Before the start of the U.S. proxy season, investors were expected to give significantly greater support for governance reform proposals while withholding votes from directors who presided over record losses. As the credit crisis worsened early in 2008, the attitudes of many investors appeared to shift from anger to anxiety.

Early on, it seemed that 2008 would be marked by frequent displays of shareholder discontent. Activist institutional investors, angered by the Securities and Exchange Commission’s decision in November to bar proxy access proposals, appeared ready to rally behind shareholder proposals seeking independent board chairs and advisory votes on executive pay. The SEC also frustrated activists by allowing many firms affected by the credit crisis to exclude most of their new proposals that sought compliance committees, mortgage risk reports, and better CEO succession planning.

After the labor-affiliated Change to Win Investment Group (CW) threatened “vote no” campaigns against directors at six large financial companies in January and February, it appeared that many investors would vote against board members at other financial firms and homebuilders. Democratic lawmakers joined the fray, holding a hearing in early March to denounce the generous compensation received by outgoing executives at Countrywide Financial, Citigroup, and Merrill Lynch.

However, shareholder views appeared to shift after Bear Stearns, an 85-year-old Wall Street stalwart, suddenly collapsed in mid-March. The firm, which had traded at $170 per share a year earlier, initially agreed to be sold for $2 a share to JPMorgan Chase in a government-supported bailout (JPMorgan ultimately agreed to pay $10 per share).

“Simply put, the bear market mauled the 2008 proxy season,” said Pat McGurn, special counsel for RiskMetrics Group's ISS Governance Services unit. “The collapse of Bear Stearns on the eve of the season let most of the air out of the shareholder activism balloon.”

The fall of Bear--along with soaring oil prices and falling real estate values--helped drive consumer and retail investor confidence and optimism to new depths. The TIPP economic optimism index--conducted by TechnoMetrica Market Intelligence for Investor’s Business Daily and the Christian Science Monitor--hit an all-time low in April and has continued to fall. The Yale School of Management’s Stock Market Confidence Index (the one-year outlook) for individual investors also hit its low point for the decade in April.

The season’s vote results suggest that many shareholders were more inclined to back management and refrain from supporting shareholder proposals or initiatives to unseat directors. With a few notable exceptions where compensation concerns were raised or a heavily staked hedge fund led the charge, most directors at U.S. companies were elected with wide support. While investors expressed slightly more support for “say on pay” advisory vote proposals and independent board chair resolutions, the increases were less than what some governance observers had expected at the start of the year. At six financial firms, support for “say on pay” actually declined from 2007 levels.

“People are focusing on whether there is going to be a tomorrow in the market, and not on these traditional governance issues,” James Cox, a securities law professor at Duke University, told Risk & Governance Weekly. “Some institutions may believe--given the trauma of the marketplace--that management shouldn’t be distracted by these concerns.”

Activist investors also appeared to shift their tactics after Bear’s collapse. The American Federation of State, County, and Municipal Employees (AFSCME) and two state pension funds dropped plans to sue Bear and JPMorgan over the exclusion of proxy access proposals. CtW decided to wage “vote no” campaigns at just two of its targeted six financial firms, while the AFL-CIO dropped a campaign against C. Michael Armstrong, Citigroup’s audit and risk management committee chair, after the company announced that he would leave the panel. The California Public Employees’ Retirement System, the largest U.S. public pension fund, focused its attention this year on firms outside the troubled financial and homebuilding sectors (with the exception of a “vote no” campaign at Standard Pacific).

This muted investor response was apparent at the April 8 meeting of Morgan Stanley, the first of the major Wall Street firms to hold its annual meeting. Despite a “vote no” campaign by CtW against two directors and Chairman/CEO John Mack, all the directors won at least 90 percent support, which is consistent with historic voting patterns at the firm. Several other factors may have contributed to the results. Mack is well liked on Wall Street, so many investment managers were reluctant to vote against him, CtW officials said. Most of Morgan Stanley’s writedowns stemmed from a single failed trading strategy, rather than broad exposure to mortgage-backed securities; Mack responded by firing the head of trading and replacing the chief risk officer, which helped assuage investor concerns. Duke University’s Cox also noted that Mack’s decision not to accept a bonus in 2007 also dampened potential opposition.

At most financial firms, directors received overwhelming support this year. Wachovia’s board members all received more than 92 percent support at the annual meeting, which occurred before the company reported more problems in its loan portfolio and fired its CEO in June. At Lehman Brothers, the directors all won at least 95 percent support. Bank of America also avoided an opposition campaign this year, but it may face greater scrutiny from investors in 2009 over its purchase of Countrywide. Countrywide, which was the largest U.S. mortgage lender, was targeted by labor funds late last year, but it didn’t hold a regular 2008 meeting.

At some companies, there may have been a limited response because investors didn’t learn of the full extent of their firm’s problems until after the annual meeting. Lender IndyMac and mortgage financiers Freddie Mac and Fannie Mae--whose troubles made headlines in July--faced no organized investor opposition at their meetings in May and early June and received just one shareholder proposal.

