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Tuesday
Jul222014

Tagging, Extensions, and Ensuring Comparability: The Role of the SEC (Part 2)

DERA (Division of Economic and Risk Analysis) conducted a study of XBRL files to assess the quality. As part of the examination, DERA analyzed the use of "custom tags." The news was at best mixed or, as DERA put it, "[o]ur assessment suggests that not all of the Commission’s expectations have been met, particularly as they relate to smaller filers and their custom tag rates."

The analysis showed "a steady decline in custom tag use by large accelerated filers during the phase-in period and thereafter." Indeed, with respect to custom tagging by larger filers, DERA concluded that even those "with high custom tag rates . . . generally revealed an appropriate use of custom tags—there was no systematic evidence of obvious selection error or unjustified use of custom tags."

The conclusions with respect to smaller filers, however, was quite different. As the Study noted: "we observed systematic evidence of smaller filers in our sample creating a custom tag instead of selecting an available standard tag." Moreover, the need for customized tags for smaller issuers should be less than for larger companies. See Id.  ("Smaller filers currently have an average custom tag rate almost twice that of larger filers, inconsistent with our expectation that smaller filers should, as a general matter, have simpler financial statements that are easier to standardize."). 

Likewise, there was a difference in the rate of custom tagging between large and small companies. "We also observed that the average use of custom tags in primary financial statements among larger filers has declined in each year since XBRL exhibits were required, while the custom tag rate in primary financial statements among smaller filers has remained relatively flat during the commensurate phase-in period."

Moreover, the Study suggested that the use of custom tagging was often preceded by consideration of the standard tag.  

  • While not required, filers are encouraged to include detailed definitions for their custom tags. In general, the larger filers used the same wording in their custom definitions as could be found in similar standard tags already in the taxonomy, but modified the text to indicate a material difference from the standard definition. This demonstrates consideration of standard tags and a desire to justify customization.

So what is the explanation? 

  • As part of our assessment, we also observed a strong correlation between third-party provider selection and exhibits with high custom tag rates. In our sample of smaller filers with high custom tag rates, 64% were served by the same third-party providers, of which one third-party provider accounted for 33% of all filers with a high custom tag rate. This suggests that in many instances the high custom tag rate may not be determined by the unique reporting requirements of a filer or available taxonomy, but an artifact of the reporting tool or service used.

The study suggests the need for more aggressive staff monitoring. Certainly greater attention to smaller issuers is warranted. 

At the same time, however, the Study does not pinpoint an appropriate or optimal amount of custom tagging. As the table from the study below illustrates, even for larger companies, the rate of custom tagging averages over 5%. Moreover, while most companies with a custom tag rate of over 50% were smaller, some did come from the larger company category. See Id. ("Analyzing the most recent XBRL exhibits as of October 30, 2013, Commission staff identified a sample of filers with custom tag rates greater than 50%. Among these, approximately 96% were smaller filers.").

Presumably more consistent monitoring of compliance would bring down the custom rate for both large and small companies.   

Grahpic shows consistent and gradual decline in the use of custom tag rates among the largest filers (phase 1)  and large filers (phase 2), but not smaller filers (phase 3).

 

Monday
Jul212014

Staff Guidance and Proxy Advisory Firms (Part 1)

The staff of the Division of Investment Management and Corporation Finance recently issued guidance with respect to proxy advisory firms.  The guidance, in the form of a Staff Legal Bulletin, is here.  The advice provides some helpful guidance but left gaps.  In one instance, the guidance has the potential to raise uncertainty outside the proxy advisory firm area. 

One section addresses the fiduciary obligations of advisers with respect to voting client shares.  The guidance purports to provide advice on whether advisers must vote "every proxy."  Advice in this area would be most useful in specifying when advisers with voting authority may nonetheless refrain from voting.  After all, this is the most common situation.  See Staff Legal Bulletin No. 20 (June 30, 2014) ("We understand that in most cases, clients delegate to their investment advisers the authority to vote proxies relating to equity securities"). 

Yet the advice was quite different and had little to do with the actual fiduciary obligations of advisers.  The advice was really about possible arrangements that clients could impose on advisers.  Thus, clients could deny advisers voting authority in its entirety.  They could prohibit advisers from voting on certain types of proposals or only provide voting authority over certain types of proposals.  Clients can also require that advisers vote in a certain fashion (as in for all management proposals). 

So the take away is that it doesn't violate an adviser's fiduciary obligations to follow voting instructions received from received by clients.  One has to wonder whether there was ever much doubt about that.  See Proxy Voting by Investment Advisers, Investment Advisers Act Release No. 2106 (Jan. 31, 2003) (noting that advisers "with proxy voting authority" was obligated to act with a duty of care).  

The advice does, however, seem to encourage clients to adopt more restrictive voting arrangements with advisers.  Of course, IM does not have jurisdiction over institutional investors so cannot actually state that such arrangements are consistent with any fiduciary obligations of clients.  Clients will have to make their own determination on that matter.   

The one place where the guidance did seem to comment on an adviser's fiduciary obligations with respect to voting may well sow the seeds of confusion.  The staff specified that advisers may follow instructions from clients to always follow a particular party's recommendations (for management or for a particular shareholder proponent).  The guidance, however, suggested that the advice could be ignored upon a "determination by the investment adviser that a particular proposal should be voted in a different way if, for example, it would further the investment strategy being pursued by the investment adviser on behalf of the client." 

To the extent that this is the staff's position (the staff could have been suggesting that advisers and clients can agree to this exception), presumably the obligation to override client instructions applies in other circumstances where necessary to further the adviser's investment strategy.  This potentially adds a great deal of uncertainty and leaves advisers open to allegations of breach whenever they vote in a manner consistent with client instructions but inconsistend with their investment strategy.   

Monday
Jul212014

Tagging, Extensions, and Ensuring Comparability: The Role of the SEC (Part 1)

Issuers have been required to "tag" their financial statements since 2009 (although the requirement was phased in for issuers over a number of years, with the last group becoming subject to the requirements in 2011).  Tagging the financial statements is a complex task, involving a taxonomy of more than 14,000 tags.  There are plenty of ways to get the tagging process wrong.  See XBRL Reporting Risk and the role of internal audit, PWC ("the primary risk associated with XBRL is providing data that is inconsistent with the corresponding financial statements. Typical risks include incorrect tagging, inconsistencies in amounts, and missing data."). 

Moreover, where the tags don't fit the unique circumstances of a company's disclosure, the company must essentially develop customized tags (extensions).  See Exchange Act Release No. 28293 (May 30, 2008)('Occasionally, because filers have considerable flexibility in how financial information is reported under U.S. reporting standards, it is possible that a company may wish to use a non-standard financial statement line item that is not included in the standard list of tags. In this situation, a company would create a company-specific element, called an extension.").

Customized tagging, however, interferes with comparability.  Concerns over extensions came up when the final rules were adopted.  Commentators noted the risk for "the potential that customized taxonomy extensions could grow so common that they would directly interfere with the comparability of inter-company data."  Exchange Act Release No. 59324 (Jan. 30, 2008). The Commission "acknowledge[d]" the concerns but asserted that the taxonomy would "become even more comprehensive over time as common extensions are incorporated into the base in annual releases thus minimizing any interference that common extensions might have with data comparability."  Moreover, the rules as adopted limited "the use of extensions to circumstances where the appropriate financial statement element does not exist in the standard list of tags."  Id.  

