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Sunday
Nov052017

In re Eaton Corporation Securities Litigation: Dismissed Consolidated Class Action Complaint Alleging Fraud

In In re Eaton Corp. Sec. Litig., No. 16-cv-5894 (JGK), 2017 BL 332475 (S.D.N.Y. Sept. 20, 2017), the United States District Court for the Southern District of New York granted Alexander M. Cutler, Richard H. Fearon (together the “Individual Defendants”), and Eaton Corporation’s (collectively, the “Defendants”) motion to dismiss the Consolidated Class Action Complaint (“CCAC”) by all purchasers of publicly traded common stock and/or exchange traded options on such common stock of Eaton Corporation between May 21, 2012, and July 28, 2014, (“Plaintiffs”) pursuant to Federal Rule of Civil Procedure 12(b)(6). The court held that the Plaintiffs failed to allege sufficient facts that the defendants made any material misstatements, were subject to a duty to disclose and failed to raise an inference of scienter.

According to the allegations, Eaton Corporation, an Ireland-based manufacturer of engineered products and historically a vehicle component manufacturer, announced plans to merge with Cooper Industries plc. Cutler was Eaton’s Chairman and Chief Executive Officer and Fearon was Eaton’s Vice Chairman and Chief Financial and Planning Officer. Cutler stated the company was not anticipating “any substantial additional change in the portfolio as a result of this transaction.” At various other shareholder meetings and calls Cutler and Freon continued to assure investors that there were no plans for divesture of company assets or any spin-offs planned. The CCAC alleged the merger was completed on November 30, 2012, and because of the acquired company’s electrical products business, there was concern that Eaton would sell off its automotive business. The CCAC alleges that the plaintiffs believed that failing to disclose the possible tax consequences of the spin-off of the automotive business adversely effected the company’s stock prices. The CCAC alleges inquiries regarding Eaton Corporation’s intent to change the business’s portfolio continued to surface, with Defendants claiming they “like[d] the portfolio we’re with” and releasing a press release entitled “Eaton Not in Discussions to Sell Its Automotive Business.” In its CCAC, Plaintiffs argued Defendants misrepresented or omitted the tax consequences of the merger between Eaton Corporation and Cooper plc. Plaintiffs claim this misrepresentation, that a company spin-off of its automotive business was economically prohibitive for the business for a period of 5 years because the spin-off would not be tax free, was materially misleading.

Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder make it “unlawful for any person . . .  [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. A claim under Section 10(b) of the Exchange Act is based in fraud and must meet the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act. To fulfill those standards a plaintiff must specify each statement alleged to have been misleading and the reasons or reasons why those statements are misleading. A plaintiff must also show the defendant acted with the required state of mind.

The court found that Defendants were under no duty to disclose the hypothetical tax consequences of a potential spin-off of the company’s automotive business because the Defendants themselves repeatedly made clear that the “indicated probability” of such spin-off was zero. Further, the court found no inference of scienter because the CCAC failed to allege sufficient facts that would support it and the Individual Defendants’ stock sales were not unusual or suspicious. The court then found that because the Plaintiffs failed to allege a plausible primary violation of Section 10(b) and Rule 10b-5, Plaintiffs did not satisfy the first element of a Section 20(a) claim.

The court granted Defendants’ motion to dismiss and ordered Plaintiff to file a formal motion including a copy of the proposed amended pleading to be filed within 21 days of the opinion, or all claims would be dismissed with prejudice. 

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Oct312017

Corporation’s Motion for Reargument Denied for Failure to Show Court Misapprehended Case

In Nguyen v. View Inc., No. 11138-VCS, 2017 BL 258186 (Del. Ch. July 26, 2017), the Court of Chancery of Delaware denied View, Inc.’s (“View”) motion for reargument.  In an earlier decision, the court  had concluded that Paul Nguyen (“Nguyen”) alleged sufficient facts to support a reasonable inference that Series B Financing (“Financing”) completed by View was void. 2017 WL 2439074 (Del. Ch. June 6, 2017.  The court denied the motion for reargument, finding that View had failed to identify any overlooked decision or principle that would have affected the outcome.   

According to the allegations, View pursued a round of Financing in 2009.  Nguyen, then the majority shareholder, initially consented to the Financing as consideration for settling various claims brought against View, but then timely exercised revocation option in the settlement agreement. View, however, closed the Financing prior to the expiration of the revocation option and contested Nguyen’s right to revoke his consent.  An arbitrator found the revocation valid and the closing of the Financing void and invalid. View then took steps to ratify the Financing and various charter amendments. Nguyen filed a complaint alleging View’s Financing was improper and sought a declaration of invalidity. View asserted that the actions had been ratified.  See DGCL 204. 

DGCL permits the ratification of “defective corporate” acts.  DGCL 204. The phrase included transactions “within the power of a corporation”.  Id.  The court, however, rejected View’s argument that the close of Financing was a defective corporate act.  Instead, the court characterized the action as unauthorized since Nguyen had revoked his consent prior to the closing.  As a result, the company lacked the power to act.  Id. (“Section 204 makes clear that the defective corporate acts that a corporation purports to ratify must be within the corporation's power a’t the time such act was purportedly taken.’”). 

View moved for reargument on the grounds that the court misapplied applicable law.  The court will deny a motion for reargument “unless the Court has overlooked a decision or principle of law that would have a controlling effect or the Court has misapprehended the law or the facts so that the outcome of the decision would be affected.” Stein v. Orloff, 1985 WL 21136, at *2 (Del. Ch. Sept. 26,1985).

View argued the court misapprehended Section 204.  The “power to act” was not limited to a corporation’s ability to act “at the time of the defective corporate act.”  Instead, the right to ratify applied to any “type of act that corporations are authorized to take”.  The court, however, found the Chancery had previously considered, and rejected this argument.

View also argued the Chancery inappropriately carved out “rejected” acts from acts that were invalid due to a “failure of authorization.” The court found View repeatedly made this argument and it was explicitly addressed in the Chancery’s opinion, therefore it was not a proper ground for reargument.

Because View failed to identify any law or facts the court misapprehended or failed to consider, the court denied the motion for reargument.

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Oct312017

Motion to Dismiss Granted Because Former Monster Stockholder Did Not Have Standing 

In Weingarten v. Monster Worldwide, Inc., No. 12931-VCG, 2017 BL 59636 (Del. Ch. Feb. 27, 2017), the Court of Chancery of Delaware granted Monster Worldwide, Inc.’s (Monster) motion to dismiss Joe Weingarten’s (Plaintiff) complaint seeking to inspect the books and records of Monster Worldwide, Inc.  The court dismissed Plaintiff’s complaint, finding that Plaintiff lacked standing to bring an action under Section 220(c) of the Delaware General Corporation Law as a former stockholder subsequent to a merger.

On August 8, 2016, Monster, a company “providing job placement, career management, and recruitment and talent management services” entered into a Merger Agreement (“Merger”). On October 19, 2016, Plaintiff sent a letter to Monster’s board demanding to inspect books and records to determine whether he should pursue litigation against all or some directors for alleged wrongdoing in connection with the Merger.

Monster rejected the demand although not until after the deadline provided by Plaintiff. On November 4, 2016, Monster finalized the Merger and Plaintiff’s stock was cancelled. Plaintiff filed a complaint on November 22, 2016 (“Complaint”) seeking to inspect the books and records of Monster.  Plaintiff alleged as a basis for the inspection two types of wrongdoing and mismanagement:  1) process-related claims alleging a flawed sales process resulting in an inadequate merger consideration; and 2) disclosure-related claims alleging Monster’s failure to disclose potential conflict of interest of Monsters managers.

Monster sought dismissal alleging that because Plaintiff had ceased to be a shareholder as a result of the merger, Plaintiff lacked standing to inspect the documents. 

