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Thursday
Jun262014

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

 This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are, for the most part, including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

 NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management. See Exchange Act Release No. 68639 (Jan. 18, 2013). 

 In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1. See 17 C.F.R. §§240.10A-3 & .10c-1.

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total
($)

John D. Baker II

151,000

150,005

0

5,000

306,005

Elaine L. Chao

105,000

150,005

0

10,000

265,005

John S. Chen

103,000

150,005

0

5,000

258,005

Llyod H. Dean

150,000

150,005

0

0

300,005

Susan E. Engel

139,000

150,005

0

0

289,005

Enrique Hernandez, Jr.

189,000

150,005

0

5,000

344,005

Donald M. James

109,000

150,005

0

5,000

264,005

Cynthia H. Milligan

148,000

150,005

0

5,000

303,005

Nicholas G. Moore*

54,500

0

0

80,000

134,500

Frederico F. Pena

115,000

150,005

0

0

265,005

James H. Quigley

26,750

87,512

0

0

114,262

Philip J Quigley*

45,000

0

18,063

80,000

143,063

Howard V. Richardson**

127,500

200,022

0

0

327,522

Judith M. Runstad

172,000

150,005

0

0

322,005

Stephen W. Sanger

176,000

150,005

0

5,000

331,005

Susan G. Swenson

115,000

150,005

0

0

265,005

John G. Stumpf***

0

0

0

0

0

*Compensation amount reflects fees earned through retirement date.

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

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

 

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

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

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

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

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

Wednesday
Jun252014

The Director Compensation Project: AT&T

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a).  This includes consideration of “personal and business relationships” between directors and management.  See Exchange Act Release No. 68639 (Jan. 18, 2013).

In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10C-1.  See 17  C.F.R. §§ 240.10A-3, 240.10C-1. 

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total*
($)

Gilbert F. Amelio**

118,200

150,000

0

250,060

518,477

Reuben V. Anderson

145,300

150,000

0

102

409,621

James H. Blanchard

211,300

150,000

0

27,240

443,544

Jaime Chico Pardo

145,100

150,000

0

15,102

310,202

Scott T. Ford

134,000

150,000

0

102

284,102

James P. Kelly

147,100

150,000

0

102

297,202

Jon C. Madonna

172,100

150,000

0

1,102

323,202

Michael B. McCallister***

132,683

150,000

0

12,813

295,496

John B. McCoy

151,600

150,000

0

10,102

311,702

Beth E. Mooney***

39,367

0

0

15,034

54,401

Joyce M. Roché

139,400

150,000

0

8,165

297,565

Matthew K. Rose

138,300

150,000

0

15,102

303,402

Cynthia B. Taylor***

80,517

0

0

60

80,576

Laura D’Andrea Tyson

137,700

150,000

0

102

294,709

* Total Compensation reflects annual changes in pension value, where applicable.

**Dr. Amelio retired from the Board in July 2013.

***Mr. McCallister, Ms. Mooney, and Ms. Taylor joined the Board in February 2013, September 2013, and June 2013, respectively.

Director Compensation. During 2013, the board held nine meetings. Each director attended at least 75% of the total number of board and committee meetings on which he or she served. All directors attended the 2013 Annual Meeting of Shareholders. Non-employee directors receive an annual retainer of $95,000, which remained the same from 2012, as well as $2,000 for each board meeting or corporate strategy session attended in person. The Chairman of each committee receives an additional annual retainer of $15,000, except for the Audit and Human Resources committee Chairmen who receive an additional annual retainer of $25,000. The Lead Director receives an additional annual retainer of $60,000. Under AT&T’s Non-Employee Director Stock and Deferral Plan, directors may elect to defer their fees and all or part of their retainers into a cash deferral account or deferred stock units. Additionally, non-employee directors receive an annual grant of fully earned and vested deferred stock units valued at $150,000. The AT&T Foundation matches directors’ charitable contributions up to $15,000 per year. However, in 2013, the Foundation made a charitable contribution of $250,000 on behalf of Dr. Amelio in connection with his retirement.  

Director Tenure. Dr. Amelio retired from the Board in July 2013. Mr. McCallister, Ms. Mooney, and Ms. Taylor joined the Board in February 2013, September 2013, and June 2013, respectively. A significant portion of the board members are relatively new to AT&T. In fact, five of the thirteen independent directors have been on the board for five or fewer years. Ms. Roché, however, holds the longest tenure having served on the board since 1998.  Several directors serve on the boards of multiple companies. Mr. Ford serves as a member of Westrock Group, LLC and First Federal Bancshares of Arkansas, Inc.  Mr. McCallister serves a board member of Fifth Third Bancorp and Zoetis Inc. Ms. Roché serves as a board member for Dr. Pepper Snapple group, Inc., Macey’s Inc., and Tupperware Brands Corporation. Mr. Rose serves as a member of BNSF Railway Company and Burlington Northern Santa Fe, LLC. Ms. Taylor serves as a board member of Oil States International, Inc. and Tidewater Inc. Ms. Tyson currently serves as a board member for CBRE Group, Inc., Morgan Stanley, and Silver Spring Networks, Inc.

CEO Compensation. Mr. Randall L. Stephenson has served as Chairman and Chief Executive Officer since 2007 and has been with AT&T since 1982. Previously, he served as Chief Financial Officer from 2001 to 2004 and Chief Operating Officer from 2004 to 2007. In 2013, Mr. Stephenson earned a base salary of $1,633,333 and compensation totaling $23,247,167. Mr. Stephenson received perquisites that included $24,000 in financial counseling and estate planning, $27,025 in home security, and $15,528 in club memberships. AT&T also paid Mr. Stephenson’s supplemental life insurance in 2013, amounting to $221,521.

Mr. de la Vega, President and Chief Strategy Officer, was the second highest compensated AT&T executive, receiving compensation totaling $8,804,108 in 2013. Mr. de la Vega received perquisites, including $6,718 for personal use of company aircraft, $15,528 in supplemental health insurance, $14,000 in financial counseling and estate planning, and $5,767 in home security.

Tuesday
Jun242014

Fee-Shifting By-Laws Remain Valid in Delaware For Now

As discussed in earlier posts (here and here) the Delaware Supreme Court in ATP Tour v. Deutscher recently approved the use of a fee-shifting by-law by a non-stock corporation.  The by-law allowed the recovery of "fees, costs and expenses" from any member/owner who brought a claim of any kind against the [entity] or any member/owner where the member/owner did "not obtain a judgment on the merits that substantially achieves, in substance and amount, the full remedy sought.”

Fearful that such by-laws would chill litigation, on May 22, 2014, the Delaware Corporate Law Council proposed an amendment to the DCGL that according to the amendment’s synopsis is “intended to limit the applicability of [the Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund] to non-stock corporations, and to make clear that such liability may not be imposed on holders of stock in stock corporations.”   

It was widely expected that the Delaware General Assembly would act on the proposed amendment before the end of its June term and it was expected that the amendment would become effective on August 1, 2014.

That is not to be.  In a victory for the US Chamber of Commerce, the Delaware legislature instead adopted a resolution to continue examining the issue, according to Senator Bryan Townsend, the sponsor of the proposed amendment.  The U.S. Chamber Institute for Legal Reform opposed the legislation, writing two letters to state lawmakers requesting delays. The Chamber said the bill would protect frivolous lawsuits intended to "line the pockets of the plaintiffs' trial bar at the expense of national and Delaware companies and their shareholders."

ILR President Lisa A. Rickard wrote that the court’s decision "gives corporations a way to protect their shareholders against these costs of abusive litigation.”  "Why would the Legislature so quickly deprive shareholders of the opportunity to obtain that protection?” she added. The ILR further states that it “will continue to staunchly oppose this legislation, as well as to educate lawmakers on the negative impact this bill would have on Delaware’s business climate.”

The proposed legislation, “takes away a new tool authorized by the Delaware courts … which businesses could use to reduce the amount of unnecessary litigation that accompanies corporate mergers,” wrote ILR's Andrew Wynne.

It is not certain when the bill will finally be considered although it probably will not reach the Delaware legislature before January 2015.  This gives the US Chamber and other business groups opposing the legislation plenty of time to rally their forces.  Proponents of the amendment will also undoubtedly work in the intervening time to shore up support.  It may prove to be an interesting battle.  It will also be interesting to see if any Delaware corporations take advantage of the delay to pass fee-shifting by-laws.  

Tuesday
Jun242014

The Director Compensation Project: Exxon Mobil Corporation

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management.  See Exchange Act Release No. 68639 (Jan. 18, 2013).

In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10C-1.  See 17 C.F.R. §§ 240.10A-3, 240.10C-1.

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total
($)

Michael J. Boskin

120,000

219,938

0

380

340,318

Peter Brabeck-Letmathe

110,000

219,938

0

380

330,318

Ursula M. Burns

110,000

219,938

0

380

330,318

Larry R. Faulkner

110,000

219,938

0

380

330,318

Jay S. Fishman

115,879

219,938

0

380

336,197

Henrietta H. Fore

110,000

219,938

0

380

330,318

Kenneth C. Frazier

110,000

219,938

0

380

330,318

William W. George

114,121

219,938

0

380

334,439

Samuel J. Palmisano

120,000

219,938

0

380

340,318

Steven S. Reinemund

110,000

219,938

0

380

330,318

William C. Weldon*

64,973

736,040

0

252

801,265

Edward E. Whitacre, Jr.

