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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. 

Monday
Sep042017

The Director Compensation Project: Pfizer, Inc. (PFE)

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 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 Pfizer Inc. (NYSE: PFE) 2016 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

Name

Fees Earned

or Paid in Cash

($)

Equity/Stock
 Awards
($)

Option Awards ($)

All Other

Compensation*

($)

 

Total

($)

Dennis A. Ausiello, M.D.

201,676

187,500

0

11,450

400,626

W. Don Cornwell

151,676

187,500

0

15,000

354,176

Joseph J. Echevarria

137,500

187,500

0

0

325,000

Frances D. Fergusson, Ph.D.

167,500

187,500

0

14,925

369,925

Helen H. Hobbs, M.D.

153,324

187,500

0

3,840

344,664

James M. Kilts

151,676

187,500

0

15,000

354,176

Shantanu Narayen

137,500

187,500

0

15,000

340,000

Suzanne Nora Johnson

153,324

187,500

0

14,000

354,824

Stephen W. Sanger

167,500

187,500

0

30,000

385,000

James C. Smith

153,324

187,500

0

0

340,824

*The amounts included in other compensation reflect charitable contributions made in 2016 through the Pfizer matching gift program.

Director Compensation. In 2016, Pfizer held nine board of director meetings. Each incumbent director attended at least 75% of the total number of meetings of the board of directors and the board committees on which he or she served. Non-employee directors received an annual cash retainer of $137,500 and Pfizer stock units with a value of $187,500. The Chair of each board committee received an additional cash retainer of $30,000 and the Lead Independent Director received an additional cash retainer of $50,000. Non-employee directors are required to own shares of Pfizer common stock with a value of at least five times the annual cash retainer ($687,500 in 2016) within five years of joining the board or within five years of an increase in the amount of stock ownership required. Directors may elect to defer all or part of their cash retainers until they leave the board and may be credited with Pfizer stock or invest in certain differed compensation investment plans available to employees. Directors who have met the stock ownership requirement may also defer units granted that year. 

Director Tenure. In 2016, the average director tenure on the board of directors was seven years. Mr. Cornwell, who has served since 1998, has the longest tenure. Mr. Smith and Mr. Echevarria have the shortest tenures, having joined in 2014 and 2015 respectively. All but one of the directors serve as directors on other boards. Mr. Echevarria serves as a director for The Bank of New York Mellon Corporation, Unum Group, and Xerox Corporation. Ms. Fergusson serves as a director for Mattel, Inc.. Ms. Johnson serves as a director for American International Group, Inc., Intuit Inc., and Visa Inc.. Mr. Narayen serves as a director for Adobe Systems Incorporated. Mr. Sanger serves as a director for Wells Fargo & Company. Under Pfizer’s Corporate Governance Principles, directors are required to retire at age 73.

CEO Compensation. Ian C. Read, Pfizer’s Chairman and CEO since 2011, has been with Pfizer since 1978. In 2016, Mr. Read earned a total compensation of $17,321,470. He received a salary of $1,905,250, incentive compensation of $4,000,000, stock awards of $3,984,592, option awards of $6,628,412, deferred compensation and change in pension of $331,706, and other compensation of $471,510. Frank D’Amelio, Executive Vice President, Business Operations and Chief Financial Officer, was the second highest compensated executive with a total compensation of $7,694,353. He received a base salary of $1,324,000, non-equity incentive compensation of $1,740,000, stock awards of $1,144,494, option awards of $1,835,559, deferred compensation and change in pension of $1,469,344, and other compensation of $180,956. 

Friday
Sep012017

No-Action Letter for McDonald's Corporation Denying Exclusion of Franchise Director Election Proposal 

In McDonald's Corporation, 2017 BL 84444 (March 16, 2017), McDonald's Corp. ("McDonald's") asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a shareholder proposal submitted by Marco Consulting Group Trust I ("Shareholder") requesting that McDonald's adopt a plan to issue a new series of preferred stock, entitling franchise owners to elect a franchise director. The SEC issued a no-action letter denying the exclusion of the proposal under Rules 14a-8(i)(7), 14a-8(i)(2), and 14a-8(i)(6).   

Shareholder submitted a proposal providing that: 

RESOLVED: that shareholders of McDonald's Corporation (“McDonald’s” or the “Company”) request that the Board take the necessary steps (including initiating appropriate amendments to the certificate of incorporation and bylaws and excluding those steps that must be taken by shareholders) to adopt a plan to give the Owner/Operators of McDonald's restaurants who pay royalties to McDonald's (hereinafter, “Franchisees”) the power to elect one new member of the Board, by issuing to Franchisees shares of a new series of preferred stock (“Franchise Preferred”), whose holders are entitled to elect the new director (the “Franchise Director”).

Shareholders requests that the Company’s amended governing documents provide that:

(i)             one share of the Franchise Preferred should be issued to each Franchisee, for each franchised restaurant;

(ii)           consideration for the Franchisee Preferred should be a minimal amount.

(iii)          the Franchisee Preferred should be redeemable by the Company at nominal cost when a Franchisee ceases to own a franchised restaurant;

(iv)          the Franchisee Preferred should entitle the holder to no amount upon liquidation, termination or dissolution of the Company;

(v)           the Franchisee Preferred should not be transferable to anyone other than McDonald’s and should not entitle its holder to vote on any matter other than the election of the new Franchisee Director; and

(vi)          the Franchisee Preferred holders have the authority to nominate and elect the Franchisee Director, who may be required to satisfy director qualifications applicable generally to independent directors.

This proposal should be implemented in a way that does not violate the terms of any existing agreement. 

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 indicates thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC & The Shareholder Proposal Rule and the SEC (Part II).

Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company's "ordinary business operations." This section understands "ordinary business" to mean issues that are fundamental to a company's daily management abilities.  Thus, proposals dealing with issues dealing in "ordinary business" are not subjected to shareholder oversight. 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), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016). 

Additionally, Rule 14a-8(i)(2) permits the exclusion of proposals that would cause a company to violate state law. See Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law. Furthermore, Rule 14-8(i)(6) permits the exclusion of proposals where a company lacks the power and authority to implement the proposal. If a company must violate the law to implement a proposal, then the company authority to comply with the shareholder request.  See Donovan Gibbons, Excluding Proposals in the Absence of Corporate Authority 

McDonald's argued the proposal should be excluded under Rule 14a-8(i)(7) because proposals asking a company to issue a new series of preferred stock relates to the management of a company's capital structure, thereby constituting "ordinary business” operations. Additionally, McDonald's argued proposals seeking corporate governance reforms “in a manner that involve[d] a company’s ordinary business” had consistently been excluded. Finally, McDonald's argued that electing a new director would amount to corporate governance reform under the rule.  

Shareholder disagreed, arguing that the main thrust of the proposal was seeking to provide board representation for franchisees, not to address the company’s capital structure. Shareholder further argued that issuing shares of a new class of preferred stock is the mechanism proposed to affect the representation on the board and that this type of governance reform was “not the kind of day-to-day tasks on which the ordinary business exclusion seeks to preclude shareholder oversight.”

McDonald's also argued for exclusion under Rule 14a-8(i)(2) and Rule 14a-8(i)(6), arguing the terms of the new stock did not confer preferences, which was required by Delaware law, the company’s state of incorporation. Thus, McDonald’s lacked the power and authority to implement a proposal that violated Delaware law.   

Shareholder, however, argued a redemption can constituted preference, and Franchise Preferred stock provided for redemption. 

The SEC did not agree with McDonald’s arguments that the proposal would fall under normal business operations, and that they would to violate state law to implement requirements of the proposal.  Therefore, the SEC recommended enforcement action if McDonald’s omitted the proposal from its proxy materials. 