The court found that Monster was not estopped from raising the issue of standing.  To invoke equitable estoppel, the party must demonstrate 1) it lacked knowledge or the means of obtaining knowledge of the truth; 2) it reasonably relied on the conduct of the party against whom estoppel is sought; and 3) it detrimentally changed position based on that reliance. The court found that Monster had not engaged in the required “conduct.”  Plaintiff informed Monster that he “expected” the company to waive the standing defense due to the delayed response to his request.  Monster, however, never responded.  Reliance on silence was not, the court concluded, “reasonable.” 

In determining the standing issue, the court looked to Section 220(b).  The Section provided that “any stockholder, in person or by attorney or other agent, shall, upon written demand under oath stating the purpose thereof, have the right during the usual hours for business to inspect for any proper purpose” records of the corporation.  In the event of a failure to respond within 5 days, Section 220(c) provided a right to bring an action in the Court of Chancery for relief. To be eligible to do so, however, the person had to, among other things, be a stockholder.

The court concluded that, as a result of the merger, the Plaintiff was not a shareholder.  Under the plain language of the statute, he lacked standing.

The language of Section 220(c) is plain and unambiguous. By requiring that a plaintiff under Section 220, to seek relief from this Court, demonstrate both that it “has”—past tense—complied with the demand requirement, and that it “is”—present tense—a stockholder, the legislature has made clear that only those who are stockholders at the time of filing have standing to invoke this Court's assistance under Section 220. 

Because Plaintiff could not establish he was a stockholder at the time this action was filed, he lacked standing, and therefore the Court dismissed the matter.

The primary materials for this case may be found on the DU Corporate Governance website

Tuesday
Oct312017

The Director Compensation Project: Walgreens Boots Alliance, Inc.

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation. We are for the most part including companies from 2016’s Fortune 500 and using information found in their 2016 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. The NYSE imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3) (see Rule 303A.06) and requires consideration by the board of directors of certain specified factors in designating directors for the Compensation Committee. See NYSE Rule 303A.02(a)(ii).

Finally, as the Commission has noted with respect to director independence:

All compensation committee members must meet the general independence standards under NYSE’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.

Exchange Act Release No. 68639 (Jan. 11, 2013); see also Exchange Act Release No. 68641 (Jan. 11, 2013).

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from the Walgreens and Boots Alliance 2016 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

 

Name

Fees Earned or Paid in Cash ($)*

Stock Awards ($)**

All Other Compensation ($)***

Total ($)

 

Janice M. Babiak

120,000

190,000

14,437

324,437

David J. Brailer

115,000

190,000

28,537

333,537

William C. Foote

155,000

190,000

62,644

407,644

Ginger L. Graham

95,000

190,000

29,342

314,324

John A. Lederer

95,000

95,000

2,418

192,416

Dominic P. Murphy

95,000

190,000

14,460

299,460

Barry Rosenstein****

71,250

189,937

10,000

271,187

Leonard D. Schaeffer

95,000

79,167

1,014

175,181

Nancy M. Schlichting

115,000

189,937

74,062

378,999

 

*Includes the annual retainer and other cash retainers outline above (in all cases including deferred amounts). Directors who join the board during a specific year receive a prorated amount for his or her service during that year

**Represents the grant date (11/1/2015) fair value determined in accordance with Financial Accounting Standards Board (FASB) Accounting Standards Certification Topic 718 of the stock grant under the Omnibus Incentive Plan to each Non-Employee Director who received this stock award (including any deferred amounts).

***Represents dividends credited to DSUs. In addition to the amounts reported, directors also are eligible to receive the same discount on merchandise purchased from the Company as is made available to employees generally.

**** Mr. Rosenstein resigned from the Board effective May 16, 2016

 Director Compensation. During the fiscal year 2015, Walgreens and Boots Alliance held twelve (12) board meetings. Each current director participated in 75% or more of the aggregate of (i) the total number of meetings of the Board held during the period for which such person has been a director, and (ii) the total number of meetings held by each committee of the Board on which such person served during the periods that such person served. The independent directors meet in executive sessions in conjunction with each regular quarterly Board meeting. The company expects all of its directors to attend the Annual Meeting of Stockholders.

 Director Tenure. In 2015, Mr. Foote, who has held his position as a member of the Board of Directors since 1997, held the longest tenure. Mr. Schaeffer and Mr. Lederer hold the shortest term as they joined in 2015. All but three of the other directors sit on other boards: Ms. Schlichting serves as a director for the Kresge Foundation, Mr. Schaeffer serves as a director of scPharmaceuticals, Mr. Pessina serves as a director for Galenice AG (a publically traded Swiss-Healthcare group) and a number of private companies including Spring Acquisitions Holdings Limited, Mr. Murphy serves as a director for Amea Holding AB & Mehilanien Oy, Acteon Group Ltd. and The Hut Group Limited and OEG Offshore Group, Mr. Graham serves as a director for a number of private companies, Mr. Foote serves as a director for Kohler Co., and Mr. Brailer serves as a director for several private companies in the healthcare sector. Additionally, Mr. Foote is a trustee of Williams College and Mr. Skinner is a trustee of the Ronald McDonald House Charities.

 CEO Compensation. Stefano Pessina, Walgreens and Boots Alliance, Inc.’s Executive Vice Chairman and Chief Executive Officer since 2015, earned total compensation of $7,133,155 in 2015. He earned a base salary of $35,850, stock awards of $7,000,006 and other compensation of $97,299. George R. Fairweather, Executive Vice President and Global Chief Financial Officer, earned total compensation of $3,047,951 in 2015 consisting of a base salary of $687,268, incentive compensation of $2,051,657 and other compensation of $309,026. Alexander Gourlay, Co-Chief Operating Officer, earned $4,495,066 in 2015. James Skinner, Executive Chairman, earned $5,480,427 in 2015. 

Monday
Oct302017

In re Dynavax Security Litigation: Consolidated Class Action Dismissed with Leave to Amend

In In re Dynavax Sec. Litig., No. 4:16-cv-06690-YGR, 2017 BL 320563 (N.D. Cal. Sept. 12, 2017), the United States District Court for the Northern District of California granted Dynavax Technologies Corporation, Eddie Gray, Michael S. Ostrach, and Robert Janssen’s (collectively, “Defendants”) motion to dismiss lead plaintiff Kwok Pang’s (“Plaintiff”) consolidated class action complaint with leave to amend. The court found Plaintiff’s complaint failed to establish that Defendants failed to disclose facts, which would have been sufficient to demonstrate materially false and misleading statements under Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder.

According to the complaint, in late 2013 or early 2014, Defendant Dynavax was engaged in a Phase III clinical trial (“the clinical trial”) for its HEPLISAV-B vaccine, in an effort to obtain FDA approval by providing a larger safety database specifically assessing the possibility of rare autoimmune side effects. On January 7, 2016, Defendants issued a press release announcing “top-line results” from the clinical trial that were consistent with expectations. According to Plaintiffs’ allegations, although Defendants discussed some Adverse Events of Special Interest (“AESIs”), Defendants failed to report “a numerical imbalance in a small number of cardiac events,” not seen in prior trials. Plaintiff filed a complaint alleging that Defendants made materially false and misleading statements by reporting certain positive aspects of the clinical trial but failing to report other AESIs. Specially, Plaintiff alleged the statements made in the January 7, 2016, press release were false. Plaintiff further alleged that Defendants’ failure to mention the occurrence of “cardiac AESIs” rendered the discussion of AESIs misleading.

Section 10(b) of the Exchange Act makes it unlawful to make any untrue statement of material fact or to omit a material fact necessary to make the statements made not misleading. Section 10(b) and Rule 10b-5 create a duty to include all facts necessary to render a statement accurate and not misleading. Absent a duty to disclose, silence is not misleading. Under the Private Securities Litigation Reform Act (“PSLRA”), a plaintiff has a heightened pleading standard; the complaint must specify each statement alleged to have been misleading, the reasons why the statement is misleading, and, if the allegation is made on information and belief, state with particularity the facts on which that belief is formed. The PSLRA also requires that, for each act or omission alleged, the complaint states with particularity the facts giving rise to a strong inference that the defendant acted with the required state of mind.