Extensions, however, can be used improperly (when, for example, a tag does exist).  Moreover, the idea that common extensions would be replaced over time presumably requires active monitoring of, and feedback about, tagging.  In truth, however, there hasn't been much feeback in this area.  Staff observations (with the exception of a recent report by DERA) are no more recent that Dec. 2011. A few (but not many) staff letters have addressed XBRL compliance.  (The most recent is here). 

What is the consequence of a system that allows the development of custom tags with little regulatory oversight?  A study by DERA (Division of Economic and Risk Analysis) provides some possible insight. 

Friday
Jul182014

Insider Trading and Gifts

One of the areas of uncertainty with respect to the law of insider trading is whether someone with material nonpublic information can violate Rule 10b-5 by making a gift to stock in order to maximize the tax benefits.  

The practice apparenlty occurs with some frequency. See Deductio ad absurdum: CEOs donating their own stock to their own family foundations, David Yermack, Professor of Finance, NYU Stern School of Business, September 2008 ("Consistent with the results below, the authors find evidence of opportunistic gift timing near local stock price maximum points, suggesting that donor CEOs use private information to increase personal income tax benefits.").  

The primary issue is whether such a gift constitutes a sale under the securities laws.  While gift and sale have two different meanings, the definition of "sale" for purposes of the securities laws is broadly construed.  Given the "value" received in the form of tax benefits, the transaction may be construed as a sale and become subject to the prohibition on insider trading. For a discussion of this issue in a earlier post, go here.  Nonetheless, law in this area is scarce.  

The SEC has, however, at least occasionally stepped into this space and sought disgorgement or repayment of amounts equal to the tax benefits arising from the contribution of overvalued stock.  See SEC v. Grendi, Litigation Release No. 15032, 95 CIV. 8085 (DAB) (S.D.N.Y.) (Sept. 5, 1996) (disgorgement equal to the “inflated tax benefits received in 1991 and 1992 of $62,447.00 resulting from donating as a charitable contribution shares of . . . common stock"). See also  SEC v. Jensen, Litigation Release No. 22014, CIVIL ACTION NO. CV 11-05316-R (AGRX) (C.D. CAL.) (June 27, 2011) (alleging that defendant “sold and donated” shares “before the company’s true financial conditioned was revealed, reaping millions of dollars in trading profits and tax benefits.”).  

Grendi was a settled case and Jensen amounted to mere allegations that were ultimately rejected by a court at trial, where the SEC lost on all counts.  So there still remains little case law in the area.   Nonetheless, the two SEC cases illustrate that, in at least some circumstances, the SEC will seek recovery of tax benefits received from a donation at a time when shares were allegedly over valued.     

Thursday
Jul172014

Data Tagging, Monitoring Compliance, and the SEC

Disclosure has more than one facet.  Foremost is to require meaningful disclosure.  In addition, however, is the need for accessibility.  Data tagging and structured data are methods of ensuring accessibility.  They allow for the recovery of data using tools (i.e. software) that are cost effective.  The SEC's Investor Advisory Committee recommendedthat the SEC more completely embrace tagging in all required forms.  The recommendation specifcally called for the tagging of some forms that are important to the governance process, including the N-PX, the form that records voting decisions of mutual funds. 

Progress in this area has been slow but steady.  A number of proposals (crowdfunding, Regulation A+) include forms that if adopted would be submitted in a "structured" format.  But tagging is more than imposing additional requirements.  There's also the issue of ensuring that a system, once in place, is adequately monitored. Without sufficient monitoring, variations can develop and comparability becomes difficult. 

 The SEC has been criticized for the lack of compliance oversight.  See Tammy Whitehouse, Long-Silent SEC Offers New Guidance, Warnings on XBRL, Compliance Week, July 8, 2014 ("The SEC's failure to enforce the quality of structured-data financial statements has prevented investors, markets, the agency, and companies from realizing the benefits of open data," said Hudson Hollister, executive director of the Data Transparency Coalition, in a statement. 'The agency's progress toward transforming its whole disclosure system from documents into open data has stalled.'"). 

One of the more interesting developments of late, therefore, has been the issuance of guidance by the Division of Corporation Finance in the form of a CFO letter regarding the use of XBRL in the financial statements attached to quarterly reports.  The prototype letter is here.  The letter noted that the XBRL file was missing specified calculation.  As the staff stated:  

  • As you know, our rules require that you file an exhibit to certain of your filings that includes your financial information in eXtensible Business Reporting Language. Our rules also require that you include calculation relationships for certain contributing line item elements for your financial statements and related footnotes. Through our selective review, we have noticed that your filing does not include all required calculation relationships.

Moreover, the letter reminded companies that acceptance of a filing by EDGAR didn't mean it was complete.

  • Acceptance of your filing by EDGAR does not mean that your filing is complete or in compliance with the Commission's requirements. We ask that you, in preparing your required exhibit with XBRL data, take the necessary steps to ensure that you are including all required calculation relationships. Please refer to Chapter 6, specifically Sections 6.14 and 6.15, of the EDGAR Filer Manual for information about this requirement.

The letter is a small step but may portend a more active role in monitoring XBRL compliance.  

Wednesday
Jul162014

Radicalism v. Respect: The Jurisprudence of VC Laster

The WSJ published an article about J. Travis Laster, one of the Vice Chancellors in Delaware. According to the article, VC Laster "has built a reputation for being as tough on bankers as on the corporate directors they advise.  He has censured boards he viewed as careless, ripped advisers he viewed as conflicted, rejected settlements he viewed as flimsy and halted transactions he viewed as unfair."  

Some described him as having "a moralistic streak" and noting that he is the grandson of a Presbyterian minister whose Bible Mr. Laster used during his swearing-in ceremony."  This has not made everyone happy.  The positions have apparently resulted in disquiet on Wall Street.  Id.  ("The rulings cast unease over Wall Street by promising closer scrutiny of its work.").  As the article noted: "His tenure hasn't been without controversy. Some see in Mr. Laster, who declined to be interviewed, a tendency to second-guess boards with little regard for market realities."

VC Laster's opinions reflect a deep respect for the jurisprudential approach adopted by Delaware courts as a legal matter.  He is suspicious of shareholder law suits (at least those challenging mergers). He has done nothing to alter the process (versus substance) approach to Delaware law.  If directors use the right process, they are free of liability, without worrying about second guessing by shareholders or courts.

His approach is to try to make the process adopted by Delaware courts meaningful.  Thus, when he sees potential conflicts of interest by advisors to boards, he doesn't ignore them but highlights them and their potential impact on the process.  When he sees directors on special committees who may have close personal relations with someone on the other side of the transaction, he declines to simply ignore the relationships.    

This is, in the end, consistent with a management friendly approach to corporate law.  Boards can still obtain complete protection from liability.  They simply have to work harder at making sure the process is actually meaningful.  In many ways, it empowers boards to do what they would prefer anyway.  To the extent friendship with officers/controlling shareholders can impair independence, boards now have a reason to reduce the number of "friends" serving as directors. 

VC Laster’s approach does not reflect a radicalism but instead reflects a deep seated respect for the Delaware approach.  It is an attitude that, if it became prevalent, would likely slow the pace of federal preemption of principles of corporate governance.  

Tuesday
Jul152014

The Absurdity of the Law on Insider Trading

Teaching about insider trading is always a pleasure.  The law in this area is ridiculous.  What seems to be insider trading may not be; what seems like it is often isn't.   Sometimes the facts of actual cases provide exam style questions that would otherwise seem almost too contrived to be real. 

