M & A Law Prof Blog

Reimbursement Policies for Shareholder Proxy Nominations

HealthSouth Corp. recently announced a policy to reimburse shareholder initiatives relating to shareholder nominations for the election of directors:

Board of Directors has authorized the Company to amend its bylaws to adopt procedures relating to shareholder nominations for the election of directors. At its October 22, 2009 regular meeting, the Board approved the general terms of an amendment to the Company's Bylaws that will provide for reimbursement of shareholder expenses in connection with a proxy solicitation campaign, subject to certain conditions including the Board's determination that reimbursement is consistent with its fiduciary duties. The Board expects to adopt the final form of this Bylaw amendment this week. The final amendment will be included in a Form 8-K to be filed with the Securities and Exchange Commission when approved.

HealthSouth's move is one of the first following Delaware's adoption of the new section 113 that permits bylaws to be amended to provide for reimbursement a successful shareholder proxy with respect to the election of directors.   Movement in this area, combined with Delaware's new section 112 relating to shareholder proxy access shows how Delaware is highly sensitive to Federal competition.  

-bjmq

Schapiro on Shareholder Access

SEC Chair Mary Schapiro's address (yesterday) to the PLI on shareholder voting and proxy access is here.  Her thoughts on shareholder access (in part):

Corporate governance, after all, is about maintaining an appropriate level of accountability — accountability to shareholders by directors whom shareholders elect, and by managers whom directors select. But accountability requires both transparency and an effective means to take action for poor performance or bad decisions.

I believe that the most effective means of promoting accountability in corporations is to make the shareholders' vote both meaningful and freely exercised. One of the most important matters presented for a shareholder vote is the election of the board of directors. However, in most cases today, shareholders have no choice in who to vote for.

They get a ballot in the mail or electronically. And they are presented with a slate of nominees. Most of the time, it's as many nominees as there are positions to fill. And, the nominees are the individuals whom the board itself has chosen.

Looks like the SEC is also taking on the question of empty voting and over-voting as well.  That's quite a full plate.

The review, which is well underway, is being conducted by staff throughout the agency — and involves outreach to market participants to ensure that a broad range of views is considered. As a result, the concept release to be voted on by the Commission is expected to probe a variety of areas:

We'll be asking about ways to ensure accuracy in vote tabulation, given that voting results on many items are becoming increasingly close and many companies have adopted majority voting for directors.

We'll be asking about whether our rules adequately address whether votes are cast by those with an economic interest in the securities. In some cases, for instance, a broker's customers may cast more votes than the broker is actually entitled to vote on their behalf — something called "overvoting". And in other cases, individuals are able to vote shares even though they lack the full economic interest that goes along with share ownership — known as "empty voting."

-bjmq

Grundfest on Shareholder Access

Joe Grundfest fo Stanford has a new paper on the SEC's shareholder access proposal, The SEC's Proposed Proxy Access Proposal: Politics, Economics, and the Law.

Abstract: The Securities and Exchange Commission has proposed proxy rules mandating shareholder access under conditions that can be modified by a shareholder majority to make proxy access easier, but not more difficult. From a legal perspective, this Mandatory Minimum Access Regime is so riddled with internal contradictions that it is unlikely to withstand review under the arbitrary and capricious standard of the Administrative Procedures Act A fully-enabling opt-in proxy access rule is, in contrast, entirely consistent with the administrative record developed to date by the agency and is easily implemented without delay. 

From a political perspective, and consistent with the agency capture literature, the Proposed Rules are easily explained as an effort to generate megaphone externalities and electoral leverage to benefit constituencies allied with currently dominant political forces, even against the will of the shareholder majority. Viewed from this perspective, the Proposed Rules have nothing to do with shareholder wealth maximization or optimal governance, and reflect a traditional contest for economic rent common to political brawls in Washington D.C. 

From an economic perspective, if the Commission nonetheless determines to implement an opt-out approach to proxy access, it will then confront the difficult problem of defining the optimal proxy access default rule that should be subject to a symmetric opt-out by shareholder majority (not the asymmetric opt out imposed by the Mandatory Minimum Access Regime, for which there is no support in the academic literature). The administrative record currently contains no information that would allow the Commission objectively to assess the preferences of the shareholder majority regarding proxy access at any publicly traded corporation. To address this gap in the record, the Commission should, if it determines to follow an opt-out strategy, conduct a properly designed stratified random sample of the shareholder base, and rely on the results of that survey to set appropriate default proxy access rules. The Commission’s powers of introspection are insufficient to divine the value-maximizing will of the different shareholder majorities at each corporation subject to the agency’s authority. 

-bjmq

Plural and Majority Voting

Today's WSJ has a good article on the beauties of plural voting for directors.  The machinations of corporate voting can be hard for normal people to understand.  In fact, when I introduce corporate voting to my introductory corporations classes, I usually have to rely on visual aids involving horses and finish lines.  Frustration with plural voting gave rise to "withhold" campaigns, majority voting policies (example: Sherwin-Williams), majority voting bylaws (Morris, Nichols memo on majority voting bylaws) and then finally the amended sec. 141(b). 