The court found that Plaintiffs failed to meet the heightened pleading standard and pled facts that, even if found true, would be insufficient to demonstrate materially false and misleading statements. The court determined the clinical trial was analyzing a specified list of AESIs, referred to as “other AESIs,” and the cardiac events were not among the defined AESIs of the study. Due to this specification, Defendants were not required to report the cardiac events with the “other AESIs” to ensure that the statements were not untrue or misleading. Following a hearing, Plaintiffs conceded the complaint misconstrued the term “AESIs”, but maintained that Defendants’ failure to disclose the cardiac events during the press releases was still misleading, even if not considered AESIs. The court, however, ruled that the complaint failed to plead these new allegations and was therefore inadequate under Section 10(b). The court encouraged the Plaintiffs to include in their amended complaint the specific facts of each statements they allege to be misleading, why they believe those statements to be misleading, and what that belief is based upon, as the heightened pleading burden requires.

For the above reasons, the United States District Court for the Northern District of California granted Defendant’s motion, dismissing Plaintiffs’ complaint with leave to amend.

The primary materials for this case may be found on the DU Corporate Governance website.

Tuesday
Oct242017

SEC v. Riel: Summary Judgement & Default Judgement Granted

In SEC v. Riel, No. 5:15-CV-1166 (MAD/DEP), 2017 BL 342140 (N.D.N.Y. Sept. 27, 2017), the United States District Court for the Northern District of New York granted in part and denied in part the Security Exchange Commission’s (“SEC”) motion for summary judgement against Charles Riel III (“Riel”), and granted the SEC’s motion for default judgement against REinvest, LLC (“REinvest”) (collectively “Defendants”), for Defendants’ violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”), Rule 10b-5 thereunder, and Section 17(a) of the Securities Act of 1933 (“Securities Act”), and Riel’s alleged violations of Sections 20(a) and 20(e) of the Exchange Act, and Section 15(b) of the Securities Act.

According to the allegations, Riel formed REinvest in 2008, and was the company’s sole member. Riel, through phone and email communications and two websites, claimed REinvest offered high yield returns through investment in commercial real estate. Between 2010 and 2014, five investors invested $285,000 with REinvest in exchange for promissory notes. According to the complaint, Riel used most of the funds for his own expenses, used a later investor’s funds to repay an earlier investor, and lost nearly $30,000 of an investor’s funds in undisclosed futures trading. Additionally, Riel provided several investors false account statements purporting to show high yields on their investments. In early 2014, after the SEC initiated its investigation into Riel and REinvest’s actions, Riel contacted his most recent investors to “clarify” that their arrangements with REinvest were private-loan arrangements rather than investments. In September 2015, the SEC filed its complaint against Riel and REinvest. At his deposition, Riel asserted his Fifth Amendment privilege in response to all substantive questions. REinvest did not appear in court to answer the claims against it.

Rule 10b-5 prohibits a person from making a material misrepresentation, with scienter, in connection with the purchase or sale of securities. Scienter can be established by showing false statements were made “with the intent to deceive, manipulate, or defraud.” Section 17(a) prohibits a person from using any means of interstate commerce to make material misrepresentations in the offer or sale of a security. Additionally, Section 15(b) prohibits aiding and abetting violations of the Securities Act, and Section 20(e) prohibits aiding and abetting violations of the Exchange Act. Finally, Section 20(a) holds control persons liable for the fraud of entities they control.

The court held Riel’s assertion of his Fifth Amendment privilege, and conclusory denials, failed to raise an issue of material fact and the SEC was entitled to summary judgement. The court found the SEC allegations established Riel made false and misleading statements to his investors through his websites and phone and email conversations, those statements were material because they were significant in the investors’ decisions to invest with REinvest, and they were made with the intent to defraud which demonstrated scienter. The court found Riel’s actions, as the owner and sole employee of REinvest, were imputed to REinvest, for the same violations. Based on these findings, the court held Defendants liable for violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act. Furthermore, the court determined Riel knowingly and substantially assisted in REinvest’s violations, and was liable for both aiding and abetting claims. Finally, the court did not find Riel liable under the control person liability claim, under Section 20(a) of the Exchange Act, because it determined Riel could not be held liable under both Section 10(b) and 20(a) for the same underlying conduct.

For the above reasons, the court granted in part and denied in part the SEC’s motion for summary judgement against Riel, and granted the SEC’s motion for default judgement against REinvest. The court permanently restrained Defendants from further violations of Section 10(b) of the Exchange Act and Section 17(a) of the Securities Act, ordered the Defendants to pay disgorgement of $197,500, plus prejudgment interest of $27,875.20, and ordered Riel to pay a civil penalty of $125,000.

The primary documents for this case may be found on the DU Corporate Governance website.

Thursday
Oct192017

No-Action Letter for Kewaunee Science Corporation. Allowed Exclusion of Proposal to Eliminate Directors’ Insurance Benefits

In Kewaunee Sci. Corp., 2017 BL 184610 (May 31, 2017), Kewaunee Science Corporation (“Kewaunee”) asked the staff of the Securities and Exchange Commission to permit the omission of a proposal submitted by The Article 6 Marital Trust under The First Amended and Restated Jerry Zucker Revocable Trust Dated April 2, 2007 (the “Marital Trust”) requesting the board of directors to include a proposal in the proxy statement that would eliminate health and life insurance participation by non-employee directors. The Commission issued the requested no-action letter and concluded it would not recommend enforcement action if Kewaunee excluded the proposal under Rule 14a-8(i)(10).

The Marital Trust submitted a proposal that stated:

Overview

Presently, non-employee members of the Board of Directors may elect to participate in the Company's health insurance program and are provided life insurance coverage of $20,000 under the Company's life insurance program, all at no cost to them. This form of compensation is costly for the Company, is not standard in the industry, and interferes with the fiduciary responsibility required by directors. In fact, such compensation could be considered a clear conflict of interest for directors.

Proposal

Non-employee members of the Board of Directors shall no longer be eligible to participate in the Company's health insurance and life insurance programs.

Kewaunee sought to exclude the proposal from its proxy materials under Rules 14a-8(i)(10) and 14a-8(i)(1).

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule provides thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(10) permits a company to exclude a shareholder proposal from its proxy material “if the company has already substantially implemented the proposal.” In applying this standard, the staff considers whether the company’s policies, practices, and procedures “compare favorably” with the guidelines of the proposal. The staff also considers whether the company has satisfied the “essential objective” of the proposal. For additional discussion of the exclusion, see Aren Sharifi, Rule 14a-8(I)(10): How Substantial is “Substantially” Implemented in The Context of Social Policy Proposals?, 93 DU Law Rev. Online 301 (2016).

Additionally, Rule 14a-8(i)(1) permits a company to exclude a shareholder proposal “[i]f the proposal is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s organization.” This allows the omission of proposals in instances where the proposal would violate a law of the state the company is incorporated under.

Here, Kewaunee argued the proposal should be excluded under subsection (i)(10) because the company previously adopted a policy that compared favorably with the proposal. Specifically, on March 10, 2017, Kewaunee’s Board of Directors adopted a policy discontinuing the option for nonemployee directors of the company to participate in the company’s health, or life, insurance programs after December 31, 2017. As such, Kewaunee asserted this policy satisfied the proposal’s essential objectives.

Kewaunee also argued the proposal should be excluded under subsection (i)(1) because § 141(a) of the General Corporation Law of the State of Delaware states that a company’s board of directors, not its stockholders, manage the business affairs of the company. Consequently, Kewaunee argued that discontinuing the option allowing nonemployee directors to participate in the company’s health or life insurance programs is not subject to action from its stockholders.