110,000

219,938

0

380

330,318

*Mr. Weldon joined the Board of Directors in May 2013, and the amounts provided reflect his pro-rated compensation for 2013.  Mr. Weldon also received a one-time grant of 8,000 restricted shares upon being first elected to the Board in May 2013.  The valuation of this award is based on the market price of $92.05 on the date of the grant. 

Director Compensation. ExxonMobil held 11 board of directors meetings and 31 board committee meetings in fiscal year 2013. Each director attended at least 95% of the board and committee meetings. No director attended less than 75% of the board and committee meetings on which he or she served, except for Mr. Weldon, who joined the board of directors in May 2013, and Mr. George, who was unable to attend the annual meeting of shareholders due to a family commitment. During fiscal year 2013, director compensation for ExxonMobil consisted primarily of two sources: a cash retainer and restricted stock grants. The base cash retainer in 2013 was $110,000, with an additional $10,000 paid to the Chairs of the Audit and Compensation Committees and the Presiding Director. Further, ExxonMobil granted 2,500 shares of restricted stock to each incumbent non-employee director and a one-time grant of 8,000 shares to each new non-employee director upon election to the board. The restricted stock awarded carries equal privileges to that of common units, including the payment of dividends; however, directors are restricted from selling the shares until retirement. Other compensation included the payment of travel accident insurance premiums. 

Director Tenure. Mr. Fishman succeeded Mr. Palmisano in 2013 as the Presiding Director. Mr. Boskin is the longest tenured board member with eighteen years of service. Half of the board members are relatively new to ExxonMobil. In fact, six of the twelve independent directors have been on the board for five or fewer years. Ten of the twelve independent directors also serve as board members of other public companies, including four as chairman. Mr. Reinemund serves on the boards of American Express, Marriott, and Wal-Mart. Mr. Brabeck-Letmathe serves on the boards of Nestlé, Credit Suisse Group, and L’Oréal. Notably, three ExxonMobil directors, Ms. Burns, Mr. Palmisano, and Mr. Reinemund, also serve together on the American Express board. Mr. Weldon, the newest board member serves on the boards of Chubb, CVS Caremark, and JPMorgan Chase.

CEO Compensation. Rex Tillerson serves as Chairman and Chief Executive Officer for ExxonMobil and has maintained that role since 2006. In the 2013 fiscal year, Mr. Tillerson earned $28,138,329 in total compensation, approximately a 30% decrease in compensation from 2012, of which $15,768,829 was realized. Mr. Tillerson’s 2013 base salary was $2,717,000, which increased to $2,867,000 effective January 1, 2014, in accordance with ExxonMobil’s goal of maintaining executive salaries that are competitive with salaries of other U.S. executives. Seventy-five percent of Mr. Tillerson’s compensation was in restricted stock in the amount of $21,254,625. Fifty percent of the restricted units received carry a vesting period of five years, with the remainder vesting at ten years or at retirement, whichever is later. Mr. Tillerson’s total compensation also included certain personal perquisites such as $33,434 of personal aircraft usage, $177,140 of personal security, and $10,261 of financial planning.

Andrew P. Swiger, who serves as Exxon Mobil’s Senior Vice President and became ExxonMobil’s Principal Financial Officer effective January 1, 2013, earned $12,259,221 in total compensation for 2013. Mr. Swiger’s total compensation decreased, including an approximate 14% decrease in his bonus from 2012.

Monday
Jun232014

The Director Compensation Project: The Goldman Sachs Group, Inc. (GS)

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and to director compensation. We are, for the most part, including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management. See Exchange Act Release No. 68639 (Jan. 18, 2013). 

In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1. See 17 C.F.R. §§240.10A-3 & .10c-1.

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total
($)

M. Michele Burns

100,000

514,828

0

20,000

634,828

Claes Dahlbäck

0

498,048

0

25,000

523,048

Stephen Friedman*

249,480

523,148

0

0

772,628

William W. George

0

425,146

0

20,000

445,146

James A. Johnson

0

423,030

0

0

423,030

Lakshmi N. Mittal

0

498,048

0

0

498,048

Adebayo O. Ogunlesi

0

125,512

0

0

125,512

James J. Schiro

0

539,928

0

20,000

559,928

Debora L. Spar

75,000

423,030

0

0

498,030

Mark E. Tucker

0

83,055

0

10,000

93,055

David A. Viniar**

68,750

0

0

20,000

88,750

*Compensation amount reflects fees earned through retirement date.

**Prorated for time served as director in 2013. Does not include amounts received for service as a named executive officer.

Director Compensation. During fiscal year 2013, Goldman Sachs held 15 board of directors meetings and 36 board committee meetings. Each director attended at least 75% of the aggregate number of board and committee meetings on which he or she served. Overall attendance at board and committee meetings averaged over 95%. All Goldman Sachs directors are required to own at least 5,000 shares of common stock or vested restricted stock units (RSUs). For 2013, each director who served the entirety of the year received an annual grant of 3,000 vested RSUs, an annual retainer of 452 vested RSUs or $75,000 at the director’s discretion, a committee chair fee of 151 RSUs or $25,000 at the director’s discretion, and the lead director received an additional 151 RSUs. All RSUs held by directors must be held for the entirety of their tenure on the board, and are not delivered until the third quarter of the year following retirement from the board.       

Director Tenure. In 2013, Mr. Johnson, who has held his position as a member of the board of directors since 1999, held the longest tenure. Mr. Viniar, the newest member of the board, joined in January 2013. Several directors also sit on other boards. Ms. Burns sits on the board of Cisco Systems Inc.; Mr. George sits on the board of Exxon Mobil Corporation; Mr. Johnson sits on the boards of Forestar Group Inc. and Target Corporation; Mr. Mittal sits on the boards of ArcelorMittal S.A. and Airbus Group; Mr. Ogunlesi sits on the boards of Callaway Golf Company and Kosmos Energy Ltd.; and Mr. Schiro sits on the boards of PepsiCo, REVA Medical, and Royal Philips Electronics.  

CEO Compensation. Lloyd Blankfein, who continues to serve as Chief Executive Officer and Chairman of the Board, received compensation totaling $19,928,813 during 2013. This represents a 33% increase from 2012, primarily in the form of RSUs. This reflects Goldman Sachs’ focus on long term compensation.  Shares of common stock underlying the RSUs are paid out over three years, 50% of the shares at risk are subject to a five year transfer restriction, and all senior executives must maintain 75% of the after-tax shares they receive as long as they hold a senior executive position. Harvey Schwartz, the CFO, received total compensation amounting to $21,285,173 in 2013.  

Goldman Sachs spends an additional $105,971 on security for Mr. Blankfein. Goldman Sachs did not characterize the security measures as “personal benefits but rather business-related necessities due to the high-profile standing of our NEOs.” Goldman Sachs spent a total of $85,802 to provide cars to Mr. Blankfein and Mr. Schwartz for commuting and personal use. Goldman Sachs provides access to private aircraft to its NEOs for business use but not for personal use, and requires NEOs to pay comparable first class fare for any personal guests they bring along on a business trip. 

Friday
Jun202014

The Director Compensation Project: BANK OF AMERICA

The Director Compensation Project: BANK OF AMERICA

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” See NYSE Rule 303A.02(a).

In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1.  See 17 C.F.R. §240.10A-3 & 10c-1. 

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total
($)

Sharon L. Allen

110,000

160,000

-

5,000

275,000

Mukesh D. Ambani*

0

0

-

0

0

Susan S. Bies****

80,000

160,000

-

123,031

363,031

Jack O. Bovender, Jr

80,000

160,000

-

0

240,000

Frank P. Bramble, Sr.

100,000

160,000

-

0

260,000

Virgis W. Colbert*

0

125,804

-

0

0

Pierre J. P. de Weck**

62,908

22,500

-

0

188,712

Arnold W. Donald**

103,028

206,020

-

0

309,048

Charles K. Gifford***

100,000

160,000

-

263,811

523,811

Charles O. Holliday, Jr.

167,000

333,000

-

0

500,000

Linda P. Hudson

80,000

160,000

-

0

240,000

Monica C. Lozano

100,000

160,000

-

0

260,000

Thomas J. May

100,000

160,000

-

0

260,000

Lionel L. Nowell, III**

103,028

206,020

-

0

309,048

Donald E. Powell*

0

0

-

0

0

Clayton S. Rose**

62,908

125,804

-

0

188,712

Charles O. Rossotti*

0

0

-

5,000

5,000

Robert W. Scully*

0

0

-

0

0

R. David Yost

80,000

160,000

-

5,000

245,000

*Compensation amount reflects fees earned through retirement date.

**Mr. Doanld and Mr. Nowell were appointed in January 2013 and Mr. de Weck and Mr. Rose were appointed in July 2013, and the amounts provided reflect pro-rated awards for the period of service for 2013. 

***Mr. Gifford receives office space and secretarial support, and is therefore not an independent director.

****Ms. Bies serves as a non-management director of Merrill Lynch International (MLI), a United Kingdom subsidiary of Bank of America.  For her services she received an annual cash retainer of £75,000, which is reported above based on an exchange rate of 0.61 pounds to one U.S. dollar.  She is an independent director.

