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SUMMARY:New Corporate Governance Legislation\, SEC Proxy Rules Proposed in Response to Financial Crisis
DESCRIPTION:   The ongoing financial crisis\, which has been  attributed\, in part\, to certain failures of corporate governance\, has  facilitated a drive for widespread expansion of shareholder rights and corporate  governance requirements.  Over the past month\, two specific proposals have been  introduced in response to these events.  Additionally\, the Chairman of the  Securities and Exchange Commission (the SEC) recently testified before a Senate  Subcommittee regarding the SEC’s role in helping to address the financial  crisis.  This bulletin addresses these recent developments. \nShareholder Bill of Rights\nOn May 19\, 2009\, Sen. Charles Schumer  (D-NY) introduced the Shareholder Bill of Rights Act of 2009 (S. 1074) (the  “Act”)\, which would encompass perhaps the most fundamental restructuring of  corporate governance in recent years.  The bill would add a new Section 14A to  the Securities Exchange Act of 1934 containing a number of new requirements\,  including\:\n  * Proxy  Access – The Act would require the SEC to establish rules requiring  companies to include shareholder nominees in their proxy materials. Proxy access  under this section would only apply to shareholders (or groups of shareholders  acting by agreement) that have beneficially owned at least 1 percent of the  voting stock of the public company for at least two years prior to the next  scheduled annual meeting.  For more information on this topic\, see “Proposed  SEC Proxy Rule Changes\,” below.\n  * “Say On Pay”  Voting – The Act would require public company proxy statements to include a  shareholder resolution approving the compensation of company executives.   Additionally\, proxy statements regarding mergers\, acquisitions\, or similar  transactions would be required to include a resolution approving executive  severance pay and other compensation related to the transaction.  Both of these  votes would be non-binding. \n  * Other  Corporate Governance Provisions – The Act would also require the SEC  to prohibit the listing on national securities exchanges of the securities of  any company not in compliance with the provisions described below subject to a  “cure” period and exceptions to be determined by the SEC based on criteria such  as the size or market capitalization of companies.\n–        Independent Chair Required – A public company  would be required to have an independent chairperson\, as defined by subsequent  SEC rule\, who has not previously served as an executive officer of the company.   Accordingly\, a single chairperson/chief executive officer would no longer be  allowed. \n–        Annual Election of Directors – Staggered terms  for directors would be eliminated as public companies would be required to  provide in their governing documents for the annual election of each member of  the board of directors.\n–        Majority Voting in Director Elections –  Incumbent directors who fail to receive a majority of the vote in  uncontested elections would be required to tender their resignations to their  boards and\, in turn\, the boards would be required to accept the resignations and  publicly disclose the effective date of the resignations within a reasonable  period of time.\n–        Risk Management – Within one year of the SEC  issuing final rules on the subject\, public companies would be required to  establish a “risk committee” consisting solely of independent directors who  would be responsible for the establishment and evaluation of the risk management  practices of the issuer.\nThis bill adopts a fairly radical\, “one size fits all” approach to  governance.  If enacted\, several of its provisions could be subject to challenge  on constitutional grounds.\nProposed SEC Proxy Rule  Changes\nOn May 20\, 2009\, the SEC voted to propose  rule amendments to facilitate the rights of shareholders to nominate directors.   According to SEC Release 2009-116 [http\://www.sec.gov/news/press/2009/2009-116.htm]\, these amendments would “provide  shareholders with a meaningful ability to exercise their own state law rights to  nominate the directors of the companies that they own.”  While the proposed rule  amendments have not yet been published\, public comments must be received by the  SEC within 60 days of publication in the Federal Register.\n  * Proposed Rule 14a-11.  Under the  proposed rule\, which would apply to all public companies\, certain shareholders  would be able to include their nominees for director in the company’s proxy  materials unless the shareholders are otherwise prohibited – either by  applicable state law or the company’s charter or bylaws – from nominating a  candidate.  