The Commission agreed with Kewaunee and concluded it would not recommend enforcement action if Kewaunee omitted the proposal from its proxy materials in reliance on Rule 14a-8(i)(10). The SEC noted Kewaunee’s policies, practices, and procedures compare favorably with the proposal’s guidelines and determined the company had substantially implemented the proposal. The SEC did not comment on Kewaunee’s argument to omit the proposal pursuant to subsection (i)(1).

The primary materials for this post can be found on the SEC website.

Wednesday
Oct182017

Acosta v. Wedbush: Motion to Dismiss Claim of Violations of ERISA Denied

In Acosta v. Wedbush Secs., C.D. Cal., No. 2:17-cv-02471-SVW-KS, (C.D. Cal Aug. 15, 2017), the United States District Court for the Central District of California denied Wedbush Securities, Inc., Edward Wedbush, Gary Wedbush, Wedbush Securities In. Employees’ PS Retirement Plan, and the Wedbush Securities Inc. Commissioned Employees’ PS Retirement plan (collectively “Defendants”) motion to dismiss a complaint filed by the Department of Labor (“Plaintiff”) alleging violations of the Employee Retirement Income Security Act of 1974 (“ERISA”), finding that the issues raised in the motion were fact-intensive and therefore more appropriately resolved at trial.

Plaintiff alleged Defendants violated their fiduciary duties with respect to two retirement plans it maintained for its employees. Plaintiff alleged the Defendants: (1) violated ERISA by engaging in self-dealing by receiving commissions for executing transactions on behalf of participants in their employees’ retirement plans; and (2) breached their fiduciary duties by allowing Defendants and their subsidiaries to receive compensation, including fees and brokerage commissions paid from the plans’ assets, in exchange for services rendered relating to investment in two hedge funds associated with Defendants.

To succeed on a Rule 12(b)(6) motion to dismiss, a plaintiff’s complaint must contain sufficient factual matter, that when accepted as true, states a claim to relief that is plausible on its face. Rule 12(b)(6) allows a party to assert a statute of limitations defense on a motion to dismiss. A motion based on the statute of limitations, however, can only be granted if the assertions in the complaint would not allow the plaintiff to prove that the statute was tolled.

The court found the question of whether disclosure forms filed by Defendants provided the Plaintiff with notice of potential ERISA violations relating to the retirement funds was sufficiently factual and could not be resolved in a motion to dismiss. Similarly, the court found a careful analysis of the context and nature of the transactions and how they relate to the disclosures was required to determine whether the disclosures in the necessary forms were sufficient to notify the Plaintiff of potential ERISA violations. The court distinguished this case from another case in which there was only a single breach by the repetition of the prohibited transactions here. The court determined that Plaintiff asserted sufficient facts in the complaint to demonstrate the suit may not be time barred.

For the above reasons, the court denied Defendants motion to dismiss.

Primary materials are available on the DU Corporate Governance Website

Thursday
Oct122017

The Director Compensation Project: Humana, Inc. (HUM)

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation. We are for the most part including companies from 2017’s Fortune 500 and using information found in their 2017 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. The NYSE imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3) (see Rule 303A.06) and requires consideration by the board of directors of certain specified factors in designating directors for the Compensation Committee. See NYSE Rule 303A.02(a)(ii).

Finally, as the Commission has noted with respect to director independence:

All compensation committee members must meet the general independence standards under NYSE’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.

Exchange Act Release No. 68639 (Jan. 11, 2013); see also Exchange Act Release No. 68641 (Jan. 11, 2013).

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from the Humana Inc. (NYSE: HUM) 2017 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name

Fees Earned or Paid in Cash

($)

Stock Awards

($)

Option Awards

($)

All Other Compensation

($)

Total

($)

Frank A. D’Amelio

130,000

154,999

0

11,406

296,405

W. Roy Dunbar

117,000

154,999

0

7,283

279,282

Kurt J. Hilzinger

302,000

154,999

0

27,072

484,072

David A. Jones, Jr.

129,000

154,999

0

25,788

315,072

William J. McDonald

123,000

154,999

0

28,765

306,764

William E. Mitchell

105,000

154,999

0

27,125

287,124

David B. Nash, M.D.

105,000

154,999

0

26,113

286,112

James J. O’Brien

105,000

154,999

0

27,397

287,396

Marissa T. Peterson

105,000

154,999

0

22,476

282,475

Bruce D. Broussard served as President and Chief Executive Officer and member of the Board of Directors. As an employee director, he did not earn compensation in connection with his service on the Board.

Director Compensation. During fiscal year 2016, Humana Inc. held 19 board of directors’ meetings. Each director attended at least 75% of the total number of board and committee meetings on which he or she served. All directors attended the 2016 Annual Meeting of Shareholders. Directors are reimbursed for expenses incurred from board service, including cost of attending board meetings.

Director Tenure. In 2016, Mr. Jones Jr. held the longest tenure as a member of the Board of Directors since 1993,. Mr. Broussard holds the shortest tenure, having joined in 2013. All but four directors sit on other boards: Mr. Hilzinger serves as a director for Oncobiologics, Inc. and National Seating and Mobility, Inc., Mr. Broussard serves as a member of the Board of Directors for America’s Health Insurance Plans, Mr. D’Amelio serves on the Board of Directors for Zoetis, Inc., Mr. Jones Jr. serves as a director for Connecture, Inc. and MyHealthDirect, Inc., Mr. Mitchell serves as a director for Veritiv, Inc., Mr. Nash serves on the board of Vestagen Specialty Textiles, and Mr. O’Brien serves as a director for Albermarle Corporation, Wesco International, Inc., and Eastman Chemical Company.

CEO Compensation. Mr. Broussard, Humana’s President and Chief Executive Officer earned a total compensation of $19,722,400 in 2016. He earned a base salary of $1,235,446, stock awards of $11,888,551, option awards of $4,370,743, non-equity incentive plan compensation of $1,973,624, and other compensation of $254,036. James E. Murray, Humana’s Executive Vice President and Chief Operating Officer earned total compensation of $6,722,630. He earned a base salary of $835,470, stock awards of $3,648,846, option awards $1,198,818, non-equity incentive plan compensation of $889,775, and other compensation of $149,721.

 

Wednesday
Oct112017

Second Circuit Affirms Dismissal of Shareholder’s Claims against Corporate Insider Seeking Disgorgement of "Short-Swing" Profits 

In Olagues v. Icahn, 866 F.3d 70 (2d Cir. 2017), the United States Court of Appeals for the Second Circuit affirmed the lower court’s holding that shareholder John Olagues (“Plaintiff”) failed to state a claim upon which relief could be granted in actions against corporate insider Carl C. Icahn (“Defendant”) seeking disgorgement of "short-swing" profits.  The court determined that Plaintiff had failed to plausibly allege the Defendant obtained additional profits that required disgorgement.

Plaintiff, a shareholder in three companies, Herbalife, Ltd., Hologic Inc., and Nuance Communications Inc. (the “Companies”), alleged that Defendant wrote "European Style" put options allowing the counterparty to exercise the option on a specific date. The Plaintiff further alleged the Defendant bought "American Style" call options allowing him to exercise the option at any time until the expiration date. The complaint asserted that Defendant set the expiration date in both transactions for the same day and included in the contract that the exercise of a call option would terminate the corresponding put option.

Defendant disgorged the amount of the premiums to the Companies when the put options were cancelled unexercised within six months of their sale.  See Rule 16b-6. Plaintiff, however, argued Defendant should also have disgorged the value of the discounts received on the premiums paid for the call options in exchange for charging lower premiums on the put options. Plaintiff further argued the premiums associated with the open market option contract show Defendant charged too low of an amount for the put options and paid too low of a price for the call options.

Under Rule 16(b) of the Securities and Exchange Act of 1934, liability attaches if the plaintiff proves (1) purchase of a security (2) sale of a security (3) carried out by an insider (4) in a six-month period. A strict liability provision, the seller need not have engaged in the transactions on the basis of inside information.  Rule 16b-6(d) specifies that profits must be recovered whenever an option is cancelled or has expired within six months of writing.  Profits include “the entire premium actually ‘received for writing the option[s’” at issue, not just the amount reported to the SEC.” (citation omitted). 

