We are sending this alert to public companies incorporated in Pennsylvania to assist them in planning for their 2009 annual meetings. In addition to discussing the relevant provisions of Pennsylvania law, we also highlight certain aspects of federal law applicable to proxy statements of which public companies should be aware. We are available to respond to any questions that you may have regarding the matters discussed in this alert or more generally in connection with your annual meeting.

Proxies and electronic voting

Shareholders in public companies traditionally have voted their shares using a proxy card. In recent years, the technology to permit shareholders to vote via the Internet or telephone has become increasingly available and utilized by many public companies. This practice is expressly contemplated by the Pennsylvania Business Corporation Law (BCL).

Under BCL § 1759(b), a proxy must be executed or authenticated by the shareholder 1 or by the shareholder’s authorized attorney-in-fact. This may be done (i) in writing or (ii) electronically if the transmission sets forth a confidential and unique identification number or other mark furnished by the corporation to the shareholder for the purposes of a particular meeting. BCL § 1702(a) also permits notices of shareholder meetings to be given by e-mail or other means of electronic communication if the shareholder has given the corporation an address for that purpose. Prior to sending notices by e-mail or other means of electronic communication, companies should ensure that their bylaws permit this practice.

While the BCL requires a corporation to give notice of each shareholder meeting, it does not require that public companies supply shareholders with a proxy statement or annual report. Those documents, instead, are furnished to shareholders because they are required by the rules of the Securities and Exchange Commission (SEC). This distinction is important and accounts for significant and subtle differences between the required treatment of notices and proxy statements.

The formal notice of a shareholder meeting required by the BCL is typically bound with the company’s proxy statement as its first page. Although that notice may now be given electronically under the BCL, it is not sufficient for a company just to post the notice on its website along with the accompanying proxy statement. To satisfy the BCL requirement of notice, we recommend that when a company sends out its e-mail message to shareholders informing them that the proxy statement and annual report are available on its website that it include in the e-mail a notice of the annual meeting that satisfies the notice requirements of the BCL. Similarly, although the rules of the SEC permit socalled “householding” of proxy statements and annual reports in which multiple copies of those documents are not sent to shareholders having the same address, the BCL does not permit householding of the notice of a shareholder meeting, so separate e-mails are necessary.

Companies must also be mindful of the interconnection between the BCL requirements of notice and the SEC’s new e-proxy rules. In 2007, the SEC adopted its e-proxy rules, which generally require public companies to post their proxy materials via the Internet. Last year, large accelerated filers were required to implement these new rules. This year, all reporting companies are subject to the rules. Under the e-proxy rules, all reporting companies must post a complete set of proxy materials on a website (other than IDEA/ EDGAR) and provide notice of the availability of these proxy materials to its shareholders. Public companies generally have two choices for complying with the e-proxy rules: “notice and access” or “full set delivery.” Under the notice and access model, the company sends a Notice of Internet Availability of Proxy Materials drafted in accordance with Proxy Rule 14a-16 to its shareholders. The company would not mail its proxy materials to its shareholders. Instead, the Notice of Internet Availability of Proxy Materials would direct shareholders to a website where the proxy materials may be accessed. A company electing the notice and access model is required to send the Notice of Internet Availability of Proxy Materials to its shareholders within 40 calendar days before the shareholder meeting. This method is designed to allow companies to take full advantage of electronic delivery methods available to companies.

Under the e-proxy rules, the Notice of Internet Availability of Proxy Materials may only contain the information specified in Proxy Rule 14a-16 and it must be sent separately from other types of shareholder communication, including the form of proxy. The SEC, however, does permit companies to modify the Notice of Internet Availability of Proxy Materials to include additional information required to be included in a notice of shareholder meeting under state law or to include with the Notice of Internet Availability of Proxy Materials a copy of any notice of shareholder meeting required under state law if that notice is not combined with the Notice of Internet Availability of Proxy Materials. While the Notice of Internet Availability of Proxy Materials may be householded, a notice of a shareholder meeting under the BCL may not. Thus householding the Notice of Internet Availability of Proxy Materials would not be sufficient under the BCL.

