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Monday
Aug142017

The Director Compensation Project: The Dow Chemical Company

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

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

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

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

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

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from the Dow Chemical Company’s (NYSE: DOW) 2017 Proxy Statement. According to the proxy statement, the company paid the directors the following amounts:

Name

Fees Earned or Paid in Cash

($)

Stock Awards ($)

Option Awards

($)

All Other Compensation

($)

Total

($)

Ajay Banga

115,000

135,474

0

0

250,474

Jacqueline K. Barton

130,000

135,474

0

0

265,474

James A. Bell

150,000

135,474

0

0

286,491*

Richard K. Davis

130,000

135,474

0

0

265,474

Jeff M. Fettig

160,000

135,474

0

0

295,474

Mark Loughridge

130,000

135,474

0

0

265,474

Raymond J. Milchovich

115,000

135,474

0

0

250,474

Robert S. (Steve) Miller

115,000

135,474

0

0

250,474

Paul Polman

115,000

135,474

0

0

250,509*

Dennis H. Reilley

135,000

135,474

0

0

270,474

James M. Ringler

130,000

135,474

0

0

265,474

Ruth G. Shaw

115,000

135,474

0

0

250,996*

* Includes the change in pension value and above-market nonqualified deferred compensation earnings.

 

Director Compensation. During fiscal year 2016, Dow Chemical held seven board meetings and twenty-four committee meetings. All of the directors attended more than 75% of the total number of Board meetings and the total number of meetings of the committees on which the director served during the past year. Each director receives an annual retainer of $115,000. The Audit Committee and Compensation & Leadership Development Committee Chairmanships receive $20,000 annually, while all other Committee Chairmanships receive $15,000 annually. Directors are compensated $15,000 for Audit Committee Membership. The Lead Director is compensated an additional $30,000 annually. 

 

 

 

Director Tenure. In 2016, Ms. Barton, who has held her position as a director since 1993, held the longest tenure. Mr. Loughridge, Mr. Milchovich, and Mr. Miller hold the shortest tenure as they joined in 2015. All but one of the independent directors sit on other boards: Mr. Banga is President and Chief Executive Officer of MasterCard Inc., Mr. Loughridge serves as a director for The Vanguard Group, Mr. Milchovich serves as a director for Nucor Corporation, and Mr. Miller serves as a director for International Automotive Components Group, American International Group, Inc., and Symantec Corporation.

 

 

Executive Compensation. Andrew Liveris, Dow Chemical’s Chief Executive Officer since 2004 and Chairman of the Board since 2006, earned a total compensation of $22,963,059 in 2016. He earned a base salary of $1,930,800, stock awards of $9,259,836, option awards of $3,630,035, non-equity incentive plan compensation of $3,959,974, deferred compensation earnings of $3,552,037, and other compensation totaling $630,377. James Fitterling, President and Chief Operating Officer, earned a total compensation of $7,934,412 in 2016. His earned a base salary of $1,090,134, stock awards of $3,635,031, option awards of $1,425,033, non-equity incentive plan compensation of $1,719,854, deferred compensation earnings of $2,160,423, and other compensation totaling $64,360. All other compensation includes the cost of Company provided automobile for the CEO, personal use of corporate aircraft by the CEO, Company contributions to employee savings plans, reimbursements of costs paid for financial and tax planning support, relocation expenses, home security, executive health examinations and personal excess liability insurance premiums. 

Monday
Aug142017

The Director Compensation Project: American Airlines Group (AAL)

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

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

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

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

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

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

Name

Fees Earned or Paid in Cash ($)

Stock Awards ($)

Option Awards ($)

All Other Compensation ($)

Total ($)

James F. Albaugh

130,000

150,000

0

28,808

308,808

Jeffrey D. Benjamin

130,000

150,000

0

55,568

335,568

John T. Cahill

160,000

150,000

0

52,988

362,988

Michael J. Ember

130,000

150,000

0

19,080

299,080

Matthew J. Hart

135,000

150,000

0

45,403

330,403

Alberto Ibargüen

130,000

150,000

0

25,296

305,296

Richard C. Kraemer

135,000

150,000

0

50,690

335,690

Susan D. Kronick

127,774

220,000

0

18,466

366,240

Martin H. Nesbitt

127,774

220,000

0

47,930

395,704

Denise M. O’Leary

130,000

150,000

0

61,678

341,678

Ray M. Robinson

135,000

150,000

0

21,615

306,615

Richard P. Schifter

135,000

150,000

0

32,368

317,368

 

Director Compensation. During fiscal year 2016, American Airlines Group held eight meetings of the Board of Directors, five meetings of the Audit Committee, eight meetings of the Compensation Committee, three meetings of the Corporate Governance and Nominating Committee, and twelve meetings of the Finance Committee. Each incumbent director attended at least 75% of the aggregate number of meetings of the Board of Directors and of the committees on which he or she served. Non-employee directors receive an annual retainer of $100,000, as well as, an additional $15,000 retainer for each committee on which they serve. The Chair of each committee receives an annual retainer of $20,000. The Lead Independent Director receives an additional annual retainer of $30,000. Non-employee directors are also entitled to complimentary personal air travel for the non-employee director and his or her immediate family on American and American Eagle, 12 round-trip or 24 one-way passes for complimentary air travel for the non-employee director’s family and friends, membership in the American Airlines Admirals Club, and AAdvantage Executive Platinum and ConciergeKey program status. Finally, non-employee directors are reimbursed for all reasonable out-of-pocket expenses incurred in connection with attendance at meetings.

Director Tenure. Ms. Kronick and Mr. Nesbitt are the shortest serving directors having joined the board in November 2015. All other directors joined in December 2013, when American Airlines Group was formed as a result of a merger between US Airways Group and AMR Corporation.  Half of the directors previously held directorships with US Airways Group or AMR Corporation. All directors, except Mr. Ibargüen, hold directorships with other public organizations. Mr. Albaugh serves as a director for Harris Corporation. Mr. Benjamin serves as a director for Caesars Entertainment Corp. and A-Mark Precious Metals. Mr. Cahill serves as a director for Kraft-Heinz and Colgate-Palmolive Company. Mr. Embler serves as a director for NMI Holdings, Inc. Mr. Hart serves as a director for American Homes 4 Rent and Air Lease Corporation. Mr. Kraemer serves as a director for Knight Transportation, Inc. Ms. Kronick serves as a director for Hyatt Hotels Corporation. Mr. Nesbitt serves as a director for Norfolk Southern Corporation and Jones Lang LaSalle Incorporated. Ms. O’Leary serves as a director for Medtronic plc and Calpine Corporation. Mr. Robinson serves as a director for Aaron’s, Acuity Brands, Inc., and Fortress Transportation and Infrastructure. Mr. Schifter serves as a director for LPL Financial Holdings, Inc. and EverBank Financial Corporation.

CEO Compensation. Mr. W. Douglas Parker serves as Chairman and Chief Executive Officer of American Airlines Group. In 2016, Mr. Parker earned a total of $11,140,763. He did not earn a base salary but earned stock awards of $11,000,000, as well as other compensation totaling $140,763. Mr. J. Scott Kirby, the former president, was the second most highly compensated executive in 2016, earning a total of $9,403,369. Mr. Kirby’s employment with American Airlines Group terminated on August 29, 2017.  He earned a base salary of $475,625, stock awards of $4,635,000, severance pay of $3,850,000, and other compensation totaling $442,744. Other compensation included dividends, flight privileges, company-paid life-insurance premiums, medical examinations, gross-up payments, and contributions to 401(k) plans.

Sunday
Aug132017

The Director Compensation Project: MetLife (MET)

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

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

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

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

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

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

 

Name

Fees Earned or Paid in Cash

($)

 

Stock Awards

($)

 

Option Awards

($)

 

All Other Compensation

($)

 

Total

($)

Cheryl W. Grisé

219,519

150,023

0

1,635

371,177

Carlos M. Gutierrez

150,000

150,023

0

1,635

301,658

David L. Herzog*

96,841

96,841

0

447

194,129

R. Glenn Hubbard, Ph.D.

175,000

150,023

0

6,635

331,658

Alfred F. Kelly, Jr.

