General Counsel Forum
Critical Issues for the 2010 Proxy Season:
               The Rise of Votes Against Director Nominee...
Agenda
•   Calls for Change Hit A Crescendo
•   Just Vote No? The Sharp Rise of Votes Against Director
    Nominees
•   Pr...
Calls for Change Hit A Crescendo
  •   Federal Policymakers Take Control of the Governance
      Agenda
  •   Institutiona...
Federal Policymakers Take Control of the
Governance Agenda
•   Government takes equity stakes in Citigroup, GM, GMAC,
    ...
The Old Activists Are Still Around
•   Historically, corporate governance debate dominated by
    corporate governance act...
Rise of Hedge Funds and Other Event-Driven
Activists
•   Using proxy fights as a way to shake up management and
    force ...
Goals of Activist Hedge Funds
•   Long term value creation may not be relevant to many
    activist hedge funds, so they p...
Proxy Advisory Firms Continue to Wield Great
Influence on Voting Decisions
•   Risk Metrics (aka ISS)
    •   Leading prox...
Institutional Investors as the New Activists?

•   Activist agenda at RiskMetrics and other proxy advisory
    firms is re...
Fidelity as an Example
•   Votes against management in uncontested elections rose
    to 25.5% in 2009, vs. 16.9% in 2008
...
The Action Moves to Small and Mid-Cap
Companies
•   Corporate governance activists have tended to focus
    on larger publ...
Agenda
•    Calls for Change Hit A Crescendo
•    Just Vote No? The Sharp Rise of Votes Against Director
     Nominees
•  ...
Just Vote No? The Sharp Rise of Votes Against
Director Nominees
  •   The Reasons Behind High Votes Against Director
     ...
Percentage of Directors Receiving High
Percentages of Opposition Votes (2007-2009)
   12.0%

   10.0%

     8.0%
         ...
Number of Directors Receiving Majority
Withhold/Against Votes


            100
            90
                           ...
Companies Where At Least One Director Nominee
Failed to Achieve Majority Support in 2009
      ACI Worldwide Inc          ...
Some of the Reasons Behind High Votes
Against Director Nominees
•   Increased willingness of proxy advisory firms to
    r...
Proxy Advisory Firms’ Recommendations
Against Nominees are Increasing
•   As voting policies tighten, votes against increa...
Dissatisfaction with Executive Compensation

•   Tax gross-ups (280G and perks)
•   Golden coffin
•   Poor pay practices o...
Pay Concerns Contributed
to more than 10% Director Opposition


            60

            50
                           ...
Option Exchanges and Repricings Without
Stockholder Approval
•   At Nvidia, company implemented a stock-option
    exchang...
Failure to Implement Majority-Backed
Stockholder Proposals
•   FirstEnergy
    •   In 2008, three stockholder proposals wo...
Failure to Implement Majority-Backed
Stockholder Proposals (continued)
•   Southwest Airlines
    •   In 2008, Southwest A...
Other Corporate Governance Concerns
•   At Massey Energy, an outside director who sits on more
    than six boards receive...
Vote No Campaigns

 •11 vote no campaigns in 2009; 17 in 2008
 •State Bancorp Inc.
       •3 directors having close to 40%...
Vote No Campaigns (continued)
  •   Citigroup
       •   Campaign against Audit and Risk Management Committee
       •   R...
Broker Discretionary Voting Has Historically
Favored Director Nominees
•   On average, 20% of outstanding shares do not is...
SEC Eliminates Broker Discretionary Voting

•   In July 2009, SEC eliminated broker discretionary voting
    of uninstruct...
Elimination of BDV Should Result in Higher Vote
Percentages Against Director Nominees
•   Loss of broker discretionary vot...
With Traditional Plurality Voting,
A High Withhold Vote Has No Teeth
•   Under plurality voting, candidates with the most ...
Two Types of Majority Voting
•   So-called “modified plurality”
    •   To give recognition to failure to receive majority...
Majority Voting Has Become the New
Standard in Recent Years
•   Most of S&P 500 has adopted majority voting
    •   Over h...
With Majority Voting as the New Standard, a No
Vote Now Has Teeth
•   Under true majority voting, failure to get majority ...
Advising the Board Now
•   Advise the Board now as to the new voting risks created by the
    rise of withhold/against vot...
Agenda
•   Calls for Change Hit A Crescendo
•   Just Vote No? The Sharp Rise of Votes Against Director
    Nominees
•   Pr...
Proxy Fights and Other Solicitations Continue
Their Upward Trend

                                Proxy Fights

     150

...
Primary Campaign Types (2009)

                        Vo te / A ctivism   Vo te A gainst a
                       A gains...
Success Rates for Proxy Fights Are Increasing

   Rate (%)
                                   Success Rate*
    100


    ...
Proxy Contest Evaluation Criteria
•   RiskMetrics focuses on two central questions:
    •   Have the dissidents met the bu...
Consent Solicitations

•   Proxy fights are usually conducted at annual stockholder meetings
    (i.e. once a year)
•   Ho...
What You Can Do to Prepare Now for a Possible
Proxy Fight or Consent Solicitation
•   Review vulnerability to hostile take...
Agenda
•   Calls for Change Hit A Crescendo
•   Just Vote No? The Sharp Rise of Votes Against Director
    Nominees
•   Pr...
Stockholder Proposals: It’s All About Director
Accountability
•   Stockholder Proposals Continue to Climb
•   Current Hot ...
Stockholder Proposals Continue to Climb
Proposals
                                      Trend in Proposals Submitted by Sh...
Background of 14a-8 Proposals
•   Rule 14a-8 permits shareholders to place proposals in
    company proxy materials
    • ...
Binding and Non-binding Stockholder Proposals

•   Shareholder proposals under Rule 14a-8 take two basic
    forms
    •  ...
Putting Teeth into Non-binding Proposals
•   More frequent and more successful campaigns against incumbent
    directors a...
Current Hot Topics in 14a-8 Proposals
•   Executive compensation
     •   Say on Pay
     •   Vote on executive death bene...
Say on Pay
What is it?

