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Entries by Anna Bernhardt (4)

Sunday
Nov052017

In re Eaton Corporation Securities Litigation: Dismissed Consolidated Class Action Complaint Alleging Fraud

In In re Eaton Corp. Sec. Litig., No. 16-cv-5894 (JGK), 2017 BL 332475 (S.D.N.Y. Sept. 20, 2017), the United States District Court for the Southern District of New York granted Alexander M. Cutler, Richard H. Fearon (together the “Individual Defendants”), and Eaton Corporation’s (collectively, the “Defendants”) motion to dismiss the Consolidated Class Action Complaint (“CCAC”) by all purchasers of publicly traded common stock and/or exchange traded options on such common stock of Eaton Corporation between May 21, 2012, and July 28, 2014, (“Plaintiffs”) pursuant to Federal Rule of Civil Procedure 12(b)(6). The court held that the Plaintiffs failed to allege sufficient facts that the defendants made any material misstatements, were subject to a duty to disclose and failed to raise an inference of scienter.

According to the allegations, Eaton Corporation, an Ireland-based manufacturer of engineered products and historically a vehicle component manufacturer, announced plans to merge with Cooper Industries plc. Cutler was Eaton’s Chairman and Chief Executive Officer and Fearon was Eaton’s Vice Chairman and Chief Financial and Planning Officer. Cutler stated the company was not anticipating “any substantial additional change in the portfolio as a result of this transaction.” At various other shareholder meetings and calls Cutler and Freon continued to assure investors that there were no plans for divesture of company assets or any spin-offs planned. The CCAC alleged the merger was completed on November 30, 2012, and because of the acquired company’s electrical products business, there was concern that Eaton would sell off its automotive business. The CCAC alleges that the plaintiffs believed that failing to disclose the possible tax consequences of the spin-off of the automotive business adversely effected the company’s stock prices. The CCAC alleges inquiries regarding Eaton Corporation’s intent to change the business’s portfolio continued to surface, with Defendants claiming they “like[d] the portfolio we’re with” and releasing a press release entitled “Eaton Not in Discussions to Sell Its Automotive Business.” In its CCAC, Plaintiffs argued Defendants misrepresented or omitted the tax consequences of the merger between Eaton Corporation and Cooper plc. Plaintiffs claim this misrepresentation, that a company spin-off of its automotive business was economically prohibitive for the business for a period of 5 years because the spin-off would not be tax free, was materially misleading.

Section 10(b) of the Securities Exchange Act of 1934 (“Exchange Act”) and Rule 10b-5 promulgated thereunder make it “unlawful for any person . . .  [t]o make any untrue statement of a material fact or to omit to state a material fact necessary in order to make the statements made, in the light of the circumstances under which they were made, not misleading. A claim under Section 10(b) of the Exchange Act is based in fraud and must meet the heightened pleading requirements of Rule 9(b) and the Private Securities Litigation Reform Act. To fulfill those standards a plaintiff must specify each statement alleged to have been misleading and the reasons or reasons why those statements are misleading. A plaintiff must also show the defendant acted with the required state of mind.

The court found that Defendants were under no duty to disclose the hypothetical tax consequences of a potential spin-off of the company’s automotive business because the Defendants themselves repeatedly made clear that the “indicated probability” of such spin-off was zero. Further, the court found no inference of scienter because the CCAC failed to allege sufficient facts that would support it and the Individual Defendants’ stock sales were not unusual or suspicious. The court then found that because the Plaintiffs failed to allege a plausible primary violation of Section 10(b) and Rule 10b-5, Plaintiffs did not satisfy the first element of a Section 20(a) claim.

The court granted Defendants’ motion to dismiss and ordered Plaintiff to file a formal motion including a copy of the proposed amended pleading to be filed within 21 days of the opinion, or all claims would be dismissed with prejudice. 

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

Saturday
Oct072017

No-Action Letter for Caterpillar Inc. Denied Exclusion of Permanent Independent Chairman Proposal

In Caterpillar Inc., 2017 BL 103240 (Mar. 28, 2017), Caterpillar Inc. (“Caterpillar”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by John Chevedden (“Shareholder”) requesting the board to adopt a permanent policy of requiring the chair of the board of director to be an independent member of the board whenever possible. The SEC declined to issue the no action letter allowing for exclusion of the proposal under Rules 14a-8(i)(1), 14a-8(i)(2), 14a-8(i)(3), or 14a-8(i)(6).  

Shareholder submitted a proposal providing that:

 RESOLVED: Shareholders request our Board of Directors adopt as permanent policy, and amend our governing documents as necessary, to require the Chair of the Board of Directors, whenever possible, to be an independent member of the Board. The Board would have the discretion to phase in this policy for the next CEO transition, implemented so it does not violate any existing agreement. If the Board determines that a Chair who was independent when selected is no longer independent, the Board shall select a new Chair who satisfies the requirements of the policy within a reasonable amount of time. Compliance with this policy is waived if no independent director is available and willing to serve as Chair. This proposal requests that all necessary steps be taken to accomplish the above.