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

Thursday
Aug312017

No-Action Letter for The Walt Disney Co. Did Not Permit Exclusion of "Proxy Access" Bylaw Amendment Proposal

In The Walt Disney Co., 2016 BL 371081 (Feb. 3, 2016), The Walt Disney Company (“Disney”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission a proposal submitted by shareholder, James McRitchie, (“Shareholder”) requesting the board of directors (the "Board") amend its "Proxy Access" bylaw, and any other associated documents, to include essential elements for substantial implementation to better facilitate meaningful proxy access by more shareholders. The SEC declined to issue the requested no action letter under Rules 14a-8(c) and 14a-8(i)(10) of the Securities Exchange Act.

Shareholder submitted a proposal providing that:

RESOLVED: Shareholders of The Walt Disney Company (the "Company") ask the board of directors (the "Board") to amend its "Proxy Access" bylaw, and any other associated documents, to include essential elements for substantial implementation to better facilitate meaningful proxy access by more shareholders as follows:

 

  • 1. The number of "Stockholder Nominees" eligible to appear in proxy materials shall be 25% of the directors then serving or 2, whichever is greater. Current bylaws restrict Stockholder Nominees to 20% of directors. Under the current 12-member board, stockholder nominees are currently limited to nominating two. Any shareholders nominee elected under the current bylaws could be easily isolated.
  • 2. No limitation shall be placed on the number of stockholders that can aggregate their shares to achieve the 3% "Required Shares" for an "Eligible Stockholder." Under current provisions, even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria at most of companies examined by the Council of Institutional Investors. Allowing an unlimited number of shareholders to aggregate shares will facilitate greater participation by individuals and institutional investors in meeting the Ownership Requirements.
  • 3. No limitation shall be imposed on the re-nomination of "Stockholder Nominees" based on the number or percentage of votes received in any election. Such limitations do not facilitate the shareholders' traditional state law rights and add unnecessary complexity.

 

Disney sought exclusion of the proposal from its proxy materials under subsections (c) and (i)(10) 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(c) provides that a shareholder may submit only one proposal to a company per shareholder meeting. A single well-defined unifying concept must bind multiple Proposals together for one proposal.

 

Rule 14a-8(i)(10) permits a company to exclude a shareholder proposal from its proxy materials if the company has substantially implemented the proposal. The purpose of subsection (i)(10) is to "avoid the possibility of shareholders having to consider matters which have already been favorably acted upon by management." The SEC has considered particular policies, practices, and procedures that compare favorably with the guidelines of the proposal to determine if it is substantially implemented. For a more detailed discussion of this exclusion, see Aren Sharifi, Rule 14a-8(i)(10):  How Substantial Is “Substantially” Implemented in the Context of the Social Policy Proposals?

Disney asserted the proposal should be excluded under subsection (c) because the Shareholder’s proposal was composed of three separate proposals – one proposal seeking to eliminate the limit on the number of aggregate shareholders, one seeking to change the number of director nominees that may be included, and a third seeking to eliminate the limit on nominees who have previously failed to attain the minimum percentage vote. Disney argued the proposal combined “separate and distinct elements that lack a single well-defined unifying concept,” in violation of the regulatory limit in Rule 14a-8(c) of no more than one proposal per shareholder. Therefore, the proposal may be excluded.

Disney also argued it substantially implemented a proxy access bylaw that compared favorably with the guidelines of the proposal. Specifically, the Board adopted a proxy access bylaw in June 2016 already accomplishes the proposal’s objective of “better facilitat[ing] meaningful proxy access by more shareholders.” As such, the proposal was already substantially implemented and should be excluded under subsection (i)(10).

 

In response, the Shareholder argued the proposal had a "single well-defined unified concept.” Shareholder differentiated the no-action letters Disney cited because none involved a case like this where a proponent sought amendments to a single section of a company's existing proxy access bylaws. The Shareholder also highlighted that Disney freely admitted it took no steps to “substantially implement any measures in the Proposal,” insisting that adopting what has become something of an industry standard for proxy access exempts them from having to include a valid shareholder Proposal for further amendments.

 

The Commission disagreed with Disney’s reasoning, and concluded Disney may not omit the proposal from its proxy materials in reliance on Rule 14a-8(c) because the proponent submitted only one proposal. It also concluded Disney could not exclude the proposal under subsection (i)(10). Based on the information presented, the Staff was unable to conclude Disney's proxy access bylaw compared “favorably with the guidelines of the proposal.” Accordingly, the Commission did not permit Disney’s exclusion of the Proposal under Rule14a-8(c) or 14a-8(i)(10).

 

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

Wednesday
Aug302017

Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co.: HP Stockholders Fail to State a Claim for Securities Fraud

In Retail Wholesale & Dep’t Store Union Local 338 Ret. Fund v. Hewlett-Packard Co., 845 F.3d 1268 (9th Cir. 2017), the United States Court of Appeals for the Ninth Circuit affirmed the District Court’s dismissal of plaintiffs’ amended class action complaint (the “Complaint”) against Hewlett-Packard Company (“HP”) and Mark Hurd, former CEO and Chairman of HP (“Defendants”). The Ninth Circuit held Retail Wholesale & Department Store Union Local 338 Retirement Fund, individually and on behalf of those similarly situated (“Plaintiffs”), failed to sufficiently allege a material misrepresentation or omission under Fed. R. Civ. P. 9(b) and the Private Securities Litigation Reform Act (“PSLRA”). 

Plaintiffs purchased HP stock between November 13, 2007, and August 6, 2010 (the “Class Period”) and held shares on August 6, 2010. According to the allegations, the HP Board conducted a sexual harassment investigation into Mark Hurd in 2010 after a former independent contractor made allegations against him. The HP Board discovered Hurd, during the Class Period, “falsified expense reports and lied about his relationship” with the independent contractor. Hurd admitted to violating HP’s corporate code of ethics, the Standards of Business Conduct (“SBC”), and conceded that at times he had failed to “live up to the standards and principles of trust, respect, and integrity” which he actively promoted at HP. According to the Complaint, the price of HP stock dropped immediately after Hurd’s resignation and resulted in a $10 billion loss to HP’s stockholders. 

The Complaint alleged violations of Sections 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder. Plaintiffs claimed that Defendants’ made misrepresentations about the business ethics of the Company.  In part, the Complaint relied on statements within the SBC. In the alternative, Plaintiffs asserted that Defendants’ omitted material information by failing to disclose Hurd’s unethical behavior. 

In order to survive a motion to dismiss a claim brought under Section 10(b) of the Exchange Act and Rule 10b-5, plaintiffs must allege: (1) a material misrepresentation or omission by the defendant; (2) scienter; (3) a connection between the misrepresentation or omission and the purchase or sale of a security; (4) reliance upon the misrepresentation or omission; (5) economic loss; and (6) loss causation. Under Fed. R. Civ. P. 9(b) and the PLSRA, plaintiffs must plead with particularity the facts giving rise to a material misrepresentation or misleading omission and explain why it is misleading. The materiality of the misrepresentation or omission, determined by an objective standard, depends on whether a reasonable investor would have viewed the information as having “significantly altered the total mix of information made available” for the purpose of investment decisions. Likewise, a material omission is actionable only when disclosure is required “to make the statements made, in light of the circumstances under which they were made, not misleading.”    

The court had to determine “whether statements made in or about an ethical code are actionable representations if the ethical code is violated.”  The court found that the allegations relating to ethical behavior were “inherently aspirational” and thus were not capable of objective verification. Moreover, representations about ethical behavior “did not reasonably suggest that there would be no violations of the SBC by the CEO or anyone else.”  The court left open the possibility that the statements could be actionable had they occurred closer in time to the scandal involving Hurd.  See Id. (“We note that the case may have been closer had Hurd's sexual harassment and false expenses scandal involved facts remotely similar to those presented by the 2006 scandal, as the ethical code could then have been understood as at least promising specifically not to do what had been done in 2006.”).  With respect to Plaintiffs’ alternative pleading, the court found neither the promotion of business ethics at HP nor Defendants’ statements created an impression of total compliance with the SBC. Therefore, Defendants’ failure to inform investors of Hurd’s unethical behavior was not a material omission.