185,000

150,023

0

6,635

341,658

Edward J. Kelly, II

168,269

150,023

0

1,635

319,927

William E. Kennard

170,000

150,023

0

6,635

326,658

James M. Kilts

180,000

150,023

0

6,635

336,658

Catherine R. Kinney

150,000

150,023

0

6,635

306,658

Denise M. Morrison

170,000

150,023

0

1,635

321,658

Kenton J. Sicchitanto

190,000

150,023

0

4,135

344,158

Lulu C. Wang

150,000

150,023

0

1,635

301,658

*David L. Herzog was appointed to the Board of Directors in 2016 after that year’s Annual Meeting. As a result, the Company paid Mr. Herzog a prorated annual retainer fee in advance for services from his appointment through the 2017 Annual Meeting. Approximately 50% of the retainer, or $96,841, was paid through the grant of 2,088 Shares at a grant date fair value of per Share of $46.38, the closing price of a Share on the NYSE on the grant date. The rest of the retainer was paid in $96,841 cash. For directors who were members of the Board of Directors in 2015, the retainer fee for the portion of 2016 prior to the 2016 Annual Meeting was paid in 2015.

Director Compensation. In 2016, the Board held ten meetings and the Board Committees of MetLife held a total of 39 meetings. Each of the current directors who served during 2016 attended more than 75% of the aggregate number of meetings of the Board and applicable Committees.

Director Tenure. In 2016, Ms. Grisé was the company’s lead director and the most tenured, serving on the board since 2004. Mr. Herzog held the shortest tenure, as he joined the board in 2016. All but one of the directors sit on other boards: Ms. Grisé serves as a director for PulteGroup, Inc., Mr. Gutierrez serves as a director for Occidental Petroleum Corporation and Time Warner, Inc., Mr. Herzog serves as a director for Ambac Financial Group, Inc. and DXC Technology Company, Mr. Hubbard serves as a director for Automatic Data Processing, Inc. and BlackRock Closed-End Funds, Mr. Kelly Jr. serves as a director for Visa Inc., Mr. Kelly III serves as a director for CSX Corporation and XL Group plc, Mr. Kennard serves as a director for Duke Energy Corporation, AT&T Inc., and Ford Motor Company, Mr. Kilts serves as a director for Pfizer, Inc., and a Non-Executive Director for Nielsen Holdings plc, Unifi, Inc., and Conyers Park Acquisition Corp., Ms. Kinney serves as a director for MCSI Inc. and QTS Realty Trust, Inc., and Ms. Morrison serves as a director for the Campbell Soup Company.

 

Saturday
Aug122017

The Director Compensation Project: Archer Daniels Midland Company (ADM)

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

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

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

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

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

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

Name

Fees Earned or Paid in Cash

($)

Stock Awards

($)

Option Awards

($)

All Other Compensation

($)

Total

($)

Alan L. Boeckmann*

0

275,000

0

20,000

295,000

Mollie H. Carter*

0

275,000

0

0

275,000

Terrell K. Crews

145,000

150,000

0

2,800

297,800

Pierre Dufour

125,000

150,000

0

0

275,000

Donald E. Felsinger*

30,000

275,000

0

25,700

330,700

Antonio Maciel*

125,000

150,000

0

0

275,000

Patrick J. Moore

140,000

150,000

0

0

290,000

Francisco J. Sanchez

125,000

150,000

0

0

275,000

Debra A. Sandler*

81,731

98,077

0

10,000

189,808

Daniel T. Shih

125,000

150,000

0

0

275,000

Kelvin R. Westbrook

145,000

150,000

0

10,700

305,700


*
Mr. Boeckmann, Ms. Carter and Mr. Felsinger each elected to receive his or her entire annual retainer in the form of stock units. Ms. Sandler was elected to the board of directors on May 5, 2016. Her period of service during 2016 was used to pro-rate the annual non-employee director compensation. Ms. Carter and Mr. Maciel did not stand for re-election, and only one nominee, Suzan F. Harrison, was selected to fill the vacancies, reducing the number of independent directors to ten. All other compensation includes charitable gifts pursuant to ADM’s matching charitable gift program and personal aircraft use.

Director Compensation. During fiscal year ending on December 31, 2016, ADM held nine board of directors’ meetings, and the independent directors met separately at regularly scheduled executive sessions. Additionally, the Audit Committee met nine times, and the Compensation/Succession and Nominating/Corporate Governance committees each met six times. Each current director attended at least 75% of all meetings of the board and committees on which he or she served. The non-management directors met in independent executive sessions four times during fiscal year 2016. All director nominees standing for election at the last annual stockholders’ meeting held on May 5, 2016, attended that meeting. Non-employee directors receive an annual retainer of $275,000 with $150,000 being paid in stock. In addition, the Lead Director received a stipend of $30,000, the chairman of the Audit Committee received a stipend of $20,000, the chairman of the Compensation/Succession Committee received a stipend of $20,000, and the chairman of the Nominating/Corporate Governance Committee received a stipend of $15,000. Directors are not paid fees for attendance at board and committee meetings, but are reimbursed for out-of-pocket traveling expenses incurred in attending board and committee meetings.

Director Tenure. Ms. Carter is the longest serving director, having served since 1996, but did not stand for re-election. Ms. Sandler is the shortest serving director, having joined in 2016, and is a director of Gannett Co., Inc.. Mr. Boeckmann is a director of Sempra Energy and BP p.l.c.. Mr. Crews is a director of WestRock Company and Hormel Foods Corporation. Mr. Dufour is a director of Air Liquide S.A. and National Grid plc. Mr. Felsinger is a director of Northrop Grumman Corporation and Gannett Co., Inc.. Mr. Luciano is a director of Eli Lilly and Company and Wilmar International Limited. Mr. Moore is a director of Energizer Holdings, Inc.. Mr. Westbrook is a director of Stifel Financial Corp., T-Mobile USA, Inc., and Mosaic Company, and trust manager of Camden Property Trust.

CEO Compensation. Mr. Luciano, Chairman of the Board since January 2016, Director since 2015, Chief Executive Officer and President since January 2015, President and Chief Operating Officer from February 2014 to December 2014, and Executive Vice President and Chief Operating Officer from 2011 to February 2014, earned a total of $14,012,616 in fiscal year 2016. He earned a base salary of $1,283,340, stock awards of $5,312,218, option awards of $5,279,331, non-equity incentive plan compensation of $1,939,600, change in pension value and nonqualified deferred compensation earnings of $49,419, and other compensation of $148,708. Mr. Young, Executive Vice President and Chief Financial Officer, was the second highest compensated executive at ADM. He earned a total of $5,620,923 in fiscal year 2016. He earned a base salary of $825,048, stock awards of $1,979,220, option awards of $1,966,968, non-equity incentive plan compensation of $794,116, change in pension value and nonqualified deferred compensation earnings of $32,419, and other compensation of $23,152. Other compensation included costs for personal use of company aircraft, imputed value of company-provided life insurance, executive health services, and company contributions under the 401(k) and Employee Stock Ownership Plan.