Director Compensation.  Bank of America Directors are expected to meet at its annual meeting of stockholders and the regular and special meetings of the Board and any Committee meetings on which they serve.  Bank of America held 16 Board meetings and each director attended at least 75% of the aggregate meetings of the Board and the committees on which they served.  The Audit Committee met 15 times, Corporate Governance Committee, 13 times, the Compensation and Benefits Committee, 11 times, the Credit Committee, nine times, and the Enterprise Risk Committee 13 times for a total of 61 committee meeting.

Director Tenure. In 2013, Mr. May and Mr. Gifford held the longest tenure, serving on the Board since 2004. Ms. Lozano and Mr. Bramble have the second longest tenure, serving on the Board since 2006 with Ms. Bies and Mr. Holliday holding the third longest tenure as members of the Board since 2009.  Many directors serve on other Boards as well. Mr. Holliday holds spots on the Boards of CH2M Hill Companies, Ltd., Deere and Company, and Royal Dutch Shell plc. Mr. Yost serves on the Boards of Excelis Inc., Marsh and McLennan Companies, Inc., and Tyco International Ltd. 

CEO Compensation.  Brian T. Moynihan has served as Chief Executive Officer since January 2010. In 2013, Mr. Moynihan earned a base salary of $11,142,643 and compensation totaling $13,139, 357. In addition to his salary, Mr. Moynihan benefitted from use of the company aircraft, which totaled $448,251 and has been included in his total salary. Bruce R. Thompson, Chief Financial Officer, was the second highest paid executive, receiving compensation totaling $11,523,146. Thomas K. Montag, a Co-Chief Operating Officer, earned the third highest salary of $15,066,301.

 

Friday
Jun202014

The Director Compensation Project: Twitter, Inc. (TWTR)

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” See NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management.  See Exchange Act Release No. 68639 (Jan. 18, 2013). 

In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1.  See 17 C.F.R. §240.10A-3 & .10c-1.

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards ($)

Option Awards
($)

All Other Compensation
($)

Total ($)

Jack Dorsey (1)

_

_

_

_

_

Peter Chernin (2)

_

_

_

_

_

Peter Currie (3)

_

_

_

_

_

Peter Fenton

_

_

_

_

_

David Rosenblatt (4)

_

_

_

_

_

Marjorie Scardino (5)

5,000

175,546

_

_

180,546

Evan Williams

_

_

_

_

_

1. As of December 31, 2013, Mr. Dorsey had an option to purchase a total of 2,000,000 shares of Twitter common stock. 25% of the shares of Twitter common stock subject to this option vested on May 9, 2012, and the balance vests in 36 successive equal monthly installments, subject to continued service through each such date. 1,374,999 of the shares of Twitter common stock subject to this option were vested as of December 31, 2013.

2. As of December 31, 2013, The Chernin Group, LLC, for which Mr. Chernin serves as founder and chairman, had 200,000 RSUs. The shares of Twitter common stock underlying the RSUs vest upon the satisfaction of a service condition and a performance condition. The performance condition was satisfied in February 2014. The service condition was satisfied as to 25% of the shares of Twitter common stock underlying the RSUs on December 1, 2013 Before satisfaction of the performance condition, an additional 1/48th of the total number of shares of Twitter common stock underlying the RSUs vested in monthly installments. After satisfaction of the performance condition, an additional 3/48th of the total number of shares underlying the RSUs vests in quarterly installments, subject to continued service by Mr. Chernin through each vesting date. In July 2013, Mr. Chernin transferred all of his rights, title and interest with respect to the RSUs to The Chernin Group, LLC.

3. As of December 31, 2013, Mr. Currie had one option to purchase a total of 400,000 shares of Twitter common stock. 25% of the shares of Twitter common stock subject to this option vested on November 18, 2011, and the balance vests in 36 successive equal monthly installments, subject to continued service through each such date. 316,666 of the shares of Twitter common stock subject to this option were vested as of December 31, 2013.

4. As of December 31, 2013, Mr. Rosenblatt had one option to purchase a total of 400,000 shares of Twitter common stock. 25% of the shares of Twitter common stock subject to this option vested on December 21, 2011, and the balance vests in 36 successive equal monthly installments, subject to continued service through each such date. 308,333 of the shares of Twitter common stock subject to this option were vested as of December 31, 2013.

5. As of December 31, 2013, Ms. Scardino had 4,018 RSUs. 25% of the shares of Twitter common stock underlying the RSUs vested on March 4, 2014, and the balance vests in three successive equal quarterly installments, subject to continued service through each such vesting date.

Director Compensation. During fiscal year 2013, Twitter held twelve board of directors meetings. Each director attended at least 75% of the aggregate number of meetings of the board of directors and meetings of the board committees on which he or she served. Beginning in 2014, each of Twitter’s non-employee directors will be granted restricted stock units (“RSUs”) having a value of $225,000. The shares of Twitter common stock underlying the RSUs will vest in quarterly installments beginning on the first quarter following the date of grant (on the same day of the month as the date of grant). If the shares have not fully vested on that date then the shares will vest in full on the date of the next annual meeting of stockholders, subject to continued service through each vesting date.

Director Tenure. In 2013, Mr. Williams and Mr. Dorsey, who held their positions as members of the board of directors since 2007, held the longest tenures. In December 2013, Ms. Scardino became the newest member of the board. Several directors also sit on other boards. Mr. Fenton currently serves on the boards of directors of Yelp, Inc. and a number of privately held companies. Ms. Scardino sits on the board of directors of International Airlines Group. Mr. Chernin sits on the boards of directors of American Express Company and Pandora Media, Inc. Mr. Dorsey serves on the boards of directors of The Walt Disney Company and Square, Inc.

CEO Compensation. Mike Gupta, who served as Twitters’ Chief Financial Officer in 2013, earned $24,639,667. Mr. Gupta received $241,667 as base salary and $24,389,000 in stock awards. Vijaya Gadde, served as Twitters’ General Counsel and Secretary in 2013, earning $15,131,983. Mr. Gadde received $219,583 as base salary, $7,500 in bonuses, and $14,904,900 in stock awards. Richard Costolo, who served as Twitters’ Chief Executive Officer in 2013, earned $130,250. Mr. Costolo received no stock awards or other compensation. Mr. Costolo’s annual salary was reduced to $14,000 effective August 2013. 

Wednesday
Jun182014

The Director Compensation Project: General Electric Company (GE)

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are, for the most part, including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management. See Exchange Act Release No. 68639 (Jan. 18, 2013).

In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 also imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10c-1. See 17 C.F.R. §§240.10A-3 & .10c-1.

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total
($)

W. Geoffrey Beattie

0

287,945

0

47,042

334,987

John J. Brennan

0

262,921

0

100,000

362,921

James I. Cash, Jr

115,000

168,859

0

79,087

362,946

Francisco D’Souza*

0

219,364

0

61,839

281,203

Marijn E. Dekkers

105,000

161,450

0

35,452

301,902

Ann M. Fudge

100,000

150,140

0

27,350

277,490

Susan J. Hockfield

100,000

150,140

0

10,883

261,023

Andrea Jung

110,000

165,154

0

50,000

325,154

Alan G. Lafley**

62,500

55,531

0

1,002,200

1,120,231

Robert W. Lane

120,000

180,168

0

0

300,168

Ralph S Larsen

0

275,257

0

50,172

325,429

Rochelle B. Lazarus

0

250,234

0

50,324

300,558

James J. Mulva

0

275,257

0

50,000

325,257

Sam Nunn**

0

101,806

0

1,001,888

1,103,694

Roger Penske**

0

92,551

0

1,005,190

1,097,741

James E. Rohr*

0

38,675

0

0

38,675

Mary L. Schapiro*

40,000

102,222

0

17,876

160,098

Robert J. Swieringa

55,000

214,629

0

49,606

319,235

James S. Tisch

0

262,921

0

0

292,921

Douglas A Warner III

120,000

180,168

0

55,857

356,025

*Compensation amount reflects fees earned for partial year board service for new directors.

**Compensation amount reflects fees earned until retirement. 

Director Compensation. During fiscal year 2013, General Electric (GE) held 14 board of directors meetings and 38 board committee meetings. Each director attended at least 75% of the aggregate number of board and committee meetings on which he or she served. In 2013, each non-employee director received $250,000 in annual compensation that was paid in four installments for each quarter of service–$100,000 in cash and $150,000 in deferred stock units (DSUs). GE provides several other benefits for its directors one example of which is incidental board meeting expenses for guest travel and activities in connection with board meetings. Directors may also receive up to $30,000 worth of GE products and appliances in a three-year period.

Upon leaving the board, directors may choose up to five charities to share a $1 million contribution to be made by GE. During 2013, retiring directors Lafley, Nunn, and Penske made such designations under the Charitable Award Program.   

Director Tenure. In 2013, Mr. Warner III, who has held his position as a member of the Board of Directors since 1992, held the longest tenure. Mr. D’Souza, Mr. Rohr, and Ms. Schapiro joined the board in 2013 while Mr. Lafley, Mr. Penske, and Mr. Nunn retired from the board the same year.  Several of GE’s directors also hold board positions on other companies including James I. Cash, Jr. (Wal-Mart), Susan Hockfield (Qualcomm), Robert W. Lane (Verizon), and James J. Mulva (General Motors).       