The court held Plaintiff did not plausibly allege Defendant failed to disgorge all premiums received. First, the court reasoned the open market option contracts did not provide a meaningful comparison to Defendant’s transactions. Plaintiff did not allege the structure of these transactions was fraudulent. Additionally, the court stated the complaint did not allege facts to support the inference that there were additional short-term swing profits. The fact that the Defendant exercised a fixed-price call option did not support this inference and was “a non-event under Rule 16(b).” Finally, the court held the events described in the complaint do not fall within the policy reasons for stopping insiders from receiving and keeping premiums from options. The Court qualified its holding, noting the complaint did not state a claim for relief because it solely relied on incomparable transactions that did not have meaningful similarities to the transactions at issue in the case.

For the above reasons, the court affirmed the lower court’s dismissal of the complaint, holding that Plaintiff failed to state a claim.

The primary materials for this case may be found on the DU Corporate Governance Page.

Tuesday
Oct102017

The Director Compensation Project: Wells Fargo & Company (WFC)

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation. We are for the most part including companies from 2017’s Fortune 500 and using information found in their 2017 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. The NYSE imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3) (see Rule 303A.06) and requires consideration by the board of directors of certain specified factors in designating directors for the Compensation Committee. See NYSE Rule 303A.02(a)(ii).

Finally, as the Commission has noted with respect to director independence:

All compensation committee members must meet the general independence standards under NYSE’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.

Exchange Act Release No. 68639 (Jan. 11, 2013); see also Exchange Act Release No. 68641 (Jan. 11, 2013).

 

The members of the Board are compensated for their services to the company. The total amount of compensation for each director can be found in the director compensation table (p. 37) of the Wells Fargo & Company’s (NYSE: WFC) 2017 proxy statement. According to the proxy statement, the directors were paid the following amounts:

Name

Fees Earned or Paid in Cash ($)

Stock Awards

($)

Option Awards

($)

All Other Compensation ($)

Total

($)

John D. Baker II

207,000

180,002

-

5,000

392,002

Elaine L. Chao*

127,000

180,002

-

5,000

312,002

John S. Chen

123,000

180,002

-

-

303,002

Lloyd H. Dean**

196,000

180,002

-

-

376,002

Elizabeth A. Duke

201,131

180,002

-

5,000

386,133

Susan E. Engel

159,000

180,002

-

-

339,002

Enrique Hernandez, Jr.**

236,000

180,002

-

5,000

421,002

Donald M. James

141,000

180,002

-

5,000

326,002

Cynthia H. Milligan**

192,000

180,002

-

5,000

377,002

Federico F. Peña**

200,673

180,002

-

5,000

385,675

James H. Quigley**

249,000

180,002

-

-

429,002

Judith M. Runstad**

76,327

-

-

-

76,327

Stephen W. Sanger**

300,628

180,002

-

5,000

485,630

Timothy J. Sloan***

-

-

-

-

-

John G. Stumpf****

-

-

-

-

-

Susan G. Swenson

177,000

180,002

-

-

357,002

Suzanne M. Vautrinot

153,000

180,002

-

-

333,002

*Resigned effective January 31, 2017

**Received an annual cash retainer of $10,000, payable quarterly in arrears, and a fee of $2,000 for any separate meeting Bank Board not held concurrently with or immediately prior to or following a Company Board or committee meeting.

***Current Employee Director

****Former Employee Director, Retired October 12, 2016

Effective March 1, 2016, Mr. Peña succeeded Ms. Runstad, who retired from the Board at the 2016 annual meeting (March 1st), as a director of the Bank.

 

Director Compensation: During the 2016 fiscal year, Wells Fargo held fourteen regular and special Board meetings and sixty-one committee meetings. The directors averaged 97.5% attendance at Board and committee meetings and each current director who served during 2016 attended at least 75% of the total Board and committee meetings during period they served. Directors are reimbursed for expenses incurred from attending board and committee meetings.

 

Director Tenure: In 2016, Ms. Milligan, who has been on the Board since 1992, held the longest tenure as a member of the Board of Directors. Mr. Sloan holds the shortest tenure, joining the Board in 2016. Thirteen Board members serves as directors for other public companies; Mr. Baker serves as a director for FRP Holdings, Inc., Ms. Chao serves as a director for News Corp. and Vulcan Materials Company, Mr. Chen serves as a director for BlackBerry Limited and The Walt Disney Company, Mr. Dean serves as a director for McDonald’s Corp., Mr. Hernandez serves as a director for Chevron Corp., McDonald’s Corp., and Nordstrom, Inc., Mr. James serves as a director for The Southern Company, Ms. Milligan serves as a director for the Kellogg Company, Mr. Peña serves as a director for Sonic Corp., Mr. Quigley serves as a director for Hess Corp. and Merrimack Pharmaceuticals, Inc., Mr. Sanger serves as a director for Pfizer Inc., Mr. Sargent serves as a director for Five Below, Inc. and The Kroger Co., Ms. Swenson serves as a director for Harmonic Inc. and Inseego Corp., and Ms. Vautrinot serves as a director for Ecolab Inc. and Symantec Corporation.

 

Executive Compensation: John G. Stumpf, Wells Fargo’s Former Chairman & CEO ending in 2016, earned total compensation of $21,341,898. He earned a base salary of $2,070,498, stock awards of $16,500,032, deferred earnings of $2,687,722, and other compensation of $83,646. Timothy J. Sloan, Wells Fargo’s President and CEO beginning in 2016, earned total compensation of $13,014,714 in 2016. He earned a base salary of $2,329,502, stock awards of $10,500,038, deferred earnings of $166,624, and other compensation of $18,550.

Monday
Oct092017

In re Medtronic Inc.: Distinguishing Direct versus Derivative Claims under Minnesota Law

In In re Medtronic Inc., Shareholder Litigation., 2016 WL 6066253 (Minn. 2017), the Supreme Court of Minnesota affirmed in part, and reversed in part Kenneth Steiner’s (“Respondent”) claims asserted in a class-action challenge to Medtronic, Inc.’s (“Medtronic”) acquisition of Covidien plc (“Covidien”). The court held Respondent’s claim of injury due to an excise tax was derivative and thus subject to Minn. R. Civ. P. 23.09, while the claims asserting injury due to dilution of shareholder’s interest in Medtronic and capital-gains tax liability were direct and thus not subject to the requirements of Minn. R. Civ. P. 23.09.

The complaint alleged, in June 2014, Medtronic, a Minnesota corporation, announced it would acquire Covidien, a public Irish company, and the resulting corporation would be organized under a new holding company, Medtronic plc (“New Medtronic”), incorporated in Ireland. The complaint alleged transaction would be structured as an inversion, enabling Medtronic to avoid future U.S. federal income tax. Medtronic shareholders incurred capital gains taxes on shares in taxable accounts. Additionally, Medtronic reimbursed excise taxes for officers and directors. In response to the acquisition announcement, Respondent filed a class action suit, alleging Medtronic’s use of an inversion structure resulted in (1) disparate treatment of Medtronic versus Covidien shareholders; (2) disparate treatment with respect to the tax liability incurred by Medtronic shareholders compared to Medtronic’s officers and directors; (3) violations of the Minnesota Business Corporation Act; and (4) the possibility of the dilution of the shareholders’ interest in New Medtronic.

Under Minnesota law, “identifying who suffered the injury and therefore who is entitled to the recovery for that injury, provides the answer to the direct-versus-derivative question.” Direct claims allege injury to the shareholder, while derivative claims allege injury to the corporation.

The court concluded that the excise tax reimbursement was derivative because the injury was primarily a waste of corporate resources and, thus, suffered by the corporation, not the shareholders. In contrast, Respondent’s claim that they incurred capital gains taxes, while the officers and directors did not, was a direct claim because the shareholders incurred the injury. Similarly, the court found Respondent’s claim of dilution was direct. The court noted that the complaint did not allege dilution based on the decreased value of the corporation, but rather that the use of an inversion structure protected the corporations’ expected tax benefit by taking a portion of the shareholder’s interest and therefore decreasing the shareholders’ interest in New Medtronic. 