Friday
Aug112017

The Director Compensation Project: Costco (COST)

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

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

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

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

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

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

Name

Fees Earned or Paid in Cash

($)

Stock Awards

 ($)

All Other Compensation

($)

Total

($)

Susan L. Decker

42,000

332,012

 

374,014

Daniel J. Evans

44,000

332,012

 

376,014

Hamilton E. James

35,000

332,012

 

367,014

Richard M. Libenson*

35,000

332,014

338,408

705,422

John W. Meisenbach

35,000

 

332,012

 

367,014

Charles T. Munger

45,000

332,012

 

377,014

Jeffrey S. Raikes

38,000

332,012

 

370,014

Jill S. Ruckelshaus

17,000

332,014

 

349,014

James D. Sinegal

35,000

332,012

 

367,014

John W. Stanton**

31,789

238,382

 

270,171

Mary Agnes (Maggie) Wilderotter

34,982

332,012

 

336,996

*Richard M. Libenson has been engaged as a consultant to the Company. For such services, a corporation that he owns was paid $300,000 during fiscal 2016. That amount has been unchanged for 16 years. In addition, the Company paid premiums on long-term disability insurance in the amount of $8,331 and premiums for health care insurance in the amount of $20,101. Mr. Libenson is not standing for re-election. He will serve a three-year term as Director Emeritus beginning in January 2017. For that service he will receive compensation (including equity compensation) equivalent to that received by board members.

**John W. Stanton was elected to the board in late October 2015 and only served a portion of the fiscal year in 2016.

Director Compensation. During the 2016 fiscal year, Costco held five board of director meetings. Each current director attended 100% of the total number of board and committee meetings on which he or she served, with the exception of Mr. Evans, who missed one Board meeting. Non-employee directors earn $30,000 per year for serving on the board and $1,000 for each Board and committee meeting attended. This year, directors also received 2,150 restricted stock units. Directors are reimbursed for travel expenses incurred from board service.

Director Tenure. Mr. Meisenbach and Mr. Sinegal are the longest serving board members as they joined the board at the company’s inception. Mr. Stanton and Ms. Wilderotter began their board tenure in 2015 and have served for the shortest amount of time. Seven board members hold board positions with other companies. Ms. Decker serves as a director for Berkshire Hathaway Inc. and Vail Resorts, Inc. Mr. Evans is the chairman of Daniel J. Evan Associates. Mr. James acts as the President and Chief Operating Officer of The Blackstone Group. Mr. Meisenbach is the President and CEO of MCM, a financial services company. Mr. Munger is Vice Chairman of the Board of Directors for Berkshire Hathaway Inc. and a chairman for the Daily Journal Corporation. Mr. Stanton is the Chairman of First Avenue Entertainment LLLP, Trilogy International Partners, and Trilogy Equity Partners. Ms. Wilderotter serves on the board of Juno Therapeutics, Inc. and Hewlett Packard Enterprise. She also holds a position on the President’s Commission on Enhancing National Cybersecurity.

Executive Compensation. W. Craig Jelinek, Costco’s President, Chief Executive Officer and Director since 2015, earned the highest compensation with a total of $6,503,276 in 2016. He earned a base salary of $700,000, stock awards of $5,563,064, bonus compensation of $81,600, deferred earnings of $57,227, and other compensation totaling $101,385. Jeffrey H. Brotman, the Chairman of the Board, earned $650,000 in base salary, stock awards of $5,563,064, bonus compensation of $81,600, deferred earnings of $78,842, and other compensation comprised of $108,248. In total, Mr. Brotman earned $6,481,745, the second highest amount of compensation. Other compensation included personal benefits such as executive life insurance, health care insurance premiums, and Company matching contributions to deferral plans.

Friday
Aug112017

Disappearing Women

How quickly things change—and not for the better.  In June, Fortune magazine reported that woman were “making strides” because a whopping 6.4% of CEOs were female.  As sad as that figure is, it just got much worse.  Avon recently announced that CEO Sheri McCoy will leave the 131-year-old cosmetics firm in March.  This news broke just one day Oreo and Cadbury owner Mondelez announced that its longtime CEO Irene Rosenfeld will give up the top spot at the company later this year.  Moreover, let us not forget that in June, Marissa Myers stepped down as the CEO of Yahoo (now known as Altaba).  Each of the CEO’s faced harsh criticism from activist shareholders during her tenure.  And so, for now, we are down to 5.8% female representation of woman in Fortune 500 companies.  Some strides.

Of course, the problem of underrepresentation is not limited to Fortune 500 companies. According to the 2017 Law360 Glass Ceiling Report, omen are 50.3 percent of current law school graduates, yet they still make up just under 35 percent of lawyers at law firms, Most important, their share of equity partnerships — where the highest compensation and leadership positions are lodged — remains at 20 percent and has not changed in recent years.

Similarly, according to the Hedge Fund Report, only 49 hedge funds managed by women are in the HFR index, or a mere 2% out of the 2,100 funds in the category.  This holds, despite the fact as reported in the Financial Times that the hedge funds led by women have outperformed a broader benchmark of alternative investment managers over the past five years, raising the question of why there are still so few female portfolio managers. HFRI Women Index produced a profitability of 4.4% over the past five years – higher than the 4.2% from the HFRI Fund Weighted Composite Index, a more extensive barometer of hedge fund performance across all strategies and for both genders.

Reams of articles have been written on this problem and myriad solutions have been suggested.  The data suggested that nothing is working thus far.  Women continue to vanish from the scene to the detriment of all.

Thursday
Aug102017

Sanctions Imposed for E*TRADE Entities’ Self-Reported Record Retention Violations

In In Re E*TRADE Securities LLC and E*TRADE Clearing LLC, No. 17-07 (CFTC Jan. 26, 2017), the U.S. Commodity Future Trading Commission (CFTC) accepted a settlement offer (“Offer”) from E*TRADE Securities LLC and E*TRADE Clearing LLC (collectively “E*TRADE Entities”) regarding self-reported violations of CFTC record retention and supervision requirements. The CFTC found both entities violated supervisory duties and failed to preserve and maintain audit trail logs for customers. As a result, the CFTC mandated future compliance with retention policies and payment of a civil fine.  E*TRADE agreed to enter into the Order without admitting or denying any of the findings or conclusions therein.

According to the Order, the E*TRADE Entities learned as a result of an internal review conducted in January 2014 that they had not preserved certain customer electronic audit trail logs. E*TRADE Securities used a third-party vendor to generate these logs on a monthly basis. The vendor stored each record for a ten-day period and allowed E*TRADE Securities to download and save the information. The vendor informed E*TRADE Securities of this retention policy by email, however, E*TRADE Securities employees did not take additional steps to preserve audit logs.

E*TRADE Securities began downloading information daily from the third-party vendors once it discovered the retention error and attempted to recover the missing log data. In the same time frame, E*TRADE Clearing learned its internal database did not store audit logs automatically. E*TRADE Securities could not recover audit logs from October 2009 through October 2011, and from June 2012 through December 2012. Both companies could not recover audit logs from March 2013 through January 2014. E*TRADE Securities updated its Manual in March 2015 to reflect the record keeping requirements.  Both entities “self-reported” the recordkeeping violations to the CFTC.

Section 4g(a) of the Commodity Exchange Act (CEA), 7 USC §6g(a), requires every person registered as a futures commission merchant (FCM), introducing broker (IB), floor broker, or floor trader to keep books and records available for inspection of transactions, and customer and commodity positions. Similarly, Regulation 1.31, CFR § 1.35(a)(1), mandates that FCMs and IBs keep full and complete records of pertinent data and memorandum of all transactions “relating to its business of dealing in commodity futures.” Under 17 CFR § 1.35(a)(3)(ii), registrants must have written operational procedures to ensure proper electronic document retention. Commission Regulation 166.3, 17 CFR § 166.3 requires registrants to develop deterrent and detection procedures to identify CEA violations. Lastly, according to FC Stone, LLC, CFTC No. 15-21 2015 WL 2066891 (May 1, 2015), registrants must diligently supervise all business activities of its officers, employees, and agents.

The CFTC determined the E*TRADE Entities’ permanent loss of more than three years of records, attributable to a failure to ensure proper record retention, violated both Section 4g(a) of the CEA and Regulations 1.31(a) and 1.35(a). The Order also identified two breaches of Regulation 166.3: the E*TRADE Entities’ failure to implement reliable procedures to retain audit trail logs, and E*TRADE Securities’ failure to address the third-party vendor’s notice regarding retention periods.