•   Say on Pay is an annual advisory vote by shareholders at
    annual meeting on senior executiv...
Say on Pay
Proposals Stalled in 2007 and 2008

•   In 2007 and 2008, Say on Pay was not gaining significant
    traction a...
Say on Pay
Stockholder Proposals Gain New Life in 2009

•   Proxy advisory firms will recommend in favor of
    stockholde...
Say on Pay
Company-sponsored Say on Pay Advisory Votes

•   Under the 2009 Stimulus Act, each entity that had
    previous...
Say on Pay
Will Institutions Continue to Support Say on Pay Advisory Votes?

•   Did institutions cut TARP firms slack in ...
Say on Pay
What to do now?

•   Expect more Say on Pay stockholder proposals under
    14a-8 for the 2010 proxy season
•  ...
Other Executive Compensation
Stockholder Proposals
•   Approve or limit executive death benefits
•   Require equity to be ...
Majority Vote to Elect Directors

•   Shareholder proposals to adopt majority voting picked
    up in 2009
    •   Over 10...
Independent Board Chair
•   Before 2009, most stockholder proposals sought a lead
    independent director
    •   In the ...
Right to Call Special Meetings
•   46% of S&P 500 and 49% of S&P 1500 companies
    already give shareholders right to cal...
Declassification
•   Proposals to declassify boards are a perennial favorite
    of corporate governance activists and sti...
Proposals to Watch for in 2010
•   Allow stockholders to recover proxy contest costs
     •   Litigated by AFSCME at CA In...
Coming Soon?
14a-8 Proposals on Proxy Access
•   Under current SEC interpretations, a stockholder proposal
    requiring p...
Agenda

•   Calls for Change Hit A Crescendo
•   Just Vote No? The Sharp Rise of Votes Against Director
    Nominees
•   P...
Update on the Latest Regulatory and Political
Initiatives
•   SEC Proposed Rules for 2010 Proxy Statements
•   The Status ...
Proposed Enhanced Governance and
Compensation Disclosures for 2010
•   On July 1, 2009, SEC (5-0 vote) proposed rules to e...
Proposed Enhanced Governance and
Compensation Disclosures (continued)
•   Change in tabular disclosure of equity grants to...
Proposed Rules Regarding Compensation and
Risk Creation
•   Requires disclosure of compensation policies or practices
    ...
Proposed SEC Proxy Access Rules
•   Potentially one of most significant corporate governance
    issues of decade
•   Curr...
Status of Proposed Proxy Access Rules
•   On May 20, 2009, SEC (by 3-2 vote) proposed new proxy access
    rules
     •   ...
Proxy Access
What Should Companies Be Doing Now?
•   Companies should stay focused on proxy access because SEC is
    inte...
Legislative Developments
•   Senator Schumer’s “Shareholder Bill of Rights”
    •   Would direct SEC to establish proxy ac...
Latham & Watkins LLP

Founded in 1934, Latham & Watkins has grown into a full-service international
powerhouse with approx...
MacKenzie Partners, Inc. is a full-service proxy solicitation, investor relations and
corporate governance consulting firm...
Questions & Comments


                   Contact Information:


    John M. Newell, Partner     David M. Taub, Partner
  ...
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Critical Issues for the 2010 Proxy Season

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Critical Issues for the 2010 Proxy Season: The Rise of Votes Against Director Nominees, Proxy Fights and Stockholder Proposals

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Critical Issues for the 2010 Proxy Season