Caterpillar sought the exclusion of the proposal from its proxy materials under subsections (i)(1), (i)(2), (i)(3), and (i)(6) 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 and The Shareholder Proposal Rule and the SEC (Part II).

 A shareholder proposal may be omitted under Rule 14a-8(i)(1) if the proposal is not a proper subject for action by shareholders under the laws in the jurisdiction of the company's organization. Rule 14a-8(i)(2) permits the exclusion of proposals that would cause a company to violate state law. 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 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.” Furthermore, 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. For additional discussion on Rule 14a-8(i)(2), see Jason Haubenreiser, Rule 14a-8 and the Exclusion of Proposals that Violate the Law, 93 DU Online L. Rev. 213 (2016).

 Caterpillar argued Shareholder’s proposal should be excluded under Rule 14a-8(i)(1) and 14a-8(i)(2) because it would result in violations of Delaware law. Implementation of any permanent policy inherently prevents a future board of directors from altering the policy, even it if is later determined the proposal is no longer in the best interests of the company or its shareholders.

 Caterpillar further argued the proposal should be excluded under Rule 14a-8(i)(6) because Caterpillar does not have the authority to implement the proposal, and doing so would violate Delaware law. Shareholder disagreed, arguing that Caterpillar’s existing company guidelines allow “permanent” changes, including the appointment of a “permanent” chairman.

 

Finally, Caterpillar argued the proposal should be excluded under Rule 14a-8(i)(3) because between 2015 and 2016, 38 other companies included proposals with an identical title as Shareholder’s proposal, although only the Shareholder’s proposal requested a unique “permanent” policy. According to Caterpillar, the similarity in title of the Shareholder’s proposal but deviation in its content would lead to confusion if shareholders were permitted to vote on it.

 Ultimately, the SEC disagreed with Caterpillar, and concluded Caterpillar may not exclude the proposal in reliance on Rules 14a-8(i)(1), 14a-8(i)(2), 14a-8(i)(3), or 14a-8(i)(6). The staff commented the proposal was not so inherently vague or indefinite that neither the shareholders or Caterpillar would be unable to determine with any reasonable certainty exactly what actions or measures the proposal required.

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

 

Tuesday
Oct032017

No-Action Letter for MFRI Inc. Allowed Exclusion of Share Repurchase Program Proposal

In MFRI Inc., 2017 BL 88215 (Mar. 20, 2017), MFRI Inc. (“MFRI”) asked the staff of the Securities and Exchange Commission (“SEC”) to permit the omission of a proposal submitted by Carl W. Dinger III (“Shareholder”) requesting MFRI to authorize and implement a stock repurchase program that would repurchase 1,000,000 shares of company stock. The SEC agreed to issue a no action letter allowing for exclusion of the proposal under Rule 14a-8(i)(7). 

Shareholder submitted a proposal providing that:

RESOLVED, the shareowners of MFRI recommend that the Board of Directors authorize and implement a three-year share repurchase program that would repurchase 1,000,000 shares of MFRI stock.

MFRI sought the exclusion of the proposal from its proxy materials under subsection (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.

Rule 14a-8(i)(7) permits a company to omit a proposal that relates to the company’s “ordinary business” operations, including the company’s litigation strategy and legal compliance. “Ordinary business” refers to those issues that are fundamental to management’s ability to run the company on a day-to-day basis. As such, “ordinary business” issues cannot practically be subject to direct shareholder oversight. For additional discussion of the exclusion, see Adrien Anderson, The Policy of Determining Significant Policy under Rule 14a-8(i)(7), 93 DU Online L. Rev. 183 (2016), and Megan Livingston, The "Unordinary Business" Exclusion and Changes to Board Structure, 93 DU Online. L. Rev. 263 (2016).

MFRI argued that Shareholder’s proposal involved a company’s “ordinary business.”  Specifically, implementation of a stock repurchase plan was part of MFRI’s capital raising, capital management, and overall financing activities.  MFRI additionally argued that the proposal sought to micro-manage the company by having shareholders participate in a decision about which they are not in a position to make an informed assessment.

In response, the Shareholder argued that the proposal was not seeking to manage ordinary business operations because the repurchase program would be implemented by the senior management of MFRI. Shareholder further argued that, according to precedent, repurchase actions were fundamental to shareholders and did not fall under the ordinary business exclusion.  Shareholder also asserted that repurchases involved “a significant social issue that has garnered substantial attention through national media outlets”. 

Ultimately, the SEC agreed with MFRI, concluding the proposal could be excluded under Rule 14a-8(i)(7). The staff noted that the proposal relates to the implementation and particular terms of a share repurchase program, and accordingly, would not recommend enforcement action if MFRI omitted the proposal from its proxy materials.

The primary materials for the post 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.