Archive for March, 2010

Federal Intervention in Executive Pay

by Joseph E. Bachelder, for The Harvard Law School Forum at Harvard Law School, March 31, 2010.

For approximately 75 years (at least), the federal government has intervened in executive pay—in both direct and indirect ways. Two examples of direct intervention are Pay Controls (1971-74) and the current TARP program, introduced in 2008 in respect of financial institutions (and subsequently extended to two automotive companies) and still in effect as to many of these institutions. [1]

An example of indirect intervention is the SEC’s requirement, commencing in the late 1930s, of disclosure regarding compensation of certain top executives in the annual proxy statements of publicly traded companies. [2] (Ironically, in contrast to direct controls, a major consequence of the SEC’s indirect intervention through required disclosure has been an upward “tilt” to executive pay—the so-called “ratcheting effect,” as discussed later in the column.)

Direct Intervention

Federal pay controls. Due to inflationary pressures, in August 1971, the Nixon administration imposed a pay and price “freeze” for a 90-day period. At the end of that period, regulations strictly limiting pay increases generally (not limited to executive pay) were introduced that generally continued until April 30, 1974. Over the period of 35 years since pay controls ended, the impact of those controls is virtually zero, and it is doubtful that pay controls have any noticeable effect on levels of executive pay today…(continue reading)

Australian Stock Exchange Puts Diversity High on Corporate Governance Agenda.

by Bidiversity, March 31, 2010.

It is anticipated that from July 1, the Australian Stock Exchange’s (ASX) revised Corporate Governance Principles and Recommendations  will come into force. The principals will require every listed company to disclose their diversity policy. In addition, listed companies will have to report on the number of women employees in the whole organisation, in senior management and on the board, whilst Boards will be required to disclose what skills and diversity criteria are sought in any new board appointment.

The recommendations come from a March 2009 report that was one of several looking into corporate governance. CAMAC’s ‘Diversity on Boards of Directors’ (March 2009). addressed the issue of women on boards in the context of diversity, outlining the role and structure of boards, the current state of diversity, ways to promote an environment conducive to diversity, and ways to assist in developing a broader pool of skilled and experienced candidates.

The Corporate Governance Principles and Recommendations will be expanded to include a new recommendation requiring each listed entity (on an “if not, why not?” basis) to establish a diversity policy that includes measurable objectives relating to gender as set by the board of the entity. The policy must be disclosed to the market in full or in summary…(continue reading)

Director Fees and Director Independence

by J. Robert Brown, for The Race to the Bottom, March 31, 2010.

We have often noted that neither Delaware nor the NYSE consider fees in determining director independence.  This leads to absurd results.  Directors who make in the vicinity of $700,000 in fees are considered independent by the NYSE while those who make substantially less (any amount over $120,000) are not independent if the amount is paid as consulting income rather than fees. 

The approach of the NYSE is particularly dubious given that the rules specifically disqualify directors as independent where they have a material relationship with the company.  See NYSE Listing Standard 303A.02 (“No director qualifies as “independent” unless the board of directors affirmatively determines that the director has no material relationship with the listed company”).  Nowhere does the Listing Standard exclude fees, yet apparently the NYSE permits this approach.

It is perhaps no surprise, therefore, that regulatory reform is potentially on the way.  Senator Dodd‘s bill would give the SEC the authority to control the definition of independent under the rules of the stock exchanges and would specifically instruct the SEC to consider the role of fees in the definition…(continue reading)

Implications of Selectica for Next-Generation Poison Pills

by  Mark D. Gerstein, for The Harvard Law School Forum at Harvard Law School, March 30, 2010.

At a time when the number of corporations with stockholder rights plans “poison pills” is declining sharply and poison pills are heavily criticized by stockholder governance proponents and proxy advisory firms, the Delaware Court of Chancery, in Selectica, Inc. v. Versata Enterprises, Inc., [1] reaffirmed the value of the poison pill to boards seeking to protect and maximize stockholder value. In upholding a poison pill used outside the hostile offer context to protect an asset of the corporation, the court also reaffirmed the flexibility of Delaware law to respond to modern threats facing corporations. Selectica demonstrates that independent directors acting in good faith, on an informed basis and with the advice of outside experts, should be afforded substantial latitude to use new defensive technologies to respond to modern threats. Selectica also provides practical guidance for boards considering the adoption of poison pills.