As such, the Supreme Court of Minnesota affirmed the court of appeals decision in part and reversed in part, and remanded the case to the district court for further proceedings.

The primary materials for this case may be found on the DU Corporate Governance website.

Saturday
Oct072017

No-Action Letter for Cardinal Health, Inc. Exclusion of a Report Describing Controlled Distribution Systems

In Cardinal Health, Inc., 2017 BL 273153 (Aug. 4, 2017), Cardinal Health, Inc. (“Cardinal”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Ronald O. Mueller (“Shareholder”), requesting a report regarding Cardinal’s controlled distribution system “to prevent the diversion of restricted medicines to prisons for use in executions, and its process for monitoring and auditing these systems”. The SEC issued the requested no action letter, finding some basis for exclusion under Rule 14a-8(i)(7).

Shareholder submitted a proposal providing that:

RESOLVED, Shareholders request that Cardinal: Issue a report at reasonable expense, and excluding confidential information, describing the controlled distribution systems it implements on behalf of manufacturers to prevent the diversion of restricted medicines to prisons for use in executions; and its process for monitoring and auditing these systems to check for and safeguard against failure.

Cardinal sought exclusion of the proposal from its proxy materials under subsection (i)(7) of Rule 14a-8. 

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if it deals with a matter relating to the company’s “ordinary business operations.” The SEC has previously permitted exclusion of a shareholder proposal under Rule 14a-8(i)(7) on the grounds that it “relates to the sale and distribution of particular products” to customers. The SEC has consistently recognized proposals relating to the sale and distribution of particular products to be related to a company’s ordinary business operations. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016); Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).

Cardinal argued Shareholder’s proposal related to ordinary business operations because the broad scope of the proposal implicates Cardinal’s relationship with its suppliers. Cardinal further argued the managing these relationships is such a fundamental task to running the company on a daily basis that it is impractical to be subject to direct shareholder oversight. Lastly, Cardinal argued the proposal is excludable because its relationships with suppliers is a core function of its management and therefore impacts ordinary business operations. 

The SEC determined the proposal may be excluded under Rule 14a-8(i)(7) because it related to Cardinal’s ordinary business operations. Specifically, the proposal addressed the sale and distribution of products to its customers.

The primary materials for this post may be found on the SEC website.

Saturday
Oct072017

No-Action Letter for Caterpillar Inc. Denied Exclusion of Permanent Independent Chairman Proposal

In Caterpillar Inc., 2017 BL 103240 (Mar. 28, 2017), Caterpillar Inc. (“Caterpillar”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by John Chevedden (“Shareholder”) requesting the board to adopt a permanent policy of requiring the chair of the board of director to be an independent member of the board whenever possible. The SEC declined to issue the no action letter allowing for exclusion of the proposal under Rules 14a-8(i)(1), 14a-8(i)(2), 14a-8(i)(3), or 14a-8(i)(6).  

Shareholder submitted a proposal providing that:

 RESOLVED: Shareholders request our Board of Directors adopt as permanent policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it does not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all necessary steps be taken to accomplish the above.

Caterpillar sought the exclusion of the proposal from its proxy materials under subsections (i)(1), (i)(2), (i)(3), and (i)(6) of Rule 14a-8.

 Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).

 A shareholder proposal may be omitted under Rule 14a-8(i)(1) if the proposal is not a proper subject for action by shareholders under the laws in the jurisdiction of the company's organization. Rule 14a-8(i)(2) permits the exclusion of proposals that would cause a company to violate state law. Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its proxy materials if the proposal or supporting statement is contrary to the SEC’s proxy rules, including 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The SEC staff has taken the position that a shareholder proposal is excludable under Rule 14a-8(i)(3) if it is so vague and indefinite that “neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.” Furthermore, Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its proxy materials if the company lacks the power or authority to implement it. For additional discussion on Rule 14a-8(i)(2), see Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law, 93 DU Online L. Rev. 213 (2016).

 Caterpillar argued Shareholder’s proposal should be excluded under Rule 14a-8(i)(1) and 14a-8(i)(2) because it would result in violations of Delaware law. Implementation of any permanent policy inherently prevents a future board of directors from altering the policy, even it if is later determined the proposal is no longer in the best interests of the company or its shareholders.

 Caterpillar further argued the proposal should be excluded under Rule 14a-8(i)(6) because Caterpillar does not have the authority to implement the proposal, and doing so would violate Delaware law. Shareholder disagreed, arguing that Caterpillar’s existing company guidelines allow “permanent” changes, including the appointment of a “permanent” chairman.

 

Finally, Caterpillar argued the proposal should be excluded under Rule 14a-8(i)(3) because between 2015 and 2016, 38 other companies included proposals with an identical title as Shareholder’s proposal, although only the Shareholder’s proposal requested a unique “permanent” policy. According to Caterpillar, the similarity in title of the Shareholder’s proposal but deviation in its content would lead to confusion if shareholders were permitted to vote on it.

 Ultimately, the SEC disagreed with Caterpillar, and concluded Caterpillar may not exclude the proposal in reliance on Rules 14a-8(i)(1), 14a-8(i)(2), 14a-8(i)(3), or 14a-8(i)(6). The staff commented the proposal was not so inherently vague or indefinite that neither the shareholders or Caterpillar would be unable to determine with any reasonable certainty exactly what actions or measures the proposal required.

The primary materials for the post may be found on the SEC Website.

 

Thursday
Oct052017

No-Action Letter for Dorian LPG Ltd. Permitted Exclusion of Duplicative Rights Plan Proposal

In Dorian LPG Ltd., 2017 BL 229502 (June 29, 2017), Dorian LPG Ltd. (“Dorian”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by SEACOR Holdings Inc. ("Shareholder"), requesting Dorian amend its bylaws to require shareholder approval prior to the adoption of any rights plan and to require the redemption of rights issued under existing rights plan. The SEC issued the requested no action letter allowing the exclusion of the proposal under Rule 14a-8(i)(11).

Shareholder submitted a proposal providing that:

RESOLVED, that, pursuant to Section 88 of the Marshall Islands Business Corporations Act and Article N of the Articles of Incorporation (the “Articles”) of Dorian LPG Ltd. (the “Company”), the Articles are hereby amended by adding the following as Article O:

O. Stockholder Rights Plan.

(a) The Corporation will not adopt any “Rights Plan” (as defined below) without prior stockholder approval. For purposes of this Article, the term “Rights Plan” refers generally to any plan providing for the distribution of preferred stock, rights, warrants, options or debt instruments to the stockholders of the Corporation, designed to assist the Board of Directors in responding in a negative manner to unsolicited takeover proposals and significant stock accumulations by conferring certain rights on shareholders upon the occurrence of a “triggering event,” such as a tender offer or third party acquisition of a specified percentage of stock.
(b) The Corporation shall redeem the rights issued under any Rights Plan in effect as of the date these Articles were amended to add this Article O.

Dorian sought exclusion of the proposal from its proxy materials under subsections (i)(1), (i)(2), and (i)(11) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC and The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(11) permits exclusion of a duplicative proposal. The purpose of this subsection is to eliminate a shareholder’s need to consider “substantially identical proposals.” Duplicative proposals need not be identical, and may vary in terms, scope, and phrasing. For a more detailed discussion of this exclusion, see Hillary Sullivan, The Exclusion of Duplicative Proposals under Rule 14a-8(i)(11), 93 Denv. L. Rev. Online 315 (2016).

Additionally, Rule 14a-8(i)(1) permits the exclusion of a proposal that is not a proper subject for action by shareholders under the laws of the jurisdiction of the company’s governing documents. Furthermore, Rule 14a-8(i)(2) permits the exclusion of a proposal that, if implemented, would cause the company to violate a law to which it is subject. For additional discussion on Rule 14a-8(i)(2), see Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals the Violate the Law, 93 Denv. L. Rev. 213 (2016).

