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Public Banks and Proxy Advisors

the-bank-accountOn the latest episode of The Bank Account, Jonathan and I were joined by our colleague, Kevin Strachan, to discuss the role and importance of the various proxy advisory services.  Corporate governance continues to be a hot topic in the industry, and the proxy advisory services have a significant sway in determining what provisions are deemed “acceptable” by many institutional investors.

Within the podcast, we look at the two primary proxy advisory services, Institutional Shareholder Services (ISS, not to be confused with ISIS, although we have them pronounced identically by some frustrated boards) and Glass Lewis.  We look at the differences between the two services, where they’ve historically focused, and ways in which they sometimes have diminished power and sometimes enhanced power.

As with so many issues, obtaining the right corporate governance for any individual bank or holding company is not something that should simply be taken off a shelf (or off a podcast).  Instead, we encourage interested parties to engage experienced counsel, such as Bryan Cave LLP, to identify the best individualized approach for the specific situation.

You can also always follow us on Twitter.  Jonathan is @HightowerBanks, Kevin is @KevinStrachan, and I’m @RobertKlingler.

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The Financial CHOICE Act and Shareholder Engagement

The Financial CHOICE Act introduced in the House this spring has largely garnered attention because of its rollback of Dodd-Frank, but the bill would also significantly change the rules governing shareholder resolutions for public companies. Currently, the restrictions are relatively modest, requiring that investors have at least $2,000 in stock or one percent of the stock at a company in order to be eligible to file resolutions. In contrast, the CHOICE Act would limit eligibility for proposing shareholder resolutions to investors that have held at least one percent of the company’s stock for a minimum of three years. This change would drastically limit who can file resolutions, given that one percent of the shares of larger companies could translate to millions or billions of dollars.

The timing of the proposed change potentially reducing shareholder engagement contrasts with recent shareholder decisions approving shareholder resolutions, as demonstrated by votes at Occidental Petroleum and ExxonMobil. Shareholder majorities at those companies, exercising their rights as owners, required Occidental and Exxon to disclose the risks climate change poses to their businesses and how the companies are preparing to respond to those risks. Although these votes were historic, they are not entirely surprising; surveys show that investors are significantly interested in the business impact of regulation and are dissatisfied with current disclosure practices when it comes to environmental and climate change risks.  Moreover, some research shows that corporations that adopt the kinds of disclosure practices demanded by shareholders are better at managing long term risk and adapt to changes more quickly.

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SEC Adopts Pay Ratio Rule

On August 5, 2015, in a 3-2 vote, the SEC adopted the rule implementing the controversial pay ratio requirement pursuant to the Dodd-Frank Act. The rule requires companies to disclose:

  • the median of the annual total compensation of all employees, excluding the principal executive officer, or CEO;
  • the annual total compensation of the CEO (which is already required to be disclosed); and
  • the ratio of  these two amounts.

The new rule applies to companies required to provide executive compensation disclosure under Item 402(c)(2)(x) of Regulation S-K in proxy statements or annual reports on Form 10-K, as well as registration statements or other filings. Most companies are required to report the pay ratio disclosure for their first fiscal year beginning on or after January 1, 2017.

View Bryan Cave’s Client Alert on the Pay Ratio Rule.

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SEC Adopts Rules Allowing Shareholder Access to Company Proxy Materials

On August 25, 2010, the Securities and Exchange Commission voted to adopt new rules that will require companies to include in their proxy materials nominations for election as directors submitted by eligible shareholders, subject to certain conditions. The proposal was adopted by a divided 3-2 vote at an SEC open meeting. Commissioners Casey and Paredes dissented, viewing the rules as intruding on substantive corporate affairs traditionally regulated by state law.

The new rules will apply to all companies subject to SEC proxy rules, including investment companies and controlled companies, except:

  • Companies subject to such rules solely due to debt registered under Section 12 of the Securities Exchange Act of 1934; and
  • Where state or foreign law or governing documents prohibit shareholders from nominating a candidate for director.

Foreign private issuers are not covered, as they are exempt from SEC proxy rules.

The new rules will be effective 60 days after publication in the Federal Register, with shareholder access permitted no earlier than 150 days and no later than 120 days prior to the anniversary date of the mailing of prior year’s proxy materials. The rules will be available if the window remains open after their effective date. Accordingly, if the new rules were to become effective on November 1, 2010, they would apply to companies that mailed their 2010 proxy statements after March 1.