Accordingly, the Ninth Circuit affirmed the District Court’s dismissal of the Complaint, with prejudice, and held that Plaintiffs failed to state a claim under the Exchange Act.

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

Tuesday
Aug292017

United States v. Gentile: Motion to Dismiss for Untimely Indictment Granted

In United States v. Gentile, No. 16-cr-00155 (JLL), (D.N.J. Jan. 30, 2017), the United States District Court for the District of New Jersey granted Guy Gentile’s (“Defendant”) motion to dismiss an indictment for securities fraud violations.  The court held the defendant unknowingly extended the statute of limitations and the “Dodd-Frank Wall Street Reform and Consumer Protection Act” (“Dodd-Frank”) statute of limitations did not apply retroactively.  Therefore, the original five-year statute of limitations in 18 U.S.C. § 3282(a) applied. 

According to allegations, Defendant was indicted for securities fraud violations connected to “pump-and-dump schemes” occurring between April of 2007 and June 2008.  The statute of limitations at the time the alleged criminal activity had ceased was five years.  18 U.S.C. § 3282(a).  Defendant, acting in cooperation with the Government, signed two waivers tolling “any statute of limitations” relating to the charges through July of 2014.  Defendant then refused to sign a third tolling waiver, stating he wanted the entire matter to be resolved by June 30, 2015.  In June 2015, Defendant rejected the Government’s felony disposition plea agreement, and was indicted on March 23, 2016. 

Defendant moved to dismiss the indictment, asserting it was untimely on two different grounds.  First, Defendant argued the six-year statute of limitations in Dodd-Frank was inapplicable because the alleged criminal acts took place prior to the statute’s enactment.  As a result, the five-year statute of limitations remained the applicable time period.  Second, Defendant argued that, if the six-year statute of limitations applied, the waivers were signed unknowingly and therefore invalid.  Defendant asserted both he and the Government were operating under the assumption the proper statute of limitations was five years when he signed both tolling waivers.  Defendant maintained he signed both tolling waivers without knowledge or a clear understanding as to the rights subject to waiver.    

In deciding the validity of the waivers, the court equated waiving a statute of limitations to that of a plea bargain in abandoning a statutory right.  For a waiver involving the relinquishing of rights to apply, a party must have an informed understanding of the consequences of the waiver.   Furthermore, a presumption existed against retroactive legislation.  Retroaction application required a clear manifestation from Congress that the presumption did not apply.    

The court first found the waivers invalid.  The Defendant had unknowingly executed both tolling waivers.  By waiving specific and important rights, Defendant would unknowingly extend his liability an additional three years rather than the two years he had expected.  As a result, the statute expired under the five-year statute of limitations on June 30, 2013, and under the six-year statute of limitations on June 30, 2014.  As a result, the indictment was untimely.    

The court further held the six-year statute of limitations created by Dodd-Frank inapplicable to the Defendant because Section 3301 of Dodd-Frank contained no discussion or mention of intent to apply the section retroactively to crimes committed prior to enactment. 

For the above reasons, the United States District Court for the District of New Jersey granted Defendant’s motion to dismiss. 

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

Monday
Aug282017

Claims Challenging the Validity of Paylocity’s Fee-Shifting Bylaws Under Section 109(b) of the Delaware General Corporation Law Move Forward

In Solak v. Paylocity Holding Corp., No. 12299-CB, 2016 BL 431917 (Del. Ch. Dec. 27, 2016), the Court of Chancery of Delaware denied in part and granted in part Paylocity Holding Corporation’s (“Paylocity” or the “Company”) Motion to Dismiss John Solak’s Verified Class Action Complaint (the “Complaint”), brought on behalf of Company stockholders (“Plaintiffs”), for lack of subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1) and failure to state a claim on which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).

In 2015, the Delaware state legislature added two new provisions to the Delaware General Corporation Law (“DGCL”) regarding corporate bylaws. First, Section 115 authorized corporations to adopt bylaws requiring internal corporate claims to be filed exclusively in Delaware. Second, amendments to Section 109(b) prohibited the bylaws from containing “any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim.”

Approximately six months after these changes to the DGCL, Paylocity, a publicly-traded Delaware corporation, adopted two new bylaws: the Exclusive Forum Bylaw and the Fee-Shifting Bylaw. The Exclusive Forum Bylaw required internal corporate claims to be filed in a Delaware court absent the Company’s consent. The Fee-Shifting Bylaw shifted attorneys’ fees and other litigation expenses to a stockholder who filed an internal corporate claim outside of Delaware without the Company’s consent if the stockholder failed to obtain “a judgment on the merits that substantially achieve[d] the full remedy sought.”

Plaintiffs sought a declaration that the Company’s Fee-Shifting Bylaw violated Sections 109(b) and 102(b)(6) of the DGCL. Additionally, Plaintiffs asserted that Paylocity’s board members breached their fiduciary duties by adopting the Fee-Shifting Bylaw and failing to include certain information in the disclosure of the bylaw’s adoption. Paylocity and its Board of Directors (“Defendants”) moved to dismiss the Complaint as unripe and for failure to state a claim.

Ripeness is a question of subject matter jurisdiction and concerns whether a suit has been brought at the correct time. Because an “actual controversy” must exist for a court to determine the validity of a bylaw and to issue a declaratory judgment, “the issue in dispute must be ripe for determination.” Where a claim challenges measures that have a substantial deterrent effect on stockholders, Delaware courts have found such claims to be ripe. The courts do so where the claims may repeat but otherwise evade review. Despite no internal corporate claim having been filed nor any intention to file such claim having been pled, the court determined that the Fee-Shifting Bylaw might never be subject to review if a stockholder first had to file a claim outside of Delaware, as such action would violate the Exclusive Forum Bylaw.

To survive a 12(b)(6) motion to dismiss when a challenge to the facial validity of a corporate bylaw is asserted, the plaintiff must show that the “bylaws cannot operate lawfully or equitably under any circumstances.” Because Section 109(b) of the DGCL provides that “bylaws may not contain any provision that impose liability on a stockholder for the attorneys’ fees or expenses of the corporation,” the court found the Fee-Shifting Bylaw invalid. Section 109(b) prohibited “any” provision shifting fees to a stockholder. As a result, the Fee-Shifting Bylaw could not operate lawfully under any circumstances.

Under Section 102(b)(6) of the DGCL, a corporation may include a provision in its articles of incorporation imposing liability on stockholders for the corporation’s debts under certain circumstances and for their own conduct. Because Plaintiffs failed to provide any authority interpreting the term “debts,” the court found Plaintiffs could not demonstrate that the Fee-Shifting Bylaw violated Section 102(b)(6).

Lastly, regarding Plaintiffs’ breach of fiduciary duties claims, the court stated that Plaintiffs failed to allege any facts suggesting any conflicts of interests, personal or financial interests in adopting the bylaws, or bad faith on behalf of the members of the Board of Directors. Further, the court opined Plaintiffs’ allegations that adopting bylaws in violation of applicable law constituted bad faith were insufficient to support an inference that the Board members acted with scienter in adopting the Fee-Shifting Bylaw.

Accordingly, the court denied Defendants’ Motion to Dismiss regarding the Section 109(b) claim, and dismissed Plaintiffs’ claims regarding Section 102(b)(6) and breach of fiduciary duties.

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

Friday
Aug252017

OM Group, Inc. Stockholder Litigation Dismissed

In In re OM Group, Inc., No. 11216-VCS, 2016 BL 339835 (Del. Ch. Oct. 12, 2016), the Court of Chancery of Delaware granted former members of OM Group, Inc. (“OM” or the “Company”) board of directors’ (“Defendants”) Motion to Dismiss former OM stockholders’ (“Plaintiffs”) Consolidated Amended Certified Class Action Complaint (the “Complaint”) for failure to state a claim on which relief can be granted pursuant to Fed. R. Civ. P. 12(b)(6).