This came up in connection with the SEC's action against a "group of friends, most of them golfing buddies" that alleged insider trading.  See SEC Charges Group of Amateur Golfers in Insider Trading Ring, Press Release 2014-134.  The complaint is here.  

In some ways, this is the usual fact pattern.  An insider allegedly tips information to others who then trade.  In this case, the information allegedly went from an insider to a "close friend" who then allegedly passed the information along to others.  

Nothing unusual about that except that the insider was not charged with insider trading.  As the press release stated: 

  • In a complaint filed in federal court in Boston, the SEC alleges that Eric McPhail repeatedly provided non-public information about American Superconductor to six others, most fellow competitive amateur golfers.  McPhail’s source was an American Superconductor executive who belonged to the same country club as McPhail and was a close friend.  According to the complaint, from July 2009 through April 2011, the executive told McPhail about American Superconducter’s expected earnings, contracts, and other major pending corporate developments, trusting that McPhail would keep the information confidential.      

 

There are a number of possibilities here.  The insider may have been viewed as culpable but the SEC did not charge him/her as a discretionary exercise.  If that is the case, the insider is the tipper and the "close friend" is the tippee.  Under Dirks, the insider must have benefited from the information.  If not, the tippee avoids liability. 

The other possibility is the application of the misappropriation theory. Misappropriation provides that insider trading can occur where the tipper gives out material non-public information in violation of a duty of trust and confidence.  When information is given to lawyer or investment bank or accounting firm, it is done with the expectation that the information will remain confidential.  As a result, the insider has done nothing wrong even if those individuals subsequently trade on the information.  The same is usually true where the insider gives the information to a spouse.  In general, one can reasonably expect that a spouse will not trade on material non-public information received from a husband/wife.  

This case, though, in an exam worthy fashion, involved an insider and a "close friend."  For misappropriation to apply, there would need to be a relationship of trust and confidence between the two individuals.  Even with a "close friend," however, there can be no automatic expectation that information will remain confidential.  Friendship connotes no single bundle of qualities, including the obligation to keep material non-public information confidential.  

In this case, therefore, insider trading will essentially come down to the strength of the friendship.  To the extent relying on the misappropriation theory, the SEC will presumably need to show, as a matter of fact, that both the insider and the "close friend" had an expectation of trust and confidentiality.  If this plays out the usual way, the insider will represent that it was and the recipient will represent that it was not.  

It is where the law has taken us.  An insider allegedly gives material non-public information to someone who trades on it and allegedly passes the information along to others.  Whether this is legal or illegal depends not on the unfair trading advantage obtained by those using the information but upon the degree of friendship possessed by the insider and recipient.  To the extent this is the applicable theory of insider trading, the busy enforcement attorneys at the SEC are not spending their time calculating trades and running down tips but are trying to figure out the strength of the friendship.  It is where the law (mostly driven by Supreme Court opinions) has taken us.    

Monday
Jul142014

Insider Trading and Another Argument Against Playing Golf

What is it about insider trading and golf?   

There was the KPMG partner alleged to have passed along tips at a "golf outing."  See SEC Charges Former KPMG Partner and Friend with Insider Trading, 2013-58 (individuals "communicated almost exclusively using their cell phones, although on at least one occasion London disclosed nonpublic information in the presence of others during a golf outing.").  Then there was the case in North Carolina where tips were allegedly made to a "golfing partner."  See SEC Charges Three in North Carolina With Insider Trading, Press Release 2012-193 (tip allegedly made to "friend and business associate" who allegedly "later tipped his golfing partner").   The complaint in that case is here.  There have been other examples.  See SEC v. Watson, Litigation Release No. 16648 (Aug. 9, 2000) (allegations that nonpublic information "tipped [to] two his friends and golfing partners").  

Which brings us to the most recent example.  Last week, the Commission announced that it had charged a "group of friends, most of them golfing buddies" with insider trading.  See SEC Charges Group of Amateur Golfers in Insider Trading Ring, Press Release 2014-134.  The complaint is here. The press release had this to say about trading on golf courses: 

  • “Whether the tips are passed on the golf course, in a bar, or elsewhere, the SEC will continue to track down those who seek an unfair advantage trading stocks,” said Paul G. Levenson, director of the SEC’s Boston Regional Office.  “Working with our partners in law enforcement, we are sending a message to all investors that insider trading does not pay.”  

So the SEC has made it clear that trading activities on the golf course will fall within its vigilent oversight.  Perhaps for some insiders, its better to changes sports to something more solitary.  Jogging anyone?  

Friday
Jul112014

Corporate Governance, Profit Maximization and Hobby Lobby (Part 2)

So the Court in Hobby Lobby has, without citation, suggested that for-profit companies do not have to profit maximize (and as a result can elevate religious views over profitability). How does the Court get there? Through a number of straw arguments that do not make the case for a corporation's right to avoid profit maximization.

First, the idea that corporate law requires for-profit companies to always pursue profit at the expense of everything else is an unhelpful statement of the issue. No one takes that position. For one thing, corporations cannot engage in illegal activity even if its purpose is to profit maximize. Paying a bribe to a government official to obtain an oil concession might be very lucrative but it would also violate the Foreign Corrupt Practices Act. As a result, it is prohibited.

Second, the approach suggests that for profit companies must seize every opportunity to make profit. That also is a position that no one really advocates. The financial crisis occurred in part because banks and other financial institutions engaged in short-term profit maximization at the expense of long-term financial health. Profit maximization is a mix of long-term and short-term opportunities that the board (really the CEO) gets to determine. Foregoing a short-term opportunity because it is not in the long-term interest of the company is well recognized and consistent with profit maximization.

Third, the examples of pollution controls or improved working conditions in excess of what is legally required do little to prove the Court's point. The Court acts as if companies doing more than what is legally required are not profit maximizing. Yet in fact many, if not most, for profit companies that seek to maximize profits exceed legal minimums. Whether in an effort to avoid long-term costs, to reduce employee turnover, or in an effort to improve reputation (and improve profits), corporations can easily justify under the standard of profit maximization, the implementation of sound working conditions, and the use of non-mandatory pollution controls.

Starbuck's decision to pay college education expenses for employees is an example. It was expressed in the usual profit maximization terms. See Starbucks to Subsidize Workers' College Degrees, WSJ, June 16, 2014 ("By responding to employees' concerns about how to afford a college education, the company said, it hopes to retain talent, thereby saving on hiring and training costs."). Will it? That is for the board to decide. Thus, the examples given by the Court do not distinguish between companies that profit maximize and those that do not profit maximize.   

Finally, buried in the quote, is the statement that certain actions can be undertaken "with ownership approval." The obligation to profit maximize arises out of the board's duty to act in the best interests of shareholders. Profit maximization arises out of the belief that this is what is in the best interests of shareholders. To the extent, however, that all shareholders want the board to engage in non-profit maximizing behavior, the board can do so. After all, a subsidiary does not have to profit maximize when the parent does not want it to.  

But this is a rule of unanimity. Moreover, it doesn't actually alter the board's legal duties, it simply redefines the best interests of shareholders to reflect the fact that the interests of all shareholders is not profit maximization. In the absence of unanimity, things are dicier. Some shareholders want the corporation to profit maximize, others do not. Boards are responsible for acting in the best interests of all shareholders, not just some of them. It is probably the case that profit maximization is still the safer position for the board to take in these circumstances (although the argument is open that a non-profit maximizing duty set out in the articles might allow for deviation). 