CEO Compensation. Jeffrey Immelt, General Electric’s current Chief Executive Officer and Chairman, earned $19,776,716 during 2013. This represents a 23% decrease from 2012. Mr. Immelt’s compensation included $423,783 in other benefits, including $343,121 for personal use of company aircraft.   

Daniel C. Heintzelman was the second highest paid executive in 2013, earning $13,256,497. In Oct. 2013, he became the Vice Chairman with responsibility for services and operations. Previously, he was the president and CEO of GE Oil & Gas. Mr. Heintzelman’s compensation included $318,116 in other benefits, including $306,897 of “other benefits.” Other benefits encompassed payments arising from Mr. Heintzelman’s relocation to Florence Italy, including and “any additional U.S. or foreign taxes” that were incurred “as a direct result of their international assignments.”

 

 

Tuesday
Jun172014

The Director Compensation Project: Starbucks

This post is part of an ongoing series that examines director independence under the rules of the stock exchange and director compensation. We are for the most part including companies from 2014’s Fortune 500 and using information found in their 2014 proxy statements.

NASDAQ and the NYSE have similar rules with respect to director independence. NYSE Rule 303A.01 requires that each listed company’s board of directors be comprised of a majority of independent directors. A director does not qualify as “independent” if he or she has a “material relationship with the company.” NYSE Rule 303A.02(a). This includes consideration of “personal and business relationships” between directors and management.  See Exchange Act Release No. 68639 (Jan. 18, 2013).

In addition, the director is not considered independent under NYSE Rule 303A.02(b)(ii) if the director received more than $120,000 in direct compensation, other than director’s fees, during any of the previous three years. NYSE Rule 303A.06 imposes a higher independence standard for directors serving on the company’s audit committee by requiring them to comport with Rule 10A-3 and requires consideration of certain specified factors for directors serving on the compensation committee under Rule 10C-1.  See 17 C.F.R. §§ 240.10A-3, 240.10C-1.

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

Name

Fees Earned or Paid in Cash
($)

Stock Awards
($)

Option Awards
($)

All Other Compensation
($)

Total
($)

William W. Bradley

120,000

59,986

58,349

0

238,335

Robert M. Gates

0

239,996

0

0

239,996

Mellody Hobson

0

239,996

0

0

239,996

Kevin R. Johnson

48,000

191,996

0

0

239,996

Olden Lee

0

239,996

0

0

239,996

Joshua Cooper Ramo

0

239,996

0

0

239,996

James G. Shennan, Jr.

0

239,996

0

0

239,996

Clara Shih

0

239,996

0

0

239,996

Javier G. Teruel

0

239,996

0

0

239,996

Myron E. Ullman, III

0

0

233,446

0

233,446

Craig E. Weatherup

0

0

233,446

0

233,446

Director Compensation.  During fiscal year 2013, Starbucks held nine board of directors meetings, nine independent director-only sessions, and 23 board committee meetings. Each director attended at least 75% of the aggregate number of meetings of the board of directors and meetings of the board committees on which he or she served. For fiscal year 2013, the annual compensation program for non-employee directors provided for a total of $240,000 per year, comprised of one or more of the following as selected by the director: cash (up to 50%); stock options; and, time-based restricted stock units.

Director Tenure. In 2013, Mr. Schultz, who has held his position as chairman of the board of directors since 1985, had the longest tenure. Mr. Shennan has been a member of the board since March 1990 and is the longest tenured independent director. Mr. Weatherup has held his position since February 1999. Mr. Gates has been a board member since May 2012 and has the shortest tenure. Several directors also sit on other boards. Mr. Weatherup serves on the board of Macy’s, Inc. Mr. Ramo sits on the board of FedEx Corporation. Mr. Teurel currently serves on the boards of J.C. Penney Company, Inc. and the Nielsen Company B.V. Ms. Shih is the Chief Executive Officer and a board member of Hearsay Social, Inc. Ms. Hobson sits on the board of directors for the Chicago Public Education Fund, Estee Lauder Companies, Inc., and Groupon, Inc. Ms. Hobson serves as Chairman of DreamWorks Animation SKG, Inc and After School Matters and sits on the boards of The Estee Lauder Companies, Inc. and Groupon, Inc.  

CEO Compensation. The majority of Starbucks’ executive compensation is awarded based on primary, secondary, and tertiary performance goals, related to achieving operating income, earnings per share, and return on invested capital objectives, respectively. For the fiscal year 2013, Howard Schultz served as Starbucks Chairman, President and Chief Executive Officer and Cliff Burrows served as President, Americas and U.S.  In 2013, Mr. Schultz and Mr. Burrows exceeded their primary, secondary, and tertiary goals and received 100% and 182% of their target bonus payouts respectively.

Mr. Shultz received total 2013 compensation of $16,750,000 with a base salary of $1,500,000. Mr. Burrows received compensation of $5,377,903 with a base salary of $737,300. Additionally, Starbucks paid for Mr. Shultz’s home and personal security services, though Mr. Schultz reimbursed the company for amounts in excess of $200,000.

Mr. Schulz is permitted limited personal use of corporate-owned aircraft, but is required to reimburse the company for incremental costs associated with his personal use. Mr. Schultz paid Starbucks $332,318 for his estimated personal use for the first month of fiscal 2014. Family members and guests may also accompany Mr. Schulz when he uses corporate aircraft. These flights are treated as imputed income to Mr. Schulz for which he does not receive a tax gross-up. Starbucks pays for its executives’ life and disability insurance premiums as well as annual physical examinations.

Tuesday
Jun172014

2014 Director Compensation Posts

Every spring new contributors to the blog get the privilege of compiling data to write director compensation posts. This spring was no different.

What is different this year is the attention that is placed on executive compensation. As the U.S. continues to recover from the recession, and shareholders continue to keep a watchful eye on corporate expenditures, executive compensation has become an important issue.

Notably we are entering the 4th year of the Say-on-Pay era and possibly the 1st for Executive Compensation Ratios.

With that said, it is our hope that our dissemination of this information will help investors best use it. And hopefully, that use can give some bite to the Federal regulation that is only needed because state law has failed in this area. 

The companies that we will be covering this year are: Bank of America; Citigroup Inc.; JPMorgan Chase & Co.; General Electric; The Goldman Sachs Group, Inc.; Wells Fargo & Company; Exxon Mobil Corporation; AT&T; Starbucks; Hewlett Packard Company; Twitter Inc.; and Wal-Mart Stores Inc. 

Monday
Jun162014

Nakkhumpun v. Taylor: Former Delta Petroleum Executives Dodge Class Action Suit

In Nakkhumpun v. Taylor, Civil Action No. 12-cv-01038-CMA-CBS, the United States District Court for the District of Colorado denied the motion to amend a dismissed class action suit against former executives of Delta Petroleum Corporation, a now bankrupt oil and gas company (“Delta”) (“Defendants”), by Patipan Nakkhumpun, an individual investor, on behalf of all persons similarly situated (“Plaintiffs”).

Plaintiffs' claims focused on a number of allegedly inaccurate statements. They included allegations that Delta had misstated the reasons negotiations ended with Opon International (“Opon”) over the sale of $400 million in assets. In addition, Defendants allegedly misrepresented Delta’s financial condition by stating that Delta’s liquidity had “improved materially" and that the company was in "a far better liquidity and financial situation" than a year earlier. In dismissing the former, the court found an absence of causation. With respect to the latter, the court found that Plaintiffs had not shown the statements to have been false.  

In their amended complaint, Plaintiffs alleged that the misrepresentations concerning the negotiations with Opon “caused” their losses as a result of the “materialization of the concealed risk.” This theory requires a plaintiff to allege that the risk which caused the loss was within the zone of risk concealed by the misrepresentation and that the share price dropped because of the risk.

Plaintiffs asserted that Delta had concealed three risks that caused the drop in share prices: the assets were not worth $400 million; the assets were not marketable at $400 million; and Delta’s inability to sell the assets at a high price would force it to file for bankruptcy.

The first alleged risk failed because Defendants do not owe a legal duty to disclose the value Opon assigned to Delta’s assets. The third alleged risk also failed because there were too many intervening events that could have led to Delta’s bankruptcy. Only the second alleged risk was found to be within the zone of risk concealed by the misrepresentations.

Nonetheless, the amended complaint could not survive because Plaintiffs failed to allege a strong inference that the July 2010 statement was made with scienter. The court ruled that the general motives for executives to further the interests of the corporation, such as signaling to potential partners that assets are marketable at a certain price, fail to raise an inference of scienter.

With respect to the statements about Delta’s liquidity, the court found that the allegations and clarifications added to the amended complaint were not sufficient to allege that the statements were false.   

In considering each of the proposed amendments, the court concluded that the amended complaint could not survive a motion to dismiss.

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

Friday
Jun132014

SEC v BIH Corp: SEC’s Motion for Summary Judgment Against BIH Corporation Denied

In SEC v. BIH Corp., CASE NO. 2:10 CV 577, 2014 BL 69810 (M.D. Fla. Mar. 13, 2014), the United States District Court for the Middle District of Florida denied the Securities and Exchange Commission’s (“SEC”) motion for summary judgment against Edward Hayter (“Defendant”).  

