Securities Mosaic® Blogwatch
March 2, 2015
ISS Issues FAQs on Proxy Voting Policies Regarding Bylaw and Charter Amendments Adopted Without Shareholder Approval
by Staff

by Andrew J. Brady
Capital Markets, Corporate Governance, Proxies, SEC

Existing (ISS) voting policy is to recommend against the election of boards of directors if charter or bylaw amendments were enacted without shareholder approval and in a manner that materially diminishes shareholders' rights or that could adversely impact shareholders.

ISS recently issued FAQs intended to clarify the types of amendments that would not automatically be deemed "materially adverse" and amendments that generally would be deemed "materially adverse."

Generally Not Materially Adverse

  • advance-notice bylaws that set customary and reasonable deadlines
  • director-qualification bylaws that require disclosure of third-party compensation arrangements
  • exclusive forum provisions (when the venue is the company's state of incorporation).

Materially Adverse

  • authorized capital increases that do not meet ISS' Capital Structure Framework
  • board classification to establish staggered director elections
  • director-qualification bylaws that disqualify shareholders' nominees or directors who could receive third-party compensation
  • fee-shifting bylaws that require a suing shareholder to bear all costs of a legal action that is not 100 percent successful
  • increased vote requirement for shareholders to amend the company's bylaws or charter
  • removal of a majority vote standard and substitution of plurality voting
  • removal or restriction of the right of shareholders to call a special meeting (including raising thresholds or restricting agenda items)
  • removal or material restriction of shareholder right to act in lieu of a meeting via written consent.

In assessing the boards of pre-IPO (initial public offering) companies, ISS will consider the timing of the adoption of the provisions that diminish post-IPO shareholders' rights, the clarity of disclosures of such changes (including in the company's prospectus or other documents connected to the public offering) and the continuity of board membership.

March 2, 2015
Cooperation By Broker Mitigates SEC Sanctions
by Tom Gorman

Cooperation was a key factor in the resolution of an action involving a minority owner of a broker-dealer that is alleged to have facilitated a fraudulent scheme to conceal losses at a major Japanese company. In the Matter of Hajime Sagawa, Adm. Proc. File No. 3-16412 (February 27, 2015).

Hajime Sagawa was a registered representative, a founding member, minority owner and a director of Axes America, LLC, from 1997 through 2008. The firm was a Commission registered broker-dealer from 1997 through 2008 when it voluntarily withdrew its registration.

This proceeding centers on efforts to conceal millions of dollars in losses at Olympus Corporation, a manufacturer and seller of cameras, microscopes, endoscopes and other medical equipment. Shares of Olympus are listed on the Tokyo Stock Exchange.

To conceal certain operating looses sustained in the mid-1980s Olympus supplemented its income with speculative investments. When the Japanese economy took a down turn in 1990 Olympus sustained significant losses on those investments. Executives 1 and 2 then moved the investments into trusts constructed under Japanese law. Those trusts were managed in such a way that write-downs could be avoided for a time.

Eventually the losses in the trusts reached the point where write-downs loomed. At that time the two executives moved the asses to off-balance sheet entities in the Cayman Islands and British Virgin Isles. Through a series of transactions Olympus claimed to have "sold" the poor investments to the off-balance sheet entities. The complexity of the transactions resulted in advisory, legal and banking fees that eclipsed the investment losses.

Following the completion of the transactions, Olympus needed to create a mechanism to repay the banking entities that financed the sales. The two executives planned to accomplish this by diverting portions of the payments that would be made for the next acquisition by Olympus to the banks.

To implement the scheme, one of the two executives executed an investment banking agreement with Axes after meeting with Mr. Sagawa. Under the terms of the agreement Axes would serve as financial adviser for the acquisition of two possible targets. The agreement called for an outsized investment banking fee.

Talks with one possible acquisition target broke down. Olympus then identified Gyrus Group PLC, a U.K firm that specialized in endoscopes as a possible target. Following the closing of that deal in February 2008 Olympus paid Axes an advisory fee in the form of cash and Gyrus preference shares valued at about 38% of the purchase price. Two years later Olympus purchased those shares from Axes and an affiliate. The $662 million purchase price, along with other portions of the fees paid to the broker-dealer, were channeled to the off-balance sheet entities to repay the bank loans.

