Your donation keeps us advertisement free

Friday
Aug252017

OM Group, Inc. Stockholder Litigation Dismissed

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

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

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

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

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

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

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

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

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

Thursday
Aug242017

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

 

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

Shareholder submitted a proposal requesting the following: 

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

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

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

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

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

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

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

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

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

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

Under Rule 14a-8(i)(10), a shareholder proposal may be excluded if the proposal has been substantially implemented. For a proposal to be considered substantially implemented, a company’s actions must have satisfactorily addressed the proposal’s underlying concerns and essential objective. A proposal need not be “fully effected,” however, to be deemed substantially implemented, but rather the company’s policies, practices, and procedures must compare favorably with the proposal’s guidelines. In regard to proposals relating to proxy access, where a company has not yet adopted a proxy access bylaw, its commitment to doing so suffices, so long as the company supplements its request for no-action relief by notifying the Staff that such action has been taken. For additional explanation of this exclusion, see Aren Sharifi, Rule 14a-8(i)(10): How Substantial is “Substantially” Implemented in the Context of Social Policy Proposals?, 93 Denv. L. Rev. Online 301 (2016).

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

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

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

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

Thursday
Aug242017

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

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

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

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

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

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

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

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

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

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

Wednesday
Aug232017

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

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

Shareholder submitted a proposal providing that:

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

Apple sought exclusion under subsections (i)(3), (i)(6), or (i)(7) of Rule 14a-8.

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. In addition, the rule includes thirteen substantive grounds for exclusion. For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC (2016).

Rule 14a-8(i)(3) permits a company to exclude a shareholder proposal from its proxy materials if the proposal or supporting statement is contrary to any of the SEC’s proxy rules, including 14a-9, which prohibits materially false or misleading statements in proxy soliciting materials. The SEC staff has taken the position that a shareholder proposal is excludable under Rule 14a-8(i)(3) if it is so vague and indefinite that “neither the stockholders voting on the proposal, nor the company in implementing the proposal (if adopted) would be able to determine with any reasonable certainty exactly what actions or measures the proposal requires.”

Rule 14a-8(i)(6) permits a company to exclude a shareholder proposal from its proxy materials if the company lacks the power or authority to implement it.

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

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

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

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

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

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

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

Tuesday
Aug222017

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

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

 

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

 

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

 

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

 

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

 

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

Tuesday
Aug222017

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

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

Shareholders submitted a proposal providing that:

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

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

Rule 14a-8 provides shareholders with the right to insert a proposal in the company’s proxy statement. 17 CFR 240.14a-8. The shareholders, however, must meet certain procedural and ownership requirements. Additionally, companies may exclude proposals that fall under thirteen substantive grounds provided in Rule 14a-8(i). For a more detailed discussion of the requirements of the Rule, see The Shareholder Proposal Rule and the SEC.

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

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

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

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

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

Monday
Aug212017

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

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

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

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

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

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

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

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

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

Monday
Aug212017

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

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

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

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

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

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

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

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

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

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

Sunday
Aug202017

The Director Compensation Project: Exxon Mobil (XOM)

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

 

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

 

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

 

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

 

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

 

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

 

Name

Fees Earned or Paid in Cash ($)

Stock Awards ($)

Option Awards ($)

All Other Compensation ($)

Total ($)

M.J. Boskin

110,000

193,000

0

239

303,239

P. Brabeck-Letmathe

110,000

193,000

0

239

303,239

A.F. Braly*

65,879

719,840

0

147

785,866

U.M. Burns

110,000

193,000

0

239

303,239

L.R. Faulkner

120,000

193,000

0

239

313,239

J.S. Fishman

73,957

193,000

0

151

267,108

H.H. Fore

110,000

193,000

0

239

303,239

K.C. Frazier

110,000

193,000

0

239

303,239

D.R. Oberhelman

110,000

193,000

0

239

303,239

S.J. Palmisano

120,000

193,000

0

239

313,239

S.S Reinemund

115,989

193,000

0

239

309,228

W.C. Weldon

110,000

193,000

0

239

303,239

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

 

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

 

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

 

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

Friday
Aug182017

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

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

Shareholder submitted a proposal stating:

 

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

 

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

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

Under Rule 14a-8(i)(7), a company may exclude proposals that relate to the company’s “ordinary business” operations. The SEC understands “ordinary business” to mean the issues that are fundamental to a company’s management abilities on a day-to-day basis. If the proposal, however, raises a significant social policy issue, the proposal may not be excluded as long as a “sufficient nexus exists between the nature of the proposal and the company.” For additional explanation of this exclusion see Megan Livingston, The “Unordinary Business” Exclusion and Changes to Board Structure, 93 DU Law Rev. Online 263 (2016), and Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Law Rev. Online 183 (2016).

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

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

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

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

Thursday
Aug172017

The Director Compensation Project: Caterpillar (CAT)

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

 

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

 

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

 

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

 

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

 

Independent directors are compensated for their service on the board. The amount of “total compensation” can be seen from examining the director compensation table from Caterpilar’s (NYSE: CAT) 2016 proxy statement. According to the proxy statement, the company paid the directors the following amounts:

 

 

 

Name

Fees Earned or Paid in Cash

($)

 

Stock Awards

($)

 

Option Awards

($)

 

All Other Compensation ($)

 

 

Total

($)

David L. Calhoun

150,000

125,015

0

0

275,015

Daniel M. Dickinson

150,000

125,015

0

32,696

307,711

Juan Gallardo

150,000

125,015

0

13,051

288,066

Jesse J. Greene, Jr.