In its complaint, the SEC alleged that Defendant helped implement a pump-and-dump scheme involving the sale of unregistered shares of BIH stock in violation of Sections 5  and 17(a) of the Securities Act of 1933 and Section 10(b) of the Securities Exchange Act of 1934. See Securities and Exchange Commission v. BIH Corporation, et al., Civil Action No. 2:10-CV-577-FTM-29DNF (M.D. FL) (September 20, 2010) ("According to the SEC's complaint, Burmaster and [Defendant] implemented a pump-and-dump scheme involving BIH stock.").  

A violation of Section 5 requires a showing that "(1) the defendant directly or indirectly sold or offered to sell securities; (2) through the use of interstate transportation or communication and the mails; (3) when no registration statement was in effect.” The provision applies not only to direct sellers but also to those deemed to be a “necessary participant” or a “substantial factor” in the selling or offering of unregistered securities.

The SEC alleged Defendant was a “necessary participant” in the issuance of BIH stock. Defendant, according to the agency, structured some of the transactions, found a broker “to sell tens of millions of shares” and was "wired over $200,000 of the sales proceeds." Defendant also allegedly "helped direct the promotional campaign that 'pumped up' the price of BIH stock."   

Defendant admitted receiving funds from the sale but described the payments as necessary “to satisfy debt owed to him by BIH.” He also admitted providing “contact information” for a broker and participating in writing some of BIH’s press releases. He denied, however, structuring the transaction. The court found that there were genuine issues of material fact as to whether Defendant was a “necessary participant” or a “substantial factor” in the offering or selling of BIH stock.

With respect to the alleged violations of Section 17 and 10(b), the SEC asserted that Defendant, along with others, committed securities fraud. According to the SEC's assertions, Defendant:

  • along with BIH and Burmaster, committed securities fraud by: (1) making a series of misrepresentations and omissions on BIH’s website and press releases regarding Galo, whether Burmaster and [Defendant] were running the company, claims about reducing the number of outstanding BIH shares, potential business transactions, contracts, and Baron being a wholly-owned subsidiary; and (2) carrying out a scheme that operated as a fraud by creating a fictitious person, Galo, forging his name on documents, hiding Burmaster and [Defendant's] involvement in BIH, and issuing shares in a scheme to evade Section 5.

Defendant acknowledged involvement in participation in the writing and dissemination of some press releases but asserted that "the press releases involved information he received from Baron and that the information seemed plausible to him.” He further asserted that he "was a consultant to BIH and did not run the company" and that Galo was "not a fictitious person and was the majority shareholder and director during the relevant time period." The court again found there were genuine issues of material fact as to whether Defendant engaged in prohibited conduct and whether Defendant acted with scienter.

Last, the SEC alleged Defendant should be held liable as an aider and abettor. To prove this, the SEC must show that “(1) a principal committed a primary violation; (2) the aider and abettor provided “substantial assistance” to the violator; and (3) the aider and abettor acted with scienter.” The court found there remained a genuine issue of material fact as to whether the Defendant acted with scienter, and, the motion for summary judgment was denied.

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

Thursday
Jun122014

Reversed! Judge Rakoff’s Legacy From SEC v. Citigroup Global Markets, Inc., 2014 WL 2486793 (2nd Cir. June 4, 2014)

It is not often that a single judge makes a stir in the business community, but the Honorable Jed S. Rakoff of the Southern District of New York has done so--more than once. Most recently he has done so by being reversed by the Second Circuit Court of Appeals, one of the pre-eminent business courts in the nation. This case is unlikely to be appealed since both the plaintiff (the Securities and Exchange Commission, “SEC”) and the defendant (CitiGroup Global Markets, Inc., “Citigroup”) were arguing the same position--that Judge Rakoff had exceeded his authority by refusing to approve a proposed consent judgment to resolve a case the SEC brought against Citigroup alleging misrepresentations in the marketing of collateralized debt obligations (“CDOs”) during the financial crisis.

History of the Case

As part of an industry-wide investigation into certain abuses that contributed to the 2007-2009 financial crisis, the SEC undertook an investigation of Citigroup’s marketing of CDOs. After several years of investigation, discovery, and discussions with Citigroup, the SEC filed a civil complaint in the Southern District of New York charging Citigroup with negligent misrepresentation under Sections 17(a)(2) and (a)(3) of the federal Securities Act of 1933 (the “1933 Act”). Simultaneously (and in accordance with customary practice) the SEC and Citigroup presented a proposed consent judgment to the district court for its approval. In the settlement, Citigroup agreed: (i) to pay $285 million into a fund to compensate CDO investors for their losses, (ii) to the entry of an order enjoining Citigroup from violating certain sections of the 1933 Act in the future (an “obey-the-law injunction”), and (iii) to establish procedures to prevent future violations and to make periodic reports to the SEC. In consenting to the settlement, and also in accordance with customary practice at the time, Citigroup neither admitted nor denied any wrongdoing.

In a surprising turn, Judge Rakoff rejected the settlement concluding that it was “neither reasonable, nor fair, nor adequate, nor in the public interest,” primarily because it included no admission by Citigroup of liability.(SEC v. Citigroup Global Markets, Inc., 827 F.Supp.2d 328, 335 (S.D.N.Y., Nov. 28, 2011)). Judge Rakoff ordered the parties to a prompt trial to commence on July 16, 2012.

Both the SEC and Citigroup sought an interlocutory appeal of Judge Rakoff’s denial, and the SEC moved to stay the effect of the district court’s order pending appeal (basically deferring the trial date). The Second Circuit granted the motion to stay on March 15, 2012 (673 F.3d 158), but did not necessarily expedite the appeal. The case was argued on February 8, 2014, and the decision was issued on June 4, 2014.

This was not the first time that Judge Rakoff had taken the SEC to task for failing to obtain admissions of fact. In 2009, Judge Rakoff disapproved a settlement the SEC reached with Bank of America Corp. (“BofA”) finding that the proposed settlement was neither fair, reasonable, adequate, nor in the public interest because the settlement set forth no facts suggesting liability. (SEC v. Bank of America Corp., 653 F.Supp.2d 507 (S.D.N.Y. 2009)). The SEC conducted more discovery, and jointly presented (with BofA) a 35-page statement of facts and a 13-page supplemental statement of facts. BofA did not contest the facts so stated. 

Judge Rakoff also reviewed “hundreds of pages of deposition testimony and other evidentiary materials” as well as evidence uncovered by the New York State Attorney General in a parallel investigation. Judge Rakoff labored over whether to approve the revised settlement “as being fair, reasonable, adequate and in the public interest.” He noted that the dollar amount of the settlement was “considerably improved over the vacuous proposal made last August” and “[i]ts greatest virtue is that it is premised on a much better developed statement of the underlying facts and inferences drawn therefrom.” Nevertheless, were he to look at the settlement solely on the merits, “the Court would reject the settlement as inadequate and misguided. 

But as both parties never hesitate to remind the Court, the law requires the Court to give substantial deference to the SEC as the regulatory body having primary responsibility for policing the securities markets.” Quoting Supreme Court Justice Harlan Stone (“the only check upon our own exercise of power is our own sense of self-restraint,” U.S. v. Butler, 297 U.S. 1, 79 (1936)), Judge Rakoff said: “In the exercise of that self-restraint, this Court, while shaking its head, grants the SEC’s motion and approves the proposed Consent Judgment.” 

Judge Rakoff did not reach the same conclusion in his denial of the SEC’s motion for a Citigroup consent judgment offered without any admissions or denials by Citigroup.

The Standard To Be Applied

In denying the original SEC motion for the consent judgment, Judge Rakoff stated that the court was required to give “substantial deference to the views of the administrative agency,” but must be satisfied that it is not being used as a tool to enforce an agreement that is unfair, unreasonable, inadequate, or in contravention of the public interest.” (328 F.Supp.2d at. 332). Judge Rakoff concluded that without any significant agreement as to the underlying facts, “the court becomes a mere handmaiden to a settlement privately negotiated on the basis of unknown facts, while the public is deprived of ever knowing the truth in a matter of obvious public importance.” (p. 332). The SEC took the position that it should be sufficient that Citigroup expressly did not deny the facts alleged in the complaint and settlement. Judge Rakoff replied this was “wrong as a matter of law and unpersuasive as a matter of fact. As a matter of law, an allegation that is neither admitted nor denied is simply that, an allegation . . . [with] no evidentiary value and no collateral estoppel effect.” (p. 333). In denying the SEC’s motion for approval of the consent judgment, Judge Rakoff said that “[a]n application of judicial power that does not rest on facts is worse than mindless, it is inherently dangerous.” (p. 335).

The Second Circuit disagreed on all grounds. First, the panel had to determine whether it even had jurisdiction to hear the appeal, given that a denial of a motion is seldom considered to be a “final order” from which an interlocutory appeal can be taken. Using 28 U.S.C. § 1292(a)(1) as its sword, the Second Circuit determined that the district court’s failure to approve a settlement “effectively denied a party injunctive relief and (in the absence of interlocutory relief) a party will suffer irreparable harm.” (2014 WL 2486793 at *5).

In establishing the standard of deference to the SEC’s proposal, the Second Circuit disagreed with Judge Rakoff’s standard: that the proposal be “fair, reasonable, adequate and in the public interest.” The Second Circuit omitted “adequate” and modified the public interest portion, thereby developing the following standard for deference to the administrative agency’s action:

  • “Today we clarify that the proper standard for reviewing a proposed consent judgment involving an enforcement agency requires that the district court determine whether the proposed consent decree is fair and reasonable, with the additional requirement that the ‘public interest would not be disserved’ in the event that the consent decree includes injunctive relief. Absent a substantial basis in the record for concluding that the proposed consent decree does not meet these requirements, the district court is required to enter the order.” (at *7).