The Order alleges violations of Securities Act Sections 17(a) and (c) and Exchange Act Sections 15(c)(1)(A). It also acknowledged the cooperation of Respondent.

Mr. Sagawa resolved the proceeding, consenting to the entry of a cease and desist order based on the Sections cited in the Order. He will also be barred from the securities business and from participating in any penny stock offering. No penalty was imposed in view of Respondent's cooperation.

March 2, 2015
Our Newly Redesigned Site! Give Me Your Feedback…
by Broc Romanek

If you head to our home page today, you'll see that we have launched a newly redesigned site! Long overdue, it's my first rethink since I completely overhauled the site when I took it over in January 2003. The reality is that only the home page has changed. The underlying content is the same, the blogs are the same, etc. If you have subscribed to have a blog or eminders pushed to you, you will still receive them as you always have. And there is no log-in box on the home page, as you will only be prompted to log-in when you encounter members-only content.

My primary redesign goal was to enable you to more easily navigate to our main areas of content, which is accomplished now through the prominent 16 tabs at the top of the home page (for example, the 500+ Practice Areas are accessible from the top left tab rather than being forced to scroll through a long left column of the home page). And you'll see that the rest of the page isn't cluttered anymore. Rather, the bulk of the home page highlights developing news & key resources. A secondary goal was to have the home page look "clean" on any mobile device. Give me your honest feedback please!

Webcast: "Conduct of the Annual Meeting"

Tune in tomorrow for the webcast - "Conduct of the Annual Meeting" - to hear Randy Clark of Sempra Energy; Angela Hilt of Clorox; Jeff Taylor of Pepco, Carol Ward of Mondelez International and Carl Hagberg of The Shareholder Service Optimizer explain how they handle the many challenges of running an annual shareholders meeting.

Our March Eminders is Posted!

We have posted the March issue of our complimentary monthly email newsletter. Sign up today to receive it by simply inputting your email address!

– Broc Romanek

March 2, 2015
US v. Newman and the Rewriting of the Law of Insider Trading (Part 1)
by J Robert Brown Jr.

In US v. Newman, a panel of the Second Circuit dismissed a conviction for insider trading against two defendants.  The Government has sought rehearing en banc and the Commission has filed an amicus brief supporting the efforts.  A small group of law professors (Professors Bainbridge, Macey and Henderson) have filed an amicus brief arguing that the decision is correct.  

The case is worthy of consideration for a number of reasons.  First, it reflects a substantial rewriting of the law of insider trading.  The decision essentially eliminated the gift analysis from Dirks and removed from the prohibition on insider trading tips of information to family and friends absent the presence of an exchange "that is objective, consequential, and represents at least a potential gain of a pecuniary or similarly valuable nature."  Given that many "tips" to friends and family will not be motivated by the potential for pecuniary gain, the court has essentially eliminated from the prohibition on insider trading the exchange of information by family members.   

Second, the panel in Newman consisted of three judges appointed by Republican presidents, two of them senior judges (Winter and Parker) and one active (Hall).  The en banc court, however, includes 13 full time judges, with eight appointed by Democratic presidents.  To the extent that the case goes en banc and is decided along party lines (based upon the political party of the appointing president), the decision will be reversed.      

Finally, the opinion is of interest because of other areas where the Second Circuit seems to be rewriting the law under Rule 10b-5.  In ParkCentral v. Porsche, for example, a panel of the Second Circuit essentially reinstated an "affects test" for determining the extraterritorial application of Rule 10b-5 in a manner that can only be used to deny, rather than grant, jurisdiction.   

In contending that the Second Circuit was incorrect (in both Newman and Porsche), the conclusion is based upon the law as it is.  Given, however, a desire by some on the Supreme Court to narrow the application of Rule 10b-5 (see Janus, Morrison and Stoneridge), the Second Circuit's rewriting of the law may well be approved if it makes it to the Supreme Court.    