Background

Selectica is a micro-cap sales execution and contract management software provider that accrued approximately $160 million in net operating losses (NOLs). Generally, NOLs can be used to offset future taxable income. Their use may be impaired, however, if an “ownership change” occurs pursuant to Section 382 of the Internal Revenue Code. Concerned that additional trading by Selectica’s five percent stockholders might cause an ownership change, Selectica’s board engaged experts to analyze the threat of impairment and possible defensive responses, including the adoption of an NOL poison pill. In response to the perceived threat, the board lowered the trigger threshold of its poison pill from 15 percent to 4.99 percent to deter both new 5 percent stockholders and additional purchases by existing 5 percent stockholders. One of Selectica’s competitors, Versata, and its parent company, Trilogy, triggered Selectica’s NOL poison pill, apparently to pressure Selectica to resolve an ongoing business dispute.

After the trigger, Selectica’s board had 10 days to exempt Versata’s purchases from the trigger if the board determined that the purchases did not jeopardize Selectica’s NOL asset. During this time, the board reexamined the likelihood of an ownership change and made repeated efforts to secure a standstill agreement from Versata. The board determined that incremental additional purchases by Versata could cause an ownership change and that Versata remained a threat, evidenced by its refusal to enter into a standstill. Selectica’s board also determined that the traditional “flip-in” could itself potentially cause an ownership change and impair the NOL asset, in addition to imposing massive dilution on Versata. Therefore, the board decided to use the exchange feature of its poison pill to dilute Versata’s holdings in Selectica from 6.7 percent to 3.3 percent and also adopted a new NOL poison pill to continue to protect the NOL asset…(continue reading)

Government policies man hurdle in implementation of corporate governance by PSUs

by TAX Guru, March 30, 2010.

Kurz v. Holbrook: Record Ownership and the SEC

by J. Robert Brown, for The Race to the Bottom, March 30, 2010.

We did a lengthy discussion of the Chancery Court’s recent opinion in Kurz v. Holbrook.  The decision contains a lengthy discussion of the voting system for street name owners.  One of the interesting asides concerns the interpretation of record ownership at the federal level.  The opinion noted that under federal law, companies must register with the Commission to the extent having “500 or more record holders of a class” of equity securities and that in counting equity securities, “DTC does not count as a single holder of record.” 

Section 12(g) requires companies with 500 shareholders and $10 million (as modified in Rule 12g-1) in assets to register with the Commission.  In counting that number, the statutory language of Section 12(g) refers to equity securities “held of record.”  Held of record in turn is defined in Rule 12g5-1.  The rule contains a number of counting rules (dealing, for example, with shares held in more than one name or by an entity).  The rule also provided that:  

  • Securities identified as held of record by one or more persons as trustees, executors, guardians, custodians or in other fiduciary capacities with respect to a single trust, estate or account shall be included as held of record by one person.

In other words, it is the custodian, not the beneficiaries, who count for purposes of record ownership.  Adopted in 1965, see Exchange Act Release No. 7492 (Jan. 5, 1965), long before the widespread use of depositories, the rule seemed to explicitly count depositories as a single record owner…(continue reading)

The magical effect of putting a famous face on a company’s board

by The Economist, March 30, 2010.

In March 1998 the Coca-Cola Bottling Company announced the appointment of a most unlikely new director to its board: Evander Holyfield, a former heavyweight boxing champion, best-known for having part of his ear bitten off in a bout by a fellow boxer, Mike Tyson. He was not the only top athlete at the time with a seat in the boardroom: Michael Jordan, a celebrated basketball player, was a director of Oakley, a sunglasses manufacturer. Other sports stars to try their hand at directing corporate America in the past 25 years include Billie Jean King, a tennis player appointed to the board of Altria (then called Philip Morris) in 1999 and Nancy Lopez, a golfer, who became a director of J.M. Smucker, a jam-maker, in 2006.