The question is this: Can directors engage in behavior that they know will not benefit the corporation in any way and will harm profitability in the absence of unanimous support from shareholders? In other words, can they act in a truly non-profit maximzing fashion? The only thing one can say with certainty is that the "analysis" in Hobby Lobby does not provide any meaningful guidance on this issue.  

Thursday
Jul102014

Corporate Governance, Profit Maximization and Hobby Lobby (Part 1)

The Supreme Court mostly addresses issues of federal law. As a result, occasional diversions into tangential areas of state law can result in some unusual interpretations. This has occurred in a number of instances with respect to corporate governance.  

Citizens United is an example. There the Court suggested that the issue of campaign contributions by corporations was a matter better left to shareholders and "corporate democracy." See Citizens United ("Shareholder objections raised through the procedures of corporate democracy, can be more effective today because modern technology makes disclosures rapid and informative.").  

The opinion, however, did not discuss or even acknowledge the near impossibility of shareholders intervening in corporate affairs to affect campaign contributions (assuming there was adequate disclosure). Shareholders have no authority to dictate day to day expenditures (that is left to the board) and cannot vote out the board under the plurality system unless running a competing slate, something that rarely occurs. The statement was either wrong or naive. Either way, it was not particularly informed.  

Governance came up again in Hobby Lobby. There, the Court had this to say about for-profit companies: 

  • While it is certainly true that a central objective of forprofit corporations is to make money, modern corporate law does not require for-profit corporations to pursue profit at the expense of everything else, and many do not do so. For-profit corporations, with ownership approval, support a wide variety of charitable causes, and it is not at all uncommon for such corporations to further humanitarian and other altruistic objectives. Many examples come readily to mind. So long as its owners agree, a for-profit corporation may take costly pollution-control and energy conservation measures that go beyond what the law requires. A for-profit corporation that operates facilities in other countries may exceed the requirements of local law regarding working conditions and benefits. If for-profit corporations may pursue such worthy objectives, there is no apparent reason why they may not further religious objectives as well. 

The quoted portion of the paragraph at least suggests that profit maximization is not required for for-profit companies. As Lyman Johnson recently noted: 

  • To hold that close corporations were “free” from the contraceptive mandate of the Affordable Care Act, because of RFRA, the Court thus had to determine that, under state corporate law, such companies are likewise “free” from some imagined state legal mandate to maximize profits. Readily concluding that corporations clearly do have the liberty not to maximize profits, the Court concluded that, as a legal matter, they were necessarily “free” to exercise religion. But critically, that means business corporations, being free in this respect under state corporate law, can pursue a whole host of objectives other than making money. Those objectives include various humanitarian, social, and environmental objectives of the sort progressives have long championed.   

As Lyman notes, the debate over the obligation to profit maximize is a longstanding one that divides corporate governance faculty. So given the depth of the dispute, the intimation that it was not required ought to have at least been backed with citations to authority supporting the view rather than appear as an unsubstantiated observation (there were no citations in the quoted portion of the paragraph).

Steve Bainbridge takes another view.   

  • Hobby Lobby's meaning will be contested on many levels for a long time to come, but I think it is best understood as recognizing the well-established principle that shareholders of a closely held corporation can alter the default rules of corporate law, including the issue of corporate purpose. I don't think Hobby Lobby should be understood as changing the default rule, especially by why of what is arguably dicta. 

The lively debate reflects something of a division among corporate scholars. Unfortunately, there is nothing in the unsupported quote set out in Hobby Lobby that really reflects the complexity of the debate. Moreover, as we will discuss in the next post, the issue was stated in a manner that was decidedly unhelpful and adds little meaningful insight into the ongoing debate about the role of profit maximization.  

Wednesday
Jul092014

The Move to Fee-Shifting By-Laws Begins in Delaware

As discussed in earlier posts (here and here), the Delaware Supreme Court in ATP Tour v. Deutscher recently upheld the use of a fee-shifting by-law by a non-stock company and the Delaware legislature failed to pass legislation that would prohibit their use during the last legislative session. With the window of opportunity open, at least two public companies have already adopted such by-laws. Echo Therapeutics and LGL Group Inc. are among the early adopters. 

          Echo Therapeutics’s by-law reads as follows:

  • Litigation Costs.  To the fullest extent permitted by law, in the event that (i) any current or prior stockholder or anyone on their behalf (“Claiming Party”) initiates or asserts any claim or counterclaim (“Claim”) or joins, offers substantial assistance to, or has a direct financial interest in any Claim against the Corporation and/or any Director, Officer, Employee or Affiliate, and (ii) the Claiming Party (or the third party that received substantial assistance from the Claiming Party or in whose Claim the Claiming Party had a direct financial interest) does not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought, then each Claiming Party shall be obligated jointly and severally to reimburse the Corporation and any such Director, Officer, Employee or Affiliate, the greatest amount permitted by law of all fees, costs and expenses of every kind and description (including but not limited to, all reasonable attorney's fees and other litigation expenses) (collectively, “Litigation Costs”) that the parties may incur in connection with such Claim.

It would not be surprising if other companies follow the lead of Echo Therapeutics and LGL Group. What will be of great interest is what may happen in the near future if many companies go down that path. Will shareholders, who under Delaware law also have the authority to amend by-laws, try to repeal board adopted fee-shifting by-laws? Or consider the following scenario. A company adopts a fee-shifting by-law. A shareholder (or group of shareholders) brings a suit that is covered by the by-law. Before the suit is concluded, the Delaware legislature enacts the proposed change to the DGCL that would make such a by-law void. Is the application of the fee-shifting provision considered at the time the law suit was filed or at the time the effect of the fee-shifting provision would be relevant to the proceeding in issue?

The potential for confusion and inter-corporate conflict is strong. Good for the lawyers but maybe not so much for companies and their shareholders.

Tuesday
Jul082014

Rule 10b-5 and the US Supreme Court

It seems like very term the Court takes a case related to the antifraud provisions under the federal securities laws. In some cases, the Court has expressed an almost militant hostility to the private right of action under Rule 10b-5. Thus, in Janus and Stoneridge, 552 US 148, the Court suggested opposition to a private right of action and announced a rule of opposition to any "expansion" of the provision.    

Morrison was a loss of sorts, with the Court staking out a hostility to extraterritorial application of the antifraud provisions. The practical impact, however, is still being assessed. While the case cut off causes of action where the harm was in the United States, the pratical effect was to open U.S. courts to actions that had no impact here but where the transaction actually occurred in the U.S.  

In a number of other cases, however, the Court more or less left the law intact. Matrixx reaffirmed the probability/magnitude test and Halliburton reaffirmed the fraud on the market theory of reliance (although allowing greater challenge at the class certification stage and raising the costs of these actions). Merck adopted a reasonable if questionable interpretation of the standard for applying the statute of limitations (Justice Scalia's concurring opinion is correct, even if uncomfortable). Tellabs interpreted the "strong inference" language in the PSLRA in about the most investor friendly manner available.  

What conclusions can be drawn from these cases? The most radical shift in the jurisprudence was the announcement of opposition to any "expansion" of antifraud provisions in the context of private rights of action (read Rule 10b-5). As a practical matter, however, the Court has only used this approach in delineating the boundary between primary and secondary liability. It seems, therefore, that in the area of extraterritorial effect and secondary liability, the Court has a five justice majority that is prepared to impose significant even radical limits on the application of the antifraud provisions.    