With respect to Newman, the decision and the request for rehearing en banc is posted, along with the SEC's amicus brief, at the DU Corporate Governance web site.  

March 1, 2015
Simpson Thacher discusses Proxy Access: Whole Foods Delays Annual Meeting, While Several Other Companies Adopt Proxy Access Bylaws
by Yafit Cohn

Many public companies continue to consider their options in responding to proxy access shareholder proposals following the Division of Corporate Finance's unusual announcement that it will not opine on "the application of Rule 14a-8(i)(9) during the current proxy season."[1] But over the last few days, several companies have made notable decisions. Whole Foods Market, Inc., which had led the charge earlier this proxy season by obtaining no-action relief from the Securities and Exchange Commission ("SEC") on the ground that it was planning to submit a conflicting management proposal to shareholders, announced on February 13 that it has decided to postpone its annual meeting, originally scheduled for March 10.[2] Whole Foods explained that given the SEC's subsequent reversal of its no-action determination, "the postponement of the Annual Meeting is necessary to ensure the Company can meet applicable deadlines and allow the Board adequate time to review and evaluate the Company's alternatives." The company stated that it would announce a new meeting date "after a final decision has been made."

At least three companies - General Electric Co., CF Industries Holdings, Inc. and HCP, Inc. - took more decisive action, amending their respective bylaws to adopt proxy access.

  • General Electric's bylaw amendments permit "a shareowner, or a group of up to 20 shareowners, owning 3% or more of the Company's outstanding common stock continuously for at least three years to nominate and include in the Company's proxy materials directors constituting up to 20% of the board," rounding down to the nearest whole number.[3]
  • CF Industries' bylaw amendments allow "any stockholder or group of up to 20 stockholders who have maintained continuous qualifying ownership of 5% or more of the Company's outstanding common stock for at least the previous three years" to nominate in the company's proxy materials up to "20% of the directors in office at the time of nomination," rounding down to the nearest whole number.[4]
  • HCP's amended bylaws "permit any stockholder or group of up to ten stockholders who have maintained continuous qualifying ownership of 5% or more of the Company's outstanding common stock for at least the previous three years" to nominate up to 20% of the board, rounding down to the nearest whole number.[5]

Interestingly, among other details, all three companies disclosed that under their amended bylaws, shareholder nominees "who are included in the Company's proxy materials but subsequently withdraw from or become ineligible for election at the meeting or do not receive at least 25% of the votes cast in the election would be ineligible for nomination under the proxy access provisions of the Bylaws for the next two years."[6]

Implications of the Decision of General Electric, CF Industries and HCP

Most public companies will likely be unwilling to exclude proxy access shareholder proposals from their proxy materials this year due to a combination of factors - most notably, the inability to obtain no-action relief from the SEC and the concern that proxy advisory firms may then recommend against one or more of their directors. Assuming that a company will not exclude the shareholder proposal it received, it faces several options. It can:

  • include only the shareholder proposal in its proxy materials, perhaps accompanied by an opposition statement from the board;
  • include both the shareholder proposal and a conflicting management proposal in its proxy materials; or
  • unilaterally adopt a bylaw providing for proxy access under terms perceived to be more favorable to the company and urge shareholders to vote against the shareholder proposal.

General Electric, CF Industries and HCP have opted for voluntary adoption of proxy access. It is possible that other corporations may follow suit and amend their bylaws to adopt proxy access on their terms. It is too early in the proxy season, however, to draw any conclusions from the decision of these three companies or to infer any trends regarding which strategies will be pursued by most companies grappling with proxy access shareholder proposals.


[1] For background on proxy access shareholder proposals and related developments this proxy season, see Simpson Thacher & Bartlett LLP, "SEC Allows Exclusion of Proxy Access Shareholder Proposal Due to Conflict with Management Proposal" (Dec. 8, 2014); Simpson Thacher & Bartlett LLP, "SEC Reconsiders No-Action Relief Granted to Whole Foods, Declines to Take Position on Conflicting Proposals" (Jan. 22, 2015).

[2] See Form 8-K of Whole Foods Market, Inc. (Feb. 13, 2015).