  1. 1. General Counsel Forum Critical Issues for the 2010 Proxy Season: The Rise of Votes Against Director Nominees, Proxy Fights and Stockholder Proposals November 17-18, 2009 John M. Newell, Partner, Latham & Watkins LLP David M. Taub, Partner, Latham & Watkins LLP Daniel H. Burch, Chairman and CEO, MacKenzie Partners Inc. Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy. ©Copyright 2009 Latham & Watkins. All Rights Reserved.
  2. 2. Agenda • Calls for Change Hit A Crescendo • Just Vote No? The Sharp Rise of Votes Against Director Nominees • Proxy Fights and Other Solicitations Continue Their Upward Trend • Stockholder Proposals: It’s All About Director Accountability • Update on the Latest Regulatory and Political Initiatives • Questions and Comments 2
  3. 3. Calls for Change Hit A Crescendo • Federal Policymakers Take Control of the Governance Agenda • Institutional Investors as the New Activists? • The Action Moves to Small and Mid-Cap Companies 3
  4. 4. Federal Policymakers Take Control of the Governance Agenda • Government takes equity stakes in Citigroup, GM, GMAC, AIG, Bank of America, Chrysler • Intense focus on executive compensation • TARP firms hold mandatory Say on Pay votes • Pay Czar cuts pay for executives at top TARP firms, an average of 50% • Legislation to require Say on Pay votes • SEC proposes new proxy access rule • SEC and NYSE eliminate broker discretionary voting • Legislation introduced in Congress to mandate a panoply of corporate governance programs 4
  5. 5. The Old Activists Are Still Around • Historically, corporate governance debate dominated by corporate governance activists • “Gadflies” still around • Union pension funds,and state and local government pension funds • Council of Institutional Investors • Social groups – religious, greens • They have tended to use 14a-8 proposals, rather than proxy fights and vote no campaigns • Some traditional activists have increased their level of involvement • AFSCME “vote no” campaign against 6 Citigroup directors, and litigation in support of proxy cost reimbursement bylaw proposal 5
  6. 6. Rise of Hedge Funds and Other Event-Driven Activists • Using proxy fights as a way to shake up management and force an event (dividend, sale) • Direct use of 14a-8 stockholder proposals is limited • Undeclared “alliance” of corporate governance activists and hedge funds • Hedge funds and other activist investors support corporate governance campaigns that weaken takeover defense and primacy of board of directors 6
  7. 7. Goals of Activist Hedge Funds • Long term value creation may not be relevant to many activist hedge funds, so they push for: • Weakened takeover defenses • Sale or restructuring of the company • Leveraging for special dividend and/or stock buy backs • Management changes • Seats on the Board • Given the leverage used by hedge funds, their financial return from any value creation is disproportionately high as compared to the size of their investment • In 2009 proxy season, market and liquidity constraints made dividend or sale events less viable, so the focus has shifted to corporate governance 7
  8. 8. Proxy Advisory Firms Continue to Wield Great Influence on Voting Decisions • Risk Metrics (aka ISS) • Leading proxy advisory firm in terms of size and influence • >1,200 clients: mutual funds, corporate and public pension funds, trusts, other fiduciaries • Many institutions vote their shares based solely on ISS’s recommendation • Strong focus on corporate governance, but will also evaluate strategic and financial issues • Glass Lewis & Co. • Significant new competitor of RiskMetrics-ISS • 8 of 10 largest mutual funds and top 5 U.S. public pension funds subscribe • Stronger focus on financial integrity and valuation issues than ISS, but significantly less influence on vote outcomes • Proxy Governance • Provides recommendations on an “issue-by-company” basis • Views proxy issues in the context of company-specific metrics (relative financial performance, business environment, strength of management and corporate strategy, quality of corporate governance, etc.) 8
  9. 9. Institutional Investors as the New Activists? • Activist agenda at RiskMetrics and other proxy advisory firms is reflected in institutional investor voting • Portfolio manager abdication to internal governance staff • Traditionally, institutions were not publicly active, but now have broad political cover and activist governance views are becoming mainstream 9
  10. 10. Fidelity as an Example • Votes against management in uncontested elections rose to 25.5% in 2009, vs. 16.9% in 2008 • Key issues are compensation-related actions (ie, gross ups, stock option exchanges and repricings without shareholder approval), poor attendance at board meetings, adoption of golden parachute plans, failure to follow through on promises to change corporate governance or pay practices • Voted against all incumbents at Delta Air Lines and Google • Fidelity voted against at least one management recommendation at 50% of shareholder meetings, up from 41% in 2008 and 38% in 2007 • Voted against 55% of all executive compensation plans in 2009 • Fidelity has its own compensation criteria and does not follow RiskMetrics criteria 10
  11. 11. The Action Moves to Small and Mid-Cap Companies • Corporate governance activists have tended to focus on larger public companies • Fewer than 20% of companies in the S&P 500 have rights plans– down from 60% as recently as 2002 • Only 35% of companies in the S&P 500 have a classified board – also down from 60% in 2002 • Small and mid-cap companies are next on list for corporate governance activist campaigns 11
  12. 12. Agenda • Calls for Change Hit A Crescendo • Just Vote No? The Sharp Rise of Votes Against Director Nominees • Proxy Fights and Other Solicitations Continue Their Upward Trend • Stockholder Proposals: It’s All About Director Accountability • Update on the Latest Regulatory and Political Initiatives • Questions and Comments 12
  13. 13. Just Vote No? The Sharp Rise of Votes Against Director Nominees • The Reasons Behind High Votes Against Director Nominees • SEC’s Elimination of Broker Discretionary Voting • With Majority Voting as the New Standard, a No Vote Now Has Teeth • Advising the Board Now 13
  14. 14. Percentage of Directors Receiving High Percentages of Opposition Votes (2007-2009) 12.0% 10.0% 8.0% 2007 6.0% 2008 2009 4.0% 2.0% 0.0% Majority 40%+ 30%+ 20%+ opposition opposition opposition opposition vote vote vote vote Source: Proxy Governance 2009 data based on meetings through 8/31/09 14
  15. 15. Number of Directors Receiving Majority Withhold/Against Votes 100 90 93 80 70 60 50 Number of Directors 40 30 20 32 10 20 0 2007 2008 2009 Source: RiskMetrics 15
