BoardroomDirect: Issues in brief

Update on the current board issues: January 2015

Issues in brief


What President Obama’s State of the Union speech could mean to companies

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In his sixth State of the Union speech on January 20, President Obama addressed several topics that could potentially affect US companies. He also made it clear to Congress that he would use the veto to keep intact his economic policies designed to help the middle class. Here is a look at some of those topics.


What President Obama said: “… we’ve seen the fastest economic growth in over a decade, our deficits cut by two-thirds, a stock market that has doubled, and health care inflation at its lowest rate in fifty years. So the verdict is clear. Middle-class economics works. Expanding opportunity works. And these policies will continue to work, as long as politics don’t get in the way. … We can’t put the security of families at risk by taking away their health insurance, or unraveling the new rules on Wall Street, or refighting past battles on immigration when we’ve got a system to fix. And if a bill comes to my desk that tries to do any of these things, it will earn my veto.”

What to expect: Rather than passing full repeal measures as in the past, at the start of the 114th Congress House Republicans advanced legislation to amend the Affordable Care Act (ACA) employer mandate’s full-time employee definition to 40 hours per week. But the President has threatened to veto it. Congressional Republicans are expected to continue seeking possible areas for bipartisan reforms to the ACA, such as advancing repeal of the medical device tax and the Sustainable Growth Rate “doc fix.” Many of these provisions would undercut the funding mechanism of the ACA. Separately, the pending US Supreme Court decision in the King v. Burwell case has the potential to significantly disrupt the ACA. If King prevails, subsidies to 37 states that depend on the federal government to run their health exchanges could be cut off abruptly.


What President Obama said: “We are making sure our government integrates intelligence to combat cyberthreats, just as we have done to combat terrorism. And tonight, I urge this Congress to finally pass the legislation we need to better meet the evolving threat of cyberattacks, combat identity theft, and protect our children’s information. If we don’t act, we’ll leave our nation and our economy vulnerable. If we do, we can continue to protect the technologies that have unleashed untold opportunities for people around the globe.”

What to expect: President Obama announced a number of cybersecurity proposals, some that would require legislative engagement and others that can be enacted through executive authority. The proposals focus on three priorities: enhancing cyberthreat information sharing between the private sector and the Federal government; data breach notifications; and strengthening law enforcement’s ability to address cybercrimes. The White House has said it plans to hold a summit on cybersecurity and consumer protection with major stakeholders in mid-February.

Tax code

What President Obama said: “As Americans, we don’t mind paying our fair share of taxes, as long as everybody else does, too. But for far too long, lobbyists have rigged the tax code with loopholes that let some corporations pay nothing while others pay full freight. They’ve riddled it with giveaways the superrich don’t need, denying a break to middle class families who do. This year, we have an opportunity to change that. Let’s close loopholes so we stop rewarding companies that keep profits abroad, and reward those that invest in America.“

What to expect: Tax reform continues to be a high priority for House and Senate leadership and could be one of the few areas for meaningful compromise between President Obama and Congress. Still, balancing Republicans’ desire to lower rates with the President's desire to secure additional revenue for infrastructure spending will be difficult to achieve. The longer Congress waits to move a tax reform bill, the more difficult it will become as the 2016 election cycle — which includes a presidential election — will quickly consume the legislative environment. [For more details on tax policy for 2015, read PwC’s publication Opportunities and challenges ahead: 2015 Tax Policy Outlook.]


What President Obama said: “Today, our businesses export more than ever, and exporters tend to pay their workers higher wages. But as we speak, China wants to write the rules for the world’s fastest-growing region. That would put our workers and businesses at a disadvantage. Why would we let that happen? We should write those rules. We should level the playing field. That’s why I’m asking both parties to give me trade promotion authority to protect American workers, with strong new trade deals from Asia to Europe that aren’t just free, but fair.”

What to expect: President Obama’s proposal for Trade Promotion Authority (TPA) may dominate much of the tax writing committees’ agenda for the first part of the year. Many free trade supporters consider TPA a prerequisite to completing several ongoing trade agreements, with the Trans-Pacific Partnership the most likely to be completed this year. Free trade is an issue where the president and Congress may find common ground.