150,000

125,015

0

2,000

$277,015

Jon M. Huntsman, Jr.

150,000

125,015

0

0

275,015

Dennis A. Muilenburg

150,000

125,015

0

0

275,015

William A. Osborn

170,000

125,015

0

13,051

308,066

Debra L. Reed

150,000

125,015

0

2,100

277,115

Edward B. Rust, Jr.

175,000

125,015

0

22,833

322,848

Susan C. Schwab

150,000

$125,015

0

15,000

290,015

Miles D. White

170,000

$125,015

0

8,000

303,015

 

Director Compensation. During the fiscal year 2016, Caterpillar held nine board of directors meetings and 23 committee meetings. Each current director attended at least 75% of the number of board and committee meetings on which he or she served. Overall attendance of current directors at meetings of the board and its committees averaged 98%. All directors attended the 2016 shareholders meeting. Directors may defer 50% or more of their annual cash retainer and stipend into an interest-bearing account or an account representing phantom shares of Caterpillar stock. Directors that joined the Board prior to 2008 also participate in a Charitable Award Program, under which a donation of up to $500,000 will be made by Caterpillar, in the director’s name, to charitable organizations selected by the director and $500,000 to the Caterpillar Foundation. Directors derive no financial benefit from the program.

 

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

 

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

Wednesday
Aug162017

The Director Compensation Project: Johnson & Johnson (JNJ)

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

 

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

 

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

 

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

 

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

 

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

 

Name

Fees Earned or Paid in in Cash ($)

Stock Awards ($)

Option Awards ($)

All Other Compensation ($)

Total ($)

M. C. Beckerle(1) 

111,667

164,985

0

17,800

294,452

M. S. Coleman(2) 

36,666

164,985

0

20,000

221,651

D. S. Davis

135,000

164,985

0

0

299,985

I. E. L. Davis

110,000

164,985

0

0

274,985

S. L. Lindquist(3) 

107,038

164,985

0

1,500

273,523

M. B. McClellan

110,000

164,985

0

0

274,985

A. M. Mulcahy

140,000

164,985

0

20,000

324,985

W. D. Perez

130,000

164,985

0

20,000

314,985

C. Prince

130,000

164,985

0

20,000

314,985

A. E. Washington

110,000

164,985

0

20,000

294, 985

R. A. Williams

130,000

164,985

0

20,000

314,985

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

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

(3) Passed away in October 2016

 

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

 

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

 

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

 

Tuesday
Aug152017

Kokocinski v. Collins: Application of the Business Judgment Rule  

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

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

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

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

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

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

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

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

Monday
Aug142017

Third Party Recipients of Fraudulently Acquired Funds Found Liable as “Relief Defendants”

In SEC v. World Capital Market, No. 15-55325, 2017 BL 87566 (9th Cir. Mar. 21, 2017), considered as a matter of first impression whether a relief defendant could divest the district court of jurisdiction by advancing “a facially colorable claim to the disputed funds as loan proceeds.” The Ninth Circuit held that the district court properly asserted jurisdiction over Victor Messina (Messina) and International Market Ventures (“IMV”) (collectively, Defendants) as relief defendants and declined to find that jurisdiction was divested as a result of the existence of a “colorable claim.” 

 

The SEC conducted an investigation of Phil Ming Xu (“Xu”) and his corporations for allegedly acquiring funds through a fraudulent investment scheme. According to the SEC, Messina acted as counsel to Xu and provided “legal advice regarding tax, corporate, and immigration matters.” Xu transferred Messina $5 million to hold for “future business endeavors” in accordance with an agreement providing that the amount would be repaid in 2019. 

 

When Xu began settlement negotiations with the SEC, he requested a return of the money. Messina, however, refused, claiming that the money had already been disbursed per their agreement. After initiating an enforcement action against Xu, the SEC filed a complaint against Messina and IMV. Defendants sought dismissal of the complaint on the grounds that they were not proper “relief defendants” because they had a “legitimate claim” to the funds.  

 

The district court held an evidentiary hearing and concluded that the Defendants “had no legitimate claim to the $5 million because the loan agreement with Xu was a sham. . . “ Subsequently, the SEC filed a motion to disgorge Defendants of the $5 million. Defendants appealed to the Ninth Circuit claiming the district court did not have subject matter jurisdiction.

 

Under 15 U.S.C. §§77t(b), 78u(d)(1), the courts have “broad equitable power to order disgorgement from non-violating third parties who have received proceeds of others’ violations to which the third parties have no legitimate claim.” Therefore, the court may exercise jurisdiction if facts show the funds were “ill-gotten” and the “third parties have no legitimate claim to [the] funds.”

 

The Ninth Circuit concluded that the existence of a colorable claim to the funds did not divest the district court of jurisdiction over the relief defendants. Instead, the court was authorized to engage in fact finding to determine whether Defendants had a “cognizable claim” to the funds. The Ninth Circuit further determined that the record did not reveal “clear error” in the lower court’s determination that the loan was “a sham” and upheld the disgorgement order. 

 

For the above reasons, the United States Court of Appeals for the Ninth Circuit affirmed the district court’s judgement, holding Defendants jointly liable as “relief defendants.”

 

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

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.