Continue reading "Preliminary U.S. Postseason Report
Submitted by: L. Reed Walton, Publications" »

Friday, July 18, 2008

Delaware Supreme Court Rejects Reimbursement Proposal
Submitted by: Ted Allen, Publications

On July 17, the Delaware Supreme Court rejected a proposed bylaw at CA Inc. that sought to require the computer software firm to reimburse dissidents for expenses incurred in successful short-slate proxy contests.

The bylaw proposal was filed by the American Federation of State, County, and Municipal Employees as an alternative to proxy access resolutions, which the Securities and Exchange Commission has allowed companies to omit. The AFSCME proposal would have required the board to reimburse successful dissidents for their “reasonable expenses” in future short-slate contests.

The case is the first time that the Supreme Court has granted a request by the SEC to rule on the legality of a shareholder proposal. Islandia, N.Y-based CA, which--like a majority of U.S. public companies--is incorporated in Delaware, asked the SEC for permission to exclude the AFSCME proposal from the proxy statement for its Sept. 9 annual meeting.

The CA v. AFSCME decision can be seen as a partial victory for investors because the Supreme Court ruled that an election-related bylaw is a proper matter for shareholder action. As Justice Jack Jacobs noted in the court’s opinion, “the shareholders of a Delaware corporation have the right ‘to participate in selecting the contestants’ for election to the board. The shareholders are entitled to facilitate the exercise of that right by proposing a bylaw that would encourage candidates other than board-sponsored nominees to stand for election.”

However, the Supreme Court went on to conclude that AFSCME’s bylaw would violate Delaware law because it would prevent CA’s board from fully exercising its fiduciary duties. While the labor union’s proposal specified that the board should award only “reasonable” expenses, Jacobs said that provision “does not go far enough because the bylaw contains no language or provision that would reserve to CA’s directors their full power to exercise their fiduciary duty to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.” The court noted that a board has a fiduciary duty to deny reimbursement in cases where a proxy contest is “motivated by personal or petty concerns” or would promote interests “adverse” to the corporation.

Following the CA decision, AFSCME said it would renew its efforts to pursue proxy access at the SEC. A short-staffed commission voted last November to allow companies to resume omitting access bylaw proposals, but SEC Chairman Christopher Cox has pledged that the agency would revisit the issue. With the U.S. presidential elections less than four months away, it’s unclear whether the SEC will tackle this controversial issue as it confronts other regulatory concerns that stem from the credit crisis.

“This decision makes Delaware less relevant to future discussions about shareholder rights, and makes a federal solution the only alternative for shareholders seeking fair and open elections,” said Richard Ferlauto, AFSCME’s director of corporate governance and pension investment. “The ball is pushed back to the SEC for when the next chairman will finally have to resolve shareowner rights to proxy access.”

J. Travis Laster, a partner with the Abrams & Laster law firm in Wilmington, Del., offered a more sanguine view of the CA decision in a posting on TheCorporateCounsel.net weblog. “Although many will likely view this as a loss for stockholders, I believe they should view the case as a significant win. Yes, the director-reimbursement bylaw was held invalid, but the court held that the election process was a proper subject for stockholder action. A bylaw mandating the inclusion of stockholder nominees on the company’s proxy statement should fare much better under a CA analysis,” he wrote.

However, Laster cautioned that the ruling would be “generally negative” for stockholder bylaws that don’t relate to elections. The court’s analysis “should doom any substantive component to a [poison] pill redemption bylaw, such as a requirement that directors not adopt or renew any pill that could be in place longer than a year,” he wrote in his posting.

The New York law firm of Wachtell, Lipton, Rosen & Katz, which represents companies and boards, hailed the CA ruling and concluded that the Supreme Court’s reasoning would preclude shareholder bylaws that would prevent boards from adopting poison pills. “The Delaware Supreme Court’s unequivocal and welcome holding should discourage further efforts by stockholder activists to erode the fundamental prerogatives of the board of directors. The opinion will hopefully signal that the courts will not permit directors to be undermined or constrained in the exercise of their fiduciary duty in the broad range of subjects traditionally within their ambit as stewards of the corporation,” the firm wrote in a memo on the case.

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Tuesday, July 15, 2008

RiskMetrics Group's Biggest Concerns Performance Update
Submitted by: Stephanie O'Neil, Marketing

With disappointing news continuing to dominate the headlines, it should not be surprising that overall company performance in the first six months of the year has been less than stellar. RiskMetrics Group’s forensic financial accounting analysts, who uncover inherent risk in companies, track a list of companies that they see as being especially concerning. As U.S. markets retreated into bear market territory in the first half of 2008, the companies included in our "Biggest Concerns List" were hit much harder than their fair share.

For an excerpt of our Biggest Concerns list performance update, please access the report here.