Shareholders would be eligible to have their nominee included in the  proxy statement if they hold a minimum percentage of the company’s shares (5  percent of non-accelerated filers\; 3 percent of accelerated filers and 1 percent  of large accelerated filers) and have held their shares for at least one year.   Such shareholders would also be required to sign statements declaring their  intent to continue to own their shares through the annual meeting at which  directors are elected and that they are not holding their stock for the purpose  of changing control of the company.  The proposed rule limits the number of  shareholder nominees in a company’s proxy statement to the greater of one or 25  percent of  the company’s board of directors. \n  * Proposed Revision to Rule  14a-8(i)(8).  This rule currently permits companies to exclude shareholder  proposals that “relate to an election.”  The proposed rule would narrow this  exclusion\, specifically allowing shareholder proposals to amend a company’s  governing documents concerning the company’s nomination procedures or other  director nomination disclosure provisions.  Shareholders seeking to include such  provisions would have to meet the current Rule 14a-8 holding requirements\:   specifically\, they must have held the lesser of $2\,000 in market value or 1  percent of the company’s securities for at least one year. \nSEC Chairman Testimony\nOn June 2\, 2009\, SEC Chairman Mary L.  Schapiro testified before a Subcommittee of the Senate Committee on  Appropriations regarding the SEC’s role in helping to address the financial  crisis.  Chairman Schapiro also discussed certain reforms to improve investor  protection and confidence in the financial markets.  Chairman Schapiro testified  that the SEC will “take up a broad package of corporate disclosure improvements”  in the coming weeks\, designed to provide shareholders with important information  about companies’ key policies\, procedures and practices\, including compensation  policies and incentive arrangements.  Specifically\, the SEC will consider the  following proposals\:\n  * Enhanced disclosure of the experience\,  qualifications and skills of director nominees\, so that shareholders can make  more informed voting decisions\n  * Disclosures to shareholders about why a board  has chosen its particular leadership structure (including whether that structure  includes an independent chair or combines the positions of CEO and  chair)\n  * Whether greater disclosure is needed about  how a company – particularly the board of directors – manages risks\, both  generally and in the context of compensation\n  * Whether greater disclosure is needed about a  company’s overall compensation approach\, beyond decisions with respect to only  the highest paid executive officers as is currently the  case\n  * Disclosure regarding conflicts of interest  with compensation consultants\nThe proposals are part of a review of certain  policies by the SEC and other agencies addressing practices that many believe  led financial companies to take on too much risk.  With this additional  information\, according to Chairman Schapiro\, shareholders will be better able to  hold directors accountable for the decisions that they make.  These rules could  be addressed by the SEC as early as July 2009.  The proposed rules would then go  through a public-comment period and require final agency approval before they  were declared effective. \nEmerging  Trends\nRegardless of whether the proposals mentioned  above are adopted into law\, states have begun to adopt similar proposals in  response to shareholder sentiment.  For example\, Delaware recently amended its  General Corporation Law to permit (but not require) shareholder access to proxy  statements for director nominees.  Additionally\, North Dakota has adopted much  broader amendments to its Publicly Traded Corporations Act.  Such changes to  state law indicate that shareholders’ voices are already being heard and call  into question whether federal legislation is needed in these areas of corporate  governance. \nFor more information\, please contact Chase Cole [http\://www.wallerlaw.com/attorneys/2007/06/11/cole-j-chase.4837]\, Brent Bowman [http\://www.wallerlaw.com/attorneys/2007/06/11/bowman-brent.4764]\, Dan Beasley  [http\://www.wallerlaw.com/attorneys/2008/10/20/beasley-daniel-t.4655]or any member of Waller Lansden’s Corporate Governance [http\://www.wallerlaw.com/services/corporate_governance] practice at  800-487-6380.\nThe opinions expressed in  this bulletin are intended for general guidance only.  They are not intended as  recommendations for specific situations.  As always\, readers should consult a  qualified attorney for specific legal guidance.\n
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CATEGORIES:corporate-governance
CLASS:PUBLIC
SEQUENCE:3
DTSTAMP:20120208T094531
CREATED;TZID=US-Central:20090611T143613
LAST-MODIFIED;TZID=US-Central:20090611T145105
DTSTART;VALUE=DATE:20090611
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