Under the “full set delivery” method, companies will continue to mail paper copies of their proxy materials to their shareholders as they have done in the past, but must include additional language in its proxy materials regarding the availability of proxy materials on the Internet. This method does not require a company to substantially alter the current is important and accounts for significant and subtle differences between the required treatment of notices and proxy statements. The formal notice of a shareholder meeting required by the BCL is typically bound with the company’s proxy statement as its first page. Although that notice may now be given electronically under the BCL, it is not sufficient for a company just to post the notice on its website along with the accompanying proxy statement. To satisfy the BCL requirement of notice, we recommend that when a company sends out its e-mail message to shareholders informing them that the proxy statement and annual report are available on its website that it include in the e-mail a notice of the annual meeting that satisfies the notice requirements of the BCL. Similarly, although the rules of the SEC permit socalled “householding” of proxy statements and annual reports in which multiple copies of those documents are not sent to shareholders having the same address, the BCL does not permit householding of the notice of a shareholder meeting, so separate e-mails are necessary.

Companies must also be mindful of the interconnection between the BCL requirements of notice and the SEC’s new e-proxy rules. In 2007, the SEC adopted its e-proxy rules, which generally require public companies to post their proxy materials via the Internet. Last year, large accelerated filers were required to implement these new rules. This year, all reporting companies are subject to the rules. Under the e-proxy rules, all reporting companies must post a complete set of proxy materials on a website (other than IDEA/ EDGAR) and provide notice of the availability of these proxy materials to its shareholders. Public companies generally have two choices for complying with the e-proxy rules: “notice and access” or “full set delivery.” Under the notice and access model, the company sends a Notice of Internet Availability of Proxy Materials drafted in accordance with Proxy Rule 14a-16 to its shareholders. The company would not mail its proxy materials to its shareholders. Instead, the Notice of Internet Availability of Proxy Materials would direct shareholders to a website where the proxy materials may be accessed. A company electing the notice and access model is required to send the Notice of Internet Availability of Proxy Materials to its shareholders within 40 calendar days before the shareholder meeting. This method is designed to allow companies to take full advantage of electronic delivery methods available to companies.

Under the e-proxy rules, the Notice of Internet Availability of Proxy Materials may only contain the information specified in Proxy Rule 14a-16 and it must be sent separately from other types of shareholder communication, including the form of proxy. The SEC, however, does permit companies to modify the Notice of Internet Availability of Proxy Materials to include additional information required to be included in a notice of shareholder meeting under state law or to include with the Notice of Internet Availability of Proxy Materials a copy of any notice of shareholder meeting required under state law if that notice is not combined with the Notice of Internet Availability of Proxy Materials. While the Notice of Internet Availability of Proxy Materials may be householded, a notice of a shareholder meeting under the BCL may not. Thus householding the Notice of Internet Availability of Proxy Materials would not be sufficient under the BCL. Under the “full set delivery” method, companies will continue to mail paper copies of their proxy materials to their shareholders as they have done in the past, but must include additional language in its proxy materials regarding the availability of proxy materials on the Internet. This method does not require a company to substantially alter the current method in which it delivers proxy materials to its shareholders.

We recommend that companies evaluate each year whether the notice and access model or the full set delivery model is preferable. This evaluation may include the cost of implementing the notice and access model versus retaining the full set delivery method, and the ability of the company to meet the 40 calendar day notification required by the Proxy Rules, which is substantially more time than currently required under the BCL.

Quorum and vote requirements

Quorum

BCL § 1756(a) provides that, unless the articles or a bylaw adopted by the shareholders provides otherwise, the presence, in person or by proxy, of the holders of a majority of the votes that all shareholders are entitled to cast on a particular matter to be acted upon at a meeting will constitute a quorum for purposes of consideration and action on that matter.