In other areas, however, the Chief Justice and Justice Kennedy (although with the four non-conservatives on the Court) are more inclined to make changes to existing law only on the margins. As a result, while the Court continues to take a record number of cases that implicate the antifraud provisions (there is a Section 11 case, Omnicare, currently pending), the risk of a significant rewrite of the standards for bringing an action seems less and less likely.

That is not to say that the five justice majority for radical won't find other areas for substantial change. The Court has, for example, never squarely resolved the state of mind requirement for violations of the proxy rules. Lower courts recognized that negligence is enough but this has never been affirmed by the Court. As a result, there is a risk that the Court could opt for a scienter standard.

Nonetheless, where it comes to significantly rewriting existing law, the Court has indicated an unwillingness to do so. The traditional elements of an antifraud violation appear likely to remain in place.  

Monday
Jul072014

The Significance of Halliburton

The Supreme Court in Halliburton, by a 6-3 majority, reaffirmed the presumption of fraud on the market. Halliburton, like Matrixx, was more significant for what it didn't do rather than what it did. The case held out the possibility that the reliance requirement would be radically changed. The Court could conceivably have adopted an actual reliance requirement that would have largely put an end to class actions in the area of securities fraud.  

The decision was disappointing to some. The folks at Wachtell noted that "[t]he case had the potential to revolutionize securities litigation, but, as decided, it will work no such change." The case did, however, impose additional burdens on plaintiffs by allowing defendants, at the class certification stage, to challenge reliance, primarily by showing the absence of "price impact." As Professor Coffee suggested, rather than plaintiffs entirely dodging a bullet, "The bullet hit, but inflicted a non-fatal wound."  

In truth, the case is not likely to have a significant impact on class actions alleging violations of the antifraud provisions. Costs will go up. Defendants will hire economists to conduct event studies in an effort to show that the alleged misrepresentations had no price impact. Plaintiffs will have to present evidence to the contrary. But these cases are already expensive and the firms on the plaintiffs side that bring them must have deep pockets. The pockets will now need to be just a little bit deeper.

On the other hand, the decision may have unintended consequences. To the extent that a class action suit survives this type of challenge, the settlement amount will likely go up. By quantifying the extent of the market impact, plaintiffs will have better evidence of alleged damages and will be in a position to insist on larger settlement amounts.   

What this case demonstrates, however, is that the limits on class actions are unrelated to the merits. The standard for scienter (the strong inference standard) doesn't really separate the wheat from the chaffe as much as it separates those where the evidence of scienter is publicly available and those where it is not. Likewise, there is no reason to believe that Halliburton will actually result in the dismissal of meritless cases. Instead, cases will be dismissed based upon the imprecise ability to show the market impact of a false statement.

Friday
Jul042014

SEC v. Garber: Judge Orders Production of Individual Tax Returns

In SEC v. Garber, No. 12 Civ. 9339, 2014 BL 3070 (S.D.N.Y. Jan. 7, 2014), the United States District Court for the Southern District of New York ordered that Danny Garber, Kenneth Yellin, and Jordan Feinstein (collectively, “Defendants”) produce their complete individual tax returns. This case was previously discussed here.

According to the complaint filed by the SEC, Defendants between 2007 and 2010  “purchased over a billion unregistered shares in dozens of penny stocks . . . and illegally  resold the shares to the investing public”. The SEC alleged that the shares were not registered in violation  of Section 5 of the Securities Act of 1933 (“1933 Act”).  

A “key issue” in the case concerned the accredited investor status of the certain entity defendants. Rule 501defines an accredited investor as a natural person with either (1) an individual or joint spousal net worth exceeding $1,000,000; (2) an annual income in excess of $200,000 in the two most recent years and reasonably expects to receive the same income in the current year; or (3) a joint income in excess of $300,000 for the two most recent years and reasonably expects to receive the same income in the current year. In addition, an entity owned entirely was accredited if “all of the equity owners are accredited investors.”

As a result, the SEC requested that the defendants produce their individual tax returns.  Defendants objected, contending that the returns were “confidential, proprietary, and irrelevant.” Subsequently, however, defendants produced the first page of their individual returns, which contained the taxpayer’s income and adjusted gross income showing that they were qualified accredited investors. The SEC objected, stating that the evidence was not authenticated and, therefore, unreliable.

The judge reviewed the documents in camera and directed the parties to write briefs on whether the SEC should be allowed to examine the tax returns in their entirety.  Following submission of the briefs, the matter was referred to the magistrate. 

In considering whether to require disclosure of the tax returns, the court applied a two-prong test.  First, the court must consider whether the tax return is relevant to the subject matter of the action. Under the second prong, the court assesses whether there is a compelling need for the disclosure because the information is not readily available elsewhere.

The party seeking disclosure bears the burden of proving relevancy. Courts, however, are split on who bears the burden of showing a compelling need for disclosure. The court found that the party resisting disclosure was in a better position to suggest alternative places where the information could be found. Once the resisting identified such locations,  the requesting party could  submit arguments as to why the alternative sources are inadequate.

Defendants asserted that the necessary information was readily available from the first page of the tax return provided to the SEC.  The court, however, found that the SEC was entitled to the entire return in order to determine the source of income, something not adequately available from the first page.  Such information was necessary to confirm the “expectations” of income in the current year.  As the court reasoned:  “If some sources were destined to expire, for example, then it would not have been reasonable for [Defendant] to anticipate equivalent income in 2010.  Indeed, if demonstrating qualifying income alone in the prior two years were enough to qualify an accredited investor in the third year, the ‘reasonable expectation’ requirement would be meaningless.”

In addition, the income test for the accredited investor standard was not based upon taxable income.  “Since determining income, and thereby evaluating whether the defendants are accredited investors, cannot be accomplished merely by reference to a particular figure on the first page of the tax returns, it would be fundamentally unfair to foreclose the SEC from access to the balance of the returns.” Finally, the court found that even if the definitions were identical, “the SEC should not be precluded from exploring the reliability of the information contained on the first page of the returns.”

Consequently, Defendants were ordered to produce their complete tax returns.

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

Thursday
Jul032014

The Director Compensation Project: CITIGROUP INC.

The Director Compensation Project: CITIGROUP INC.

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 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.” See 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. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1.  See 17 C.F.R. §240.10A-3 & 10c-1.

Independent directors are compensated for their service on the board. The amount of compensation can be seen from examining the director compensation table from the Citigroup (NYSE: C) 2014 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
($)

Duncan P. Hennes

17,857

21,428

0

0

39,285

Franz B. Humer

125,000

150,000

0

0

275,000

Robert L. Joss*

175,000

150,000

0

350,000

675,000

Michael E. O’Neill**

500,000

0

0

0

500,000

Gary M. Reiner

62,500

75,000

0

0

137,500

Lawrence R. Ricciardi***

87,500

37,500

0

0

125,000

Judith Rodin

75,000

150,000

0

0

225,000

Robert L. Ryan

175,000

150,000

0

0

325,000

Anthony M. Santomero

236,250

150,000

0

0

386,250

Joan E. Spero

125,000

150,000

0

0

275,000

Diana L. Taylor

206,250

150,000

0

0

356,250

William S. Thompson

101,250

150,000

0

0

251,250

James S. Turley

62,500

75,000

0

0

137,500

Ernesto Zedillo Ponce de Leon

83,750

150,000

0

0

233,750

*Mr. Joss earned $350,000 for consulting services provided to Citigroup in 2013 but remains an independent director.