  16. 16. Companies Where At Least One Director Nominee Failed to Achieve Majority Support in 2009 ACI Worldwide Inc HMS Holdings Southwest Airlines Advanced Analogic Tech Interline Brands Inc Southwestern Energy Co Anixter Intl Inc Kansas City Southern SPSS Inc Associated Estates Rlty Corp Layne Christensen Co Swift Energy Co Assurant Inc Lifepoint Hospitals Inc Syniverse Holdings Inc Cablevision Sys Corp –CL A Mariner Energy Inc Tennant Co Catalyst Health Solutions Massy Energy Co Tetra Technologies Inc/DE Checkpoint Systems Inc Mednax Inc. Thoratec Corp Circor Intl Inc Mentor Graphics Corp Triquint Semiconductor Inc Cognex Corp Natco Group Inc United Online Inc Computer Programs & Systems NBTY Inc United Therapeutics Corp Digi International Inc NV Energy Inc Valueclick Inc Dollar Tree Inc Plexus Corp Zapata Corp Essex Property Trust Pride International Inc Zoll Medical Corp First Mercury Financial Corp Pulte Homes Inc Firstenergy Corp Red Robin Gourmet Burgers Healthcare Services Group Skywest Inc 16
  17. 17. Some of the Reasons Behind High Votes Against Director Nominees • Increased willingness of proxy advisory firms to recommend against candidates • Increased willingness of institutions to vote against management • Investor frustration with financial performance • Dissatisfaction with executive compensation • 57% of directors receiving majority opposition votes are members of compensation committee • Failure to implement majority-approved stockholder proposals • Corporate governance concerns • Rise of “vote no” campaigns by activist investors against targeted nominees 17
  18. 18. Proxy Advisory Firms’ Recommendations Against Nominees are Increasing • As voting policies tighten, votes against increase • Advisory firms are not giving sufficient advance warning of changes in policy • Tax gross-ups • Other “poor pay practices” • Employment agreements with multi-year guaranteed salary increases, equity grants • Walk-away rights, excessive severance • Large bonuses not linked to performance • Pay-for-performance disconnect between increased CEO pay and poor total shareholder return (relative to industry group) 18
  19. 19. Dissatisfaction with Executive Compensation • Tax gross-ups (280G and perks) • Golden coffin • Poor pay practices or disclosures • Single trigger CIC payments, walk-away rights • Has Board responded to investor concerns? • Stock option exchanges and repricings 19
  20. 20. Pay Concerns Contributed to more than 10% Director Opposition 60 50 50 Number of 40 Companies 30 20 24 18 10 6 0 2006 2007 2008 2009 Source: RiskMetrics 20
  21. 21. Option Exchanges and Repricings Without Stockholder Approval • At Nvidia, company implemented a stock-option exchange program without stockholder consent • One board member received 41.9% dissent • Two other board members had more than 34% opposition • Google also established a stock option exchange program without stockholder consent • Two directors got 11% dissent, even though Google’s officers and directors own 70.6% of the outstanding shares 21
  22. 22. Failure to Implement Majority-Backed Stockholder Proposals • FirstEnergy • In 2008, three stockholder proposals won at least 67% support (to eliminate supermajority voting, reduce the threshold for calling special meetings, and adopt majority vote standard for election of directors). Board failed to implement. • In 2009, four directors received more than 50% opposition votes • Seven other directors received more than 48% opposition • Pulte Homes • Following successful stockholder proposals, Board failed to put poison pill defense to a stockholder vote, and failed to declassify board • In 2009, three directors received majority opposition • Board refused to accept director resignations • Under investor pressure, Board agreed to put poison pill to vote next year and recommend declassification later 22
  23. 23. Failure to Implement Majority-Backed Stockholder Proposals (continued) • Southwest Airlines • In 2008, Southwest Airlines investors approved majority voting for directors by 68%, but Board failed to implement majority voting • In 2009, an outside director on nominating committee received 53.7% withhold vote • Extension of poison pill without stockholder approval resulted in more than 40% opposition at Cameron International, Convergys and Abercrombie & Fitch 23
  24. 24. Other Corporate Governance Concerns • At Massey Energy, an outside director who sits on more than six boards received 58% opposition • “Affiliated” outside directors who sit on key committees received more than 40% withhold votes at Consol Energy, Pepco and Vornado • Poor meeting attendance 24
  25. 25. Vote No Campaigns •11 vote no campaigns in 2009; 17 in 2008 •State Bancorp Inc. •3 directors having close to 40% of votes cast withheld •Dissident later appointed to Board •Bank of America •Campaign against all 18 directors by CalPers/CalSters •RiskMetrics recommended withhold on 5 of 18, based on concerns about Merrill acquisition •All directors re-elected, but successful stockholder proposal strips Ken Lewis of Chairman title •Lewis resigns 25
  26. 26. Vote No Campaigns (continued) • Citigroup • Campaign against Audit and Risk Management Committee • RiskMetrics recommends withhold on 4 out of 14 • Dollar Tree Inc. • Campaign by CalPers to withhold on 3 incumbents • RiskMetrics recommends withhold on all 3 for failure to implement successful declassification stockholder proposal • All 3 directors had 50% of votes withheld 26
  27. 27. Broker Discretionary Voting Has Historically Favored Director Nominees • On average, 20% of outstanding shares do not issue voting instructions to brokers in uncontested director elections • Factors contributing to increasing failure to instruct • Retail stockholders are more likely to not issue instructions • Poor financial performance can increase retail investor apathy • Notice & Access has increased the number of uninstructed shares • Under NYSE Rule 452, if brokers do not receive voting instructions from street holders by the tenth day before the stockholder meeting, the broker has discretion as to whether and how to vote those shares on routine matters • For most brokers, 100% of uninstructed shares have been voted in favor of the Board’s nominees • Some brokers allocate discretionary votes in proportion to non- institutional voting instructions received 27
  28. 28. SEC Eliminates Broker Discretionary Voting • In July 2009, SEC eliminated broker discretionary voting of uninstructed shares in uncontested elections (3-2 vote by Commissioners) • Applies to shareholder meetings starting in 2010 • Specifically, NYSE Rule 452 was modified to make all director elections “non-routine” • This change impacts most public companies, because most brokerage firms are members of NYSE and subject to its rules • SEC recognized the need for investor education to encourage greater retail investor voting 28