Election of directors

Unless otherwise provided in the articles or bylaws for the election of directors, BCL § 1758(b) provides that the candidates for election as directors receiving the highest number of votes cast (known as a plurality) up to the number of directors to be elected will be elected. Plurality voting is why the typical proxy card does not provide for a vote against a director or an abstention since only the number of votes cast for each candidate is relevant. Plurality voting is also why management should never go into a meeting with proxies that authorize votes for a number of candidates that is less than all of the open board seats, unless the corporation has a valid and applicable bylaw requiring advance notice of nominations. Otherwise, any shareholder present at the meeting will be able to nominate a candidate who may be able to win election just on the basis of the number of votes cast at the meeting. If it is intended to reduce the size of the board in connection with the annual meeting, that action should be taken before the convening of the meeting.

Even though plurality voting is the default rule in Pennsylvania, the recent trend for reporting companies to implement majority voting for election of directors has been well publicized. Many companies have either implemented a “majority of the votes cast” provision or in some cases, a “majority of the outstanding vote” provision. For companies that have a majority of the outstanding vote provision, particular attention must be paid to the treatment of abstentions under the BCL, described more fully below. We note that broker “non-votes” (also described below) should not have an impact for majority voting for election of directors in the absence of a contest, because election of directors is a routine matter for which brokers are permitted to vote without instruction from the beneficial owner.

Action on other matters

For most other shareholder actions, BCL § 1757(a) provides generally that action at a properly convened shareholders meeting requires only the affirmative vote of a majority of the votes cast at the meeting. BCL § 1103 provides that recording an abstention or failing to vote on a matter does not constitute “casting a vote.” For certain types of shareholder action, a company’s articles or bylaws, the rules of the New York Stock Exchange, or other exchanges or markets may establish various higher vote requirements.

Broker “non-votes” and abstentions

If shares are held for a shareholder by a nominee or in “street name,” a broker is permitted by applicable New York Stock Exchange or NASDAQ rules to vote the shares on certain routine issues (such as the election of directors in the absence of a contest and approval of auditors) if no instructions are received from the beneficial owner The broker, however, is not permitted to vote on more significant issues. If no instruction is received on an issue on which a broker is not authorized to act without instruction, a so-called broker non-vote results on that issue if the broker returns a proxy for the shares involved.

To deal with the problem that broker non-votes could create when establishing the presence of a quorum, BCL § 1756(a)(4) provides that if a proxy votes shares on any issue other than a procedural motion, the shares will be considered present at the entire meeting for all quorum purposes. Thus, shares voted by a broker on any issue will be considered present for each matter to be voted upon even if the shares are not voted on every matter.

An abstention or failure to vote, which would include a broker non-vote, is not equivalent to a negative vote. BCL § 1103 provides that “voting” or “casting a vote” does not include recording the fact of abstention. Since the required vote on matters other than election of directors is generally a majority of the votes cast, abstentions and broker non-votes do not have an impact under the BCL on approval of actions at a shareholder meeting once a quorum has been established.

If the vote required is a majority or other percentage of all the votes entitled to be cast, the effect of an abstention or a broker non-vote will be the same as a vote against the proposal because an absolute percentage of affirmative votes is required, and neither a negative vote nor an abstention or broker non-vote is an affirmative vote.

Item 21(b) of Schedule 14A of the Proxy Rules requires the proxy statement to disclose the treatment and effect of broker non-votes under state law, and questions frequently arise as to the proper disclosure of the effect of broker non-votes on vote requirements. In light of the differing impact that abstentions and broker non-votes will have on specific proposals, companies must pay particular attention to their disclosures in their proxy statements in order to adequately inform their shareholders as to how a vote, abstention or broker non-vote will be treated at a meeting, which may require a tailored disclosure for each proposal included in the proxy statement.

It should also be noted that both Form 10-K and Form 10-Q require disclosure of the results of each matter voted upon by the shareholders during the prior quarter, broken down in the number of votes cast for, against or withheld, as well as the number of abstentions and broker non-votes as to each matter.