**Mr. O’Neill receives $500,000 annually for his service as Chairman of the Board.

***Mr. Ricciardi retired from the Board on April 24, 2013 and the amounts provided reflect pro-rated compensation for 2013. 

Director Compensation. The Board of Directors met 19 times and the Audit Committee met 16 times, the Personnel and Compensation Committee, 10 times, the Nomination, Governance and Public Affairs Committee, 11 times, the Risk Management and Finance Committee, eight times, and the Executive Committee met four times for a total of 49 committee meeting. Each director attended at least 75% of the total number of meetings of the Board and the committees on which he or she was a member. In addition, Ms. Spero and Ms. Taylor, and Mr. Joss, Mr. Reiner, Mr. Ryan, Mr. Thompson, and Mr. Zedillo served on several “ad hoc” committees, reviewing such topics as technology, compliance, and operational matters. 

Director Tenure. Ms. Rodin holds the longest tenure with Citigroup, serving as a Director since 2004.  Mr. Ryan holds the second longest tenure, serving as a Director since 2007, and Mr. Thompson, Ms. Taylor, Mr. Santomero, Mr. O’Neill, and Mr. Joss have all been Directors since 2009.  Several of the directors also sit on other boards. Mr. Santomero is a director of RenaissanceRe Holdings, Ltd., Penn Mutual Life Insurance Company and Columbia Funds. Mr. Zedillo Ponce de Leon is a director of Alcoa Inc., Procter & Gamble Company, and Grupo Prisa.

Executive Compensation. Michael Corbat, Chief Executive Officer, earned a base salary of $1,500,000 in 2013 and a bonus of $5,200,000, which is more than three times his salary.  Mr. Corbat also received $3,900,000 in both deferred stock units and performance share units, brining his total compensation for 2013 to $14,500,000 million, almost $3,000,000 more than he received in 2012. Mr. James A. Forese, Co-President of Citigroup and Chief Executive Officer of Institutional Clients Group, received a base salary of $475,000, and a total compensation of $14,000,000.

Wednesday
Jul022014

The Director Compensation Project: JPMORGAN CHASE & Co.  

The Director Compensation Project: JPMORGAN CHASE & Co.

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 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.” See 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. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1.  See 17 C.F.R. §240.10A-3 & 10c-1 

Independent directors are compensated for their service on the board. The amount of compensation can be seen from examining the director compensation table from the JPMorgan Chase & Co. (NYSE: JPM) 2014 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
($)

Linda B. Bammann**

26,250

0

-

5,000

31,250

James A. Bell

87,278

170,000

-

22.500

279,778

Crandall C. Bowles

102,278

170,000

-

20,000

292,278

Stephen B. Burke

75,000

170,000

-

0

245,000

David M. Cote***

43,750

170,000

-

0

213,750

James S. Crown

101,389

170,000

-

36,833

308,222

Timothy P. Flynn

81,833

170,000

-

7,500

259,333

Ellen V. Futter***

43,750

170,000

-

0

213,750

Laban P. Jackson, Jr.****

106,834

170,000

-

191,833

468,667

Michael A. Neal

0

0

-

0

0

Lee R. Raymond

113,500

170,000

-

20,000

303,500

William C. Weldon

90,000

170,000

-

45,722

305,722

*“All other compensation” includes additional fees earned or paid in cash based on each members’ contribution to special committees.

**Ms. Bammann joined the Board in September 2013, and the amounts provided reflect the pro-rated awards for 2013.

***Mr. Cote and Ms. Futter retired from the Board in July 2013, and the amounts provided reflect their pro-rated awards for 2013.

****Mr. Jackson attended 30 specific purpose meetings and the table above includes $110,000 in compensation for his service as a director of J.P. Morgan Securities plc, an indirect wholly-owned subsidiary of JPMorgan Chase.  He is an independent director.

Director Compensation.  In 2013, JPMorgan Chase & Co. held 13 Board meetings and 85 Committee meetings. The Audit Committee met 15 times, Compensation and Management Development, six times, Corporate Governance and Nominating, five times, Public Responsibility four times, Risk Policy, eight times and Specific Purpose Meetings i.e. Bank Secrecy Act/Anti-Money Laundering Compliance Committee met 13 times, Mortgage Compliance Committee 12 times, Trading Compliance Committee, 14 times, Sworn Documents Compliance Committee three times, and Review Committee in connection with the CIO met five times. The annual cash retainer for the chairs of the Audit and Risk Policy Committees increased by 66% from $15,000 to $25,000, and the annual cash retainer for members of the Audit Committee increased by 50% from $10,000 to $15,000. Each director attended at least 75% of the total number of meetings of the Board and the committees on which he or she served. All but one member of the Board was present for the 2013 annual Board meeting 

Director Tenure.  Mr. Raymond, who holds the longest tenure of any director, has served on the Board since 2001, and prior to retiring in July 2013, Ms. Futter, had served on the Board since 2001 as well. Mr. Crown and Mr. Burke have been on the Board since 2004.  Some of the directors also serve on other boards. In addition to serving on the Board of JPMorgan Chase, Mr. Weldon is a director of CVS Caremark Corporation, The Chubb Corporation, and Exxon Mobil Corporation, and Ms. Bowles is a director of Deere & Company.

Executive Compensation.  James Dimon, Chairman and Chief Executive Officer since 2005, earned a base salary of $1,500,000 and received a total compensation in the amount of $11,791,833 in 2013. The total compensation for Mr. Dimon is down almost 40% from the $18,717,013 he received in 2012. Mr. Dimon also had special use of the company aircraft, use of company vehicles, and residential security paid for by the company, valued at $291,833. Mathew E. Zames, Chief Operating Officer, received a base salary of $750,000 and total compensation of $17,400,000.  The total compensation for the other executives ranged from $8,228,388 to $17,231,640.  

Tuesday
Jul012014

The Director Compensation Project: Wal-Mart Stores, Inc. (WMT) 

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 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.” See NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management.  See Exchange Act Release No. 68639 (Jan. 18, 2013). 

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. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1.  See 17 C.F.R. §240.10A-3 & .10c-1.

Independent directors are compensated for their service on the board. The amount of compensation can be seen from examining the director compensation table from the Wal-mart (NYSE: WMT) 2014 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Director

Fees Earned or Paid in Cash ($)

Stock Awards
 ($)

Option Awards
($)1

 

All Other Compensation
($) 
2

 

Total
 ($)

Aida M. Alvarez

94,379

175,025

0

0

269,404

James W. Breyer*

41,236

0

0

0

41,236

M. Michele Burns*

34,725

0

13,907

2,542

51,174

James I. Cash, Jr.