Climate change

What President Obama said: “The best scientists in the world are all telling us that our activities are changing the climate, and if we do not act forcefully, we’ll continue to see rising oceans, longer, hotter heat waves, dangerous droughts and floods, and massive disruptions that can trigger greater migration, conflict, and hunger around the globe. That’s why, over the past six years, we’ve done more than ever before to combat climate change, from the way we produce energy, to the way we use it. That’s why we’ve set aside more public lands and waters than any administration in history. And that’s why I will not let this Congress endanger the health of our children by turning back the clock on our efforts. I am determined to make sure American leadership drives international action.”

What to expect: The Environmental Protection Agency is expected to propose extensive ozone regulations as well as expand regulatory power over streams and wetlands. The agency is also expected to issue new regulations on greenhouse gases, including reducing carbon emissions from coal-fired plants by 30 percent – a move likely to elicit harsh criticism from Republicans and Democrats alike in coal producing states.


Chair White asks SEC staff to review shareholder proposal exclusion rule

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SEC Chair Mary Jo White has asked the agency’s staff to review a rule that allows a company to exclude a shareholder proposal that directly conflicts with a management proposal. In the meantime, the commission’s Division of Corporation Finance announced it will “express no views on the application of Rule 14a-8(i)(9) during the current proxy season.”

“Due to questions that have arisen about the proper scope and application of Rule 14a-8(i)(9), I have directed the staff to review the rule and report to the Commission on its review,” White said.

In early December, the SEC granted a no-action request to Whole Foods Market to exclude a proxy access shareholder proposal from its 2015 proxy because management would have its own proposal on the same ballot.

The shareholder proposal proponent James McRitchie has since appealed the SEC Division of Corporation Finance decision and has received support from the Council of Institutional Investors (CII). Also, 11 more companies have submitted no-action letters seeking relief from the SEC to exclude a shareholder proposal on proxy access from its 2015 proxy based for the same reason.

The SEC staff agreed with Whole Foods that including both the company and shareholder proposals would “present alternative and conflicting decisions for the stockholders and would create the potential for inconsistent and ambiguous results.”

McRitchie’s proposal to amend the company’s bylaws would have allowed shareholders (or groups) that, for the preceding three years, have continuously held at least 3% of the company’s voting securities to nominate up to 20% of the board (or no less than two directors in the event the board size was reduced).

Management’s proposal, which is included in its 2015 proxy statement, calls for higher proxy access thresholds. Those shareholders owning 5% or more of the company’s common stock continuously for five years would be allowed to nominate the greater of one director, or 10% of the board.

It is expected that more companies will file similar no-action requests in response to the New York City Comptroller Scott M. Stringer’s proxy access shareholder proposal campaign that began late last year. He submitted proposals at 75 companies on behalf of the $160 billion New York City Pension Funds. [For more information on this, read BoardroomDirect November 2014 (Issues in brief).]


US Chamber of Commerce expounds on SEC proxy advisory firm guidance

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In a special January 7 corporate governance alert, the US Chamber of Commerce’s Center for Capital Markets Competitiveness called the June 2014 SEC staff guidance on proxy advisory firms a “positive first step toward bringing more transparency and rationality to the current system of proxy voting advice.”

On June 30, 2014, the staff of the SEC’s Divisions of Investment Management and Corporation Finance issued guidance in the form of a 13-question Q&A that relates to the proxy voting responsibilities of investment advisers, the use of proxy advisory firms, and the use of exemptions to the federal proxy rules used by proxy advisory firms. In essence, the guidance said that asset managers who use proxy advisory firms to help them make decisions on behalf of investors should review the advisors’ voting recommendation policies to ensure they are acting in the best interests of the investors. [For more information on the SEC staff guidance, read BoardroomDirect July 2014 (Issues in brief). Wachtell Lipton Rosen & Katz summarize the SEC staff guidance in the following June client memo.]

The Chamber report, Corporate Governance Update: Public Company Initiatives in Response to the SEC Staff’s Guidance on Proxy Advisory Firms, offers advice to public companies on how to ensure that the concepts in that SEC guidance are implemented in the best interest of public company shareholders.

Former SEC Chair Harvey Pitt, the report’s author, wrote that “while the shareholders of public companies – whose interests the proxy advisory system is ultimately meant to serve – stand to benefit, it remains to be seen whether proxy advisory firms will take this opportunity to improve the transparency and efficacy of their business operations.”