On behalf of the Company, Plaintiffs sought declarations that the individual former directors of OM breached their fiduciary duties by entering into a merger and an award of post-closing “recessionary damages.” In the Complaint, Plaintiffs alleged Defendants rushed to sell OM to avoid a prolonged proxy fight and wrapped its business units in one package ignoring the Company’s financial advisors’ opinion that separate sales would yield maximum value.

According to the complaint, OM, a Delaware corporation, was a global chemical and technology conglomerate comprised of five diverse business units. After ten years of engaging in a growth strategy favoring acquisitions, OM’s lackluster performance became the focus of several shareholder proposals. Soon thereafter, potential strategic purchasers began expressing interest in OM’s various business lines.

After receiving an indication of acquisition interest, the Company limited its outreach efforts “to financial buyers reasonably likely to consider a transaction involving a sale of the entire company,” despite having been advised that its ability to maximize value through a merger or sale of the whole company would be limited. Prior to approving an offer to acquire all of OM’s outstanding shares, the OM Board reached an agreement with an activist investor. In particular, the Company agreed to include two of the investor’s nominees in the Company’s proxy statement and to expand the Board by one seat to be filled by an additional stockholder nominee. The investor agreed to abide by standstill provisions, which prohibited, among other things, participation in merger proposals or communications in opposition to any merger. The OM Board then held a special stockholder meeting to vote on a merger agreement, resulting in stockholder approval by a margin of 10:1.

Plaintiffs alleged the Defendants acted unreasonably in approving the transaction and breached their fiduciary duties under Revlon. First, Plaintiffs asserted Defendants “deliberately shut out strategic acquirors from the process in favor of a quick deal” to avoid a proxy fight. Second, Plaintiffs asserted Defendants failed to manage conflicts of interest among its investment bankers. Lastly, Plaintiffs asserted Defendants allowed a less-than-reasonable merger price to appear fair to stockholders by including manipulated projections and misleading, incomplete public disclosures in the Company’s proxy materials, which resulted in overwhelming shareholder support to approve the merger. Defendants moved to dismiss on the grounds that the irrebuttable business judgment rule applied because the majority of fully informed, uncoerced, disinterested stockholders voted in favor of the merger.

When considering a breach of fiduciary duties claim in regard to a board of directors’ course of conduct in negotiating and approving a corporate transaction, the court must first determine the applicable standard of review. Where a sale is inevitable, the enhanced Revlon scrutiny applies, and the court considers whether the directors “acted reasonably to pursue the transaction that offered the best value reasonably available to the [company’s] stockholders.” Where the disinterested stockholders approve the transaction through a fully-informed, uncoerced vote, however, the board’s decision to approve the transaction is “insulate[d] . . . from all attacks other than on grounds of waste.” Under the business judgment rule, the entire fairness standard applies. To hold directors liable under this standard, a plaintiff must “(1) demonstrate that the transaction amounted to corporate waste; or (2) demonstrate that the stockholder vote was uninformed or coerced.” A successful challenge to the soundness of the shareholder vote requires showing the directors either omitted material information or made material misrepresentations to stockholders regarding the transaction. For a fact to be considered material, it must present a “substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.”

The court reasoned the Company’s disclosures with respect to a competing bid, an alleged conflict of interest, and the engagement of a second financial advisor, were adequate. First, the court opined the disclosures regarding a competing proposal obtained during the Go-Shop Period adequately provided stockholders with the necessary information to conclude the “Board, in good faith, had determined that the offer would not be more favorable to stockholders.” Next, the court determined Plaintiffs failed to allege any facts plausibly suggesting an actual conflict of interest existed. Thus, omissions regarding the potential conflict could not be deemed material. Finally, with respect to the financial advisor’s engagement, the court concluded the stockholders were fully informed because the terms and circumstances of that engagement were disclosed in the proxy materials.

Accordingly, because the majority of the disinterested stockholders were uncoerced and fully informed and approved the merger, the court held Plaintiffs failed to overcome the presumption of the business judgment rule. As such, the court granted Defendants’ Motion to Dismiss the Complaint.

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

Thursday
Aug242017

No-Action Letter Relief Issued: Berry Plastics Group, Inc. Substantially Implemented Proxy Access Bylaw Proposal

 

In Berry Plastics Grp., Inc., 2016 WL 6649050 (Dec. 14, 2016), Berry Plastics Group, Inc. (“Berry Plastics” or the “Company”) asked the staff of the Securities and Exchange Commission (the “SEC staff”) to permit the omission of a proposal submitted by Myra K. Young (“Shareholder”) requesting that Berry Plastics’s Board of Directors adopt an amendment to the Company’s bylaws to provide shareholders proxy access. The SEC staff issued the no-action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(10).

Shareholder submitted a proposal requesting the following: 

RESOLVED: Shareholders of the Berry Plastics Group (the “Company”) ask the board of directors to amend its bylaws or other documents, as necessary, to provide proxy access with essential elements for substantial implementation as follows:

1) Nominating shareholders or shareholder groups (“Nominators”) must beneficially own 3% or more of the Company’s outstanding common stock (“Required Stock”) continuously for at least three years and pledge to hold such stock through the annual meeting.

2) Nominators may submit a statement not exceeding 500 words in support of each nominee to be included in the Company proxy.

3) The number of shareholder-nominated candidates eligible to appear in proxy materials shall be one quarter of the directors then serving or two, whichever is greater.

4) No limitation shall be placed on the number of shareholders that can aggregate their shares to achieve the 3% of Required Stock.

5) No limitation shall be placed on the re-nomination of shareholder nominees by Nominators based on the number or percentage of votes received in any election.

6) The Company shall not require that Nominators pledge to hold stock after the annual meeting if their nominees fail to win election.

7) Loaned securities shall be counted as belonging to a nominating shareholder if the shareholder represents it has the legal right to recall those securities for voting purposes and will hold those securities through the date of the annual meeting.

Berry Plastics sought exclusion of the proposal from its proxy materials under subsection (i)(10) of Rule 14a-8.

Rule 14a-8 permits shareholders to include proposals in the company’s proxy statement. 17 C.F.R. 240.14a-8. Shareholders, however, must meet certain procedural and ownership requirements. Additionally, the Rule contains thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Under Rule 14a-8(i)(10), a shareholder proposal may be excluded if the proposal has been substantially implemented. For a proposal to be considered substantially implemented, a company’s actions must have satisfactorily addressed the proposal’s underlying concerns and essential objective. A proposal need not be “fully effected,” however, to be deemed substantially implemented, but rather the company’s policies, practices, and procedures must compare favorably with the proposal’s guidelines. In regard to proposals relating to proxy access, where a company has not yet adopted a proxy access bylaw, its commitment to doing so suffices, so long as the company supplements its request for no-action relief by notifying the Staff that such action has been taken. For additional explanation of this exclusion, 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).

Berry Plastics argued the proposal was substantially implemented and should be excluded under Rule 14a-8(i)(10) because the Board of Directors expected to adopt bylaw amendments that would provide for “a meaningful form of proxy access.” The Company recognized that the bylaw amendments would differ in certain respects from the proposal, namely the number of stockholders who could comprise of a “group” to meet the ownership threshold would be limited to twenty. Additionally, the number of stockholder nominated director candidates would be limited to two or twenty percent of the total number of directors, and a repeat nominee would be disqualified for re-nomination after receiving less than twenty-five percent of the total votes cast in either of the two most recent annual meetings. Berry Plastics’ Board of Directors subsequently approved the proxy access bylaws and provided the Staff with notice of such action, including a side-by-side comparison of the adopted bylaws and the proposal.

Shareholder declared it would not pursue the proposal further, but disagreed that it had been substantially implemented.