  29. 29. Elimination of BDV Should Result in Higher Vote Percentages Against Director Nominees • Loss of broker discretionary voting will result in loss of significant block of votes “for” company’s director nominees • Companies with large retail holders will suffer biggest loss of “for” votes • Companies using Notice & Access mailing will also be hit • The impact of withhold/against votes is amplified • The influence of proxy advisory firms and institutional investors is increased 29
  30. 30. With Traditional Plurality Voting, A High Withhold Vote Has No Teeth • Under plurality voting, candidates with the most votes win • In an uncontested election, the number of nominees would normally equal the number of Board seats available • If a director receives at least one affirmative vote, he or she is elected • As result, with plurality voting, a majority withhold vote has no legal effect on the outcome of the election (unless there is an election contest) • However, a majority withhold vote can be a real embarrassment for directors and the company • Some of the directors with majority withhold votes have voluntarily resigned, but resignations are not always accepted by company • Delaware litigation over Axcelis failure to accept 3 director resignations 30
  31. 31. Two Types of Majority Voting • So-called “modified plurality” • To give recognition to failure to receive majority vote, modified plurality standard retains plurality voting as operative legal standard but adds director resignation policy • Director resignation policy requires director to resign if does not receive a majority of votes cast, and Board then determines whether to accept resignation • True majority voting • Must receive majority of votes cast to be elected; failure to receive majority vote means candidate is not elected • Typically coupled with director resignation policy (as above) to overcome holdover problem (arising because incumbent stays in office until successor duly elected) • Corporate governance activists have prevailed in making true majority voting combined with director resignation policy “best practice” 31
  32. 32. Majority Voting Has Become the New Standard in Recent Years • Most of S&P 500 has adopted majority voting • Over half of S&P 500 companies have adopted “true majority” voting and another 18% have adopted “modified plurality” • However, three-quarters of Russell 3000 companies still use plurality standard • Many companies have adopted majority voting voluntarily as a best corporate governance practice, others in response to a 14a-8 proposal • Shareholder proposals to adopt majority voting picked up in 2009 • Over 100 such proposals were submitted in 2009 • Majority voting proposals routinely get support well above 50% of the votes cast 32
  33. 33. With Majority Voting as the New Standard, a No Vote Now Has Teeth • Under true majority voting, failure to get majority vote means director is not re-elected • Holdover following conclusion of term addressed with director resignation requirements • Consequences if no directors are re-elected • Poison put considerations 33
  34. 34. Advising the Board Now • Advise the Board now as to the new voting risks created by the rise of withhold/against votes and elimination of broker discretionary voting • Analyze stockholder base (retail holders) and voting profiles of key stockholders • Review voting policies at institutions and proxy advisory firms • Do corporate governance policies and compensation-related issues violate policies? • Determine how influential proxy advisory firms will be given your stockholder base • Monitor corporate actions year-round with an eye towards proxy advisory firm policies • Consider whether to use Notice and Access for proxy mailing • Handling 14a-8 proponents 34
  35. 35. Agenda • Calls for Change Hit A Crescendo • Just Vote No? The Sharp Rise of Votes Against Director Nominees • Proxy Fights and Other Solicitations Continue Their Upward Trend • Stockholder Proposals: It’s All About Director Accountability • Update on the Latest Regulatory and Political Initiatives • Questions and Comments 35
  36. 36. Proxy Fights and Other Solicitations Continue Their Upward Trend Proxy Fights 150 120 90 137 60 125 100 108 75 30 56 42 0 2003 2004 2005 2006 2007 2008 2009 Source: FactSet TrueCourse through 11/10/09 meeting dates 36
  37. 37. Primary Campaign Types (2009) Vo te / A ctivism Vo te A gainst a A gainst a M erger M anagement Remo ve 2% P ro po sal Withho ld Vo te fo r Directo r(s), No 1% Directo r(s) Dissident No minee 3% to Fill Vacancy 1% Vo te fo r a Sto ckho lder P ro po sal 4% B o ard Co ntro l B o ard 27% Representatio n 62% Source: FactSet TrueCourse through 11/10/09 meeting dates 37
  38. 38. Success Rates for Proxy Fights Are Increasing Rate (%) Success Rate* 100 75 55 57 56 48 49 51 44 46 50 36 25 0 2001 2002 2003 2004 2005 2006 2007 2008 2009 Source: FactSet TrueCourse 2009 figures based on data through 11/10/09 meeting dates. *Number of outright victories, partial victories or settlements by the dissident as a percentage of all proxy fights where an outcome has been reached. 38
  39. 39. Proxy Contest Evaluation Criteria • RiskMetrics focuses on two central questions: • Have the dissidents met the burden of proof that change is warranted at the company? • If so, will the dissidents be better able to effect such change versus the incumbent board? • Criteria for Board control: • Dissidents must have: • Well-reasoned, detailed business plan • Transition plan describing how change of control will be effected • Identification of qualified and credible new management team • RiskMetrics will compare the dissident’s and incumbent management’s plans, board and management team in order to arrive at their vote recommendation • Criteria for minority Board position: • Burden of proof RiskMetrics imposes on the dissidents is lower than in the case of control • Dissidents detailed plan of action not required • Dissidents do not have to prove that their plan is superior • Dissidents must prove that change is preferable to the status quo and that the dissident slate will add value to board deliberations by considering the issues from a different viewpoint than the current board members 39