Deadlines for shareholder proposals

Proxy Rule 14a-5(e) requires the proxy statement to disclose “under an appropriate caption,” (i) the deadline for submitting shareholder proposals for inclusion in the proxy statement and proxy card for the next annual meeting “calculated in the manner provided in Rule 14a-8(e) (Question 5),” and (ii) the deadline after which submission of a shareholder proposal will be untimely, calculated as provided in Proxy Rule 14a-4(c)(1) or under an applicable advance notice provision.

Inclusion in Proxy Statement and Proxy Card

If a shareholder proposal is submitted for inclusion in the proxy statement and proxy card for a regularly scheduled annual meeting, Proxy Rule 14a-8(e) (Question 5) provides that it must be received by the company at its principal executive office at least 120 calendar days before the first anniversary of the date of the proxy statement for the prior year’s annual meeting.

Presentation at the Annual Meeting

A shareholder may opt not to submit a proposal for inclusion in the proxy statement and proxy card, but may still want to present the proposal at the meeting itself. The shareholder will be able to do so unless the company has a provision in its bylaws (or articles) requiring the shareholder to give the company advance notice of the proposal. BCL § 1758(e) provides that an advance notice bylaw is valid if the procedure it imposes is “fair and reasonable.”

Proxy Rule 14a-4(c)(1) provides that a proxy may confer discretionary authority to vote on shareholder proposals at an annual meeting if the company did not have notice of the proposal at least 45 days before the first anniversary of the date of mailing of the proxy statement for the prior year’s annual meeting and a specific statement to that effect is made in the proxy statement or form of proxy. A proxy may also confer discretionary authority to vote on any matter that the company does not have notice of by the date specified for receipt of notice in an advance notice bylaw.

As a result of these rules, if a company has an advance notice bylaw that requires notice earlier than the 45 day period required under Proxy Rule 14a-4(c)(1), the company only need disclose that deadline in its proxy statement. If the company does not have such an advance notice bylaw, the company will need to disclose the 45 day deadline for submission of proposals. In light of the fact that Proxy Rule 14a-4(c)(1) does not prevent shareholders from presenting a proposal at an annual meeting even if a company did not receive advance notice of the proposal, companies should strongly consider adopting an advance notice bylaw.

We recommend that all publicly traded Pennsylvania corporations adopt advance notice bylaws. In addition, we urge companies that currently have such provisions to review periodically their advance notice bylaws. In the past year, we have seen an increase in the activity surrounding the efficacy and adequacy of advance notice bylaws. Last spring two Delaware Chancery Court cases, Levitt Corp. v. Office Depot, Inc. and Jana Master Fund, Ltd. v. CNET Networks, Inc. allowed dissident shareholders to introduce at the annual meeting proposals that the companies did not think complied with their advance notice bylaws. These cases remind companies that such provisions need to be carefully thought through and applied, since if they do not work as expected, it can become difficult for the company to effectively respond to a proposal. Companies should also consider whether to require any shareholder seeking to make a proposal or to have its representatives placed on the board to disclose any hedged positions or derivative securities they have in the company’s stock, which allows the company, and the other shareholders, to better assess a dissident shareholder’s overall investment in the company.

Conduct of a shareholder meeting

BCL § 1709 imposes an express requirement that there be a presiding officer at every shareholder meeting. Except as otherwise provided in the bylaws, the presiding officer has express statutory authority to determine the order of business and to establish rules for the conduct of the meeting.

Postponements and adjournments

In some circumstances, a company may consider postponing or adjourning an annual meeting. In doing so, a company must consider whether this would be permissible under Pennsylvania and federal law. BCL § 1755 provides that “[e]xcept as otherwise provided in the articles, at least one meeting of the shareholders shall be held in each calendar year for the election of directors at such time as shall be provided in or fixed pursuant to authority granted by the bylaws.” BCL § 1755 states further that “[i]f the annual or other regular meeting is not called and held within six months after the designated time, any shareholder may call the meeting at any time thereafter.” BCL § 1792(a) allows a court to summarily order the annual meeting when failure to hold the meeting “has continued for thirty days after the date designated or appropriate therefor.”