For the above reasons, the CFTC directed the E*TRADE Entities to immediately end any record retention violations and ordered payment of a $280,000 civil monetary penalty. The Order recognized the E*TRADE Entities’ cooperation in this matter.

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

Wednesday
Jul052017

First Circuit Found Sufficient Evidence to Affirm Insider Trading Conviction

In United States v. Bray, 853 F.3d 18 (1st Cir. 2017), defendant Robert Bray (”Defendant”) appealed his conviction for insider trading. The First Circuit affirmed the jury’s guilty verdict for criminal securities fraud, finding that sufficient evidence supported the jury’s findings and that an error in the jury instructions was inconsequential.

The prosecution alleged Defendant asked for, and received, nonpublic information from Chris O’Neill (“O’Neill”) after stating he needed to make a “big score” to fund a real estate project and asking for any “bank stock tips”. O’Neill, who worked for Eastern Bank (“Eastern”), was performing due diligence on a local bank, Wainwright Bank & Trust Co. (“Wainwright”), a possible acquisition target. After O’Neill provided Wainwright’s name on a napkin, Defendant allegedly purchased a large amount of shares. After Eastern announced the acquisition, Defendant offered O’Neill an opportunity to invest in his real estate project. He ultimately sold the shares, netting approximately $300,000.

Defendant challenged the sufficiency of the prosecution’s evidence that he knew O’Neill breached a fiduciary duty by providing the tip. Specifically, Defendant asserted that O’Neill did not receive a “personal benefit” for providing the information. He also claimed the trial court erred by instructing the jury that it could convict him if he “should have known” O’Neill had an obligation to keep the information confidential. 

The unlawful trading of securities based on material, nonpublic information, or illegal insider trading, violates both Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b-5. Individuals trusted with confidential information about a corporation cannot secretly use that information for their personal advantage and must either abstain from trading in that corporation’s securities or disclose the information ahead of time. In “tipping” situations, the person receiving the misappropriated information “inherits” the tipper’s duty to abstain or disclose “’if the tippee knows the information was disclosed in breach of the tipper’s duty’ and ‘may commit securities fraud by trading in disregard of that knowledge.’” To breach a duty, however, the tipper must receive a “personal benefit” as a result of the disclosure. 

With respect to jury instructions, failure to object results in an application of the “plain error” standard. “In order to establish plain error, [Defendant] must show ‘(1) that an error occurred; (2) that the error was clear or obvious; (3) that the error affected his substantial rights; and (4) that the error also seriously impaired the fairness, integrity, or public reputation of judicial proceedings.’”

The court held there was sufficient evidence for a reasonable jury to conclude that Defendant “knew O'Neill tipped him in expectation of a personal benefit.” As the court determined: 

O'Neill and [Defendant’s] close relationship is our starting point: though Bray may not have known the exact benefit O'Neill sought in exchange for the tip, a reasonable jury could have readily inferred O'Neill's intent to benefit [Defendant]. [Defendant’s] actions after Eastern announced the Wainwright acquisition bolster this conclusion. He thanked O'Neill for the tip and, unprompted, offered him an opportunity to invest in the Watertown Project on two separate occasions, the same project for which he requested the tip in the first place. Before this, [Defendant] had never offered O'Neill a similar opportunity and had rarely (if ever) made such offers to anyone else at Oakley. Consequently, the jury was entitled to conclude that [Defendant] knew O'Neill sought a personal benefit in exchange for the tip. (citation omitted) 

The evidence was, therefore, sufficient for a jury to conclude that O’Neill “anticipated a benefit and breached a fiduciary duty to his employer.” 

With respect to the jury instruction, the court found that the lower court “clearly erred.” Nonetheless, “the government presented ample evidence that [Defendant] knew O'Neill had breached a duty of confidentiality by tipping, or at least possessed the requisite ‘culpable intent.’” As a result, “different jury instructions ‘would have been of little help’” to Defendant and, his allegations feel “short of the ‘rather steep’ road to success under the ‘exacting’ plain-error standard.” For the reasons above, the court affirmed the Defendant’s guilty conviction.

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

Sunday
Jun252017

Chitwood v. Vertex Pharms: Massachusetts Supreme Judicial Court Provides Guidance on Shareholder Inspection Demands 

In Chitwood v. Vertex Pharms., Inc., 71 N.E.3d 492 (Mass. 2017), the Supreme Judicial Court of Massachusetts vacated the lower court’s decision to dismiss Fred Chitwood’s (“Shareholder”) claim for inspection of corporate records of Vertex Pharmaceuticals, Inc. (“Vertex”).  The Court held that the lower court applied too demanding of a standard and the scope of the demand made by the shareholder far exceeded the authorized scope of inspection under § 16.02 (b).

According to the complaint, Vertex, in the spring of 2012, issued “false and misleading” statements in a press release about the initial study results of the effectiveness of two drugs. Vertex’s stock rose due to the announcement. Three weeks later, Vertex issued a second press release which indicated the drug study did not result in a new medical breakthrough and Vertex’s stock declined. Seven of Vertex’s officers and directors allegedly sold over $37 million in Vertex stock between the first and second announcement.

 Plaintiff sent a letter to Vertex’s board of directors (the “Board”), claiming Vertex officers and directors wrongly engaged in insider trading prior to the second announcement and demanded that the Board initiate a derivative action based on the alleged misconduct. The Board investigated the Shareholder’s allegations and determined there was no breach of fiduciary duty by any officer or director. Shortly thereafter, Shareholder demanded to inspect and copy seven categories of Vertex’s books and records to investigate the actions of the Board. The Board rejected Shareholder’s request, and the Shareholder filed suit to compel inspection of the requested records. After concluding Shareholder failed to sufficiently show “proper purpose,” the trial court dismissed the complaint.

 Under G. L. c. 156D, § 16.02 (b) of the Massachusetts Business Corporation Act (“Act”), a shareholder, upon written notice, is entitled to inspect and copy various categories of corporate records if the shareholder makes the demand “in good faith and for a proper purpose,” and if the particular records sought to be inspected are “directly connected” with that purpose.

The Court rejected the “credible basis” standard used by Delaware courts, concluding that while “modest,” the standard imposed a burden that was “more demanding than is appropriate for the more limited scope of books and records subject to inspection under § 16.02.”  As a result, the Shareholder did not need to provide evidence of wrongdoing beyond “the timing of the press releases and the insider trades” to establish “proper purpose” for demanding records. The Court found the Shareholder had a proper purpose for requesting excerpts from the original meetings of the Board and committee. Therefore, the Court held that the trial court misapplied the “proper purpose” standard of § 16.02.

For the above reasons, the court vacated the judgment of dismissal and remanded the case to the Superior Court for further proceedings.

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

 

Sunday
Jun252017

In Re Hedayati: Cease-and-Desist Proceedings against Nema Hedayati

In In Re Hedayati, Securities Exchange Act Release No. 80238 (admin proc Mar. 14, 2017), the Securities and Exchange Commission (“SEC”) issued an order instituting public administrative and cease-and-desist proceedings against Nima Hedayati (“Hedayati”) for alleged violations of Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 thereunder. In anticipation of the proceedings against him, Hedayati submitted, and the SEC accepted, an Offer of Settlement (“Offer”), in which he neither admitted nor denied the allegations.   

According to the SEC’s allegations, Hedayati was an audit staff member employed by Lam Research Corporation’s (“Lam”) independent audit firm. In October 2015, Hedayati, in the course of his employment, acquired material nonpublic information concerning a planned acquisition of KLA-Tencor Corporation (“KLA”) by Lam. Shortly thereafter, Hedayati purchased 20 contracts for out-of-the money KLA call options in his account and an additional 20 KLA call options in the account of his fiancée. Hedayati also advised his mother to trade in KLA stock and, based on his advice, Hedayati’s mother purchased 1,400 shares of KLA common stock. After KLA and Lam announced their merger on October 21, 2015, KLA shares rose nineteen percent. Following the merger announcement, Hedayati liquidated the 40 KLA options, realizing profits of $27,971.59. His mother realized profits of $15,056. 