Dorian asserted the proposal should be excluded under Rule 14a-8(i)(11) because it “substantially duplicate[d]” an earlier proposal. Dorian argued Shareholder’s proposal was similar because both proposals called for Dorian’s board to redeem the existing shareholder rights plan and provide shareholders with an opportunity to vote on any subsequent rights plan. Dorian argued, while the Shareholder proposal was binding on the board and the earlier proposal was not, proposals need not be identical for the Shareholder proposal to qualify for exemption under the rule.

Alternatively, Dorian argued for exclusion under Rule 14a-8(i)(1) because the proposal substantively limited the board’s authority in responding to a takeover proposal, exceeding the power of shareholders according to Dorian’s governing documents. Dorian further argued for exclusion under Rule 14a-8(i)(2) because the proposal required the board to act without regard to its fiduciary duties, in violation of Marshall Islands law.

The SEC agreed with Dorian and found the Shareholder proposal “substantially duplicate[d]” another proposal. Because the other proposal was submitted prior to the Shareholder’s, and it would be included in Dorian’s 2017 proxy materials, the SEC concluded it would not recommend enforcement action if Dorian excluded the Shareholder’s proposal from its proxy materials in reliance of Rule 14a-8(i)(11).

The primary materials for this post can be found on the SEC website.

Thursday
Oct052017

SEC v. Hovannisian: Executive Family Members Settle Insider Trading Claims

SEC v. Hovannisian: Executive Family Members Settle Insider Trading Claims

In SEC v. Hovannisian, No. 1:17-at-00617, 2017 (E.D. Cal. Aug. 10, 2017), defendants Damon Hovannisian, Vernon Hovannisian, Vincent Hovannisian, and Eddie Arakelian (collectively “Defendants”) consented to the entry of a permanent injunction against them, prohibiting future violations of the Securities Exchange Act Section 10(b) (“§ 10b”) and disgorgement of profits including prejudgment interest totaling $470,000 to settle securities fraud claims brought by the United States Securities and Exchange Commission (“SEC”) in United States District Court for the Eastern District of California.

The complaint alleged on August 20, 2014, two semi-conductor companies, International Rectifier and Infineon, publically announced that Infineon would acquire International Rectifier.  On the day of the announcement, the trading price of International Rectifier’s shares closed up 47.21% from the previous day’s closing price. According to the complaint, Damon Hovannisian misappropriated material non-public information from his spouse (“Spouse”) without her knowledge.  He allegedly obtained access to the information about the pending acquisition when his spouse worked on due diligence for the acquisition while on vacation with him in late July 2014.  Spouse was the director of operations for International Rectifier in 2014 and worked on the acquisition deal. Damon Havonnisian then allegedly provided Defendants with material non-public information about the acquisition with the intention that they use the information to trade on. Defendants allegedly purchased stock in International Rectifier prior to the August 20, 2014, announcement, and promptly sold the stock, collectively receiving $155,000 in profits from the trades.

Rule 10b-5 prohibits the use of any device, scheme, or artifice to defraud and or engage in acts, practices, or courses of business which operated or would operate as a fraud or deceit upon any person in connection with the purchase or sale of any security. Fraud is considered to be in connection with a securities transaction if it was material to the decision to buy or sell a security.

Through their allegations, the SEC believed that Damon Hovannisian misappropriated confidential information from his spouse for securities trading purposes, and disclosed this information to Vernon Hovannisian, Vincent Hovannisian, and Eddie Arakelian with the intention to trade on the information.  Due to this conduct and the evidence against Defendants the SEC believed it necessary to institute this action against Defendants to enjoin their violations of §10b and rule 10b-5 thereunder. 

Defendants agreed to settle the claims brought by the SEC. In doing so, Defendants agreed to a permanent injunction prohibiting future violations of Section 10b of the Securities Exchange Act of 1934, to individually disgorge illegal trading profits from the fraudulent transaction, plus prejudgment interest, and pay a civil penalty equal to the amount of disgorgement.

The primary materials for this case may be found on the DU Corporate Governance website.

Wednesday
Oct042017

U.S. v. Klein: Ex-Law Firm Partner Convicted of Insider Trading

In United States v. Klein, No. 2:16-cr-00442 (E.D.N.Y. Aug 04, 2016), a grand jury indicted Robert Schulman (“Defendant”), a partner at a law firm (“Law Firm”) for conspiracy to commit securities fraud and securities fraud.  According to published reports, Mr. Shulman was eventually of convicted of “securities fraud and conspiracy” in March 2017.  See NY jury convicts ex-law firm partner of insider trading on Pfizer-King deal, Reuters, March 15, 2017. 

According to the allegations in the indictment, Defendant learned from an associate at his Law Firm of a possible merger between King Pharmaceuticals ("King") and Pfizer Inc. ("Pfizer").   According to the indictment, Defendant met with Klein, President of Klein Financial Services and Defendant’s investment advisor, to discuss his investment portfolio. During this meeting, Defendant allegedly revealed material non-public information about the pending merger (“Information”) to Klein. A few days later, Klein allegedly purchased shares of King stock for himself and for clients of Klein Financial, including shares for Schulman. Klein was alleged to have revealed the Information to a co-conspirator who, on Klein’s recommendation, bought additional shares and call options.  

According to the indictment, after the public acquisition announcement, Klein sold all of his and his clients shares in King, earning $319,000 in profits for his clients, $15,500 for Defendant, and a personal profit of $8,800. Under Klein’s direction, the co-conspirator exercised all unexpired call options in King and sold all shares in King, making a profit of more than $109,000. According to the allegations, the co-conspirator paid $28,000 of those profits to Klein through checks made to family members. 

The indictment included a count for securities fraud and conspiracy to commit securities fraud.  Violations of Rule 10b-5 required a showing that the indicted party “knowingly and willfully” used and employed a manipulative and deceptive device or contrivance by (1) employing one or more devices, schemes or artifices to defraud, (2) making untrue statements of material fact and omitting to state material facts necessary in order to make the statements made not misleading, and (3) engaging in acts, practices and courses of business which would and did operate as a fraud and deceit upon investors in the relevant company. 

The indictment alleged that Defendant engaged in securities fraud.  As the indictment stated: 

In advance of the public announcement of the merger between King and Pfizer, the defendant obtained MNPI [material non-public information] regarding a transaction involving King and, based in whole or in part on that information, caused clients of Klein Financial and others to execute securities transactions in King, directly and indirectly, by use of means and instrumentalities of interstate commerce and mails. 

The indictment also placed Defendant on notice of an intent to seek criminal forfeiture in the event of a conviction. 

The indictment for this case may be found on the DU Corporate Governance Page.

Wednesday
Oct042017

No-Action Letter for Wal-Mart Store, Inc. Permitted the Exclusion of Corporate Governance Reform Proposal

In Wal-Mart Stores, Inc., 2017 BL 87193 (March 16, 2017), Wal-Mart Stores, Inc. (“Wal-Mart”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by shareholder Jing Zhao (“Shareholder”) requesting Wal-Mart revise its corporate governance guidelines to allow the board of directors to discontinue and remove disqualified members of the board of directors in accordance with applicable laws. The SEC declined to issue the requested no action letter under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED, Shareholders recommend that Wal-Mart Stores, Inc. reform the Corporate Governance Guidelines in respect of the Director Qualifications to add guidelines to discontinue and remove disqualified members of Board of Directors, in accordance with applicable laws. 

 Wal-mart argued the proposal may be excluded from the company’s proxy materials under subsections (i)(2), (i)(6), (i)(3), (i)(10), and (i)(8) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8 (i)(10) provides that the company can exclude proposals that the company has already “substantially implemented”.  Substantial implementation occurs where the company’s existing policies achieved the proposal’s underlying concerns and essential objectives. For a more comprehensive discussion of the Rule, see Aren Sharifi Rule 14A-8(I)(10): How Substantial is “Substantially” Implemented in the Context of Social Policy Proposals?, 93 Denv. L. Rev. Online 301 (2016).

