has adopted conforming changes to its rule governing uninstructed voting by its member brokers.

Brokers have typically voted uninstructed shares in favor of management’s nominees and proposals, and many retail shares are likely to go unvoted, as holders typically fail to provide voting instructions to their brokers. As a result, these changes will likely increase the power of institutional shareholders and proxy voting advisory firms like ISS to influence the outcome of director elections and say on pay advisory votes, increasing the chances that shareholders will vote against the say on pay proposal and that directors in elections in which a majority vote is required by the issuer’s bylaws will fail to receive the requisite number of votes.

ISS 2011 Policy Updates

The proxy advisory firm Institutional Shareholder Services (ISS), recently issued its annual update to its 2011 proxy voting policies concerning executive compensation and corporate governance issues for shareholder meetings held on and after February 1, 2011. ISS policy guidelines are used by ISS to determine its vote recommendations for its institutional shareholder clients, which can have a material impact on the voting results of companies with a sizeable institutional shareholder bases. Public companies should be familiar with the new ISS policies to determine whether such policies may influence the voting results of their upcoming annual meetings. The most material updates for 2011 are summarized below.

Annual Say on Pay Vote. With respect to the frequency of the advisory shareholder vote concerning executive compensation, as expected, ISS is recommending an annual say on pay vote rather than a biannual or triennial vote. ISS states that such an advisory vote is most useful if it occurs in a consistent and timely manner. ISS believes an annual advisory vote provides the highest level of accountability and direct communication by responding consistently to the executive compensation information presented in each annual proxy statement.

Shortened List of Problematic Pay Practices. ISS has revised its policy on problematic pay practices by reducing the list of the most egregious pay practices that may lead to an adverse vote recommendation. ISS will continue a case-by-case evaluation of problematic pay practices, but this list identifies the most egregious practices that may result in a negative vote recommendation based on consideration of the company’s overall pay program and past practices. The list includes:

  • Repricing or replacing underwater stock options/SARS without prior shareholder approval;
  • Excessive perks or tax gross-ups;
  • New or extended agreements that provide for:

– Change in control payments exceeding three times base salary and average/target/most recent bonus;
– CIC severance payments without involuntary job loss or substantial diminution of duties; and
– CIC payments with excise tax gross-ups.

No Longer Accept Future Commitments on Problematic Pay Practices. ISS will no longer accept future commitments on problematic pay practices as a way of preventing or reversing a negative vote recommendation. ISS states that its policies are transparent to issuers, which who should have sufficient awareness of ISS actions that may result in negative vote recommendations. ISS may still consider future commitments with respect to pay for performance and burn rate commitments and plan language related to certain equity grant practices.

No Longer Accept Private Disclosure of Less Than 75% Director Attendance. ISS policy has been to recommend a vote against or withhold from individual directors who attend less than 75%of board and committee meetings without a valid excuse. Previously, ISS would evaluate such absences on a case-by-case basis if the company provided meaningful public or private disclosure explaining the director’s absences. The revised policy will continue the recommendation of a vote against or withhold from such individual directors, but ISS has removed the private disclosure option for explaining absences. ISS will consider the following reasons for director absences, but only if disclosed in the proxy statements or other SEC filings:

  • Medical issues/illness;
  • Family emergencies; and
  • If the director’s total service was three meetings or less and the director missed only one meeting.

Will Consider Company’s Overall Governance Practices and Takeover Defenses in Evaluating Proposals for Shareholders to Act by Written Consent. ISS’ current policy is to generally recommend a vote for proposals that provide for shareholder ability to act by written consent, taking into account the following factors:

  • Shareholders’ current right to act by written consent;
  • Consent threshold;
  • Inclusion of exclusionary or prohibitive language;
  • Investor ownership structure; and
  • Shareholder support of, and management’s response to, previous shareholder proposals.

ISS will now also consider, as an additional factor, the company’s overall governance practices and takeover defenses (with an emphasis on shareholders’ ability to call special meetings) in evaluating such proposals. ISS will evaluate on a case-by-case basis (and may recommend against) if the company has the following shareholder rights provisions:

  • An unfettered right of shareholders to call special meetings at a 10 percent threshold;
  • A majority vote standard in uncontested elections;
  • No nonshareholder-approved pill; and
  • An annual elected board.

Proxy Access Not Applicable For 2011 Proxy Season

As required by Section 971 of Dodd-Frank, the SEC proposed and recently adopted new Rule 14a-11,5 which requires a public reporting company to include in its proxy statement and on its proxy card the name of a person or persons nominated by a shareholder or group of shareholders for election to the company’s board of directors, and to include specific disclosures about such nominee or nominees and the nominating security holder or holders. The rule was to become effective on November 15, 2010, but the SEC stayed its implementation pending a petition for judicial review.

The judicial review resulted from a petition filed by the Business Roundtable and the U.S. Chamber of Commerce with the Court of Appeals for the D.C. Circuit on September 29, 2010, alleging that the proxy access rules are arbitrary and capricious in violation of the Administrative Procedure Act; the SEC had failed to adequately assess the rules’ effects on efficiency, competition and capital formation as required by the federal securities laws; and the rules violate companies’ First and Fifth Amendment rights under the U.S. Constitution. While the rules will not be effective until the petition for judicial review is resolved, the parties and the court have agreed on an expedited briefing schedule that contemplates the filing of final briefs by February 2011. Based on this schedule, it is possible that oral arguments could be held in spring 2011, with a decision by the court in summer 2011.

As a result of the court challenge and the SEC stay, public companies will not have to comply with Rule 14a-11 for the 2011 proxy season.

1

See our earlier Public Company Alert, “Plan Ahead: Material Disclosure Changes for 2010” (January 21, 2010), for more background on the disclosure enhancements.

2 The SEC, as permitted by Section 951 of the Dodd-Frank Act of 2010, has delayed the effectiveness of the say on pay requirements for smaller reporting companies by two years. As a result, smaller reporting companies need not comply until the first shareholder meeting after January 21, 2013, at which directors are elected and compensation information is included in the related proxy statement.

3 These requirements became effective for shareholder meetings held on or after January 21, 2011, at which directors will be elected. In the rare instance when an issuer holds a special meeting to elect directors before its first annual meeting after January 21, 2011, or in lieu of its 2011 annual meeting, and the proxy statement relating to the meeting includes required compensation information, the resolutions must be included in the special meeting proxy statement.

5 See SEC Release Nos. 33-9136; 34-62764; IC-29384, “Facilitating Shareholder Director Nominations” (August 25, 2010).

As part of our service to you, we regularly compile short reports on new and interesting developments in our business services program. Please recognize that these reports do not constitute legal advice and that we do not attempt to cover all such developments. Rules of certain state supreme courts may consider this advertising and require us to advise you of such designation.Your comments on this newsletter, or any Dykema publication, are always welcome. © 2011 Dykema Gossett PLLC.

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