The Second Circuit went on to say that "[t]he job of determining whether the proposed SEC consent decree best serves the public interest, however, rests squarely with the SEC" and not with the court. The Second Circuit also determined that it was an abuse of the trial court’s discretion “to require . . . that the SEC establish the ‘truth’ of the allegations against a settling party as a condition for approving the consent decrees,” although “the district court will necessarily establish that a factual basis exists for the proposed decree. In many cases, settling out the colorable claims, supported by factual averments by the SEC, neither admitted nor denied by the wrongdoer, will suffice to allow the district court to conduct its review.” Where the district court’s review “raises a suspicion that the consent decree was entered into as a result of improper collusion between the SEC and the settling party,” a more detailed factual showing may be required. (at *8).

Thus the case returns to Judge Rakoff for further proceedings (although Judge Lohier’s concurrence would have had the Second Circuit “direct the District Court to enter the consent decree” since “it does not appear that any additional facts are needed” to make the necessary determination). (at *11).

Judge Rakoff’s Legacy

It is strange to consider a judge’s legacy following a significant reversal containing excoriating language by the appellate court. And yet, that legacy exists because of actions by the SEC after the original November 2011 opinion.

On January 6, 2012, Robert Khuzami, Director of the SEC’s Division of Enforcement, announced that the Division would no longer permit those convicted or who otherwise admitted the facts in a parallel criminal action to settle with the SEC based on “not admitting or denying” the facts. As Director Khuzami said, “[i]t seemed ‘unnecessary’ for the SEC to include its traditional ‘neither admit nor deny’ approach if a defendant had already been criminally convicted of the same conduct.” While in the last century the SEC and the U.S. Department of Justice did not normally have parallel proceedings, this has since changed. More than half of the SEC’s civil cases are filed in tandem with parallel criminal proceedings.

More recently, on June 18, 2013, SEC Chair Mary Jo White further refined the SEC’s “neither admit nor deny” policy when she advised the investment community that even in non-criminal settings, the SEC may require admissions in cases “where heightened accountability or acceptance of responsibility through the defendant’s admission of misconduct may be appropriate” (as reported in the New York Times at page B-1, June 22, 2013).  In those cases, the SEC enforcement staff has been advised to seek admissions or litigate the case. This may, of course, make litigation more frequent since many defendants may have believed in their innocence, but chose the “neither admit nor deny” settlement to avoid the time, expense, and uncertainty of litigation. According to Chair White, she anticipates that the admissions will be required in cases involving “particularly widespread harm to investors” and “egregious intentional misconduct.” 

The SEC defense bar has raised a number of concerns about Chair White’s announcement and the anticipated effect of the new SEC practice. Among these concerns is whether this new policy might be subject to arbitrary application by staff. Equally significantly, where a defendant is given the option of making admissions (which can then be used in subsequent shareholder litigation or even a criminal proceeding) or contesting the claims, defendants are more likely to contest the claims and seek vindication. Where settlements used to be simpler, the resulting litigation will likely involve a significantly greater amount of SEC resources to prosecute and of corporate (that is, shareholder) resources to defend. Defense lawyers have also pointed out that the SEC’s recent track record on significant litigation has not been stellar.

Predictably, the plaintiffs’ attorneys applauded this change since they will now be able to use any admissions in their civil litigation. This fact, itself, will be a significant disincentive to targets of investigation to settle cases with admissions of wrongdoing.

How these new policies play out remains to be seen. One can bet that the District Court will likely approve the Citigroup settlement on remand. Unless, of course, Judge Rakoff continues to ask questions of and expect answers from the SEC.

Herrick K. Lidstone, Jr., Burns, Figa & Will, P.C.

Wednesday
Jun112014

Delaware General Assembly Asked to Bar Fee Shifting By-Laws

As was discussed in an earlier post (here) the Delaware Supreme Court recently upheld a fee shifting bylaw adopted by a non-stock corporation in ATP Tour v. Deutscher and suggested that it was likely that  the Delaware legislature would take action to overturn portions of the decision, as it did with respect to CA v. AFSCME.

Those actions are well underway.  On May 22, 2014, the Delaware Corporate Law Council proposed an amendment to the DCGL that according to the amendment’s synopsis is “intended to limit the applicability of [the Delaware Supreme Court decision in ATP Tours, Inc. v. Deutscher Tennis Bund] to non-stock corporations, and to make clear that such liability may not be imposed on holders of stock in stock corporations.”   

The amendment affects § 102(b) (6), Title 8 of the Delaware Code and adds a new Section 331.  Under new Section 331 and Section 102(b) (6) as amended, a provision of the certificate of incorporation or bylaws that would purport to require a holder of stock in a stock corporation to pay expenses incurred by the corporation, its directors, officers, employees, agents or controlling stockholders in connection with litigation initiated or claims prosecuted by the stockholder would be facially invalid.   The expansive wording of the proposed Section 331 would prohibit not only fee-shifting provisions in charters and bylaws, but practically all charter and bylaw provisions that would impose liability on stockholders.

The amendments are not intended to limit a court's power to impose sanctions under applicable law or the enforceability of any charter or bylaw provision that binds any person pursuant to any separate contract.

A corresponding amendment proposed to Section 114(b) (2) makes clear that the prohibition in Section 331 would not apply to non-stock corporations. As noted in the proposed amendments' synopsis, these amendments are "intended to limit applicability of [the Court's ATP Tour decision] to non-stock corporations, and to make clear that such liability may not be imposed on holders of stock in stock corporations."

The legislation is expected to be presented to the Delaware General Assembly before the end of its term in June and is slated to become effective on August 1, 2014.

The purported public policy reasoning behind the proposed statute is that fee shifting bylaws unduly chill meritorious claims from being brought, and undermine the limited liability protections afforded to shareholders by Delaware corporate law.   Of particular concern (supposedly) was that a fee shifting provision would chill the willingness of a stockholder to file claims in order to enforce the fiduciary duties of directors. 

Whether you believe that these reasons lie behind the quick proposal of the amendments barring fee shifting bylaws or whether you accept other justifications (set forth here) it seems extremely likely that they will be enacted. 

The rush to pass these amendments is both ironic—Delaware encouraging shareholder litigation!—fiduciary duty suits!—and to some degree unfortunate.  By enacting a blanket prohibition on all fee shifting bylaws, Delaware misses an opportunity to craft a more nuanced approach.  Not all cases are the same.  It may be that fee shifting is appropriate in some but not in others.   The proposed amendments forestall the opportunity to engage in a broader discussion about the appropriate role of fee shifting bylaws specially and the role of stockholder litigation generally.

Tuesday
Jun102014

Revisiting the Bad Actor Provision under the Securities Act of 1933

Some of the most important protections for investors with respect to sale of securities exempt from registration are the bad actor provisions.  These provisions seek to render the relevant exemption unavailable to the extent bad actors are involved in the offering.  Presumably the avoidance of bad actors promotes the integrity of the offering process.  It also may have a deterrent effect by increasing the consequences to those found to be "bad actors."     

The bad actor provisions were recently added to Rule 506, see Disqualification of Felons and Other “Bad Actors” from Rule 506 Offerings, Securities Release No. 9414 (July 10, 2013).  The Commission's decision to add the requirement was not volitional. Congress mandated the change in Dodd-Frank. See Section 926.

As a result, the provisions have become increasingly ubiquitous with respect to exemptions from registration. In addition to Rule 506, bad actor provisions apply to Rule 505 and Regulation A, and will apply to Regulation A+ (see Exchange Act Release No. 71120 (Dec. 18, 2013)) and crowdfunding.  SeeExchange Act Release No. 70741 (Oct. 23, 2013).  Moreover, their inclusion in Rule 506 means that they apply to the most commonly used exemption. 

In adopting the bad actor provisions in Rule 506, the Commission essentially updated the definition.  Rule 506, for example, includes persons subject to cease and desist orders.  Rule 262 under Regulation A (and the basis for the bad actor provision in Rule 505) does not.  Nonetheless, the Regulation A+ proposal does provide for changes to the Regulation A/505 area that would largely bring them into conformity with Rule 506.  See Securities Act Release No. 9497 n. 467 (Dec. 18, 2013) (" If adopted, the amendments to Rule 262 would also effectively modify the bad actor disqualification provisions of Rule 505 of Regulation D, which incorporate Rule 262 by reference. We are proposing technical amendments to Rule 505 to update the citations to Rule 262.").

Once these provisions are in place, the Commission should step back and consider comprehensively the bad actor provisions. There are four areas that require consideration.  First, the consideration needs to be given to the expansion of bad actor provisions to other exemptions, thereby making all SEC safe harbors conditioned upon an absence of bad actors. This would include Rule 147 (the intrastate exemption) and Rule 504.  With respect to the latter, the Commission has noted: 

  • Offerings under Rule 504, the remaining Regulation D exemption, would be the only Regulation D exemption not subject to any federal disqualification requirements. We are concerned that there may be confusion, and that compliance costs could be increased, if different disqualification standards apply to these exemptions. Securities Act Release No. 9211 (May 25, 2011).    