If a company designates a meeting date and time, it has the right to either advance or delay the date, so long as it satisfies the notice requirements and record date requirements of the BCL.4 In doing so, companies must be aware that such action could be seen as an attempt to “disenfranchise the vote.” There is Pennsylvania case law, most notably Jewelcor Management, Inc. v. Thistle Group Holdings, Co. (2002 Phila. Ct. Com. Pl. Lexis 79), to this effect. In Jewlcor, the court stated, “[a] corporation’s board of directors acts improperly when it manipulates a corporate election to perpetuate its own control of the corporation.” Id. at 10.

Companies may also consider adjourning an annual meeting until a later date. BCL §2522 (within chapter 25 relating to Registered Corporations) allows adjournment “for such period as the shareholders present and entitled to vote shall direct.” This section generally precludes the chairperson from adjourning a shareholder meeting without a shareholder vote. If a company is considering the option of adjourning a convened meeting or anticipates an adjournment may be necessary, it should specifically request discretionary authority to adjourn in its solicitation of proxies. The SEC Staff takes the position that if the proxy statement authorizes discretion only on “other matters,” that is not sufficient to give the proxies authority to vote for adjournment. The proxy card would need a separate voting item for adjournment with an accompanying disclosure in the proxy statement. 5Adjourning the meeting after conducting some business, but before voting on controversial items, may also implicate Jewelcor as discussed above.

Proxy statement disclosure

The disclosure required in proxy statements is largely unchanged from last year. Nevertheless, we note a few changes and areas to which companies should pay particular attention this proxy season.

Audit Committee Reports

In September 2008, the SEC approved a technical amendment to Item 407(d)(3) of Regulation S-K relating to the Audit Committee Report. The amendment replaces a reference to Independence Standards Board Standard No. 1, which was previously adopted as an interim standard, with the applicable requirements of the PCAOB’s Ethics and Independence Rules. The new rule requires the Audit Committee to now state that it “has received the written disclosures and the letter from the independent accountant required by applicable requirements of the Public Company Accounting Oversight Board regarding the independent accountant’s communications with the audit committee concerning independence, and has discussed with the independent accountant the independent accountant’s independence.”

D&O Questionnaires

In 2008, there were only modest changes affecting D&O questionnaires. In August 2008, the SEC approved amendments to the NYSE and NASDAQ listing standards providing that a director is not independent if he or she receives more than $120,000 (previously $100,000) in compensation from a company during any 12-month period in the last three years. In addition, the NYSE revised its independence standards to exempt a director having an immediate family member serving as an employee (not a partner) of a company’s independent registered public accounting firm, provided that the family member does not personally work on the company’s audit.

Executive Compensation Disclosure

Shareholder concerns regarding executive compensation and corporate governance practices have heightened due to deteriorating market conditions. In drafting Compensation Discussion & Analysis (CD&A) section, companies must be prepared to carefully assess and analyze their compensation policies and be able to adequately justify their compensation policies. Companies should pay particular attention to executive bonuses, performance based compensation decisions, golden parachutes and other compensation practices that have come under intense scrutiny over the past year as a result of economic conditions. The CD&A should include a discussion if the company took any compensation action due to the economy, such as freezing salaries, modifying or waiving performance targets, modifying awards or plans or repricing or replacing existing options or other equity awards.

Other proxy statement and shareholder meeting issues involving Pennsylvania and federal law may arise. We are available to consult with you on any of the matters discussed above, to review the disclosures in your proxy statement, Form 10-K and annual report, and to answer any questions you may have concerning Pennsylvania and federal law as they apply to your proxy statement, proxy card and annual meeting.