Wal-Mart argued Shareholder’s proposal should be excluded under Rule 14a-8(i)(10) because the essential purpose of the proposal had been substantially implemented. Specifically, Wal-Mart contended that the essential objective of the proposal was to give shareholders the ability to remove unqualified directors. Wal-Mart asserted that shareholders had the ability to remove directors through the proxy process in connection with annual meetings.

Shareholder, however, argued that Wal-Mart’s proxy materials did not disclose negative aspects about certain directors that would make them unqualified. Additionally, Shareholder argued that shareholders did not have a meaningful way to remove unqualified directors because the director elections were uncontested.

The SEC staff agreed with Wal-Mart and determined the company had substantially implemented the proposal pursuant to Rule 14a-8(i)(10).  As such, the SEC concluded it would not recommend enforcement action if Wal-Mart omitted the proposal from its proxy materials. The staff justified this determination under exclusively under 14a-8(i)(10), and did not consider Rule 14a-8 subsections (i)(2), (i)(3), (i)(6), and (i)(8).

The primary materials for this post may be found on the SEC website.

 

 

 

Tuesday
Oct032017

No-Action Letter for MFRI Inc. Allowed Exclusion of Share Repurchase Program Proposal

In MFRI Inc., 2017 BL 88215 (Mar. 20, 2017), MFRI Inc. (“MFRI”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Carl W. Dinger III (“Shareholder”) requesting MFRI to authorize and implement a stock repurchase program that would repurchase 1,000,000 shares of company stock. The SEC agreed to issue a no action letter allowing for exclusion of the proposal under Rule 14a-8(i)(7). 

Shareholder submitted a proposal providing that:

RESOLVED, the shareowners of MFRI recommend that the Board of Directors authorize and implement a three-year share repurchase program that would repurchase 1,000,000 shares of MFRI stock.

MFRI sought the exclusion of the proposal from its proxy materials under subsection (i)(7) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements.  In addition, the Rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Rule 14a-8(i)(7) permits a company to omit a proposal that relates to the company’s “ordinary business” operations, including the company’s litigation strategy and legal compliance. “Ordinary business” refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. As such, “ordinary business” issues cannot practically be subject to direct shareholder oversight. For additional discussion of the exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Online L. Rev. 183 (2016), and Megan Livingston, The "Unordinary Business" Exclusion and Changes to Board Structure, 93 DU Online. L. Rev. 263 (2016).

MFRI argued that Shareholder’s proposal involved a company’s “ordinary business.”  Specifically, implementation of a stock repurchase plan was part of MFRI’s capital raising, capital management, and overall financing activities.  MFRI additionally argued that the proposal sought to micro-manage the company by having shareholders participate in a decision about which they are not in a position to make an informed assessment.

In response, the Shareholder argued that the proposal was not seeking to manage ordinary business operations because the repurchase program would be implemented by the senior management of MFRI. Shareholder further argued that, according to precedent, repurchase actions were fundamental to shareholders and did not fall under the ordinary business exclusion.  Shareholder also asserted that repurchases involved “a significant social issue that has garnered substantial attention through national media outlets”. 

Ultimately, the SEC agreed with MFRI, concluding the proposal could be excluded under Rule 14a-8(i)(7). The staff noted that the proposal relates to the implementation and particular terms of a share repurchase program, and accordingly, would not recommend enforcement action if MFRI omitted the proposal from its proxy materials.

The primary materials for the post may be found on the SEC Website.

Sunday
Sep102017

The Director Compensation Project: HCA Holdings, Inc. (“HCA”) 

This post is part of an ongoing series that examines the way stock exchange independence rules relate to director compensation. We are for the most part including companies from 2016’s Fortune 500 and using information found in their 2017 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. The NYSE imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 (C.F.R. §240.10A-3) (see Rule 303A.06) and requires consideration by the board of directors of certain specified factors in designating directors for the Compensation Committee.  See NYSE Rule 303A.02(a)(ii).

Finally, as the Commission has noted with respect to director independence:

All compensation committee members must meet the general independence standards under NYSE’s rules in addition to the two new criteria being adopted herein. The Commission therefore expects that boards, in fulfilling their obligations, will apply this standard to each such director’s individual responsibilities as a board member, including specific committee memberships such as the compensation committee. Although personal and business relationships, related party transactions, and other matters suggested by commenters are not specified either as bright-line disqualifications or explicit factors that must be considered in evaluating a director’s independence, the Commission believes that compliance with NYSE’s rules and the provision noted above would demand consideration of such factors with respect to compensation committee members, as well as to all Independent Directors on the board.

Exchange Act Release No. 68639 (Jan. 11, 2013); see also Exchange Act Release No. 68641 (Jan. 11, 2013).

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from HCA Holdings (NYSE: HCA) 2017 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

 

Name

Fees Earned or Paid in

Cash

($)

Stock

Awards

($)

Option

Awards

($)

All Other

Compensation

($)

Total ($)

R. Milton Johnson

1,391,667

4,176,192

4,305,242

11,458,473

21,331,574

Robert J. Dennis

110,000

174,922

0

0

284,922

Nancy-Ann DeParle

110,000

174,922

0

0

284,922

Thomas F. Frist III*

0

0

0

0

0

William R. Frist*

0

0

0

0

0

Charles O. Holliday, Jr.

78,381

174,922

0

0

253,303

Ann H. Lamont

127,500

174,922

0

0

302,422

Jay O. Light

166,151

174,922

0

0

341,073

Geoffrey G. Meyers

140,000

174,922

0

0

314,922

Wayne J. Riley, M.D.

142,500

174,922

0

0

317,422

John W. Rowe, M.D.

110,000

174,922

0

0

284,922

* The Frists were elected to the board in 2016 because of their relationship with the investment funds from Frist Entities who owns approximately 18.8% HCA’s common stock.

Director Compensation.  During fiscal year 2016, HCA held seven board of directors meetings and twenty-seven committee meetings. Each current director attended at least 75% of the total number of board and committee meetings on which he or she served. Directors are also encouraged to attend the annual stockholder meetings.

Director Tenure.  In 2016, Mr. Frist III, who has held his position as a member of the Board of Directors since 2006, has the longest tenure. He is also a principal of Frist Capital LLC, and a brother to William Frist. Mr. Holliday holds the shortest tenure as he joined the Board in 2016. He also has worked for DuPont for 37 years, and served as Dupont’s Chief Executive Officer from 1998 to 2008. Mr. Dennis has served as President and Chief Executive Officer of Genesco, Inc. since 2008, Ms. DeParle is a founding partner of Consonance Capital Partners. William Frist is a principal of Frist Capital LLC. Ms. Lamont has been a Managing Partner at Oak Investment Partners since 2006. Mr. Light has been the Dean Emeritus of Harvard Business School since 2006. Mr. Meyers is the Chairman of the Board for PharMerica Corporation, and a director of two other companies. Mr. Riley is President Emeritus of the American College of Physicians. Mr. Rowe has been a professor at the Columbia University Mailman School of Public Health since 2006.

CEO Compensation.  R. Milton Johnson, HCA’s Chairman and Chief Executive Officer since 2014, and a director of HCA since 2009, earned total compensation of $21,331,574 in 2016. He earned a base salary of $1,391,667, stock awards of $4,176,192, option stock awards of $4,305,242, incentive compensation of $1,943,442, deferred earnings of $9,497,031, and other compensation totaling $18,000. William B. Rutherford, Executive Vice President and Chief Financial Officer, earned total compensation of $4,092,366 in 2016. He earned a base salary of $793,750, stock awards of $1,197,035, option stock awards of $1,223,623, incentive compensation of $718,584, and other compensation totaling $169,374.