Second, consideration needs to be given to the persons subject to the bad actor provisions.  Currently, the provisions apply to issuers (and persons associated with issuers, including executive officers, directors, and large shareholders), and sellers (including promoters and persons compensated for locating buyers). To the extent designed to promote the integrity of the offering process, other categories of persons should be considered.  

Transfer agents and lawyers are other obvious possibilities.  See Seed Capital, Rule 504 and the Applicability of Bad Actor Provisions.  See also SEC Obtains Asset Freeze to Halt Fraud at Illinois-Based Transfer Agent, Press Release, 2014-107, May 28, 2014 (allegations that transfer agents "were misusing money belonging to their corporate clients and the clients’ shareholders in order to fund their own payroll and business obligations.").  

This could be addressed in part by routinely adding a bar from participating in exempt offerings to the relief obtained against lawyers and transfer agents, at least for specified violations (i.e. antifraud or registration provisions). See In re North East Capital, Exchange Act Release No. 70223 (admin proc Aug. 16, 2013) (undertaking "[f]or a period of five years from the date of this Order" to "not engage in or participate in any unregistered offering of securities conducted in reliance on Rule 506 of Regulation D").  

Third is the issue of enforcement.  Under Rule 506, bad actors can include issuers or affiliated issuers (presumably a company in a control relationship with the issuer) and persons paid remuneration for solicitation of purchasers.  The bad actor provisions are "all or nothing."  Once triggered, bad actors cannot participate in exempt offerings as long as they retain their status. This can amount to a bar for as long as ten years for certain felonies or misdemeanors and five years for certain orders, judgments or decrees from a court.

For large brokers, a sanction triggering the bad actor provisions could remove them from the business of selling securities in private placements under Rule 506.  It could also disrupt existing offerings.  Perhaps as a result, Section 506 permits waivers of the disqualification.  See Rule 506(d)(2), 17 CFR § 230.506(d)(2) (permitting a waiver of bad actor disqualification "upon a showing of good cause and without prejudice to any other action by the Commission").   

The staff has, using delegated authority, issued a number of waivers. The waivers are here.  In one case, however, the financial institution sought and the Commission (not the staff) granted a more "limited" waiver. See In re Credit Suisse, Securities Act Release No. 9589 (May 19, 2014).  The waiver request is here.  The decision may portend a more nuanced approach to the issuance of waivers.  

Nonetheless, whatever the approach, it should be transparent, with relevant standards publicly disclosed. This would ensure uniformity and reduce the possibility of sudden and material shifts in approach to the issuance of these waivers. See Essay: The Politicization of Corporate Governance: Bureaucratic Discretion, the SEC, and Shareholder Ratification of Auditors.

Finally, the Commission should take steps designed to facilitate compliance with the bad actor provisions by lowering the costs of issuer due diligence.  As the adopting release for the bad actor provisions in Rule 506 noted, issuers can rely on BrokerCheck, the database maintained by FINRA, to determine whether a broker is subject to a disqualification. 

  • In general, issuers should make factual inquiry of the covered persons, but in some cases—for example, in the case of a registered broker-dealer acting as placement agent—it may be sufficient to make inquiry of an entity concerning the relevant set of covered officers and controlling persons, and to consult publicly available databases concerning the past disciplinary history of the relevant persons. Broker-dealers are already required to obtain much of this information for their own compliance purposes.  

Under FINRA Rule 8312, however, BrokerCheck only applies to a current or former brokers registered with FINRA (or one of the exchanges) and current or former associated persons.  BrokerCheck does not provide information on sanctions against unregistered firms or their associated persons. See In re Olive, Exchane Act Release No. 72274 (admin proc May 29, 2014) ("The complaint also alleged that Susan Olive offered and sold unregistered securities, and acted as an unregistered broker-dealer.").   

The Commission should, therefore, seek to maintain a separate data base that can interface with BrokerCheck and would include sanctions issued by the SEC.  The information would not provide information on all disqualifying events.  Nonetheless, it would facilitate the ability of issuers to easily and in a cost effective manner at least rule out that anyone selling securities was sanctioned by the SEC. 

Friday
Jun062014

The SEC, Enforcement, and the Problem of Stats

James Kidney, an attorney in the trial division, recently retired. In an unusual step, his departing speech at the Commission has been posted. The speech is here.  

The remarks raised a number of issues with respect to the Commission. One in particular concerned the use of stats (number of cases brought) as a means of assessing productivity. This, he asserted, was a "cancer." 

  • The only other item I want to be serious about, besides some personal observations in a minute, is the metric of the division of enforcement: number of cases brought. It is a cancer. It should be changed. . . . Please don’t tell me we account for other factors in our management of cases. We think about them, of course, but we all see cases frequently to which we offer a head scratching response. Really? The SEC spent time and money on that? These cases have no significant impact and the conduct is of minimal or no harm to the investing public. But the investigation has been intense and expensive. Could no one in management exercise judgment and call the investigation to a halt? Of course not! Bringing the case is a stat! The metric we have now is built into the soul of the Division. It has to be removed root and branch. 

We have discussed the issue of stats on this Blog before, including the resulting emphasis on quantity rather than quality. But we have also examined the issue from a different perspective. An emphasis on finished cases essentially penalizes those who spend time on "unfinished" cases. The easiest way to be sure a case will be finished is to investigate instances of fraud (or other violations) that have already become apparent. In other words, this encourages a post-hoc strategy of enforcement.

Yet there is plenty of room to argue that the Commission should be investigating in an anticipatory fashion, "looking around the corner" so to speak. DERA's accounting quality model is designed to spot problems before they become public. A consequence of looking around the corner, however, is that sometimes nothing will be there. In other words, finding violations that have not yet become public will result in more unfinished investigations. And if unfinished investigations count against the enforcement attorneys involved and weigh against the producivity of the Division, there will be far less incentive to implement this approach in any meaningful sense.  

The emphasis on stats also has the potential to encourage the staff to bring smaller cases. Actions against a large company or firm with top counsel can involve millions of documents and thousands of attorney hours. The complaint filed in the Goldman case (the one that settled for $550 million) included 10 attorneys. Goldman presumably counted as one stat. Had the same attorneys instead worked on smaller cases, they could have generated additional stats.  

The SEC has now been in place for 80 years (it was created in the Exchange Act, not the Securities Act of 1933). The Division of Enforcement was created in 1972.  As bureaucracies age, they can sometimes become excessively beholden to the way "things have always been done." The efforts by the Division to create speciality divisions and eliminate branch chiefs represented an effort to overcome this inclination. Perhaps the use of stats as a principle measure of productivity should likewise be reexamined.  

Wednesday
Jun042014

Resource Extractive Industries Rule Back on SEC Agenda

While the conflict minerals rule litigation has garnered a great deal of attention, much less focus has been placed on another of the “miscellaneous” provisions of Dodd-Frank, specifically Section 1504, and the resource extractive industries provision. As discussed in earlier posts (herehere), Section 1504--the Cardin-Lugar Amendment--and the rules promulgated thereunder require publicly traded resource extractive industry issuers—those involved in oil, gas and mining--to make project-level disclosures on a new Form SD (separate from the annual report) of payments in excess of $100,000 made to governments around the world for the purpose of commercial development of natural resources. 

The resource extractive industries rule (“Rule”) originally adopted by the SEC was invalidated by the U.S. District Court for the District of Columbia in July 2013 in response to a lawsuit brought by four trade groups, including the American Petroleum Institute. The Court invalidated the Rule for two reasons. The Court found that (1)  the SEC required public disclosure of issuer payments based on a misreading of Dodd-Frank Section 1504 (the statutory provision directing the SEC to draft the rule) and (2) that the decision by the SEC to deny any exemption to the disclosure requirements of the rule was arbitrary and capricious.

That invalidation left the SEC with the obligation to take further action to fulfill the Congressional mandate of Section 1504, which required the SEC to adopt a rule pursuant to the Section.

Whether the SEC actually will take action on the resource extractive industries rule in the time projected remains to be seen. The Regulatory Flexibility Act requires federal agencies to, twice a year, submit a list of significant rule making items they expect to pursue over the next 12 months for inclusion in the Office of Management and Budget Office of Information and Regulatory Affairs' unified agenda. However, simply because an item is included on the agenda of an agency, does not mean that the agency guarantees the action will happen; some argue that the agenda is more aspirational than realistic.

There is real hope that action will be forthcoming, as support for it is coming from unusual sources, including issuers who will be subject to the rule. In a letter dated May 1, Royal Dutch Shell and Exxon Mobil urged agency action on the issue in part because the EU is moving on the issue with legislation planned to come into effect at the end of 2014.

  • "[W]e believe implementation of the EU Accounting & Transparency Directives, in particular the fast-track schedule being pursued in the U.K., increases the urgency of our industry's request for the Commission to consider [Section] 1504 in 2014 and to work towards publishing proposed rules as soon as possible and in any event before year-end. We strongly believe that the public interest of achieving a coordinated and harmonized global transparency regime, which will best serve the interests of all stakeholders, depends upon it."
  • If the SEC were able to indicate their willingness to consider the proposed new rules under 1504 before the U.K. legislation is finalized, the U.K. government could take the SEC approach into account in implementing its own transparency legislation. Since the U.K. will be the first EU Member State to implement the EU Accounting & Transparency Directives, thus setting a precedent for other EU Member States’ implementation, this is especially important for purposes of “equivalency” between the EU and U.S. reporting regimes.