The SEC staff permitted Berry Plastics to omit the proposal in reliance on Rule 14a-8(i)(10) because the Company demonstrated that the Board of Directors had substantially implemented the proposal by adopting a proxy access bylaw that addressed the proposal’s essential objective.

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

Thursday
Aug242017

The Fifth Circuit Court of Appeals Dismisses Sessa Capital’s Injunction Appeal as Moot

In Ashford Hosp. Prime, Inc. v. Sessa Capital (Master), LP, No. 16-10671, 2016 BL 418598 (5th Cir. Dec. 16, 2016), the Fifth Circuit Court of Appeals dismissed hedge fund Sessa Capital’s (“Sessa”) appeal of the district court’s decision.  Sessa had filed for injunctive relief concerning the election of the board of director at Ashford Hospitality Prime, Inc.’s (“Ashford Prime”) annual meeting.  The court found the appeal moot since the injunctive relief did not present a live controversy.

Sessa sought to nominate directors to replace five current members of the Ashford Prime board.  Ashford Prime’s bylaws required nominees to submit, in advance, questionnaires so that the Board could evaluate their qualifications and plans if elected. Sessa’s candidates provided the required questionnaires, but Ashford Prime rejected them as incomplete and alleged nondisclosure of plans to either force sale of the company or invalidate an advisory agreement containing a substantial termination fee in the event of major board composition changes.

Sessa argued these omissions were immaterial and filed suit in Maryland seeking court ordered approval of the nominees. In the litigation that ensued, Sessa sought to prevent Ashford Prime from soliciting proxies until the board approved Sessa’s candidates. Consequently, Ashford Prime sought a court declaration that the Sessa candidates were ineligible due to their incomplete and noncompliant questionnaires. 

The district court, applying Maryland law, ruled in favor of Ashford Prime, finding that the business judgment rule warranted deference to Ashford Prime’s decision to deny approval of Sessa’s candidates.  Sessa filed a notice of appeal from the district court’s order denying its request for injunction and granting Ashford Prime’s request. Sessa asked the Fifth Circuit to stay the district court’s order and postpone the June 10 election until resolution of the appeal. A motions panel denied Sessa’s request and the board election occurred on June 10, 2016, resulting in the re-election of Ashford Prime’s board directors. 

Sessa pursued the appeal of the injunction alleging the business judgment rule did not apply to board election matters. Ashford Prime filed a motion to dismiss the appeal as moot given the election had already taken place. Sessa argued its appeal was not moot for three reasons: (1) the part of the injunction enjoining it from soliciting votes extended beyond the June election, (2) the appeal constituted an “exceptional situation”, and (3) success in the appeal could invalidate the election.

With respect to the continuing nature of the injunction, the court found the matter abandoned because the appeal did not ask for changes to that portion of the preliminary injunction.  The court also acknowledged the exception to mootness for situations “capable of repetition yet evading review”.  Sessa’s failure to obtain a stay in this case did not establish it would be unable to do so in a repeat controversy.

As for the argument against mootness that the court could invalidate the results of the election, interlocutory review was only possible of relief sought in trial court.  28 U.S.C. § 1292(A)(1).   Sessa, however, provided no argument in the alternative stipulating that if the election took place, results should be invalid.

Accordingly, the court dismissed the appeal as moot.  The court did not express a view whether Sessa may start again in a trial court requesting the relief of undoing the June election or whether such relief is warranted in the event it can establish liability.

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

Wednesday
Aug232017

No-Action Letter for Apple, Inc. Denied Exclusion of Request for Apple to Retain Additional Compensation Consultants

In Apple Inc., 2016 BL 360609 (Oct. 26, 2016), Apple Inc. (“Apple”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by Jing Zhao (“Shareholder”) requesting that Apple retain additional independent compensation consultants to reform its executive compensation policies. The SEC declined to issue a no action letter, concluding Apple could not exclude the proposal under Rules 14a-8(i)(3), 14a-8(i)(6), or 14a-8(i)(7).

Shareholder submitted a proposal providing that:

RESOLVED, shareholders recommend that Apple Inc. engage multiple outside independent experts or resources from the general public to reform its executive compensation principles and practices.

Apple sought exclusion under subsections (i)(3), (i)(6), or (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 (2016).

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 any of 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.”

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.

Rule 14a-8(i)(7) permits a company to exclude a shareholder proposal from its proxy materials if the proposal relates to the company’s “ordinary business operations.” This section understands that certain tasks are “so fundamental to management’s ability to run a company on a day-to-day basis that they could not, as a practical matter, be subject to direct shareholder oversight.” The staff considers “the degree to which the proposal seeks to ‘micro-manage’ the company by probing too deeply into matters of a complex nature upon which shareholders, as a group, would not be in a position to make an informed judgment.” For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7).

Apple argued for exclusion under Rule 14a-8(i)(3) because the proposal failed to define “Outside Independent Experts,” “Resources,” and “General Public.” Absent definitions, these terms subjected the proposal to multiple interpretations regarding the manner of implementation.  Apple also asserted that the proposal was ambiguous to whom it applied – the company or the board of directors.

Apple also sought exclusion under Rule 14a-8(i)(6) because the company lacked the power to implement the proposal. Specifically, the implementation would cause the company to violate SEC rules relating to compensation committees, as well as the listing standards of the NASDAQ stock market, the principal exchange for Apple’s shares.

Apple further argued for exclusion under Rule 14a-8(i)(7) because the proposal urged the company to change the process for making compensation decisions.  Therefore, the proposal sought to mandate a hiring decision, which the staff consistently allowed exclusion of under subsection (i)(7).

In response, Shareholder argued that the key terms were defined or commonly used words.  Moreover, any lack of specific definitions gave the company flexibility in implementing the proposal. In addition, Shareholder argued the company had the power and authority to implement the proposal without violating applicable laws and rules. Finally, Shareholder urged the proposal dealing with compensation policies was not related to the company’s hiring decisions, and thus was not an ordinary business matter.

The SEC disagreed with Apple’s arguments, and concluded Apple may not omit the proposal from its proxy materials in reliance on Rule 14a-8(i)(3), (i)(6), or (i)(7). The staff noted the proposal was not “so inherently vague or indefinite” that the shareholders or the company would not be able to determine exactly what actions or measures the proposal requires. In addition, the staff did not agree with Apple that the company lacked the power or authority to implement the proposal. While the proposal focused on senior executive compensation, the staff determined it could not be excluded as ordinary business matters.

The primary materials for this no action letter can be found on the SEC Website

Tuesday
Aug222017

Wells Fargo Fraudulent Account Opening Litigation: Response to Mitchell Motion to Transfer Actions

In In re: Wells Fargo Fraudulent Account Opening Litig., J.P.M.L., No. 2766, (March 28, 2017), Wells Fargo Bank, N.A. and Wells Fargo & Company (“Defendants”) responded to Plaintiffs’ pending motion to transfer putative class actions. See Jabbari, et al. v. Wells Gargo & Co., et al., No. 3:15-cv-02159-VC (N.D. Cal., filed May 13, 2015) (“Jabbari Action”), pursuant to 28 U.S.C. § 1407.

 

According to the allegations in the complaint, Defendants, acting without the consent of Plaintiffs, opened accounts in their names and enrolled them in, or submitted applications on their behalf for, various products and services.  Defendants provided notice of a proposed nationwide settlement in the Jabbari Action, which would encompass all members of the putative class and cover allegations from January 1, 2009, through the date of the settlement agreement.

 

Under 28 U.S.C. § 1407, putative class actions may be transferred for centralization of pretrial proceedings upon the MDL Panel’s determination “that transfers for such proceedings will be for the convenience of parties and witnesses and will promote the just and efficient conduct of such actions.”