  40. 40. Consent Solicitations • Proxy fights are usually conducted at annual stockholder meetings (i.e. once a year) • However, 38% of Russell 3000 companies allow stockholders to act by written consent outside of a stockholder meeting • The ability to act by written consent can be an important factor in any proxy fight • No need to wait until next annual meeting • Speed • Element of surprise • Ability to run a consent solicitation can be a powerful tactic in a hostile bid • Requires a charter amendment to remove right • Activist investors and proxy advisory firms strongly support right to act by written consent 40
  41. 41. What You Can Do to Prepare Now for a Possible Proxy Fight or Consent Solicitation • Review vulnerability to hostile takeover in conjunction with proxy fight to remove Board • Proxy fights and consent solicitations are typical tactics in hostile takeover bids • Used to neutralize poison pill and “just say no” defenses • Used to amend corporate governance procedures that would impede a hostile bid • Update bylaws for latest advance notice procedures • Address 2008 Delaware court decisions • Include disclosure of derivative positions and other dissident information • If action by written consent is permitted, adopt bylaws to regulate consent process • Bylaws should provide for an orderly, defined process, similar to those used in advance notice bylaws 41
  42. 42. Agenda • Calls for Change Hit A Crescendo • Just Vote No? The Sharp Rise of Votes Against Director Nominees • Proxy Fights and Other Solicitations Continue Their Upward Trend • Stockholder Proposals: It’s All About Director Accountability • Update on the Latest Regulatory and Political Initiatives • Questions and Comments 42
  43. 43. Stockholder Proposals: It’s All About Director Accountability • Stockholder Proposals Continue to Climb • Current Hot Topics in 14a-8 Proposals • Current Strategies for Handling Stockholder Proposals 43
  44. 44. Stockholder Proposals Continue to Climb Proposals Trend in Proposals Submitted by Shareholders 1,200 (1989-2009) 1168 1145 1119 1,000 947 800 847 774 725 600 607 550 563 560 517 528 502 466 478 400 409 403 408 357 200 260 0 D 95 96 05 07 08 89 90 91 92 93 94 97 98 99 00 01 02 03 04 06 YT 20 20 20 20 19 19 19 19 19 19 19 19 19 19 19 20 20 20 20 20 09 20 Source: *IRRC (1989 to 2005), ISS (2005 to 2007) and RiskMetrics Group (2007-2009) Corporate Governance Bulletin, ISS 2005 Postseason Report, ISS 2006 Postseason Report, and RiskMetrics Group ‘09 Proxy Season Trends and a Look Ahead. From 1989 to 1996, IRRC tracked the shareholder proposals of 1,500 companies. In 1997, IRRC tracked the shareholder proposals of 1,800 companies. From 1998 to 2009, IRRC (after 2005, ISS then RiskMetrics Group) tracked the shareholder proposals of 2,000 companies. 2009YTD as of 6/1/09. 44
  45. 45. Background of 14a-8 Proposals • Rule 14a-8 permits shareholders to place proposals in company proxy materials • Historically, province of “corporate gadflies,” who could be nuisances but rarely had substantive impact • Now, used by pension funds, labor, activists, hedge funds • 14a-8 process has been transformed by corporate governance activists • Cohesiveness of activists and informal alliances with RiskMetrics and other proxy advisory firms, internal corporate governance experts at fund complexes, hedge funds, etc. • Facilitated by SEC bias in favor of permitting shareholder proposals to be placed on ballot • E.g., SEC Staff Legal Bulletin 14E (Oct. 27, 2009) reverses position and allows proposals relating to risk, and CEO succession planning 45
  46. 46. Binding and Non-binding Stockholder Proposals • Shareholder proposals under Rule 14a-8 take two basic forms • Recommendations for board action which are not binding (precatory) • Proposed bylaw amendments, which if adopted by requisite vote of shareholders are binding and take effect immediately • In 2009, 13 proposals were cast as binding bylaw provisions 46
  47. 47. Putting Teeth into Non-binding Proposals • More frequent and more successful campaigns against incumbent directors are being used to “discipline” boards that do not implement successful non-binding proposals • Typically results in a multi-year campaign against board • First year is majority vote for non-binding stockholder proposal • If board does not implement proposal, it may be subjected to RiskMetrics and other proxy advisory firms recommending “against” reelection of incumbent directors • Possibility of a “vote no” campaign in following years 47
  48. 48. Current Hot Topics in 14a-8 Proposals • Executive compensation • Say on Pay • Vote on executive death benefits (golden coffins) • Require that equity awards be held through retirement • Disclose information about compensation consultants • Corporate Governance • Majority voting for directors • Independent Board Chair • Right to call a special meeting • Board declassification • Adopt cumulative voting • Eliminate supermajority vote provisions • Social Policies • Issue sustainability report • Set greenhouse gas emissions goals • Adopt principles for health care reform • Adopt sexual orientation anti-bias policy • Coming Soon? 14a-8 Proposals on Proxy Access 48
  49. 49. Say on Pay What is it? • Say on Pay is an annual advisory vote by shareholders at annual meeting on senior executive compensation • No set formulation for Say on Pay advisory vote • Sometimes articulated as approval of CD&A section in proxy • Sometimes as approval of compensation policies for all Named Executive Officers • Other variations are used or have been suggested • Even if not legally binding, a negative vote would have significant consequences in board room 49
  50. 50. Say on Pay Proposals Stalled in 2007 and 2008 • In 2007 and 2008, Say on Pay was not gaining significant traction among traditional institutional investors • Most Say on Pay shareholder proposals under Rule 14a-8 failed • However, over 30 companies have “voluntarily” adopted annual non-binding Say on Pay votes, most as a result of either successful shareholder proposals or pressure from governance activists • Include: Apple, Hewlett-Packard, Intel, Verizon, Pfizer 50
  51. 51. Say on Pay Stockholder Proposals Gain New Life in 2009 • Proxy advisory firms will recommend in favor of stockholder Say on Pay proposals • Stockholder-sponsored Say on Pay proposals gain greater support in 2009 • 44% of votes cast in favor in 2009, vs. 39% in 2008 and 2007 • 13 out of 66 votes receive a clear majority of votes cast 51
  52. 52. Say on Pay Company-sponsored Say on Pay Advisory Votes • Under the 2009 Stimulus Act, each entity that had previously received TARP assistance must submit a non- binding Say-on-Pay resolution to stockholders • 300 companies were required to hold votes • At most companies, resolutions received over 90% approval • All proposals received a majority of votes cast in favor • Say on Pay votes at non-TARP companies received similar support 52