The knock on all of these developments was that even though a majority of shareholders might vote to withhold, that a director could nevertheless still retain her seat.  The WSJ reported Riskmetrics' data on voting at 50 companies.  Ninety-three directors failed to get a majority votes. Directors at two companies that had either majority voting policies or bylaws submitted their resignations as required, but then were promptly reappointed to the board.  Apparently, no directors actually lost their seats following an election in which they received less than 50% of the vote.  So much for shareholder democracy.

I think Webb Crockett, a director at Southwest Airlines who garnered just 46.3% of the vote, sums it up nicely, "I have the grey matter to serve...How many people who voted against me have any knowledge of my expertise about Southwest and the airline industry?" Yummy, cake.

-bjmq

SEC Considering New Director Rules

According to Bloomberg, the SEC commissioners will meet today to consider proposing "Armstrong celebrity" director rules.  The webcast of the meeting, set to start at 10AM (ET), is here.  More disclosure about director nominees and their qualifications is probably a good thing - especially as we move toward increased shareholder access to the proxy. 

However, I wonder how big a problem this really is.  The SEC has been gradually tigtening the screws on director nominations and qualifications.  SOX has placed added burdens on directors.  If you're a celebrity, why would you want the hassle?  

At the same time directorships appear to be a tight club -- take a look at the board of Apple if you don't believe me.  If you're not CEO of another large corporation or former VP, then you're probably not going to get on the Apple board, even if you are Lance Armstrong.  This does raise the question however, just how effective a monitor can one be if one is also CEO of a large company, like Avon.  I'm sure Ms. Jung is a very capable CEO, but she's also on the board of GE as well as that of Apple.    I wonder if the SEC might better spend their time thinking about limiting the number of board assignments that full-time CEOs take on.  The new CEO job is supposed to be all encompassing, isn't it?  How does that leave much time to monitor management and provide strategic advice to another company?  Not to mention two or more. It might be worth the SEC giving some consideration to Ron Gilson and Reinier Kraakman's proposal.

-bjmq

SEC Commissioner Paredes' View on Shareholder Access

Commissioner Paredes shared his dissenting view on the new shareholder access proposal in a speech before the Chanber of Commerce yesterday.  The text of the speech is here.  He argues that states are best able to tailor approaches to the corporate law, in particular that Delaware has an enabling statute intended to provide shareholders with flexibility in designing their relations with management. He points to DGCL new sections 112 and 113 as examples of Delaware's flexibility.    One might also point to the new North Dakota Public Company chapter of its corporation code as an example of state flexibility and tailoring.  Its section 10-35-08 provides for shareholder access to the corporate proxy on terms largely similar to those proposed by the SEC.

In his speech Commissioner Paredes reiterates his own proposal:  amending Rule 14a-8(i)(8) to permit shareholders to include in the company's proxy materials a bylaw proposal that would allow shareholders proxy access for nominating directors so long as the company's jurisdiction of incorporation has adopted a provision explicitly authorizing a proxy access bylaw (for example, DGCL Sec.112).

-bjmq 

The Original Shareholder Activists

The proposed shareholder access rules and the debate surrounding the role of shareholder activists got me thinking.  Some opposed to increased shareholder power paint pictures of the end of capitalism that will come when shareholders force boards to adopt unwise business positions motivated by political and other interests.  Of course, this is not the first time we’ve had this debate.  Long before cheap credit fueled the private equity bubble of the past few years and before Mike Milken and the junk bonds made the buyout craze of the 1980’s possible, there were a set a characters who started the modern takeover movement and were the original shareholder activists.  

The first corporate raiders of the post-World War II era were Thomas Mellon Evans, Robert Young and Louis Wolfson among others.  They were called pirates and financial hooligans for their attacks on the comfortable life of corporate boards that typified the 1950s.   The takeover tactics that these raiders developed would later become commonplace.  They used cumulative voting to get minority board representation, they successfully challenged staggered boards, they used leverage to increase their influence, and they sought to make the market more efficient by buying up underperformers and turning them around.   

I just finished reading Diana Henriques’ White Sharks of Wall Street.  White Sharks is a portrait of these raiders and Thomas Evans in particular.  Evans, Wolfson, and Young all looked to acquire underperforming “businesses run by boards devoid of any meaningful ownership” and underperforming family-owned businesses where the genetic lottery resulted in an uninterested group of founders’ children trying to manage the business. They bought these businesses and shook them up – sometimes by turning them around and other times by breaking them up and selling them off.

Evans and the other “activists” of the 1950s were the face of the nascent takeover market.  They were also a threat to the social and political fabric of the day.  By forcing boards to face facts, they undid all the stability of the business in the 1950s.  Notwithstanding this threat from activist shareholders, boards and the system stood up reasonably well, adapted and thrived for many years.  One wonders what parallels we can learn from that experience that might inform how we think about shareholder access rules.