[3] Form 8-K of General Electric Co. (Feb. 11, 2015).

[4] Form 8-K of CF Industries Holdings, Inc. (Feb. 10, 2015).

[5] Form 8-K of HCP, Inc. (Feb. 11, 2015).

[6] Id; see also Form 8-K of CF Industries Holdings, Inc., supra note 4 (same); Exhibit 3(ii) to Form 8-K of General Electric Co., supra note 3 ("Any Shareholder Nominee who is included in the Company's proxy materials for a particular meeting of shareholders but either (i) withdraws from or becomes ineligible or unavailable for election at the meeting, or (ii) does not receive at least 25% of the votes cast in favor of the Shareholder Nominee's election, shall be ineligible to be a Shareholder Nominee pursuant to this Article VII Section F for the next two annual meetings of shareholders following the meeting for which the Shareholder Nominee has been nominated for election.").

The full and original memorandum was published by Simpson Thacher & Bartlett LLP on February 18, 2015 and is available here.

February 28, 2015
Considerations on the Use of Electronic Board Portals
by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation

Editor's Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication.

Board portals and other mechanisms for the electronic dissemination of information to directors of public companies, non-profits and other organizations are in widespread use. Many companies have found that these portals can offer significant benefits, including improved document security, speed and ease of distribution and, for many directors, improved efficiency and ease of access to board materials.

Boards and management should be aware, however, that there is increasing discussion, including among Delaware jurists and practitioners on both the plaintiff and defense sides, concerning possible negatives associated with board portals and other electronic communications, if not properly managed. There are two areas in particular that merit thoughtful attention.

First, there is some concern, including among Delaware jurists, that the provision of important board information only by electronic delivery, without an option for receiving printed copies, can hinder the ability of some directors to effectively absorb, reflect upon and annotate or otherwise comment on complex documents. This concern may emanate from the personal preferences of individuals who themselves prefer to review complex documents in paper, rather than electronically, but it nevertheless exists.

Second, there is increasing interest among plaintiff lawyers in seeking discovery of electronic information that might reflect upon the level of time and attention devoted to board materials and board meetings. Plaintiffs may seek discovery of data concerning both director engagement (through seeking information demonstrating the amount of time spent reviewing electronic board materials) and director distraction (through evidence of director use of e-mail, text messages, phone calls and other activity during board meetings, especially telephonic board meetings). A danger exists that such evidence could receive excessive attention in litigation and obscure other evidence of director engagement on board issues.

Accordingly, we suggest portal users consider the following, recognizing that every company, board and user is different and there is no "one size fits all" approach that is advisable:

  • Consider providing hard copies of the information, in addition to making it available on the portal, for directors who may prefer to also receive paper materials.
  • Consider, if printing of board materials from the portal is not permitted, whether directors might benefit from having the choice to print at least some of the more important or complex information.
  • While board portals offer the possibility of immediate dissemination of materials, care should be taken to avoid this leading to last-minute distributions of voluminous materials in a manner that does not provide sufficient time for board review.
  • Consider whether directors have received (and taken advantage of) training on the use and features of the board portal, including on annotating and note-taking online (or on iPad). Companies may want to evaluate the annotation and data storage aspects of their board portal (and consult with appropriate technology personnel) to confirm that these functions are consistent with broader board policies or practices on note-taking and document retention.
  • Whether or not the company uses a board portal, consider whether it is advisable to provide directors with additional counseling as to the importance of undivided focus during in-person and telephonic board meetings, and avoiding the use of personal electronic devices during board meetings.

Board portals often are viewed as only improving director access to information and information security. Companies should be aware that some important constituencies are focusing on potential downsides to the use of these portals. To the extent that some of these downsides can be mitigated without fundamentally compromising the important benefits of board portals, the benefits of these mitigation actions should be considered.