  53. 53. Say on Pay Will Institutions Continue to Support Say on Pay Advisory Votes? • Did institutions cut TARP firms slack in extraordinary circumstances? • Is a vote against pay a better way to send a message than a vote against compensation committee members? • As Say on Pay becomes more common, institutions will be able focus on what level of disclosure is required, and what compensation practices are acceptable 53
  54. 54. Say on Pay What to do now? • Expect more Say on Pay stockholder proposals under 14a-8 for the 2010 proxy season • Will early adopters get credit? • Consider triennial or biennial advisory votes as an alternative to annual votes • Microsoft announces triennial votes; Prudential Financial adopts biennial votes • Monitor Say on Pay legislation progress • Begin to prepare for inevitable enactment of Say on Pay, including reevaluation of hot button executive compensation packages 54
  55. 55. Other Executive Compensation Stockholder Proposals • Approve or limit executive death benefits • Require equity to be retained • Disclosure of executive compensation • Restrict supplemental retirement plans • Link pay to performance • Approve future golden parachutes 55
  56. 56. Majority Vote to Elect Directors • Shareholder proposals to adopt majority voting picked up in 2009 • Over 100 such proposals were submitted in 2009 • Majority voting proposals routinely get support well above 50% of the votes cast • Most companies that receive a majority voting proposal will settle and adopt it 56
  57. 57. Independent Board Chair • Before 2009, most stockholder proposals sought a lead independent director • In the 2009 proxy season, there was fault line shift from proposals for lead independent directors to proposals for separate independent board chairs • In 2009, 43 proposals sought independent chairs vs. 34 in 2008 • Support is also up: 35% in 2009 vs. 28% in 2008 • Approximately 45% of S&P 1500 have already separated the CEO and board chairs • RiskMetrics and other proxy advisory firms will recommend in favor of separation proposal, with limited exceptions • Political and regulatory support • Pending legislation would mandate independent board chair • SEC proposed disclosure rules would focus disclosure on this issue 57
  58. 58. Right to Call Special Meetings • 46% of S&P 500 and 49% of S&P 1500 companies already give shareholders right to call special meeting • Shareholder proposals would amend bylaws to • Add a stockholder right to call a special meeting • Or lower threshold to enable as few as 10% of shareholders to call a special meeting • Creates constant threat of a possible proxy contest rather than limiting it to once a year at annual meeting • How high a threshold will institutions accept? • RiskMetrics will support a 10% threshold even if the company has already adopted a 20% threshold • Right to call special meeting proposals have increased • 63 proposals in 2009 vs. 45 in 2008 • Support is up as well: 56% in 2009 vs. 45% in 2008 58
  59. 59. Declassification • Proposals to declassify boards are a perennial favorite of corporate governance activists and still very much in fashion • Number of proposals held steady in 2009 • 76 in 2009 vs. 88 in 2008 • When on the ballot, declassification routinely wins • 75% support in 2009 vs. 73.5% in 2008 • RiskMetrics and other proxy advisory firms will recommend in favor • Classified boards are on steady decline • Only 35% of S&P500 companies have classified board, down from 60% in 2002 • Schumer bill would mandate board declassification at listed companies 59
  60. 60. Proposals to Watch for in 2010 • Allow stockholders to recover proxy contest costs • Litigated by AFSCME at CA Inc. • Adopted by HealthSouth in October 2009 • CEO succession planning • SEC 2009 Staff Legal Bulletin 14E (SLB 14E) reverses course, and succession planning proposals will now be allowed • Social policy resolutions • SEC 2005 SLB 14C found that social policy resolutions could be omitted as “ordinary business operations” if they involve an “internal assessment of risk or liabilities that the company faces as a result of its operations that may adverse affect the environment or public health.” • In SEC SLB 14E, Staff reversed position. Rather than focusing on whether the proposals relates to an evaluation of risk, the Staff will focus on “the underlying subject matter to which the risk relates.” • Will this allow resolutions on climate change, HIV/AIDS, importation of drugs from Canada and various environmental questions? 60
  61. 61. Coming Soon? 14a-8 Proposals on Proxy Access • Under current SEC interpretations, a stockholder proposal requiring proxy access is excludible under Rule 14a-8 because it relates to an election contest • Part of the SEC’s proxy access proposal includes an amendment to Rule 14a-8 to permit stockholders to submit proxy access proposals • Although it is possible that this rule change will be adopted before comprehensive proxy access rules are adopted, it is not likely 61
  62. 62. Agenda • Calls for Change Hit A Crescendo • Just Vote No? The Sharp Rise of Votes Against Director Nominees • Proxy Fights and Other Solicitations Continue Their Upward Trend • Stockholder Proposals: It’s All About Director Accountability • Update on the Latest Regulatory and Political Initiatives • Questions and Comments 62
  63. 63. Update on the Latest Regulatory and Political Initiatives • SEC Proposed Rules for 2010 Proxy Statements • The Status of Proposed Proxy Access Rules • Political and Legislative Developments 63
  64. 64. Proposed Enhanced Governance and Compensation Disclosures for 2010 • On July 1, 2009, SEC (5-0 vote) proposed rules to expand disclosures relating to public companies’ governance structure • Would require disclosure focused on the company’s board leadership structure, and why structure is appropriate for company • If applicable, would call for explanation of why the company combines chair and CEO positions • Would also require explanation of board’s role in risk management and effect on the company’s leadership structure • Disclosures in practice likely to become somewhat standardized, but SEC is counting on “embarrassment” factor to stimulate governance changes in both areas • Would also require additional disclosures about each nominee’s specific experience and skills “qualifying” him/her for service on board and specific board committees, prior directorships and legal proceedings involving the nominee 64