 

In light of the proposed settlement agreement, Defendants argued the centralization of pretrial proceedings and creation of a multidistrict litigation (MDL) would hinder the settlement proceedings and delay the resolution of these actions.  Furthermore, Defendants claimed that even after the court in the Jabbari Action granted preliminary approval to the prosed settlement, other plaintiffs in the related actions could opt out or object to the class-wide settlement offer.  If the claims do not settle, Defendants claimed the Mitchell party would be free to file a new transfer motion at a later time.  Accordingly, Defendants requested the MDL Panel to either deny the motion or defer ruling on the pending motion until after the resolution of the settlement proceedings.

 

For the above reasons, the court denied Plaintiffs’ motion for centralization.

 

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

Tuesday
Aug222017

No-Action Letter for Walgreens Boots Alliance, Inc. Allowed Exclusion of Report Assessing the Risks of Continued Tobacco Sales

In Walgreens Boots Alliance, Inc., 2016 BL 376203 (Nov. 7, 2016), Walgreens Boots Alliance (“Walgreens”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit omission of a proposal submitted by the Sisters of the Humility of Mary (“Shareholders”) requesting that the board of directors issue a report about the risks of the continued sales of tobacco products in Walgreens’ stores. The SEC issued the requested no action letter, and concluded Walgreens could omit the proposal from its annual proxy statement under Rule 14a-8(i)(7).

Shareholders submitted a proposal providing that:

RESOLVED, Shareholders request the Board of Directors issue a report within six months of the 2017 annual meeting, at reasonable expense and excluding proprietary information, assessing the financial risk, including long-term legal and reputational risk, of continued sales of tobacco products in our stores.

Walgreens sought exclusion under Rule 14a-8(i)(7).

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. Additionally, companies may exclude proposals that fall under thirteen substantive grounds provided in Rule 14a-8(i). For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

Subsection (i)(7) permits the exclusion of proposals that relate to the company’s “ordinary business operations.” This section understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a daily basis. Thus, proposals relating to ordinary business are not subjected to shareholder oversight. For additional explanation of this exclusion, see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, and Adrien Anderson, The Policy of Determining Significant Policy Under Rule 14a-8(i)(7)

Walgreens argued the proposal related to ordinary business operations because the underlying subject matter concerned the sale of particular products and services. Specifically, Walgreens argued the Commission has consistently permitted the exclusion of proposals that relate to the sale of a particular product as a component of “ordinary business.” Walgreens further asserted the proposal sought to impose an obligation for the company to re-examine its decision to sell a particular product, and therefore the proposal was excludable as its subject matter involved “ordinary business.”

In response, the Shareholders argued that the sales of tobacco products by pharmaceutical companies constituted an exception to this general rule as implicating a significant policy issues. Shareholders asserted there was a sufficient nexus between the sales of tobacco products and the death of customers to create a significant policy issue for the company.

The Commission agreed with Walgreens reasoning, and concluded it would not recommend enforcement action if Walgreens omitted the proposal from its proxy materials under subsection (i)(7). The staff noted the proposal related to ordinary business operations.

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

Monday
Aug212017

In Re Stifel, Nicolaus & Co.: Stifel, Nicolaus & Co. Agreed to Settle SEC Charges

In In re Stifel, Nicolaus & Co., Inc., Investment Advisors Act Release No. 4665 (admin proc Mar. 13, 2017), the Securities and Exchange Commission (“SEC”) filed an order instituting cease-and-desist proceedings against Stifel, Nicolaus & Co., Inc. (“Stifel”) pursuant to Section 203(k) of the Investment Advisers Act of 1940 (“Advisers Act”) for alleged violations of Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder for failure to fully disclose charges associated with its wrap fee programs. Stifel submitted an Offer of Settlement (the “Offer”) and the SEC accepted the Offer, which neither admitted nor denied the allegations.

Under the facts alleged by the Commission, Stifel offered clients a “wrap fee program.” The program allowed clients to pay “a single fee for investment advisory services, trade execution services, custody and other standard brokerage services.” Moreover, under the arrangement, clients did not have to pay commissions.” Where, however, sub-advisers “traded away” by using a broker other than Stifel, the client could “incur additional trading costs such as commissions and fees that are paid to the executing broker-dealer.”

In the first quarter of 2015, Stifel began collecting information on the additional commissions and fees for transactions executed through other brokers. Stifel learned that a “number of sub-advisers placed a majority of client trades with broker-dealer firms other than Stifel for execution while incurring additional trading costs.” Once uncovered, Stifel began providing the information to wrap fee clients on the confirmation of any trade.

Section 206(4) of the Advisers Act and Rule 206(4)-7 thereunder require investment advisers to “adopt and implement written policies and procedures reasonably designed to prevent violation . . . of the Act and the rules that the Commission has adopted under the Act.”

According to the Commission, Stifel failed to adopt or implement policies or procedures to disclose this information to financial advisors or its clients. Without this information, financial advisers were unable to consider the additional commissions and fees associated with trading away practices when analyzing the suitability for advisory clients of particular sub-advisers in the wrap fee program. By failing to implement these policies and procedures, the SEC alleged Stifel violated Section 206(4) of the Advisers Act and Rule 206(4)-7.

The SEC ordered Stifel to cease and desist from committing or causing any violations and any future violations and assessed a civil penalty of $300,000. In resolving the case, the SEC considered both Stifel’s voluntary remedial acts and undertakings, and its cooperation with the SEC staff. Stifel promptly undertook steps to strengthen its compliance function, to review and update its policies and procedures related to tracking and disclosing the trading away practices and associated costs by the sub-advisers, to periodically provide this information to clients and financial advisors in the wrap free program, and to develop and conduct training for financial advisors regarding how to use this information in assessing whether an investment is suitable for a particular client.

For the foregoing reasons, the SEC accepted the Offer from Stifel and deemed it appropriate to impose the sanctions agreed to in the Offer.

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

Monday
Aug212017

Cease-and-Desist: In re Citigroup Global Markets, Inc.; In re Morgan Stanley Smith Barney LLC.

In In the Matter of Citigroup Global Markets, Inc., SEC Admin. Proc. File no. 3-17808 (Jan. 24, 2017), and In the Matter of Morgan Stanley Smith Barney LLC, SEC, Admin. Proc. File No. 3-17809 (Jan. 24, 2017), the Securities and Exchange Commission (“Commission”) found, in actions where the respondents neither admitted nor denied the findings, that Citigroup Global Markets Inc., (“CGMI”), and Morgan Stanley Smith Barney LLC (“MSSB”) violated Section 17(a)(2) of the Securities Act of 1933 (“Securities Act”).  CGMI and MSSB consented to the order of a cease-and-desist order based on the alleged violations and agreed to pay civil penalties to resolve the proceedings. 

According to the Order, CGMI is a wholly owned indirect subsidiary of Citigroup, Inc. that functions as a broker-dealer and investment advisor.  At the time of events, CGMI held 49% ownership interest in MSSB, a limited liability company that was also a broker dealer and investment advisor.  CGMI developed several quantitative foreign exchange trading models called the CitiFX Alpha family of strategies and incorporated them into the CitiFX Alpha Program, a financial program that operated as an investment contract to certain brokerage customers and advisory clients of MSSB (the “Relevant Investors”).  

Upon enrolling in the CitiFX Alpha Program, Relevant Investors opened foreign exchange trading accounts at CGMI and posted cash or securities to those accounts as collateral.  Financial advisors at MSSB, in tandem with CGMI, selected the notional amounts that the Relevant Investors traded.  Some Relevant Investors posted collateral as little as ten percent of their notional amount.  Additionally, Relevant Investors’ financial advisors were responsible for the size of the mark-ups charged on all CitiFX Alpha trades. 

The Commission claimed the two major assumptions regarding the CitiFX Alpha’s past performances were not adequately disclosed to the Relevant Investors during PowerPoint and oral presentations by CGMI personnel and MSSB financial advisors.  The presentations used past performance and risk metrics that assumed fully collateralized accounts, or accounts that had an equal amount of collateral to the notional amount.  The presentations also assumed no mark-ups would be charged on trades.  