Rule 10b-5 prohibits any person from employing any device, scheme or artifice to defraud in connection with the purchase or sale of any security. 17 CFR 240.10b-5.  This includes the purchase or sale of a security on the basis of material, nonpublic information about that security, in breach of a duty of confidence that is owed, directly or indirectly, to the issuer of that security.

The SEC determined Hedayati received training on, and was familiar with, his employer’s code of conduct that required him to safeguard confidential client information and prohibited Hedayati “from using that information for his own personal benefit.” The code of conduct specifically prohibited employees from trading on the basis of material, nonpublic information. Additionally, the SEC claimed Hedayati knew the information about the proposed merger was material, nonpublic information. The SEC determined Hedayati knowingly or recklessly breached his duty of trust and confidence to his employer when he traded in KLA options and advised his mother to trade in KLA on the basis of material, nonpublic information. Based on these findings, the SEC charged Hedayati with willfully violating Section 10(b) of the Exchange Act and Rule 10b-5 thereunder.

For the above reasons, the SEC determined to accept the Offer from Hedayati and ordered Hedayti to cease-and-desist from committing any further violations of Section 10(b) of the Exchange Act, prohibited him from appearing or practicing before the SEC as an accountant, with a right to seek reinstatement after 5 years, and ordered Hedayati to pay disgorgement of $43,027.59, plus prejudgment interest of $1,269.70, and a civil penalty of $43,027.59.

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

Wednesday
Jun212017

No-Action Letter for Ecolab, Inc. Permits Exclusion of Proxy Access Proposal but Denies Deadline Waiver

In Ecolab Inc., 2017 BL 84445 (Mar. 16, 2017), Ecolab Inc. (“Ecolab”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by John Chevedden (“Shareholder”) requesting an increase in the limitation of shareholders from 20 to 50 who can aggregate their shares for purposes of “proxy access.” The SEC issued the requested no action letter, finding “some basis” for exclusion under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED: Shareholders request that our board of directors replace the limit of 20 shareholders who are currently allowed to aggregate their shares to equal 3% of our stock owned continuously for 3-years in order to make use of our shareholder proxy access provisions adopted recently. The 20 shareholder limit is to be increased to a limit of 50 on the number of shareholders who can aggregate their shares for the purpose of shareholder proxy access.

Under current provisions, even if the 20 largest public pension funds were able to aggregate their shares, they would not meet the 3% criteria for a continuous 3-years at most companies examined by the Council of Institutional Investors. Additionally many of the largest investors of major companies are routinely passive investors who would be unlikely to be part of the proxy access shareholder aggregation process.

Under this proposal it is unlikely that the number of shareholders who participate in the aggregation process would reach an unwieldy number due to the rigorous rules our management adopted for a shareholder to qualify as one of the aggregation participants. Plus it is easy for our management to reject an aggregating shareholder because management simply needs to find one of a list of requirements lacking.

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

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

Rule 14a-8(i)(10) permits a company to exclude a shareholder proposal if the company has already “substantially implemented” the proposal. The SEC has permitted exclusion under this rule when the company’s policies, practices, and procedures compare favorably with the guidelines of the proposal or, alternatively, when a proposal has not been implemented exactly as proposed by the shareholder so long as the company has satisfied the proposal’s essential objective. For additional discussion of the exclusion, see Aren Sharifi, Rule 14a-8(i)(10): How Substantial is “Sub­­stantially” Implemented in the Context of Social Policy Proposals?, 93 Denv. L. Rev. Online 301 (2016).  

Under Rule 14a-8(j)(1), a company intending to exclude a proposal from its proxy materials must file the reasons with the SEC no later than 80 days before filing definitive proxy materials.  The SEC may permit the filing of a submission later than 80 days if the company demonstrates good cause for missing the deadline. For a more detailed discussion of this requirement, see Mark G. Proust, The Evolution of Rule 14a-8(j):  The Good Cause to Clarify Good Cause, 93 Denv. L. Rev. Online 289 (2016).

Ecolab argued Shareholder’s proposal should be excluded under Rule 4a-8(i)(10) because the amended and restated bylaws satisfied the proposal’s essential objective. In December 2015, Ecolab amended and restated its bylaws to adopt a Proxy Access Provision. The Provision permitted a shareholder, or a group of up to 20 shareholders, owning at least 3% stock continuously for at least three years, to nominate and include in the Company's annual meeting proxy materials director candidates constituting up to two individuals or 20% of the Board. Any 20 owners of at least 0.15% of Ecolab’s stock individually, may aggregate their holdings to meet the 3% ownership threshold. Ecolab asserted that its provision provided a meaningful proxy access right to the shareholders, satisfying the Proposal’s objective.

Ecolab also asserted the 80-day limitation set forth in Rule 4a-8(j)(1) should be waived for good cause because Ecolab submitted Proxy Access Aggregation Letters which were posted after the 80-day requirement and therefore Ecolab could not have met the 80-day requirement despite its good faith effort to minimize delay.

The SEC determined Ecolab’s amended and restated bylaws substantially implement the Proposal. As the no action letter stated: “Based on the information you have presented, it appears that Ecolab's policies, practices and procedures compare favorably with the guidelines of the proposal and that Ecolab has, therefore, substantially implemented the proposal.”  Therefore, the SEC did not recommend enforcement action if Ecolab omitted the proposal in reliance on Rule 4a-8(i)(10), however the SEC was unwilling to waive the 80-day requirement of Rule 14a-8(j)(1).

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

Sunday
Jun112017

In Re General Motors Co.: SEC Accepts Settlement Offer and Institutes Cease-and-Desist Proceedings

In In Re General Motors Co., S.E.C., No. Admin. Proc. File No. 3-17797 (January 18, 2017), the Securities and Exchange Commission (the “Commission”) instituted a cease-and-desist order pursuant to Section 21C of the Securities and Exchange Act of 1934 (the “Exchange Act”) against General Motors Company (“GM”), and accepted an Offer of Settlement (“Settlement Offer”) from GM in anticipation of the cease-and-desist proceedings.  General Motors submitted the settlement offer “without admitting or denying the findings”. 

As reported by the Commission, GM’s approach to accruing estimated losses associated with vehicle recalls from the period starting in 2012 through the third quarter of 2014, included placing engineering defects recommended for recall on an “Emerging Issues List” (EIL) after review by several internal committees. Once placed on the EIL, the “potential” for a recall was considered “probable and estimable”.  The EIL  was reported to those responsible for the accounting treatment of possible losses related to potential recall actions (the “Warranty Group”).

Beginning in 2012, GM engineers began exploring claims related to a defective ignition switch (the “Defective Switch”) in GM’s line of Chevrolet Cobalts. The Warranty Group was not notified until the fourth quarter of 2013, when the Defective Switch issue finally made the Emerging Issues List. “As a result, from 2012 through the first quarter of 2014, the Warranty Group was not able to consistently consider whether a loss was “reasonably possible” under ASC 450 and for which disclosure was necessary prior to the point at which GM considered the potential field action for an accrual.”

Section 13(b)(2)(B) of the Exchange Act requires issuers to devise and maintain a system of internal accounting controls sufficient to provide reasonable assurances that, among other things, transactions are recorded as necessary to permit preparation of financial statements in conformity with generally accepted accounting principles (“GAAP”). ASC 450 provides guidance for the recognition and disclosure of a loss contingency, and requires issuers to assess the likelihood the future event or events will confirm the loss or impairment of an asset or the incurrence of a liability is “remote”, “reasonably possible”, or “probable”. Upon a determination of probable and estimable, “ASC 450 requires the issuer to accrue the estimated loss.” Where the loss is not subject to a reasonable estimate, disclosure is necessary.