  65. 65. Proposed Enhanced Governance and Compensation Disclosures (continued) • Change in tabular disclosure of equity grants to NEOs and directors (SCT and DCT) • Under current rules, disclosed amounts reflect the expense recognized in the covered year under FAS 123R • Proposed rules require disclosure of the total grant date fair value of awards granted during the year, computed in accordance with FAS 123R. • Will increase sticker shock value of grants • Proposed rules require enhanced disclosure of compensation consultant services and fees • Expectation is that new disclosure rules will be adopted in November and effective for 2010 proxy season 65
  66. 66. Proposed Rules Regarding Compensation and Risk Creation • Requires disclosure of compensation policies or practices that could incentivize any employee to take on excessive amounts of risk • Currently, CD&A is limited to compensation programs and policies for NEOs • Disclosure of risks arising from compensation practices is required only if the risks may have a material effect on the company • Proposed rules do not require an affirmative statement if company determines that no disclosable risks exist, but the SEC has requested comments on this issue 66
  67. 67. Proposed SEC Proxy Access Rules • Potentially one of most significant corporate governance issues of decade • Current regime • Only company’s nominees for election to board are included in company’s proxy materials • If shareholder wants to nominate opposition candidates, it must prepare, pay for and distribute separate proxy materials • Proposed shareholder proxy access regime • Would allow shareholders of public company to include in company’s proxy materials (proxy statement and proxy card) candidates for election to the board, nominated by shareholders, in opposition to board’s candidates • Result would be a proxy contest for election of directors • Only handful of companies have voluntarily adopted proxy access to date • Includes RiskMetrics, LSB Industries and Carl Icahn-controlled American Railcar 67
  68. 68. Status of Proposed Proxy Access Rules • On May 20, 2009, SEC (by 3-2 vote) proposed new proxy access rules • Would require companies to include shareholder nominees for directors in company’s proxy materials under SEC-prescribed circumstances • To be eligible to make nomination, a shareholder or shareholder group would be required to own for a year at least 1% of companies with market capitalizations in excess of $700 million, 3% of companies between $700 and $75 million, or 5% of smaller market cap companies • Total number of shareholder nominated directors would be capped at 25% of full board (rounded down) • Multiple shareholders or groups could submit nominations, but total still capped at 25% and priority would be allocated on a first-in-time basis • SEC proposals would also allow shareholders to insert proposals regarding proxy access matters in company proxy materials under Rule 14a-8 • In October 2009, the SEC announced it had deferred action on the proposed rule until early 2010, so proxy access will not apply for the 2010 proxy season 68
  69. 69. Proxy Access What Should Companies Be Doing Now? • Companies should stay focused on proxy access because SEC is intent on making some kind of change in 2010 • Make sure the Board and management is briefed about proxy access in general and updated on developments • Although comment on the SEC proposal is closed, the SEC appears willing to continue the dialog with interested parties • Proxy access legislation is pending in Congress, so lobbying could still be productive • If the SEC allows companies to opt-out (i.e. proposed their own versions of proxy access), companies should consider what alternatives they might propose to stockholders 69
  70. 70. Legislative Developments • Senator Schumer’s “Shareholder Bill of Rights” • Would direct SEC to establish proxy access • Would also make other fundamental changes in corporate governance—declassification, mandatory independent chair • Mandatory Say on Pay votes • Similar bill by Rep. Gary Peters • Senator Dodd’s Financial Reform Bill • Covers majority voting, declassification, proxy access, independent chairman, clawbacks, Say on Pay, golden parachutes, and independent consultants and counsel • Recent changes to state corporation law • Delaware corporate law amended to specifically authorize companies to adopt bylaw provisions permitting proxy access • Model Business Corporation Act (sponsored by ABA) being amended to same effect 70
  71. 71. Latham & Watkins LLP Founded in 1934, Latham & Watkins has grown into a full-service international powerhouse with approximately 2,000 attorneys in 27 offices around the world. The founders of Latham & Watkins instilled an ethic of hard work, commitment and quality that flourishes today and has nurtured the firm's dramatic growth into one of the world's premier business law firms. Latham consistently ranks among the best transactional and finance practices in leading legal publications such as The American Lawyer, mergermarket, Chambers and Asia Legal Business and earns praise worldwide for work on high-profile and groundbreaking deals. Latham's dedication to excellence extends to pro bono and public service. As a Signator to the Law Firm Pro Bono Challenge, we have a longstanding commitment to providing pro bono legal services, financial support and volunteer time to charitable organizations and to individuals most in need throughout the world. 71
  72. 72. MacKenzie Partners, Inc. is a full-service proxy solicitation, investor relations and corporate governance consulting firm specializing in mergers-and-acquisitions and proxy contest related transactions. The firm has offices in New York City, Los Angeles, Palo Alto and London. MacKenzie's services include – in addition to traditional proxy solicitation – corporate governance consulting, securityholder solicitations, information agent services for tender and exchange offers, beneficial ownership identification, market surveillance and associated financial, investor and media relations services. We work in close partnership with our client's attorneys, investment bankers and other consultants, providing advice and counsel at each stage of the transaction. NEW YORK PALO ALTO LONDON LOS ANGELES 105 MADISON AVE 228 HAMILTON AVE 17 CAVENDISH SQUARE 1875 CENTURY PARK EAST NEW YORK, NY 10016 PALO ALTO, CA 94301 LONDON W1G 0PH UK LOS ANGELES, CA 90067 PH: (212) 929-5500 PH: (650) 798-5206 PH: +44 (0)20 3178 8057 PH: (310) 284-3110 FX: (212) 929-0308 FX: (650) 798-5207 FX: +44 (0)20 7504 8665 FX: (310) 360-2420 72
  73. 73. Questions & Comments Contact Information: John M. Newell, Partner David M. Taub, Partner Latham & Watkins LLP Latham & Watkins LLP 415.395.8034 (direct) 213.891.8395 (direct) john.newell@lw.com david.taub@lw.com Daniel H. Burch, Chairman & CEO MacKenzie Partners Inc. 212.929.5748 (direct) dburch@mackenziepartners.com 73
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