On November 24, 2008, the SEC and RiskMetrics Group (previously ISS) each published new guidance for public companies seeking authorization of blank check preferred stock.
The SEC Guidance is based on the staff’s review of a number of preliminary proxy statements filed by institutions seeking to participate in the TARP Capital program. (We have provided a list of a number of such proxy statements.) The SEC guidance is designed to aid financial institutions in preparing proxy statements and provides actual comments the staff has issued in its filing reviews. For those that have not yet filed, a close review of these comments may reduce the risk of comments in the preliminary proxy process.
The SEC Guidance includes the following sample comments:
- Discuss why you plan to participate in the TARP Capital program or are considering participating.
- Disclose whether you have applied to participate in the TARP Capital program and describe the status of your application.
- Disclose the material terms of your participation in the TARP Capital program. Describe the material terms of the securities and warrants you will issue to the Treasury Department.
- Disclose the estimated proceeds of your proposed sale of securities to the Treasury Department and disclose how you expect to use them.
In addition, the SEC Guidance provides additional details regarding the pro forma financial statements that the SEC is looking for when reviewing proxy statements for blank check preferred to receive TARP Capital.
RiskMetrics Group Guidance
RiskMetrics Group, a governance service for institutional shareholders, published an article describing its perceived impacts of the TARP Capital program and a FAQ on proxy statements for participation in the TARP Capital program. While RiskMetrics’s guidance is generally only directly relevant to companies with a large proportion of institutional investors, it is a generally respected advisor on corporate governance issues. RiskMetrics has indicated that it will analyze shareholder proposals related to the TARP Capital program on a CASE-BY-CASE basis, considering the following factors:
- management’s rationale for the shares, as well as public disclosure regarding the company’s intention to participate in the TARP Capital program;
- shareholder protection measures such as “declawed” shares or a sunset provision applicable to newly-requested shares not used in connection with the TARP Capital program;
- the company’s financial situation, including share performance and capital ratios; and
- the company’s existing governance structure, including the level of board independence, existing takeover defenses, and any problematic governance concerns.
RiskMetrics advises that it will recommend a vote AGAINST any proposal for blank check preferred stock unless (i) the company can only issue such shares for purposes of the TARP Capital program or (ii) the blank check preferred has been “declawed” so that it cannot be used as a takeover defense. In order to “declaw” the blank check preferred stock, a Board of Directors will need to make a representation that it will not, without prior shareholder approval, issue any series of preferred stock for any defensive or anti-takeover purpose. Presumably, a Board can make such a representation either in the proxy statement itself or in a subsequent Form 8-K to make the representation public.
The Synovus Financial Corporation proxy statement includes the following statement:
The Board of Directors represents that it will not, without prior shareholder approval, issue any series of preferred stock for any defensive or anti-takeover purpose, for the purpose of implementing any shareholder rights plan or with features specifically intended to make any attempted acquisition of Synovus more difficult or costly. Within the limits described above, the Board of Directors may issue preferred stock for capital raising transactions, acquisitions, joint ventures or other corporate purposes that has the effect of making an acquisition of the Company more difficult or costly, as could also be the case if the Board were to issue additional common stock for such purposes.
As such a representation limits the authority of the Board to exercise its discretion in the management of the company, each Board of Directors should examine whether it wishes to make such a representation, including an analysis of whether a RiskMetrics recommendation is likely to affect the outcome of a shareholder vote.