The Commission found GM’s large recall campaigns for the period 2012 through the second quarter of 2014 violated Section 13(b)(2)(B) of the Exchange Act by not devising and maintaining a system of internal accounting controls sufficient to provide reasonable assurances that transactions were recorded as necessary to permit preparation of financial statements in conformity with GAAP.

Accordingly, the Commission, pursuant to 21C of the Exchange Act, ordered GM to cease and desist from committing or causing any further violations of Section 13(b)(2)(B). GM agreed to pay a civil money penalty in the amount of $1,000,000 to settle the proceeding.

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

Sunday
Jun112017

Haque v. Tesla Motors, Inc.: Court Denies Shareholder Request for Company Books and Records

In Haque v. Tesla Motors, Inc., No. 12651-VCS (February 2, 2017), the Delaware Court of Chancery declined shareholder Shahid Haque’s (“Plaintiff”) request to review the corporate books and records of Tesla Motors, Inc. (the “Company”), finding Plaintiff failed to demonstrate a credible basis from which the court could infer possible wrongdoing that would warrant further investigation.

According to the allegations, the Company designs, develops, manufactures, and sells fully electric vehicles and energy storage products. The production of these vehicles presents “complex design, engineering and manufacturing challenges” and is further complicated by a delicate supply chain comprised of more than 350 suppliers around the globe. Performance metrics are tracked in quarterly shareholder letters, including the number of vehicles produced and the number of vehicles delivered by the Company in that quarter.

When its production or deliveries have fallen short of targets, the Company has consistently maintained the “shortfalls are driven by production issues” and “not a lack of consumer demand for its vehicles.” Plaintiff questioned the truthfulness of these representations, and requested the books and records of the Company. After the Company refused to fully comply with Plaintiff’s demand, Plaintiff filed this action to compel the Company to release the relevant records pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”).

“The right to inspect books and records under Section 220 is broad but not unlimited.”   Shareholders bear “the burden of establishing by a preponderance of evidence” that the shareholder: (1) owns stock of the company in question; (2) complied with Section 220 “respecting the form and manner of making a demand for inspection” of the documents; and (3) has a proper purpose. A shareholder also must present some evidence of a credible basis supporting the alleged purpose. 

The court found Plaintiff failed to establish a credible basis for the alleged wrongdoing. Plaintiff’s allegations rested on mathematical speculation based on production numbers disclosed by the Company to shareholders. Plaintiff specifically alleged discrepancies between the number of vehicles the Company could conceivably produce and the number of vehicles the Company actually produced and delivered in each quarter. The court disagreed with Plaintiff’s reasoning and concluded that:  “While some consistency in production levels is to be expected, merely highlighting that average production levels (weekly, monthly, quarterly, etc.) dropped from a prior quarter is not enough to support an inference that Tesla could be fabricating the timing of its vehicle production in order to mislead investors about why it cannot meet its vehicle delivery guidance.”

Accordingly, the court denied Plaintiff’s request to compel the release of Company books and records under Section 220.

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

Sunday
Jun112017

Haque v. Tesla Motors, Inc.: Court Denies Shareholder Request for Company Books and Records

In Haque v. Tesla Motors, Inc., No. 12651-VCS (February 2, 2017), the Delaware Court of Chancery declined shareholder Shahid Haque’s (“Plaintiff”) request to review the corporate books and records of Tesla Motors, Inc. (the “Company”), finding Plaintiff failed to demonstrate a credible basis from which the court could infer possible wrongdoing that would warrant further investigation.

 

According to the allegations, the Company designs, develops, manufactures, and sells fully electric vehicles and energy storage products. The production of these vehicles presents “complex design, engineering and manufacturing challenges” and is further complicated by a delicate supply chain comprised of more than 350 suppliers around the globe. Performance metrics are tracked in quarterly shareholder letters, including the number of vehicles produced and the number of vehicles delivered by the Company in that quarter.

 

When its production or deliveries have fallen short of targets, the Company has consistently maintained the “shortfalls are driven by production issues” and “not a lack of consumer demand for its vehicles.” Plaintiff questioned the truthfulness of these representations, and requested the books and records of the Company. After the Company refused to fully comply with Plaintiff’s demand, Plaintiff filed this action to compel the Company to release the relevant records pursuant to Section 220 of the Delaware General Corporation Law (“Section 220”).

 

“The right to inspect books and records under Section 220 is broad but not unlimited.”   Shareholders bear “the burden of establishing by a preponderance of evidence” that the shareholder: (1) owns stock of the company in question; (2) complied with Section 220 “respecting the form and manner of making a demand for inspection” of the documents; and (3) has a proper purpose. A shareholder also must present some evidence of a credible basis supporting the alleged purpose. 

 

The court found Plaintiff failed to establish a credible basis for the alleged wrongdoing. Plaintiff’s allegations rested on mathematical speculation based on production numbers disclosed by the Company to shareholders. Plaintiff specifically alleged discrepancies between the number of vehicles the Company could conceivably produce and the number of vehicles the Company actually produced and delivered in each quarter. The court disagreed with Plaintiff’s reasoning and concluded that:  “While some consistency in production levels is to be expected, merely highlighting that average production levels (weekly, monthly, quarterly, etc.) dropped from a prior quarter is not enough to support an inference that Tesla could be fabricating the timing of its vehicle production in order to mislead investors about why it cannot meet its vehicle delivery guidance.”

 

Accordingly, the court denied Plaintiff’s request to compel the release of Company books and records under Section 220.

 

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

Tuesday
Jun062017

Time Limited No-Action Position For Failure To Collect And/Or Post Variation Margin 

In Commodity Futures Trading Commission (“CFTC”) Letter No. 17-11, the Division of Swap Dealer and Intermediary Oversight (“DSIO”) of the CFTC, provided general relief from complying with Commission Regulation 23.153 (with a compliance date of March 1, 2017) until September 1, 2017.    DSIO received requests for a transitional relief period for the March 1 requirements from virtually all swap dealers and entities that used swaps to hedge commercial risk. These entities included The Securities Industry and Financial Markets Association’s Asset Management Group, The Investment Adviser Association, The American Council of Life Insurers, and more.

Pursuant to Section 4s(e) of the Commodity Exchange Act (“CEA”), the CFTC is required to promulgate requirements for margin for uncleared swaps applicable to each swap dealer for which there is no “prudential regulator.” As part of this requirement the CFTC created Commission Regulation 23.153, “which requires swap dealers to collect and post variation margin with each counterparty that is a swap dealer, major swap participant, or financial end user.”

The dates for complying with the margin rule were staggered so that swap dealers would come into compliance over a four year period. The first phase affected swap dealers with the largest notional amounts of uncleared swaps and the compliance date for phase one was September 1, 2016.

The swap dealers and their respective trade groups stated they must execute new or amended credit support documentation to settle the variation margin in accordance with the requirements of Regulation 23.153 and, due to the complexity and variation required in these credit agreements, there was not a “one-size-fits all” agreement that works for all market participants. For this and other reasons swap dealers claimed they would not be able to implement the requirements of Regulation 23.153 by the March 1, 2017, deadline without causing substantial disruptions to the uncleared swap market.

The DSIO concluded that a limited delay would serve to preserve the CFTC’s March 1, 2017, implementation commitment, while helping to avoid disruption in the uncleared swap market. Thus, DSIO would not recommend an enforcement action against a swap dealer that does not comply with the requirements prior to September 1, 2017, subject to the following conditions:

1) the swap dealer does not comply with the March 1 requirements with respect to a particular counterparty solely because it has not, despite good faith efforts, completed necessary credit support documentation; 2) the swap dealer uses its best efforts to continue to implement compliance with the March 1 requirements without delay with each counterparty following March 1, 2017; 3) to the extent a swap dealer has existing variation margin arrangements with a counterparty, it must continue to post and collect variation margin with such counterparty in accordance with such arrangements until such time as the swap dealer is able to comply with the March 1 requirements; and 4) no later than September 1, 2017, the swap dealer complies with the March 1 requirements with respect to all swaps to which the March 1 requirements are applicable entered on or after March 1, 2017.

