Court Denies Proxy Contest After Board Determines Dissident Candidates Failed to Complete Questionnaire

A recent case interprets and demonstrates the importance of the requirements in advance notice bylaws.

The U.S. District Court in the Northern District of Texas granted a preliminary injunction to Ashford Hospitality Prime that invalidated Sessa Capital’s slate of candidates for Ashford’s annual meeting. Sessa owns more than 8% of Ashford’s stock and notified the company that it intended to nominate five candidates to Ashford’s seven-member board.

Ashford’s bylaws require nominees to fill out a questionnaire, and include all information relating to the nominee that must be disclosed in connection with the solicitation of proxies in a contested election under SEC rules. Continue Reading

NASDAQ Amends Rule Filing on Disclosure of Third-Party Compensation for Directors and SEC Extends Review Period

The SEC has extended to July 4, 2016, as the deadline for taking action on NASDAQ’s proposal requiring its listed companies to disclose any third-party compensation payments related to candidacy or service as directors on the companies’ boards.

We previously discussed the rule proposal here. Last week NASDAQ amended the rule filing so that the disclosure must be made in the proxy statement for any shareholder meeting that elects directors, not just at annual meetings. Alternatively, the disclosure could be posted on a company’s website.

The amendment also explicitly identifies indemnification arrangements under the rule proposal’s already broad definition of compensation. Continue Reading

Davis Polk Memo – SEC Guidance on Use of Non-GAAP Measures

We have issued a memo on the recent SEC staff interpretations about the use of non-GAAP measures by companies, including the practical implication of the guidance and the effect on companies that disclose those types of metrics to investors in presentations, earnings releases and SEC filings.

Read the Full Memo > Continue Reading

Proposed Legislation on Oversight of Proxy Advisory Firms

The Proxy Advisory Firm Reform Act, introduced by  Congressman Sean Duffy (R-Wisconsin), is on the agenda for a hearing on Tuesday by the House Financial Services Committee.

Under the proposed legislation, proxy advisory firms must register with the SEC and provide information that would be made public about their procedures for advising their clients, including whether and how they consider the size of a company when making decisions. Not surprisingly because it is a constant source of criticism, the application must describe any potential or actual conflicts of interest. This includes whether they engage in consulting services and the amount of those revenues, as well as a list of their 20 largest clients and how they prevent such clients from having “undue influence.”

The registration could be denied if the SEC believes a firm does not have adequate financial or management resources to consistently deliver services “with accuracy and integrity” and to materially comply with their own procedures. Continue Reading

Dodd-Frank Update: Incentive Compensation for Financial Institutions

On Monday, May 2, 2016, the Federal Reserve and, on Friday, May 6, 2016, the SEC issued their versions of a reproposed rule to regulate incentive compensation at the financial institutions under their purview, as required by Section 956 of the Dodd-Frank Act. These issuances follow the releases in the prior weeks of the proposed rule by the National Credit Union Administration, the Federal Deposit Insurance Corporation, Office of the Comptroller of the Currency and the Federal Housing Finance Agency. We reported on the release of the proposed rule in our visual memorandum released last Monday.

As a reminder, Section 956 of Dodd-Frank generally requires that these agencies jointly issue rules that:

(1) prohibit incentive compensation that encourages inappropriate risks by certain financial institutions by providing excessive compensation or that could lead to material financial loss; and

(2) require those financial institutions to disclose information concerning incentive compensation to the appropriate federal regulator. Continue Reading

PCAOB Reproposes Standards on Critical Audit Matters, Tied to Audit Committee Communications, and Adds Tenure Disclosure to Auditors’ Reports

When it first proposed disclosure of critical audit matters in auditors’ reports back in August 2013, the PCAOB faced an outcry. Now the regulator is making a second attempt, emphasizing how its revised proposal reflects responses to public comments and additional outreach.

Under the proposal, auditors’ reports must include any critical audit matters arising from the audit, but the definition of such matters have been refined. It covers any matter that was communicated or required to be communicated to audit committees and that (a) relates to accounts or disclosures that are material to financial statements and (b) involved especially challenging, subjective, or complex auditor judgment. Continue Reading

Status of Proxy Access Shareholder Proposals, Including Binding Bylaw Proposals

At annual meetings so far this year, investors have already voted on more than 30 shareholder proposals asking companies to make proxy access rights available to shareholders who have owned 3% of common stock for at least three years, with more than 50 proposals remaining to be decided through August.  Some of these proposals have been featured at companies that already adopted bylaws providing shareholders with the right to nominate candidates at those 3%/ three-year ownership thresholds, while other proposals are being presented at companies that are adamantly opposed to proxy access in any form.

Early voting results tend to split largely along the lines of whether companies have an existing proxy access bylaw.  Continue Reading

Supplemental Proxy Filings on Say-on-Pay Do Not Affect Overall Vote Results

A recent Semler Brossy report that examined supplementary proxy materials on say-on-pay proposals since 2011 found no material impact on the vote outcome for companies that made those filings in response to a negative ISS recommendation.  The average results for companies that received an “against” recommendation and made a supplemental filing are equal to or below the results at companies that received negative recommendations and did not file additional materials.

While the number of these filings have decreased from a high of 113 in 2012 to just 38 three years later, companies continue to file them.  So far this year there has even been an increase.  Continue Reading

A Look at BlackRock’s Engagement Activity

We are in the busiest annual meeting week of the year, with 350 meetings expected to take place during this week alone, making it the appropriate time to examine how investors view voting and engagement.

BlackRock reported that it conducted 126 engagements in the first quarter of 2016 with issuers in the Americas region (U.S., Canada and Latin America), focused on corporate strategy, board composition and skills, executive compensation, bylaw amendments, as well as issues related to capital structure, executive succession planning and sustainability reporting. The first quarter tends to have lower meeting volume, and BlackRock voted at only 379 meetings in the U.S., making decisions on 3,015 proposals. Continue Reading

SEC Concept Release Considers Format and Delivery Changes for Periodic Reporting

In our prior posts here and here, we considered certain aspects of the SEC concept release that asks for comments on changes to Regulation S-K disclosure. In this last post, we look at the options to amend the way disclosure is presented and delivered.

The concept release evaluates different ways to provide information with the goal of improving the “readability and navigability” of disclosure, as well as discourage repetition and disclosure of immaterial information. Much of the focus is on how to take advantage of the Internet. This section provides the greatest opportunity for innovation, but there is a strain of caution that stems from being aware that SEC rules do not lend itself to an overhaul that would make reading SEC documents akin to perusing the Wall Street Journal. Continue Reading