169,808

175,025

0

1,092

345,925

Roger C. Corbett

84,489

175,025

0

45,332

304,846

Pamela J. Craig

22,741

93,936

0

0

116,677

Douglas N. Daft

68,489

175,025

10,044

0

253,558

Timothy P. Flynn

143,489

175,025

0

2,298

320,812

Marissa A. Mayer

83,489

175,025

0

5,093

263,607

Gregory B. Penner**

103,489

175,025

0

231

278,745

Steven S. Reinemund

79,808

175,025

0

2,213

257,046

H. Lee Scott, Jr.

68,489

175,025

0

1,146

244,660

Arne M. Sorenson*

26,044

0

0

0

26,044

Jim C. Walton

68,489

175,025

0

3,575

247,089

Christopher J. Williams

208,489

175,025

0

1,307

384,821

Linda S. Wolf

108,489

175,025

0

837

284,351

1 Wal-mart neither issues stock options to, nor provides non-equity incentive compensation for, Outside Directors.

2  The amounts in this column include tax gross-up payments paid during fiscal 2014 relating to income attributable to spousal travel expenses, meals, and related activities in connection with certain Board meetings during fiscal 2014. For Mr. Corbett, this column also includes the aggregate cost of such spousal travel expenses, meals, and related activities in the amount of $34,928, primarily related to his travel from his residence in Australia to our Board and Board committee meetings. The cost of any such spousal travel expenses, meals, and related activities for each of the other directors is omitted from this column because the total incremental cost for such benefits for each other director was less than $10,000.

* Served as directors from February to June 2013 and rotated off of the Board in accordance with Corporate Governance Guidelines.

**Gregory B. Penner is the son-in-law of S. Robson Walton.

Director Compensation.  During fiscal year 2014, Wal-Mart maintained six standing committees and held six board of directors meetings. Each director attended at least 85% of the aggregate number of meetings of the board of directors and meetings of the board committees on which he or she served. The base compensation for non-management directors upon their election to the board on June 7, 2013, consisted of a share award and an annual retainer. On June 7, 2013, each non-management director received an award of shares determined by dividing $175,000 by the closing price of the shares. Within 5 years of their election, Wal-Mart’s non-management directors must own shares, restricted stock, or stock units valued at an amount equal to five times the annual director retainer for the year they were elected; all of the non-management directors fulfilled this requirement. During fiscal 2014, Michael T. Duke, C. Douglas McMillon, and S. Robson Walton received compensation only for their services as employees and not in their capacities as directors.

Director Tenure.  In 2013, Mr. Walton, who has held his position as a member of the board of directors since 1978, held the longest tenure. Ms. Craig joined the Board in 2013 and holds the shortest tenure. Several directors also sit on other boards. Mr. Corbett sits on the boards of Fairfax Media Limited, Mayne Pharma Group Limited, and PrimeAg Australia Limited. Mr. Reinemund sits on the boards of Exxon Mobil Corporation, American Express Company, and Marriott International, Inc.

CEO Compensation.  Effective February 1, 2014, C. Douglas McMillon succeeded Michael T. Duke as Walmart’s President and Chief Executive Officer. Mr. McMillon received total compensation of $25,592,938, which included a $954,408 base salary, $23,011,020 in stock awards, $1,035,019 in non-equity incentive compensation, and $254,091 in other compensation. The remaining difference was attributable to changes in pension values and nonqualified deferred compensation earnings. Neil M. Ashe, an Executive Vice President, came in second for highest compensation. Mr. Ashe received total compensation of $13,178,743, which included a $843,544 base salary, $11,252,483 in stock awards, $1,030,705 in non-equity incentive compensation, and $51,169 in other compensation. Likewise, the difference was attributable to an incidental change in Mr. Ashe’s pension value. In addition, Wal-Mart incurred $479,572 in expenses for the personal use of company aircraft for its executive officers. 

Monday
Jun302014

The Supreme Court and Gender Neutrality

The Court came out with the opinion in Halliburton.  Fraud on the market survives.

The Supreme Court now has three women.  A majority of the country consists of women.  Most of our college students are women.  Isn't it time for opinions to be gender neutral?  Halliburton was not.  

The Chief Justice apparently thinks all plaintiffs and investors are men.  

Plaintiffs: 

  • "Halliburton urges us to overrule Basic’s presumption ofreliance and to instead require every securities fraud plaintiff to prove that he actually relied on the defendant’s misrepresentation in deciding to buy or sell a company’s stock"; 
  • "In either of those cases, a plaintiff would have to prove that he directly relied on the defendant’s misrepresentation in buying or selling the stock.");
  • "or that a plaintiff would have bought or sold the stock even had he been aware that the stock’s price was tainted by fraud"; 
  • "presumption of reliance with respect to an individual plaintiff by showing that he did not rely on the integrity of the market price in trading stock."
  • "And if the plaintiff did not buy or sell the stock after the misrepresentation was made but before the truth was revealed, then he could not be said to have acted
  • "if a plaintiff shows that the defendant’s misrepresentation was public and material and that the stock traded in a generally efficient market, he is entitled to a presumption that the misrepresentation affected the stock price. Second, if the plaintiff also shows that he purchased the stock at the market price during the relevant period, he is entitled to a further presumption that he purchased the stock in reliance on the defendant's misrepresentations."

 Investors: 

  • "That is because, even assuming an investor could prove that he was aware of the misrepresentation, he would still"; 
  • "That provision requires an investor to prove that he bought or sold stock “in reliance upon” the defendant’s misrepresentation."

In some cases, the opinion also used quotes that were not gender neutral.  At least there, the lack of gender neutrality came from the quote.  In at least one instances, however, the majority opinion makes a gender neutral quote into a non-gender neutral quote.  See majority opinion, at 17 ("If it was not, then there is 'no grounding for any contention that [the] investor[] indirectly relied on th[at] misrepresentation[] through [his] reliance on the integrity of the market price." 

The same lack of gender neutrality was reflected in the concurring opinion by Justice Thomas.  There, in addition to investors (see concurring opinion at 11) and plaintiffs (see concurring opinion at 3), the opinion went for a hat trick and characterized defendants as men.  See concurring opinion, at 12 ("Thus, by its own terms, Basic entitles defend­ants to ask each class member whether he traded in reli­ance on the integrity of the market price.  Thus, by its own terms, Basic entitles defend­ants to ask each class member whether he traded in reli­ance on the integrity of the market price.").  

So were any of the opinions gender neutral?  Only the short opinion written by Justice Ginsburg.   

Friday
Jun272014

The Director Compensation Project: Hewlett-Packard Company (HPQ)

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 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.” See NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management.  See Exchange Act Release No. 68639 (Jan. 18, 2013). 

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. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1.  See 17 C.F.R. §240.10A-3 & .10c-1.

Independent directors are compensated for their service on the board. The amount of compensation can be seen from examining the director compensation table from the Hewlett-Packard Company (NYSE: HPQ) 2014 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
($)
2

Total
($)

Marc L. Andreessen

10,000

275,020

_

_

285,020

Shumeet Banerji

2,000

275,020

_

798

277,818

Robert R. Bennett

29,863

109,818

_

_

139,681

Rajiv L. Gupta

136,730

87,517

87,641

33,098

344,986

Raymond J. Lane

_

275,020

_

_

275,020

Ann M. Livermore1

_

_

_

_

_

Raymond E. Ozzie

29,863

109,818

_

_

139,681

Gary M. Reiner

11,708

137,510

137,719

_

286,937

Patricia F. Russo

115,000

175,014

_

_

290,014

James A. Skinner

29,863

109,818

_

_

139,681

Margaret C. Whitman1

_

_

_

_

_

Ralph V. Whitworth

107,708

175,014

_

_

282,722

John H. Hammergren*

4,292

18,100

_

21,831

44,223

G. Kennedy Thompson*

12,585

18,100

_

_

30,685


1 Employee Directors.

2 Amounts in this column represent the cost to HP of product donations made on behalf of non-employee directors.

*Compensation amount reflects fees earned through retirement date.