To rely on the protections of the no-action letter swap dealers are expected to make continual, consistent, and quantifiable progress toward compliance with the March 1 requirements.

The primary materials for this no action letter can be found here

Tuesday
Jun062017

William Beaumont Hospital Sys. v. Morgan Stanley: Hospital Fails to Satisfy Heightened Pleading Standard 

In William Beaumont Hospital Sys. v. Morgan Stanley, No. 16-1135 (6th Cir. Jan. 26, 2017), the United States Court of Appeals for the Sixth Circuit affirmed the district court’s dismissal of William Beaumont Hospital System’s (“Plaintiff’) state law fraud claim against Morgan Stanley and Goldman Sachs (collectively “Defendants”) for failing to satisfy the heightened pleading standard of Fed. R. Civ. P. 9(b).

According to the allegations, Plaintiff and Defendants in 2006 entered into a structured debt-issuance agreement for auction-rate securities (“ARS”) to finance renovations of one of its hospitals and for construction of a new facility. Defendants, as underwriters for the debt, agreed to purchase and to make a public offering of the ARS. Pursuant to the agreement and related disclosures, Defendants would submit cover bids in the ARS market to prevent auction failure and reduce costs to Plaintiff. As the “economy slowly deteriorated leading up to the 2008 financial crisis,” a number of different ARS auctions failed.  Banks “began to limit inventory exposure to ARS and discuss ‘exit strategies’ regarding the ARS market.” By early 2008, Defendants stopped submitting cover bids, and while Plaintiff’s auctions never failed, demand decreased, and Plaintiff was “left paying investors a higher-fixed interest rate.”

Plaintiff filed suit against Defendants and subsequently filed arbitration proceedings before FINRA alleging fraudulent misrepresentation. In particular, Plaintiff claimed Defendants: (1) withheld information about the structure of the ARS market and their cover bid practice; (2) misrepresented the availability of rate structures in order to achieve a higher broker-dealer fee; and (3) failed to warn Plaintiff about the failing ARS market. 

In order to successfully plead fraud or misrepresentation in Michigan, a plaintiff must allege:

(1) that the defendant made a material misrepresentation, (2) that was false, (3) that the defendant knew it was false, or was made recklessly without any knowledge of its truth, (4) that the defendant made it with the intention that the plaintiff would act upon it, (5) the plaintiff acted in reliance upon it, and (6) suffered damages. 

Moreover, a plaintiff must satisfy rule 9(b)’s heightened pleading standard, which requires the complaint to contain specific facts of misrepresentation.

First, Plaintiff alleged that if it knew of the structure of the ARS market and Defendants’ cover bid practice, then it would not have signed the agreement. The court was not swayed by this argument because Plaintiff “acknowledged” in its Official Statement that broker-dealers routinely cover auctions to prevent failure, but they are not obligated to do so. The acknowledged statement also noted that “there is no assurance that any one or more Auctions will not fail.”  In light of the specific disclosures made, there was no actionable claim regarding these allegations. 

Next, the court held the allegations pertaining to the rate structure failed to meet the heightened pleading standard. Specifically, the court found the claims involved vague accusations of fraud and misrepresentation rather than the specific, identifiable statements. The court held the complaint completely void of “specific misstatements made at a certain time and place.” 

Finally, although relying on common law theories of fraud and misrepresentation, the court believed plaintiff was attempting “to impose the duties of a financial advisor on [D]efendants.” The court viewed this approach as “misguided.” Moreover, the claims could not withstand the heightened pleading standard because they failed to provide the names of representatives who participated in the conversations and ran the presentations from which Plaintiff’s allegations arose.

For the above reasons, the Sixth Circuit affirmed the district court’s dismissal of Plaintiff’s fraud claim for failure to plead with specific particularity under Rules 12(b)(6) and 9(b). 

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

Friday
Apr212017

Aztec Oil & Gas, Inc. v. Fisher: The Issue of Representative Shareholders

In Aztec Oil & Gas, Inc. v. Fisher, 2016 BL 16110 (S.D. Tex. Jan. 21, 2016), third party plaintiffs Frank Fisher (“Fisher”), Robert Sonfield (“Sonfield”), and the Livingston Growth Fund Trust (“Livingston”) by and through Livingston’s only trustee, Robert L. Sonfield, Jr. (“Sonfield Jr.”) (collectively, “Plaintiffs”) brought a third party shareholder derivative suit on behalf of themselves and Aztec Oil & Gas, Inc. (“Aztec Oil”) against third party defendants Jeremy Driver (“Driver”), Kenneth E. Lehrer (“Lehrer”), and Mark Vance (“Vance”) (collectively, “Defendants”) through allegations of breach of fiduciary duty, aiding and abetting breach of fiduciary duty, fraud, waste, concerted action, and conspiracy. The United States District Court for the Southern District of Texas granted Defendants’ motion to dismiss the third party derivative suit pursuant to Fed. R. Civ. P. 23.1 (“Rule 23.1”).

Prior to the third party derivative suit’s commencement, Aztec Oil and Aztec Energy, LLC brought an action against Fisher, Sonfield, Mychal Jefferson (“Jefferson”), Livingston, and International Fluid Dynamics, LLC (“IFD”), a company Fisher owned, alleging violations of federal securities law, breach of fiduciary duty, fraud, aiding and abetting fraud, aiding and abetting breach of fiduciary duty, conspiracy, legal malpractice, and violations of the Texas Deceptive Trade Practices Consumer Protection Act (the “Underlying Action”). While the Underlying Action was pending, Plaintiffs brought the third party derivative suit, which asserted Defendants, while acting as directors and officers of Aztec Oil, participated in conduct antithetical to shareholders. The derivative suit further alleged Aztec Oil failed to compensate IFD for consulting fees and Fisher for salary earned.

Defendants filed a motion to dismiss in response to Plaintiffs’ third-party claims, alleging Plaintiffs did not have standing to bring a derivative suit under Rule 23.1.

Rule 23.1 allows shareholders to bring a derivative action on behalf of a corporation to enforce a right the corporation failed to enforce. As required under Rule 23.1, a court will examine various factors to determine whether a shareholder’s derivative action fairly and adequately represents similarly situated shareholder interests. Among these factors are whether “economic antagonism” exists between the plaintiff and other shareholders, the “relative magnitude” of plaintiff’s interest in the derivative suit compared to its personal interest, and “plaintiff’s vindictiveness towards” other defendants.

Here, the court ruled Sonfield and Sonfield Jr. did not have standing because they were not shareholders of Aztec Oil. The court also found that Fisher and Livingston were not representative shareholders because they were majority shareholders of Aztec Oil and controlled 80% of the votes. The court concluded that the ownership made it "highly likely that Fisher and the entities he controls will pursue Fisher's own interests at the expense of all minority shareholders and evidencing a serious conflict of interests."   

Accordingly, the court granted Defendants’ motion to dismiss for Plaintiffs’ lack of standing.

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

Wednesday
Apr192017

No-Action Letter for Equinix, Inc. Allowed Exclusion of Proxy Access Bylaw

In Equinix, Inc., 2016 WL 110889 (April 7, 2016), Equinix, Inc. (“Equinix”) requested the staff of the Securities and Exchange Commission permit the omission of a proposal submitted by John Chevedden (the “Shareholder”) requesting that Equinix adopt a bylaw that allowed for specific proxy access. The SEC agreed to issue a no action letter allowing for the exclusion of the proposal under Rule 14a-8(i)(10).