The Commission also stated that the Relevant Investors included “individuals who had no experience in foreign exchange trading and who did not understand what a notional amount is; that the cash they posted to their foreign exchange accounts merely served as collateral; or that there was a difference between the notional amounts they traded and the amount of collateral they posted to their accounts.” 

Section 17(a)(2) of the Securities Act, 15 U.S.C. § 77q(a)(2), prohibits any person in the offer or sale of a security from obtaining money or property by means of any untrue statement of a material fact or any omission of material fact necessary to make statements, in light of the circumstances under which they were made, not misleading.  

The Commission determined that CGMI and MSSB had violated section 17(a)(2) of the Securities Act for failing to disclose the metrics used in presentations were not reflective of the degree of leverage the Relevant Investors would need, and for failing to disclose the adequate amount of mark-ups to be employed.  Both omissions materially altered disclosed performance and risk metrics, meaning that CGMI and MSSB omitted material information necessary to make non-misleading statements about the CitiFX Alpha program. 

CGMI and MSSB agreed the sanctions imposed by the Commission and the cease-and-desist order for their violations.  Each party was ordered to pay discouragement of $624,458.27, prejudgment interest of $89,277.34, and a civil money penalty in the amount of $2,250,000.00 to the Commission within 21 days. 

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

Sunday
Aug202017

The Director Compensation Project: Exxon Mobil (XOM)

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 (NASDAQ:XOM) Exxon Mobil 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 ($)

M.J. Boskin

110,000

193,000

0

239

303,239

P. Brabeck-Letmathe

110,000

193,000

0

239

303,239

A.F. Braly*

65,879

719,840

0

147

785,866

U.M. Burns

110,000

193,000

0

239

303,239

L.R. Faulkner

120,000

193,000

0

239

313,239

J.S. Fishman

73,957

193,000

0

151

267,108

H.H. Fore

110,000

193,000

0

239

303,239

K.C. Frazier

110,000

193,000

0

239

303,239

D.R. Oberhelman

110,000

193,000

0

239

303,239

S.J. Palmisano

120,000

193,000

0

239

313,239

S.S Reinemund

115,989

193,000

0

239

309,228

W.C. Weldon

110,000

193,000

0

239

303,239

*Ms. Braly joined the board in 2016. Ms. Braly received a one-time grant of 8,000 restricted shares upon first being elected to the Board in May 2016. The valuation of this award is based on the market price of $89.98 on the date of the grant

 

Director Compensation. During 2016, the board held 12 meetings. Roughly 93% of the directors attended the board and committee meetings in which no single director attended less than 75% of the meetings. Only the non-employee directors were reimbursed for expenses incurred from attending the board meetings.

 

Director Tenure. The longest tenure has been held by Michael Boskin, who has been on the board since 1996. Mr. Boskin currently serves at the CEO of Boskin & Co. Susan Avery holds the shortest tenure, as she began serving as a director in 2017. Ms. Avery has previously served as the President and Director of Woods Hole Oceanographic Institution, however, currently does not hold any other board or executive positions.

 

Executive Compensation. R.W. Tillerson served as CEO until the end of 2016 in which he was succeed by Darren Woods.  Mr. Tillerson’s salary was $3,167,000 with a $1,670,000 bonus and $19,731,375 stock award. Mr. Tillerson’s total compensation for the 2016 year equaled $27,393,342. Mr. Woods total compensation in 2016 was $3,805,931, with a salary of $1,000,000, bonus of $1,232,000 and stock award of $12,014,215. M.J. Dolan has served as Senior Vice President since 2008 and earned a total compensation of $15,645,735 during the 2016 fiscal year. Mr. Dolan received a salary of $1,385,000 with a $1,145,000 bonus and $10,874,180 stock award. 

Friday
Aug182017

No-Action Letter for Deere & Company Permitted Exclusion of Emissions Elimination Proposal

In Deere & Co., 2016 BL 406370 (Dec. 5, 2016), Deere & Company (“Deere”) requested the staff of the Securities and Exchange Commission (“SEC”) permit omission of a proposal submitted by Christine Jantz (“Shareholder”) requesting the board of directors generate a plan to reach net-zero greenhouse gas emissions by the year 2030. The SEC agreed to issue the requested no-action letter allowing for exclusion of the proposal under Rule 14a-8(i)(7).

Shareholder submitted a proposal stating:

 

  • RESOLVED: Shareholders request that the Board of Directors generate a feasible plan for the Company to reach a net-zero [greenhouse gas] emission status by the year 2030 for all aspects of the business which are directly owned by the Company, including but not limited to manufacturing and distribution, research facilities, corporate offices, and employee travel, and to report the plan to shareholders at reasonable expense, excluding confidential information, by one year from the 2017 annual meeting.

 

Deere argued the proposal may be excluded from its proxy materials under Rule 14a-8(i)(7).

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. 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.

Under Rule 14a-8(i)(7), a company may exclude proposals that relate to the company’s “ordinary business” operations. The SEC understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a day-to-day basis. If the proposal, however, raises a significant social policy issue, the proposal may not be excluded as long as a “sufficient nexus exists between the nature of the proposal and the company.” 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), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).

Deere argued for omission under Rule 14a-8(i)(7) because the proposal detailed how the board of directors should plan to reduce emissions and would “transfer responsibility for critical operational and production decision-making from the board and management to the shareholders”.  Deere further argued the social policy exception should not apply given the absence of a clear nexus between climate change and the machinery manufacturing business. Even if the SEC determined the nexus sufficient, the proposal sought to micromanage by imposing a time frame for complex policy implementation, thus the social policy exception still would not apply.

In response, the Shareholder argued catastrophic climate change implicated a significant policy issue with a clear nexus to Deere because large manufacturing companies had energy-intensive operations. The Shareholder further asserted the proposal did not micromanage as it gave Deere the flexibility to determine the means of greenhouse gas elimination and only provided an overall goal.

The SEC agreed with Deere’s reasoning, and concluded Deere may exclude the proposal under subsection (i)(7). The staff noted the proposal sought to micromanage the company by probing too deeply into complex matters beyond the shareholders purview. Therefore, the staff concluded it would not to recommend enforcement of action for the proposal’s omission from proxy materials.

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

Thursday
Aug172017

The Director Compensation Project: Caterpillar (CAT)

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 Caterpilar’s (NYSE: CAT) 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

($)

 

Option Awards

($)

 

All Other Compensation ($)

 

 

Total

($)

David L. Calhoun

150,000

125,015

0

0

275,015

Daniel M. Dickinson

150,000

125,015

0

32,696

307,711

Juan Gallardo

150,000

125,015

0

13,051

288,066

Jesse J. Greene, Jr.

150,000

125,015

0

2,000

$277,015

Jon M. Huntsman, Jr.

150,000

125,015

0

0

275,015

Dennis A. Muilenburg

150,000

125,015

0

0

275,015

William A. Osborn

170,000

125,015

0

13,051

308,066

Debra L. Reed

150,000

125,015

0

2,100

277,115

Edward B. Rust, Jr.

175,000

125,015

0

22,833

322,848

Susan C. Schwab

150,000

$125,015

0

15,000

290,015

Miles D. White

170,000

$125,015

0

8,000

303,015

 

Director Compensation. During the fiscal year 2016, Caterpillar held nine board of directors meetings and 23 committee meetings. Each current director attended at least 75% of the 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%. All directors attended the 2016 shareholders meeting. Directors may defer 50% or more of their annual cash retainer and stipend into an interest-bearing account or an account representing phantom shares of Caterpillar stock. Directors that joined the Board prior to 2008 also participate in a Charitable Award Program, under which a donation of up to $500,000 will be made by Caterpillar, in the director’s name, to charitable organizations selected by the director and $500,000 to the Caterpillar Foundation. Directors derive no financial benefit from the program.

