Federal Securities Law Blog : Federal Securities Lawyer & Attorney : Porter Wright Law Firm : Securities Exchange Law : Serving Ohio, Washington DC, Florida

Earlier this month ISS updated its 2011 corporate governance policies, which apply to shareholder meetings held in February or later. Key updates include:

• Say on Pay Votes. ISS will recommend annual say on pay votes, but it is unclear what action ISS will take if shareholders approve biennial or triennial votes. Companies that support triennial votes often argue that approval every three years comports with a long-term approach to compensation.

• Equity Burn Rate. The cap designed to limit the dilutive effect of compensating employees with equity cannot change more than 2% from the prior year’s cap.

• Problem Pay. ISS could recommend against directors for pay practices that include repricing underwater stock options without shareholder approval, "excessive" (not defined) perks or gross-ups, and change-in-control payments that exceed three times base salary and average/target/most recent bonus or are paid without involuntary job loss.

• Absent Directors. ISS will recommend against director nominees who attend less than 75% of board and committee meetings without an acceptable reason (medical issues, family emergencies).
   

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Earlier this week, Columbus retailer Big Lots Inc. filed suit in Florida against a stock research company that Big Lots claims obtained nonpublic information about inventory, payroll, and margins.  Big Lots claims that research firm Retail Intelligence Group stole trade secrets and aided employees’ breach of fiduciary duties by inducing 72 Big Lots managers to disclose the confidential information.  Retail Intelligence Group allegedly sold the information to investors in the form of a research report, which correctly predicted decreased performance for the third quarter.

The lawsuit touches on the difficulty of defining what types of behavior should be considered illegal insider trading.  Federal securities laws (and case law) generally prohibit trading securities in breach of a duty to the issuer (or otherwise) while in the possession of material, nonpublic information.  Research firms are known to estimate inventory, converse with suppliers and customers, and engage experts on specific companies or industries, among other things, in order to predict performance.  There is a serious question as to when simply having detailed insight into the health of a corporation morphs into obtaining nonpublic information.  Federal courts have historically interpreted the term “nonpublic” to mean information that companies have not widely disseminated.

Of further concern are the implications for Regulation FD raised by this lawsuit.  Regulation FD prohibits selective disclosure to market professionals and securityholders of material, nonpublic information unless the information is simultaneously disclosed to the public.  Employees certainly cannot tip others with confidential corporate information.  But it is possible to conceive of a situation where one manager’s disclosure of non-material, non-confidential information becomes material, non-public information in the hands of a research firm that has obtained the same type of information from 71 other managers within a single corporation.

The case has garnered further attention because it comes at a time when the U.S. Government is conducting an ongoing criminal investigation of analysts and consultants who provide similar “expert network” services to hedge funds and mutual funds looking for a trading edge.
 

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