Shareholder submitted a proposal providing that:

RESOLVED: Shareholders ask our board of directors to adopt, and present for shareholder approval, a “proxy access” bylaw that . . . require the Company to include in proxy materials prepared for a shareholder meeting at which directors are to be elected by name, Disclosure Statement…of any person nominated for election to the board by a shareholder or an unrestricted number of shareholders forming a group that meets [certain criteria].

Equinix sought to exclude the proposal under subsection (i)(10) of Rule 14a-8.

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

Subsection (i)(10) permits a company to omit a proposal if the company has already substantially implemented the proposal. A company meets this standard if its implemented “policies, practices, and procedures compare favorably with the guidelines of the proposal.” The company need not take the exact action requested by the shareholder; it must only implement the proposal’s essential objectives. For a more detailed discussion of this exclusion, see Aren Sharifi, RULE 14A-8(I)(10): HOW SUBSTANTIAL IS “SUBSTANTIALLY” IMPLEMENTED IN THE CONTEXT OF SOCIAL POLICY PROPOSALS?.   

Equinix argued the proposal should be omitted under subsection (i)(10) because it adopted an amendment to its bylaws in March of 2016 that satisfied the proposal’s essential objective of providing shareholders a meaningful proxy access right. Specifically, the amended provision allowed any shareholder owning at least 3% or more of the company’s stock continuously for at least three years to nominate candidates for election up to the greater of (1) two candidates, or (2) 20% of our Board, to be included in Equinix’s proxy materials. Equinix believed the proxy access provision in its bylaws compared favorably to, and addressed, the essential objective of the proposal.

The SEC agreed and concluded it would not recommend enforcement action to the Commission if Equinix omitted the proposal from its proxy materials in reliance on subsection (i)(10). The SEC noted the Company’s “board has adopted a proxy access bylaw that addresses the proposal’s essential objective.”

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

Monday
Apr172017

No-Action Letter for Procter & Gamble Company Denied Exclusion of LGBT Discrimination Policies Proposal

In Proctor & Gamble Co., 2016 BL 271869, (Aug. 16, 2016), Procter & Gamble Co. (“P&G”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by NorthStar Asset Management, Inc. Funded Pension Plan (the “Shareholders”) requesting a report on the risks and costs to P&G caused by “enacted or proposed state policies supporting discrimination against LGBT people”, and strategies to protect its LGBT employees. The SEC declined to issue the requested no action letter, concluding P&G could not exclude the proposal under Rule 14a-8(i)(3) and Rule 14a-8(i)(7).

Shareholders submitted a proposal providing that:

RESOLVED, shareholders request that P&G issue a public report by April 1, 2017, detailing the known and potential risks and costs to P&G caused by any enacted or proposed state policies supporting discrimination against LGBT people, and detailing strategies above and beyond litigation or legal compliance that P&G may deploy to defend its LGBT employees and their families against discrimination and harassment that is encouraged or enabled by these policies.

P&G sought to exclude the proposal under subsections (i)(3) and (i)(7) of Rule 14a-8.

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

Rule 14a-8(i)(3) permits the exclusion of proposals that are contrary to any of the SEC’s proxy rules or regulations. The subsection applies to proposals that may be inconsistent with Rule 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. This subsection permits the exclusion of proposals that are vague and indefinite, rendering the company’s duties and obligations unclear.

Additionally, Rule 14a-8(i)(7) permits the exclusion of proposals that relate to the company’s “ordinary business operations”, including the company’s litigation strategy and legal compliance. “Ordinary business” refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. As such, “ordinary business” issues cannot practically be subject to direct shareholder oversight.  For a more detailed discussion of this exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7)  and Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure

P&G argued the proposal should be excluded under subsection (i)(7) because the scope of the proposal extended into ordinary business matters. While it acknowledged the proposal involved discrimination concerns, P& G argued the proposal also encompassed matters fundamental to its day-to-day business. Specifically, P&G asserted the proposal and its supporting statement relates to hiring and workplace practices, litigation risks, and location of operations, all of which are ordinary business matters.

The Shareholders disagreed and contended the proposal addressed a significant policy issue – LGBT discrimination policies. They argued the proposal did not attempt to “micro-manage” P&G operations by prescribing specific actions, but only sought reporting and analyses on relevant issues. The Shareholder further argued state LGBT discrimination policies have a clear nexus to P&G because it has operations in states with discriminatory laws.

P&G also argued the proposal should be excludable under subsection (i)(3) because the language of the proposal was ambiguous and vague. Specifically, the proposal did not define or explain exactly which policies P&G must consider. P&G questioned whether the proposal meant P&G to report on policies that form an “outright attack” on the LGBT community, or those policies that may not directly address LGBT rights, but could conceivably lead to policies that impact these rights in the future.

In response, the Shareholders argued the proposal was neither vague nor indefinite. They contended the inclusion of bills that may impact future LGBT rights in the proposal presented no problematic ambiguity in the scope of the report. The Shareholders also argued the proposal language clearly calls for disclosure of the impact of both proposed and enacted policies.

The SEC agreed with Shareholders that the proposal was not excludable under either subsection (i)(3) or (i)(7). The SEC noted the proposal was not “so inherently vague or indefinite” that P&G would not be able to determine what actions it must take to implement the proposal. In addition, the SEC noted the proposal did not relate to the company’s ordinary business operations under (i)(7).

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

Wednesday
Apr122017

Loeza v. Doe et al.: Second Circuit Dismisses ERISA Complaint for Failure to Allege Preventing Harm Would Not Cause "More Harm Than Good."

In Loeza v. Doe et al., No. 16-222-cv, 2016 BL 292694 (2d Cir. Sept. 08, 2016), the United States Court of Appeals for the Second District dismissed the putative class action of current and former employees (“Plaintiffs”) of JPMorgan Chase & Co. ("JPMorgan"). The court found that the Complaint failed to plausibly allege that the named fiduciaries (“Defendants”) of the JPMorgan 401(k) Savings Plan (the "Plan") breached the duty of prudence owed to Plan participants under the Employee Retirement Income Security Act ("ERISA").

According to the allegations, Plaintiffs participated in the Plan and invested portions of their retirement in the JPMorgan Common Stock Fund (the "Fund").  The Fund primarily invested in JP Morgan Stock and, as a result, fell under ERISA. Plaintiffs alleged that defendants-appellees Douglas Braunstein and James Wilmot should have prevented the Fund from purchasing JPMorgan stock at an inflated price because they knew the firm's Chief Investment Officer (the "CIO") had taken risky trading positions and helped circumvent JPMorgan's internal risk controls. Braunstein and Wilmot allegedly could have discharged their duty of prudence and prevented harm to the Fund by either freezing its purchases of JPMorgan stock or through public disclosure as required under federal securities laws. According to Plaintiffs, by allowing the fraud to continue, Braunstein and Wilmot created a “more painful” stock price correction, and therefore increased the amount of harm to Plan participants, allegedly causing JPMorgan's stock price to fall by approximately 16% in one day. The Plaintiffs argue that the remedial measures would not have caused the Fund “more harm than good.”

ERISA requires the fiduciaries of a pension plan to act prudently in managing the plan's assets. Fifth Third Bancorp establishes new pleading standards regarding ERISA fiduciaries breaching their duty of prudence.  134 S. Ct. 2459 (2015).  To state a claim for breach of the duty of prudence, a complaint must plausibly allege a legal alternative action that the defendant could have taken that a prudent fiduciary in the same circumstances would not have viewed as more likely to harm the fund than benefit it.

The district court granted Defendants' motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) for failing to allege that the challenged actions would cause the Fund “more harm than good.” The court reviewed the district court's decision de novo to determine whether the Complaint satisfied the "more harm than good" prong of Fifth Third Bancorp.

The U.S. Court of Appeals for the Second District affirmed the district court's judgment, finding the allegations “wholly conclusory and materially indistinguishable from the allegations that the Supreme Court found insufficient” in Amgen Inc. v. Harris, 136 S.Ct. 758 (2016). 

The primary material for this case can be found on the DU Corporate Governance Website.