February 27, 2015
The Difficulties of Reconciling Citizens United with Corporate Law History
by Kobi Kastiel

Editor's Note: The following post is based on a recent article earlier issued as a working paper of the Harvard Law School Program on Corporate Governance, by Leo Strine, Chief Justice of the Delaware Supreme Court and a Senior Fellow of the Program, and Nicholas Walter, associate in the litigation department at Wachtell, Lipton, Rosen & Katz. The article, Originalist or Original: The Difficulties of Reconciling Citizens United with Corporate Law History, is available here. Related research from the authors includes Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United, discussed on the Forum here. Research from the Program on Corporate Governance about corporate political spending includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, discussed on the Forum here, Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert Jackson, available here, and Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United by Leo Strine and Nicholas Walter, discussed on the Forum here.

Citizens United has been the subject of a great deal of commentary, but one important aspect of the decision that has not been explored in detail is the historical basis for Justice Scalia's claims in his concurring opinion that the majority holding is consistent with originalism. In this article, we engage in a deep inquiry into the historical understanding of the rights of the business corporation as of 1791 and 1868—two periods relevant to an originalist analysis of the First Amendment. Based on the historical record, Citizens United is far more original than originalist, and if the decision is to be justified, it has to be on jurisprudential grounds originalists traditionally disclaim as illegitimate. The article is available on SSRN at

Citizens United v. FEC struck down McCain-Feingold's restraints on electoral expenditures by corporations. In his concurring opinion, Justice Scalia argued that the decision could be justified through the originalist approach to constitutional interpretation. In particular, Justice Scalia asserted that there was "no evidence" that, at the time of the Founding, corporations were not subject to government regulation of their ability to spend money to advocate the election or defeat of political candidates.

This article tests Justice Scalia's assertion against the historical understanding of the role of corporations as of two relevant periods. In the first period, when the First Amendment was ratified in 1791, we find that business corporations were understood to have the exact opposite relationship to society as Lockean-Jeffersonian human beings. Whereas human beings were endowed with inalienable rights that society could not take away, corporations had only such rights as society chose to give them, as illustrated by Chief Justice Marshall's iconic decision in Trustees of Dartmouth College v. Woodward. In 1791, corporations had to be specially charted by legislatures and were bound by the ultra vires doctrine to pursue only the ends for which they were chartered. Based on this history, we see no basis to contend that business corporations were thought to possess the same speech rights as human beings and that society could not restrict their ability to participate in the political process, much less through limited restrictions such as McCain-Feingold's requirement that corporations raise voluntary contributions through PACs from which to make political expenditures.

We also examine the period when the Fourteenth Amendment was ratified in 1868 to see if the understanding that corporations were fundamentally different from human beings had changed. Although by that time the movement toward general chartering of corporations had emerged, the historical understanding of the corporation's relationship to society remained the same, and corporations were still subject to the ultra vires doctrine and other tight restrictions on their scope of operations. Though the law had recognized that corporations' property rights had to be respected for them to function as intended, corporations were not accorded the liberty rights, such as speech, of individuals. And stockholders used the ultra vires doctrine to restrict corporate political and charitable spending. Likewise, as soon as corporations began to involve themselves in the political process, legislative regulation of the conduct emerged with no concern about whether those restrictions were inhibited by the First Amendment. As a result, we find no basis to conclude that the adoption of the Fourteenth Amendment represented a decision to accord corporations free speech rights akin to those of human persons, much less that it restricted Congress from enacting the kind of means limitations in McCain-Feingold that Citizens United struck down. And, of course, until the 1920s, First Amendment law itself was largely undeveloped and it would not be until the 1970s that the Supreme Court first examined the First Amendment implications of campaign finance laws.

Given the complexity involved in applying a constitution to new disputes in a constantly changing society, it does not surprise us that current constitutional cases cannot be rationalized solely by current-day Justices based on the publicly understood meaning of the Constitution as of 1789 and 1868. Rather, Citizens United is best explained by the reality that generations of intervening interpretations, when rendered in the context of real disputes arising in a changing society, have an effect on the meaning of the Constitution and how it applies in future cases. In other words, whether one finds favor with the holding in Citizens United or not, the outcome in the case is not one that can easily be rationalized by applying the originalist method of interpretation. To the contrary, the strong weight of the historical evidence supports the constitutional validity of Congress's right to regulate the corporation's involvement in the political process through the means set forth in McCain-Feingold. As such, the decision in Citizens United to overturn a bipartisan statute appears to us more original than originalist.

