Broker Discretionary Voting

Posted on July 31, 2009 by Robert J. Tannous

On July 1, 2009, the SEC approved a proposed rule change to amend NYSE Rule 452 and Section 402.08 of the NYSE Listed Company Manual to eliminate broker discretionary voting for the election of directors. The amendment will be in effect for all elections of directors held at stockholder meetings held on or after January 1, 2010. Note that the amendment does not apply to a stockholder meeting that was originally scheduled to be held prior to January 1, 2010, but was properly adjourned to a date after January 1, 2010.

Under the current NYSE Rule 452, the election of directors was considered a "routine" matter, which allowed brokers to vote on such matter if the broker did not receive specific voting instructions from the beneficial owner within ten days of the stockholder meeting. The elimination of the election of directors as "routine" matters could have an impact where companies have adopted majority vote provisions or where companies are targets of "just vote no" or "withhold" campaigns.

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Cuban Insider Trading Case Dismissed

Posted on July 20, 2009 by Jack J. Gravelle

On Friday the Federal District Court in Dallas dismissed the SEC’s insider trading case against Dallas Mavericks owner Mark Cuban. Cuban was accused of selling stock in an internet search company (Mamma.com) on the basis of material nonpublic information in breach of a confidentiality agreement. The Company was about to issue additional stock that was expected to decrease the stock price and dilute current owners.

Several commentators viewed the SEC’s position with skepticism, including five law professors who filed amici curiae on behalf of Mr. Cuban. The district judge agreed and ruled that promising to keep information confidential is not the same as promising not to trade on the basis of such information. Cuban only promised the former, and such a promise alone does not create a duty between Cuban and Mamma.com sufficient to amount to insider trading if such a duty is breached. If there was no duty, there can be no breach, and Cuban is not guilty of insider trading unless the SEC can allege new facts to establish the duty.
 

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New SEC Executive Compensation Proposal Requires More Than Just Additional Disclosures

Posted on July 10, 2009 by Jack J. Gravelle

The SEC has released a new rule proposal for executive compensation disclosures for next proxy season. In broad strokes, the proposal calls for disclosing information about “the relationship of a company’s overall compensation policies to risk, director and nominee qualifications, company leadership structure, and the potential conflicts of interests of compensation consultants.” All these items seem like things a shareholder would want to know about.

But, as the SEC lays out the arguments for the new rules in the release, it becomes clear that the Commission is concerned with more than just accurate disclosure of compensation. The SEC is also apparently interested in influencing issuer behavior and changing the way issuers compensate.

For example, on page 8 of the release, the Staff explains that there is a concern that “compensation policies have become disconnected from long-term company performance because the interests of management and some employees, in the form of incentive compensation arrangements, and the long-term well-being of the company are not sufficiently aligned.” The SEC’s solution is a requirement for new disclosures about “how a company’s overall compensation policies for employees create incentives that can affect the company’s risk and management of that risk.”

One interpretation of this requirement is the SEC just wants shareholders to know how companies think about risk when they compensate employees. A more meddlesome interpretation is that the SEC wants issuers to stop using compensation to create short-term incentives that don’t benefit the company in the long-term.  But, whether an issuer's compensation system is good or bad is theoretically the kind of thing that can be decided by shareholders, as long as they have full disclosure.

The tacit message from the SEC’s language is more than just a request for information about risk, but rather a push for new compensation schemes, which is not in the SEC’s job description.
 

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