Effectiveness of the new rules will be delayed for three years for smaller reporting companies, to allow the SEC time to monitor implementation and make adjustments, if desired.

The text of the new rules is available online as is a print-friendly version of this client alert.

Executive Summary

Eligible shareholders can require a company to include one or more nominees in the company’s proxy materials, unless applicable laws or governing documents prohibit nominations by shareholders. Companies will only be required to include up to the greater of (i) 25% of the company’s directors or (ii) one nominee. The rule sets priorities in case of multiple nominations.

To be eligible, the nominating shareholder or group must, among other requirements, (i) own at least 3% of the total voting power (which may be aggregated among shareholders), (ii) have held such securities for at least three years, and continue to hold them through the shareholder meeting, (iii) not have intent to change control of the company or to gain more board seats than permitted by the rule, and (iv) not have any agreement with the company regarding the nomination.

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SEC Issues Proposed Rule Implementing TARP Say on Pay

On July 1, 2009, the SEC proposed a rule to implement the “Say-on-Pay” provisions contained in the TARP executive compensation restrictions.

The proposal would add a new Exchange Act Rule 14a-20, which would require TARP recipient to provide a separate shareholder vote to approve the compensation of their executives, as disclosed under Item 402 of Regulation S-K, in their proxy solicitations for an annual meeting at which directors are to be elected.  In addition, a TARP recipient would be required to explain the general effect of the vote, such as whether the vote is non-binding.

The SEC is not dictating the specific language, form of resolution, or proxy disclosure that a TARP recipient must use to provide shareholders with a “Say-on-Pay.”  However, footnote 14 to the Proposing Release contains an important caveat:

“However, as stated in Section 111(e)(1) of the EESA, the vote must be to approve “the compensation of executives, as disclosed pursuant to the compensation disclosure rules of the Commission (which disclosure shall include the compensation discussion and analysis, the compensation tables, and any related material).” We believe that a vote to approve a proposal on a different subject matter, such as a vote to approve only compensation policies and procedures, would not satisfy the requirements of Section 111(e)(1) of the EESA or proposed Rule 14a-20.”

The proposed rule also (i) continues to require that TARP recipients submit a preliminary proxy statement for potential SEC review; and (ii) confirms that TARP recipients that qualify as smaller reporting companies under the SEC disclosure framework may rely on the smaller reporting company disclosure requirements, and are therefore not required to provide a Compensation Discussion & Analysis.

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OTC Bulletin Board and TARP Capital

OTC Bulletin Board and TARP Capital

December 10, 2008

Authored by: Robert Klingler

The Treasury’s fourth round of completed TARP Capital infusions added four more public companies that are traded on the Over-The-Counter Bulletin Board (OTCBB): Blue Valley Ban Corp., Coastal Banking Company, Inc., Manhattan Bancorp, and Oak Valley Bancorp.  As a result, it seems clear that the Treasury is willing to allow public reporting companies that are traded over the OTCBB participate in the TARP Capital program under the public company terms.

As we’ve previously noted, the definition provided by the Treasury of a publicly traded company is “a company (1) whose securities are traded on a national securities exchange and (2) required to file, under the federal securities laws, periodic reports such as the annual (Form 10-K) and quarterly (Form 10-Q) reports with either the Securities and Exchange Commission or its primary federal bank regulator.”  While the Treasury has not defined what constitutes a national securities exchange, the OTCBB is generally not considered a “national securities exchange.”  The SEC does not consider the OTCBB to be a national securities exchange.   Neither does the OTCBB itself, which states that it is “not an issuer listing service, market or exchange.”

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New Proxy Statement Guidance

New Proxy Statement Guidance

November 25, 2008

Authored by: Robert Klingler

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.

SEC Guidance

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.

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TARP Capital Decliners and Proxy Statements

We have added two new pages to the site for banks looking to see how other bankers are handling certain TARP Capital issues.  (We’ve always found bankers prefer to listen to other bankers rather than lawyers.)

For examples of press releases of banks that have decided to publicly announce that they will not be participating in the TARP Capital program, see our TARP Capital Decliners.

For examples of proxy statements where banks have decided to seek shareholder approval to put in blank check preferred stock, see our TARP Capital Proxies.

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