Director Compensation.  As of the date of the proxy statement, Hewlett-Packard (HP) had five standing committees and held nine board of directors meetings, including six executive sessions. Each incumbent director serving during fiscal 2013 attended at least 75% of the aggregate of all board and applicable committee meetings held during the period that he or she served as a director. In July 2013, the board approved an amendment to the HP bylaws increasing the number of directors on the board from nine to twelve. Each non-employee director serving during fiscal 2013 was entitled to receive an annual cash retainer of $100,000. HP’s stock ownership guidelines required non-employee directors to accumulate shares of HP common stock equal in value to at least five times the amount of their annual cash retainer, within five years of election to the board. Currently, all directors who have served five years or more have met the requirement or are expected to meet the requirement following the vesting of outstanding equity awards during the first half of fiscal 2014. 

Director Tenure.  In 2013, Mr. Andreessen and Mr. Gupta, who held their positions as members of the board of directors since 2009, held the longest tenures. Mr. Bennett, Mr. Ozzie, and Mr. Skinner are the newest directors and were elected to the board in 2013. Several directors also sit on other boards. Mr. Andreessen is a director of eBay Inc., Facebook, Inc. and several private companies. Mr. Bennett currently serves as a director of Discovery Communications, Inc., Demand Media, Inc., Liberty Media Corporation and Sprint Corporation. Mr. Gupta is a director of Delphi Automotive PLC, Tyco International Ltd., The Vanguard Group and several private companies. Mr. Reiner is a director of Citigroup Inc. and several private companies and is a former director of Genpact Limited. Ms. Russo is a director of Alcoa, Inc., General Motors Company and Merck & Co., Inc. Mr. Skinner currently serves as a director of Illinois Tool Works Inc. and previously served as a director of McDonald's. Ms. Whitman also serves as a director of The Procter & Gamble Company and is a former director of DreamWorks Animation SKG, Inc. and Zipcar, Inc.

CEO Compensation.  Margaret C. Whitman, who served as HP’s President and Chief Executive Officer, earned $17,643,243 during the 2013 fiscal year. Ms. Whitman became President and CEO of HP in September 2011. Ms. Whitman received a base salary of only $1 in 2013 but received $4,394,475 in stock awards, $12,713,433 in option awards, and $260,000 in incentive compensation. Ms. Whitman also received $275,334 in additional compensation, $254,162 of which accounted for personal use of the company aircraft. Also included in Ms. Whitman’s “all other compensation,” were home security services and imputed income with respect to attendance at HP events by Ms. Whitman’s guests. William L. Veghte, Executive Vice President and General Manager of the Enterprise Group during 2013, received $15,644,849 in total compensation. Mr. Veghte, received $866,776 as base salary, $3,450,021in stock awards, $9,926,810 in option awards, $1,083,470 in bonuses, and $295,303 in incentive compensation. HP reported that it paid Mr. Veghte $22,469 in “all other compensation,” including 401(k) contributions, personal use of company aircraft, and imputed income with respect to attendance at HP events by Mr. Veghte’s guests.

Thursday
Jun262014

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

 This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are, for the most part, including companies from 2014’s Fortune 500 and using information found in their 2014 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). This includes consideration of “personal and business relationships” between directors and management. See Exchange Act Release No. 68639 (Jan. 18, 2013). 

 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. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1. See 17 C.F.R. §§240.10A-3 & .10c-1.

Independent directors are compensated for their service on the board. The amount of compensation can be seen from examining the director compensation table from the Wells Fargo & Company (NYSE: WFC) 2014 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
($)

John D. Baker II

151,000

150,005

0

5,000

306,005

Elaine L. Chao

105,000

150,005

0

10,000

265,005

John S. Chen

103,000

150,005

0

5,000

258,005

Llyod H. Dean

150,000

150,005

0

0

300,005

Susan E. Engel

139,000

150,005

0

0

289,005

Enrique Hernandez, Jr.

189,000

150,005

0

5,000

344,005

Donald M. James

109,000

150,005

0

5,000

264,005

Cynthia H. Milligan

148,000

150,005

0

5,000

303,005

Nicholas G. Moore*

54,500

0

0

80,000

134,500

Frederico F. Pena

115,000

150,005

0

0

265,005

James H. Quigley

26,750

87,512

0

0

114,262

Philip J Quigley*

45,000

0

18,063

80,000

143,063

Howard V. Richardson**

127,500

200,022

0

0

327,522

Judith M. Runstad

172,000

150,005

0

0

322,005

Stephen W. Sanger

176,000

150,005

0

5,000

331,005

Susan G. Swenson

115,000

150,005

0

0

265,005

John G. Stumpf***

0

0

0

0

0

*Compensation amount reflects fees earned through retirement date.

**Mr. Richardson resigned as a director effective January 31, 2014.

*** As an employee director, Mr. Stumpf does not receive additional compensation for his board service.

 

Director Compensation. During fiscal year 2013, Wells Fargo held nine board of directors meetings and thirty-two board committee meetings. Each current director attended at least 75% of the total number of board and committee meetings on which he or she served. Overall attendance of current directors at meetings of the board and its committees averaged 98.75%. In 2013, each non-employee director elected to the board at the annual meeting of stockholders received common stock valued at $150,000. The annual stock award increased to $160,000 on January 1, 2014. Directors are reimbursed for expenses incurred from board service, including cost of attending board and committee meetings.      

Director Tenure. In 2013, Ms. Milligan, who has held her position as a member of the Board of Directors since 1992, held the longest tenure. Mr. James Quigley holds the shortest tenure, having just joined the board in 2013. Mr. Moore and Mr. Philip Quigley retired at the 2013 stockholder meeting and Mr. Richardson resigned from the board in January 2014. All of the directors except Ms. Runstad and Ms. Engel sit on other boards. Three directors each sit on three additional boards: Ms. Swenson sits on the boards of Harmonic Inc., Novatel Wireless Inc., and Spirent Communications plc; Ms. Milligan sits on the boards of Calvert Funds, Kellogg Company, and Raven Industries Inc.; and Mr. Hernandez Jr. sits on the boards of Chevron Corporation, McDonald’s Corporation, and is the Chairman of the Board for Nordstrom Inc.      

CEO Compensation. John Stumpf, Wells Fargo’s President and Chief Executive Officer since 2007 and Chairman of the Board since 2010, earned total compensation of $19,320,409 in 2013. As an employee director, Mr. Stumpf does not receive separate compensation for his board service. Mr. Stumpf’s 2013 compensation reflects a 15.5% decrease from 2012 due to a $3,588,081 change in pension value and nonqualified deferred compensation earnings in 2012 that were not present in 2013.

David A. Hoyt, Wells Fargo’s Senior Executive Vice President of Wholesale Banking, earned total compensation of $11,086,952 in 2013. Despite a $162,452 base salary increase from 2012, Mr. Hoyt’s total compensation for 2013 represents a 13.7% decrease from 2012. In 2012, Mr. Hoyt received $1,994,728 in option awards that were not present in 2013.

Wells Fargo does not provide privileges to executives for items like financial planning, automobiles, or club memberships except for security or business reasons. Wells Fargo spent $45,792 to install a security system in Mr. Hoyt’s home in 2013, however they do not characterize this as a “personal benefits because they arise from the nature of these executives’ employment.” Mr. Hoyt also received a car and driver for “security or business purpose” during 2013.