February 27, 2015
White House Releases Revised Consumer Privacy Bill of Rights
by Staff

by David S. Turetsky, Barney J. Skladany Jr., Jo-Ellyn Sakowitz Klein, Francine E. Friedman, Matthew Thomas (Senior Public Policy Specialist)
Policy & Regulation, Privacy, Data Protection & Cybersecurity

On Friday, February 27, 2015, the White House released a revised version of its 2012 proposal for a consumer privacy bill of rights. The revised legislative proposal largely tracks with the 2012 proposal in that it focuses on seven core principles for the collection, use and security of consumers' personal data:

1. Transparency: Covered entities would be required to provide clear and concise notices about their privacy and security practices.

2. Individual Control: Covered entities would be required to allow consumers to exercise control over what data is collected about them and how it is used.

3. Respect for Context: Would require that covered entities collect and use data in ways that are consistent with the context in which consumers provide such data. Would require internal reviews of privacy and security practices for data collected outside of such contexts.

4. Focused Collection and Responsible Use: Would require covered entities to only collect, retain and use data that is reasonable in light of context. Would require deletion or de-identification of data within a reasonable time period after use.

5. Security: Covered entities would be required to identify reasonable risks and implement safeguards designed to protect against breach, theft, loss, etc. of personal data.

6. Access and Accuracy: Covered entities would be required to grant individuals access to, or an accurate representation of, data collected about them upon request. The consumer would have the right to correct or amend the data.

7. Accountability: Covered entities would be required to take steps appropriate to the privacy risks associated with their data collection activities, including employee training, conducting periodic internal risk assessments, and constructing appropriate security systems and procedures.

The proposal would grant the FTC, as well as state attorneys general, enforcement authority, and includes civil penalties for violations. It would also preempt any state laws governing consumer data, except for those pertaining to health information, financial information, data on minors and K-12 students, fraud and consumer safety, and state data breach notification laws. It would provide a qualified exemption for entities subject to specified federal privacy and data security laws, such as the Gramm-Leach-Bliley Act (GLB) and the Health Insurance Portability and Accountability Act (HIPAA).

Covered entities are defined under the proposal as any "person that collects, creates, processes, retains, uses, or discloses personal data in or affecting interstate commerce" but would not include federal, state or local government agencies, tribal governments or entities that collect personal data of less than 10,000 persons over a 12-month period. The definition also excludes entities that collect personal data for the purposes of security research, provided such entities take reasonable steps to mitigate privacy risks and destroy or de-identify such data after research activities are concluded.

Finally, the proposal establishes a mechanism whereby a covered entity may apply to the FTC for approval of private "codes of conduct" governing the processing of personal data by the covered entity. If the FTC determines that the private code of conduct provides equal or greater protections than the relevant requirements described above, such codes may serve as a safe harbor defense before any suit brought against the covered entity for alleged violations of the Act.

It is unclear at this time whether a bill with the same or substantially the same language will be introduced in Congress, or if this will serve as a discussion draft to assist in the crafting of legislation as Congress moves forward.

View today's posts

3/2/2015 posts

AG Deal Diary: ISS Issues FAQs on Proxy Voting Policies Regarding Bylaw and Charter Amendments Adopted Without Shareholder Approval
SEC Actions Blog: Cooperation By Broker Mitigates SEC Sanctions Blog: Our Newly Redesigned Site! Give Me Your Feedback…
Race to the Bottom: US v. Newman and the Rewriting of the Law of Insider Trading (Part 1)
CLS Blue Sky Blog: Simpson Thacher discusses Proxy Access: Whole Foods Delays Annual Meeting, While Several Other Companies Adopt Proxy Access Bylaws
HLS Forum on Corporate Governance and Financial Regulation: Considerations on the Use of Electronic Board Portals
HLS Forum on Corporate Governance and Financial Regulation: The Difficulties of Reconciling Citizens United with Corporate Law History
AG Deal Diary: White House Releases Revised Consumer Privacy Bill of Rights

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