Strategically preparing for the 2016 Proxy Season by focusing on compensation, proxy disclosure, shareholder activism and proxy access will help companies put their best foot forward in their annual meetings say Latham & Watkins partners Steven Stokdyk and Jim Barrall and Georgeson Senior Managing Director Rhonda Brauer.
Where should companies start making changes to comply with the SEC’s proposed compensation rules under Dodd Frank?
Barrall: Of the four proposed rules, the clawback rules require the most immediate action. Companies should put provisions in their equity awards and equity plans that all grants made thereunder are subject to whatever clawback policies may be adopted under Dodd-Frank by the stock exchanges or otherwise adopted by the company. The proposed rules require mandatory clawbacks; however, the rules are less than clear in explaining how that happens when such matters are governed by contract law and labor laws in some states which limit the ability of employers to clawback compensation which has been unconditionally earned.
What recent developments in director compensation are causing such a ruckus, and how should companies respond?
Barrall: In the Calma v. Templeton case against Citrix Systems, the court held that that the directors’ decisions in setting their own compensation are not protected by the business judgment rule. Instead, the decisions are subject to review under the entire fairness standard, which puts the burden on the directors to prove that their compensation was entirely fair — not only in amount but also in the process by which it was determined. This is a very demanding standard and puts directors in an uncomfortable position. Approximately 10 other similar lawsuits have been filed, and they are not easy to defend.
Companies should consider putting meaningful shareholder-approved limitations on director compensation, either by having shareholders approve specific formula grants, or — more likely — approving special limits for directors under their discretionary omnibus equity plans. Companies that do not now have such limits in their plans should consider adopting them this year, as well as building a record demonstrating the entire fairness of their director compensation setting process and drafting more complete disclosure in their 2016 proxy statements about their process.
What is the main trend you are seeing in shareholder engagement?
Brauer: While we still recommend investor engagement to understand how to position your company as well as possible for your 2016 annual meetings, we are seeing increasing difficulty for companies trying to engage with their shareholders, particularly large institutional investors. Unless the company has a significant problem, such as issues with say-on-pay or shareholder proposals, or the company has long-standing relationships with some of its institutional investors, it may be very difficult to get that investor engagement. Investors need to balance increased demand for overall engagement with engaging just those companies in their portfolio that represent the most problematic issues for them.
Why is it important for companies to engage their investors once shareholder proposals have passed, particularly for proxy access?
Brauer: Although the shareholders spoke and their proposals passed, it is advantageous for companies to reach out to their investors again regarding their plans for responding. Take proxy access, for example. After the proposal passes, the company tries to figure out what to adopt and there is a great deal of detail in the proxy access bylaws to consider. By reaching out to its investors, the company will likely get divergent viewpoints, which puts its board in a better position to adopt what it thinks makes the most sense for the company. In its proxy statement, the company can disclose that it reached out to its significant shareholders, obtained different views, and detail why it chose the proxy access bylaw with which its board is most comfortable. There are other specific situations where companies should plan for additional shareholder engagement and these are detailed in the slides from the Latham & Watkins and Georgeson Webcast.
How is shareholder activism changing?
Stokdyk: Activism continues to be a white-hot area for public companies all across the spectrum. We are seeing numerous companies look at activists’ proposals and decide whether it is worth the cost benefit of spending the massive amounts of money to go through a full proxy contest. Even if the company wins, the victory will come at an extremely high price tag; if the company loses, then it will likely have to reimburse the dissidents for their expenses as well. Many companies are choosing to settle with activists, and we discuss some typical terms of settlement agreements in this webcast.
Many mainstream institutional investors are supporting activist shareholders and we are seeing a “team approach” trend in M&A activism. What we mean by this is a company already contemplating an M&A transaction considering bringing their activist investors “under the tent” to explain the rationale for the transaction and send necessary information to activists — under confidentiality agreements and no-use agreements. The company’s goal here is to gain support for potential transaction proposals from the activist investor(s), so the company can very promptly get support from some of the key institutional investors, who are often teamed with those activist investors, once the transaction is announced.