-bjmq

Proposed Shareholder Access Rules Available for Comment

While I was out on the road last week, the SEC posted its proposed shareholder access rules for comment.  The 250 page proposed amendments to the proxy rules are here and the form for submitting comments (due by Aug 17, 2009) is here.

In its overview of the rules, the SEC makes it clear that's its purpose is to help shareholders generate board accountability and responsiveness to shareholders and its recognized that the rules as they currently stand may unintentionally frustrate shareholder voting rights rights by preventing shareholders from getting access to the corporate proxy.    

The proposed amendments to the proxy rules to require companies to include disclosures about shareholder nominees for director in the companies’ proxy materials, under certain circumstances, so long as the shareholders are not seeking a change in control require companies to include shareholder nominees for director in the companies’ proxy materials.  This requirement would apply unless state law or a company’s governing documents prohibits shareholders from nominating directors.

The proposed amendments also precludes companies from relying on Rule 14a-8(i)(8) to exclude from their proxy materials shareholder proposals by qualifying shareholders that would amend a company’s governing documents regarding nomination procedures or disclosures related to shareholder nominations.

 

Federalist Society Panel from April 2008 discussing shareholder access proposals (includes presentations by Norm Veasey and Stephen Bainbridge among others).

-bjmq

More Fuel for Shareholder Access Debate

The real question regarding the shareholder access debate is whether once shareholders have the power to nominate minority directors whether they will use it for good or ill, or at all.  Yair Listokin has a paper, “If You Give Shareholders Power, Do They Use It? An Empirical Analysis,” in which suggests the answer might be that they won’t use it at all.  Listokin looked at state antitakeover protection statutes that provide shareholders with the opportunity to opt-out through the adoption of shareholder initiated bylaw proposals.  He finds that very few companies’ shareholders take advantage of the opportunity to opt-out of these statutes.   This finding is consistent with earlier work from Rob Daines and Michael Klausner who looked at customization of incorporation documents and found very little opting out of default provisions (here). 

Recently, we started to have experience with shareholder votes relating to ‘say-on-pay’ a hot-button issue (and here) it there ever was one.   So far, shareholders who have had the opportunity to vote on pay packages appear reticent to say ‘no.’  The WSJ recently canvassed 15 companies large cap companies with say-on-pay policies that permit shareholders to review executive pay policies (here) and none of questions passed.  Given the high degree of emotion that pay questions can generate, the vote results (or lack of them) are pretty amazing.  All of this simply provides fuel for the shareholder access debate.

-bjmq 

Bioenvision: Wins in Delaware?!

See the press release below.  I was meaning to write this up in full tomorrow, but the whole affair is just plain odd.  And I wonder what Bioenvision went to court on when it already had the necessary number of votes to effect the merger (my guess -- the winning votes came in only after the meeting had ended).  I'll take a look at the petition and other documents and have more later.  (Addendum:  Here is the petition and here is the order -- it appears that Bioenvision was petitioning to reopen the meeting in order to count late votes -- otherwise the merger would have failed) 

Delaware Court Approves Bioenvision, Genzyme Joint Petition (Dow Jones 10/10 15:00:23)

Special Meeting to be Reconvened on October 22

NEW YORK and CAMBRIDGE, Mass., Oct. 10 /PRNewswire-FirstCall/ -- Bioenvision, Inc. (Nasdaq: BIVN) and Genzyme Corporation (Nasdaq: GENZ) announced today that the Court of Chancery of the State of Delaware granted a petition filed yesterday by both companies to reconvene Bioenvision's special stockholder meeting on October 22 to vote on the merger agreement between Bioenvision and Genzyme.

Under the Chancery Court's order, Bioenvision will reconvene the special meeting of stockholders on October 22, 2007 and reopen the polls to ensure that all Bioenvision stockholders as of the record date of September 5, 2007 are afforded an opportunity to vote for or against the adoption of the Merger

Agreement and for those votes to be properly counted. Bioenvision will accept for consideration all votes, proxies or ballots related to the merger agreement delivered by any record holder. Bioenvision stockholders are not obligated to take any action or they could change their votes if they chose or vote even if they have not previously cast a vote on this matter.

Appraisal rights are available to all Bioenvision stockholders prior to the taking of the vote on October 22. Bioenvision will provide additional information concerning the reconvened special meeting to all stockholders on the Record Date in a mailing to be sent October 11, 2007.

Based on a preliminary count of the votes received through October 5, 2007, approximately 55 percent of issued and outstanding shares have voted in favor of the merger.

Stockholders who have questions about the merger, need assistance in submitting their proxy or voting their shares (or changing a prior vote of their shares) should contact Bioenvision's proxy solicitor, The Altman Group, 1200 Wall Street West, Lyndhurst, NJ 07071, (800) 622-1642 (toll-free stockholders line) or (212) 681-9600 (collect), email: [email protected].