 

Director Tenure. Mr. Gallardo held the longest tenure since joining the board in 1998. Ms. Reed joined the board in 2015, holding the shortest tenure. All directors but Mr. Greene and Mr. Dickinson sit on other boards of public companies: Mr. Calhoun serves as a director for Nielsen Holdings PLC and The Boeing Company; Mr. Gallardo serves as a director for Grupo Aeroportuario del Pacifico, S.A.B. de C.V., Grupo Financiero Santander Mexico, S.A.B. de C.V., and Organización CULTIBA, S.A.B. de C.V.; Mr. Huntsman serves as a director for Chevron Corporation, Ford Motor Company, and Hilton Worldwide Holdings Inc.; Mr. Muilenburg serves as chairman for The Boeing Company; Mr. Osborn serves as a director for Abbott Laboratories and General Dynamics Corporation; Ms. Reed serves as a director for Halliburton Company and chairman for Sempra Energy; Mr. Rust serves as a director for Helmerich & Payne, Inc. and S&P Global Inc.; Ms. Schwab serves as a director for FedEx Corporation, Marriott International, Inc., and The Boeing Company; and Mr. White serves as a director for Abbott Laboratories and McDonald’s Corporation.

 

Compensation. Douglas R. Oberhelman retired from the role of CEO on December 31, 2016 and remained the Executive Chairman until his retirement from the Company on March 31, 2017. Mr. Oberhelman earned total compensation of $15,472,514 in 2016. He earned a base salary of $1,600,008, stock awards of $3,577,816, option awards of $7,218,819, incentive compensation of $2,891,179, deferred earnings of $3,658, and other compensation totaling $181,034. David P. Bozeman, Senior Vice President, earned total compensation of $7,300,960 in 2016. He earned a base salary of $698,904, stock awards of $1,412,362, option awards of $2,324,923, incentive compensation of $471,608, and other compensation totaling $2,393,163.

Wednesday
Aug162017

The Director Compensation Project: Johnson & Johnson (JNJ)

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 Johnson & Johnson’s (NYSE: JNJ) 2017 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

 

Name

Fees Earned or Paid in in Cash ($)

Stock Awards ($)

Option Awards ($)

All Other Compensation ($)

Total ($)

M. C. Beckerle(1) 

111,667

164,985

0

17,800

294,452

M. S. Coleman(2) 

36,666

164,985

0

20,000

221,651

D. S. Davis

135,000

164,985

0

0

299,985

I. E. L. Davis

110,000

164,985

0

0

274,985

S. L. Lindquist(3) 

107,038

164,985

0

1,500

273,523

M. B. McClellan

110,000

164,985

0

0

274,985

A. M. Mulcahy

140,000

164,985

0

20,000

324,985

W. D. Perez

130,000

164,985

0

20,000

314,985

C. Prince

130,000

164,985

0

20,000

314,985

A. E. Washington

110,000

164,985

0

20,000

294, 985

R. A. Williams

130,000

164,985

0

20,000

314,985

 (1) Appointed Chair of Science, Technology & Sustainability Committee in December 2016. Chairman retainer payment was prorated.

(2) Retired from the Board in April 2016. Cash fees are pro-rated for partial year of service

(3) Passed away in October 2016

 

Director Compensation. During fiscal year 2016, Johnson & Johnson’s board held nine regular meetings and one special meeting. All directors attended at least 75% of the regularly-scheduled and special meetings. Non-employee directors receive an annual retainer of $110,000. The Chair of each committee receives an additional annual retainer of $20,000, except for the Audit Committee Chair who receives an additional annual retainer of $25,000. The Lead Director receives an additional annual retainer of $30,000. Other compensation included perquisites and other personal benefits, tax reimbursements, company contributions to the 401(k) Savings Plan, insurance premiums, stipends, and relocation.

 

Director Tenure. Ms. Beckerle is the shortest serving director, having joined in 2015. Ms. Beckerle serves as a director for American Association for Cancer Research. America. Mr. Prince is the longest serving director, having served since 2006.

 

CEO Compensation. Mr. Alex Gorsky serves as Chairman Board of Directors and Chief Executive Officer. In 2016, Mr. Gorsky earned total compensation of $ 26,871,720. Mr. Gorsky earned a base salary of $1,600,000, stock awards of $10,608,901, long-term incentive compensation of $16,848,019, deferred compensation of $5,663,771, option awards of $4,118,398 and other compensation totaling $228,094. Mr. Paulus Stoffels, Executive Vice President and Chief Scientific Officer, was the second highest compensated Johnson & Johnson executive. In 2016, Mr. Stoffels earned total compensation of $12,725,476. Mr. Stoffels received a base salary of $765,833, stock awards of $4,294,312, incentive compensation of $1,144,000, deferred compensation of $2,642,012, and other compensation totaling $380,232.

 

Tuesday
Aug152017

Kokocinski v. Collins: Application of the Business Judgment Rule  

In Kokocinski v. Collins, 850 F.3d 354 (8th Cir. 2017), the Eighth Circuit Court of Appeals affirmed the dismissal of Charlotte Kokocinski’s (“Plaintiff”) shareholder derivative action against Medtronic’s directors and officers (“Defendants”) and the Special Litigation Committee formed by Medtronic (“SLC”). The court held that the District Court did not abuse its discretion because Defendants properly formed the SLC, the SLC was entitled to discretion under the Business Judgment Rule (“BJR”), and the District Court exercised sound discretion in concluding discovery was not necessary.

According to the allegations, Medtronic was the subject of a well-publicized controversy and Public Heath Notification by the Food and Drug Administration (“FDA”) because of the promotion to physicians of an “off-label” use of its “Infuse” product. Medtronic’s revenue and share price suffered as a result of the negative publicity.

Plaintiff brought a derivative action alleging that Defendants “violated §14(a) of the Exchange Act, 15 U.S.C. § 78(n)(a), breached their fiduciary duties, wasted corporate assets, and had been unjustly enriched.” In response, Defendants formed the SLC, which concluded it would not be in Medtronic’s best interest to pursue litigation. The court dismissed the derivative action.

After exercising inspection rights, Plaintiff an amended complaint.  According to the complaint, Medtronic did not properly form the SLC.  The SLC itself was not given authority to pursue litigation  and the committee’s decision was not binding. Plaintiff alleged the SLC was not entitled to deference under the BJR because the SLC did not consist of disinterested and independent members and because the SLC’s report did not sufficiently address Plaintiff’s allegations. Finally, Plaintiff alleged the district court committed reversible error by declining to order discovery before deciding on the motion to terminate.  

The Minnesota Supreme Court requires courts to apply the BJR and defer to an SLC’s recommendation “if the proponent of that decision demonstrates that (1) the members of the SLC possessed a disinterested independence and (2) the SLC’s investigative procedures and methodologies were adequate, appropriate, and pursued in good faith.” Under Rule 23.1(c), a “derivative action may be settled, voluntarily dismissed, or compromised only with the court’s approval.” The Court found Rule 23.1(c) “voluntary dismissal” to be the closest analog to a motion to terminate because a shareholder’s derivative claim belongs to the corporation. Thus, the Court concluded the proper standard of review was an abuse of the District Court’s discretion.

In affirming the decision, the Court determined Defendants properly formed the SLC, Defendants were bound by the SLC’s decision regarding whether to pursue litigation, and the SLC’s investigation warranted deference to its report under the BJR. The court held that the district court did not abuse its discretion in determining the SLC was independent and disinterested and the SLC’s investigation “easily met the requirements of Minnesota’s BJR” because the investigation was extensive in both length and scope. Finally, the court concluded the District Court’s denial of discovery was not reversible error because the evidence available was sufficient to “establish the SLC’s independence and the validity of its methodology.”  

For the above reasons, the court affirmed the district court’s dismissal of Plaintiff’s shareholder derivative action.

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