Similarly, Chevron Corp. and the American Petroleum Institute have both asked for a re-proposed Rule to be issued as quickly as possible.

With much rule-making under Dodd-Frank still incomplete or under challenge, the resource extractive industries rule may not seem to be the most important item on the SEC’s proposed agenda, but for those subject to its mandate (and global regulations soon to come) the fate of the Rule matters a lot.

Tuesday
Jun032014

Resource Extractive Industries Rule Back on SEC Agenda

While the conflict minerals rule litigation has garnered a great deal of attention, much less focus has been placed on another of the “miscellaneous” provisions of Dodd-Frank, specifically Section 1504, and the resource extractive industries provision. As discussed in earlier posts (here, here), Section 1504--the Cardin-Lugar Amendment--and the rules promulgated thereunder require publicly traded resource extractive industry issuers—those involved in oil, gas and mining--to make project-level disclosures on a new Form SD (separate from the annual report) of payments in excess of $100,000 made to governments around the world for the purpose of commercial development of natural resources. 

The resource extractive industries rule (“Rule”) originally adopted by the SEC was invalidated by the U.S. District Court for the District of Columbia in July 2013 in response to a lawsuit brought by four trade groups, including the American Petroleum Institute. The Court invalidated the Rule for two reasons. The Court found that (1)  the SEC required public disclosure of issuer payments based on a misreading of Dodd-Frank Section 1504 (the statutory provision directing the SEC to draft the rule) and (2) that the decision by the SEC to deny any exemption to the disclosure requirements of the rule was arbitrary and capricious.

That invalidation left the SEC with the obligation to take further action to fulfill the Congressional mandate of Section 1504, which required the SEC to adopt a rule pursuant to the Section.

Whether the SEC actually will take action on the resource extractive industries rule in the time projected remains to be seen. The Regulatory Flexibility Act requires federal agencies to, twice a year, submit a list of significant rule making items they expect to pursue over the next 12 months for inclusion in the Office of Management and Budget Office of Information and Regulatory Affairs' unified agenda. However, simply because an item is included on the agenda of an agency, does not mean that the agency guarantees the action will happen; some argue that the agenda is more aspirational than realistic.

There is real hope that action will be forthcoming, as support for it is coming from unusual sources, including issuers who will be subject to the rule. In a letter dated May 1, Royal Dutch Shell and Exxon Mobil urged agency action on the issue in part because the EU is moving on the issue with legislation planned to come into effect at the end of 2014.

"[W]e believe implementation of the EU Accounting & Transparency Directives, in particular the fast-track schedule being pursued in the U.K., increases the urgency of our industry's request for the Commission to consider [Section] 1504 in 2014 and to work towards publishing proposed rules as soon as possible and in any event before year-end. We strongly believe that the public interest of achieving a coordinated and harmonized global transparency regime, which will best serve the interests of all stakeholders, depends upon it."

If the SEC were able to indicate their willingness to consider the proposed new rules under 1504 before the U.K. legislation is finalized, the U.K. government could take the SEC approach into account in implementing its own transparency legislation. Since the U.K. will be the first EU Member State to implement the EU Accounting & Transparency Directives, thus setting a precedent for other EU Member States’ implementation, this is especially important for purposes of “equivalency” between the EU and U.S. reporting regimes.

Similarly, Chevron Corp. and the American Petroleum Institute have both asked for a re-proposed Rule to be issued as quickly as possible.

With much rule-making under Dodd-Frank still incomplete or under challenge, the resource extractive industries rule may not seem to be the most important item on the SEC’s proposed agenda, but for those subject to its mandate (and global regulations soon to come) the fate of the Rule matters a lot.

Tuesday
Jun032014

The Proxy Plumbing Release Revisited and the Need for Version 2.0

For the second year in a row, students wrote papers on a common legal topic. The papers were then collectively published as a complete issue of the University of Denver Online Law Review. This year, the topic was the Proxy Plumbing Release revisted. The issue can be found here.   

In 2010, the SEC published the Proxy Plumbing Release, a release that examined a number of important issues relating to the proxy process, including back office issues, the role of intermediaries, and the plight of retail investors. The online issue reexamines concerns raised in the Proxy Plumbing Release. In addition to topics discussed in the original Release, student article lay the groundwork for a version 2.0 that would expand the discussion of “plumbing” problems to other matters. 

The articles in the issue include:  

J. Robert Brown, Jr., The Proxy Plumbing Release Revisited and the Need for Version 2.0

Jessica Bullard, Proxy Distribution and the Requirement of Impartiality, 91 Denv. U. L. Rev. Online 93 (2014)

Julian Ellis, The "Common Practice" of Bundling: Fact of Fiction?, 91 Denv. U. L. Rev. Online 105 (2014)

Jeremy Liles, Enhancing SEC Disclosure with Interactive Data, 91 Denv. U. L. Rev. Online 121 (2014)

Christie Nicks, Voting of Partially Instructed Shares by Brokers, 91 Denv. U. L. Rev. Online 155 (2014)

Lincoln Puffer, Proxy Cards and the Requirements of Clarity and Impartiality in Titling Proposals, 91 Denv. U. L. Rev. Online 167 (2014)  

The issue demonstrates the strengths of online scholarship. The DU Law Review (through the hard work of Jonathan Gray, the online editor) was able to cite check and post the articles only a few months after submission. Because the articles are highly topical, they will likely have immediate impact in the corporate governance debate. Moreover, the articles are in the legal data bases and can therefore be found through traditional search techniques. 

This can be seen from the use of the articles published in last year's issue on the JOBS Act (something that can be found here). One of the pieces was cited by a federal district court judge. See Landegger v. Cohen, 2013 WL 5444052 (D.Colo., September 30, 2013) ("But in affording weight to these factors, a court must take a measured approach. These two factors must not be weighted so heavily so as to subsume the others in the analysis. Specifically, these factors should not swallow what is ultimately a fact-intensive definition—and one as to which the SEC Commission has been unwilling to create the necessary guidance in order to provide clarity. See . . . Samuel HagreenThe Jobs Act: Exempting Internet Portals from the Definition of Broker–Dealer, 90 Denv. U.L.Rev. 73 (2013).").  

Two others were cited in articles. See Sahil Chaudry, THE IMPACT OF THE JOBS ACT ON INDEPENDENT FILM FINANCE, 12 DePaul Bus. & Com. L.J. 215, n. 116 (2012) (citing Lindsey Anderson Smith, Note, Crowdfunding and Using Net Worth to Determine Investment Limits, 90 Denv. U. L. Rev. 127, 130 (2013)); John Wroldsen, THE CROWDFUND ACT'S STRANGE BEDFELLOWS: DEMOCRACY AND START-UP COMPANY INVESTING, 62 U. Kan. L. Rev. 357 n. 165 (2012) (citing Lina Jasinskaite, Note, The JOBS Act: Does the Income Cap Really Protect Investors?, 90 Den. U. L. Rev. Online 81 (2013)).   

Monday
Jun022014

Another Appeal Filed in Conflict Minerals Case

On May 29th the Securities and Exchange Commission petitioned the U.S. Court of Appeals for the District of Columbia Circuit to rehear the First Amendment portion of the conflict minerals case (Nat'l Ass'n of Mfrs. v. SEC) but asked the Court to hold the case for potential panel rehearing or rehearing en banc until after a decision is rendered in the re-hearing of American Meat Institute v. United States Department of Agriculture for which oral arguments were held May 19th.  

As discussed in an earlier post (here), the rehearing in American Meat was held in order to consider whether rational basis review can apply to compelled disclosures even if they serve interests other than preventing deception.  The decision reached in American Meat has significant implications for the First Amendment claims relevant to NAM.  This fact was raised by Judge Sri Srinivasan partial dissent in NAM when he suggested that the majority should have withheld its decision on the constitutional issue pending a ruling by the full D.C. Circuit in American Meat.

The problem for the SEC is that the period for seeking rehearing in NAM will expire before the Court’s decision in American Meat is issued—hence the need for abeyance.  The SEC notes that abeyance is proper as long as there is good cause, citing to DC Cir. 35(a) (“The time for filing a petition for panel rehearing or rehearing en banc will not be extended except for good cause shown.”) and Phelps-Roper v. Troutman, 712 F.3d 412, 416 (8th Cir. 2013) (per curiam) (“The rehearing petition was held in abeyance in December 2011, pending an en banc decision in Phelps-Roper v. City of Manchester, 697 F.3d 678 (8th Cir. 2012) (en banc), a case with similar First Amendment issues.”), among others.

Essentially, the petition buys time for the SEC.  If the American Meat appeal applies the same standard of review to compelled disclosure that the Court applied in NAM, the SEC will probably not bother with an appeal.  Conversely, if the Court used a different standard of review in American Meat, an appeal of the First Amendment portion of NAM seems likely.

The petition makes clear that the SEC seeks rehearing only of the First Amendment portion of the decision by stating that   “[T]he Commission requests that the remainder of the panel's opinion remain the opinion of the Court.”

On the same day that the SEC filed its petition, intervenor Amnesty International filed a similar petition asking the court to rehear the case, also pending the outcome of American Meat.

Neither of these petitions affects the obligation of issuers to comply with the June 2nd filing deadline for conflict minerals reports and Forms SD.  But they do keep topic alive and interesting.