The report highlights three areas public companies should focus on in light of the guidance: communication with proxy advisory firms, managing proxy advisory firm conflicts of interest, and communication with institutional investors. Among the many recommendations in the report, the Chamber advises public companies to:

  • Ask proxy advisory firms (namely Institutional Shareholder Services and Glass Lewis) to allow them input before and after the firms make their recommendations final
  • Formally let proxy advisory firms and portfolio managers who hold their securities know if the company does not believe it was afforded an adequate opportunity for input before proxy advisory firms finalized recommendations
  • Alert proxy advisory firms, portfolio managers, and others (including SEC staff) about instances where a proxy advisory firm relied on inaccurate or stale data


Delaware Supreme Court affirms exclusive forum bylaw in recent case

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On December 23, the Delaware Supreme Court reaffirmed the power of public company boards to adopt exclusive forum selection bylaws in United Technologies Corp. v. Treppel. Such bylaws require shareholders to file litigation in the state where a company is incorporated.

In United Technologies Corp. v. Treppel, shareholder Lawrence Treppel sought information from the company related to a deferred prosecution agreement. After his request was rejected by the company, Treppel filed a request with the Court of the Chancery to receive the records. After the company gave Treppel most of the documents he sought, it asked that he limit any lawsuit to Delaware. Treppel refused this request and asked the chancery court to allow him to use the records in any other court. The chancery court ruled that it did not have the authority to make that decision. [For more information on this case, read a recent article.]

The Delaware Supreme Court reversed the Court of the Chancery decision that it could not impose conditions on the production of books and records. Citing an existing Delaware corporation law, the higher court held that the Court of Chancery has the authority to impose conditions on the production of books and records. Also, the Supreme Court noted that the company adopted the forum selection bylaw after the lawsuit was filed, but still rejected the plaintiff's argument that the bylaw was not binding. [For more information on the relevance of this case, read a client memo from Wachtell, Lipton, Rosen & Katz.]

In its memo, Wachtell Lipton wrote: ”In remanding to the Court of Chancery to exercise this discretion, the Supreme Court instructed that the Vice Chancellor should consider that a corporation has a ‘legitimate interest in having consistent rulings on related issues of Delaware law, and having those rulings made by the courts of this state,’ and a similarly legitimate interest in avoiding undue expense in defending against duplicative derivative lawsuits. The Supreme Court also reaffirmed the power of boards to adopt forum selection bylaws …”

This was not the first time the Delaware court upheld exclusive forum selection bylaws. In June 2013, the Delaware Court of Chancery, in an opinion by Chancellor Leo E. Strine Jr., upheld the statutory and contractual validity of exclusive forum selection bylaws adopted by Chevron’s and FedEx’s boards.


Political lobbying disclosure shareholder proposal cleared for ballot

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The SEC declined AT&T’s request for no action on a UAW Retiree Medical Benefits Trust/Zevin Asset Management proposal requesting that the company regularly report on its lobbying efforts. That means the proposal must be included in the company’s proxy statement.

As the 2015 proxy season nears, other companies facing similar shareholder proposals may want to take note of the SEC’s action. According to a recent Director Notes report from The Conference Board, political spending disclosure shareholder proposals will figure prominently this year. In 2014, 86 political spending disclosure proposals were voted on, with seven receiving at least 40% shareholder support, according to The Conference Board.

In a letter to AT&T, the SEC’s Office of the Chief Counsel of the Division of Corporation Finance spelled out the reason for not granting the no-action letter. “We are unable to concur in your view that AT&T may exclude the proposal under rule 14a-8(i)(3). We are unable to conclude that the proposal is so inherently vague or indefinite that neither the shareholders voting on the proposal, nor the company in implementing the proposal, would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

In its no-action request letter, AT&T stated it believed the proposal could be excluded because it is “impermissibly vague and indefinite so as to be inherently misleading.”

The UAW shareholder proposal requests that the AT&T board authorize the preparation of a semi-annual report that would disclose:

  1. Policy and procedures governing lobbying, both direct and indirect, and grassroots lobbying communications
  2. A listing of payments used for (a) direct or indirect lobbying; or (b) grassroots lobbying communications, in each case including the amount of the payment and the recipient
  3. AT&T's membership in and payments to any tax-exempt organization that writes and endorses model legislation
  4. The decision making process and oversight by management and the board for making payments