Boards have also recruited from the ranks of Hollywood. Disney appointed Sidney Poitier to its board in 1994, for example. Deepak Chopra, an author and lifestyle guru, was recruited to the board of Men’s Wearhouse, a suit retailer, in 2004. Stretching the definition of celebrity a bit, General “Stormin’” Norman Schwarzkopf was appointed a director by the Home Shopping Network in 1996. And you can take your pick from scores of politicians-turned-directors, including Al Gore, a former vice-president and a member of Apple’s board since 2003…(continue reading)

NZ joins global corporate governance association

by Robert Smith, for The National Business Review, March 29, 2010.

New Zealand’s affiliation with a new global corporate secretaries group will give the country a say in the establishment of international best practice corporate governance.

The Geneva-based Corporate Secretaries International Association (CSIA) was launched late last week and represents more than 70,000 governance professionals in more than 70 countries.

The organisation is designed to provide a global focus on improving corporate governance practices, linking professionals with worldwide organisations such as the WTO, World Bank and the UN.

While corporate secretary associations and institutes from countries such as Australia, Hong Kong, India and UK have signed on as full CSIA members, New Zealand’s professional body has joined as an affiliate member alongside Canada and the US.

Chartered Secretaries New Zealand president Dev Oza told NBR the local division of the international Institute of Chartered Secretaries and Administrators had been working well since it opened in 1937, but joining as an affiliate with the new organisation gave it a wider scope to determine local best practise…(continue reading)

Unilever N.V. takes steps to further improve corporate governance

by Unilever, March 29, 2010.

Rotterdam – Unilever N.V. today announced proposals to improve and simplify its corporate governance and capital structure. Unilever N.V. intends to propose to cancel its 4% cumulative preference shares and to seek authorisation to buy back its 6% and 7% cumulative preference shares.

Proposals to simplify capital structure of Unilever N.V.

Unilever believes that these actions will strengthen the link between economic interest and voting rights for Unilever N.V. shareholders and move it towards the principle of one share, one vote.

Over the years Unilever N.V. issued various classes of preference shares. Since then there has been a gap between their economic value and the votes that they represent.

Unilever N.V. will put to its forthcoming Annual General Meeting, to be held on 11 May 2010, a proposal to cancel its 4% cumulative preference shares. Upon cancellation holders would receive a cash payment of €45.37802 for each 4% Unilever N.V. cumulative preference share, as provided in the Unilever N.V. articles of association. Unilever N.V. will also pay the dividend accrued until the moment of cancellation.

Unilever N.V. also intends to seek authority from the Unilever N.V. Annual General Meeting to buy back the 6% Unilever N.V. cumulative preference shares at a price of up to €575.50, and the 7% Unilever N.V. cumulative preference shares at a price of up to €671.40 per share…(continue reading)

Rating Agencies in the Face of Regulation

by R. Christopher Small, for The Harvard Law School Forum at Harvard Law School, March 29, 2010.

In our paper, Rating Agencies in the Face of Regulation – Rating Inflation and Regulatory Arbitrage, which was recently made publicly available on SSRN, we develop a rational expectations framework to analyze how rating agencies’ incentives are altered when ratings are used for regulatory purposes such as bank capital requirements. Rating agencies have been criticized by politicians, regulators and academics as one of the major catalysts of the 2008/2009 begin_of_the_skype_highlighting              2008/2009      end_of_the_skype_highlighting financial crisis. One of the most prominent lines of attack, as voiced by Henry Waxman, is that rating agencies “broke the bond of trust” and fooled trustful investors with inflated ratings. However, should sophisticated financial institutions be realistically categorized as trustful and fooled investors in light of the fact that they interacted with rating agencies not only as investors but also as originators of subprime mortgage securities? Why would these institutional investors care about ratings when they knew about rating agencies’ practices?

We argue that a first-order benefit of a high rating stems from financial regulations, such as minimum bank capital requirements. Over the last 20 years bank capital requirements (Basel I guidelines (1988) and Basel II guidelines (2004)) have become increasingly reliant on ratings as a measure of risk. For example, banks must hold five times as many reserves against BBB+ securities than against AAA securities. Moreover, the investment-grade threshold and the AAA threshold have become regulatory investment restrictions for pension and money market funds. Since these regulations are of first-order relevance for institutional investors’ capital management, a AAA label is economically valuable, independently of the underlying information it provides about the risk of a security…(continue reading)


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(in Portuguese) A weekly chronicle about shareholders' rights & duties, activism and capital markets regulation, by Renato Chaves.
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