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Friday, July 11, 2008

2008 Proxy Review: France
Submitted by: Guillaume Tassin, French Market Analyst

With the majority of annual shareholder meetings past, the French proxy season this year was notable for a greater focus on executive pay, and more pressure from activist investors.

The Law for the Promotion of Employment, Labor, and Buying Power (TEPA), which went into effect this year, reflects the growing shareholder discontent with executive severance pay. The law was adopted partly in response to the 2006-2007 insider trading scandal at European Aeronautic Defence and Space. TEPA requires that all executive pay at listed companies--except that related to supplemental retirement benefits or non-competition agreements--must be performance-based. Performance targets must also be verified by the board of directors, according to the law, which specifically targets retirement and severance benefits.

The law expands on a 2005 measure that stipulated that the terms of any new employment agreements with company presidents, CEOs, managing directors, and deputy managing directors be subject to approval by the board and by shareholders, according to a release by Soulier, a Paris-based law firm.

According to RiskMetrics Group data, 11 of 17 companies in the CAC 40--a major French stock index--that have submitted employment agreements to a shareholder vote this year have limited total severance benefits to two times an executive’s last total pay package. Though no pay measures failed to win majority shareholder support this year, a significant number of investors opposed severance packages with a salary multiple greater than two. For instance, 20 percent of shareholders voted against an employment agreement at Alcatel-Lucent’s May 30 meeting that would provide CEO Pat Russo with a €6 million ($9.5 million) severance package. Shareholders may have disapproved of the performance targets, which allow the severance payout if the company achieves 90 percent of its target revenue and/or 75 percent of target operating profit if Russo retires in 2009. Despite this high-profile instance, such agreements are rare in France.

Despite the passage of TEPA, companies can still choose a broad range of performance criteria--ranging from easily measurable shareholder returns to such benchmarks as internal business unit performance or client satisfaction. As the law still exempts payments in the case of a change in control or provided by a non-compete agreement, French executives and directors may still walk away with large severance packages.

Continue reading "2008 Proxy Review: France
Submitted by: Guillaume Tassin, French Market Analyst" »

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Monday, July 7, 2008

Delaware Court to Hear Reimbursement Bylaw Dispute
Submitted by: Ted Allen, Publications

In a historic move, the Delaware Supreme Court has agreed to rule on the legality of a shareholder bylaw proposal at CA Inc. that would provide reimbursement for expenses incurred by successful dissidents in a short-slate proxy contest.

The court will hear arguments on the matter on July 9 in Dover. This is the first time that the Supreme Court has agreed to resolve a legal question presented by the Securities and Exchange Commission (SEC). Delaware lawmakers approved legislation in 2007 to allow the SEC to directly ask the Supreme Court to rule on disputes over shareholder proposals.

The bylaw proposal--filed by the American Federation of State, County, and Municipal Employees (AFSCME)--would require the Islandia, N.Y.-based software company to reimburse successful dissidents for their “reasonable expenses” in future short-slate contests. To qualify for reimbursement, the dissidents would have to seek less than 50 percent of the board seats, win at least one seat, and there not be cumulative voting in place. In addition, the reimbursed expenses could not exceed the sum spent by the company on that election.

Attorneys for CA asked the SEC’s Corporation Finance Division in April for permission to exclude the proposal, arguing that it is barred by SEC Rule 14a-8(i)(8), is not a proper subject for shareholder action, and could violate Delaware law. Lawyers for AFSCME’s pension plan responded by asserting that investors have broad authority under Delaware law to enact bylaws and may constrain actions by directors.

On June 27, the SEC asked the Supreme Court to rule on: 1) whether the resolution is a proper subject for shareholder action; and 2) whether the proposed bylaw would cause CA to violate any Delaware law. On July 1, the court agreed to hear the case, and directed the parties to submit briefs on the dispute by July 7.

Richard Ferlauto, director of pension and benefit policy at AFSCME, said he is encouraged that Delaware now allows disputes over shareholder proposals to go directly to the Supreme Court. In past disputes over Delaware law, investors have had to file a lawsuit in Chancery Court and then wait “months or years” for the case to reach the Supreme Court, he noted.

AFSCME has filed several short-slate reimbursement proposals as an alternative to proxy access resolutions, which the SEC allowed companies to omit this year. Reimbursement generally is not an issue in full-slate contests, as dissidents who win board control typically are able to recover proxy expenses. An AFSCME reimbursement proposal is on the ballot at computer maker Dell on July 18. A similar proposal went to a vote May 8 at Apache, which has not yet released official vote results. A reimbursement resolution received 13.9 percent support at the Houston-based oil firm in 2007.

Feraluto said he is “optimistic” about the labor fund’s chances in the CA bylaw dispute. “While a corporation has wide latitude for the actions it takes, that’s based on the premise that directors are agents of shareholders,” he said. “The corollary is that shareholders should be able to structure the procedures for nominating and electing directors.”

In a memo on the case, the law firm of Wachtell, Lipton, Rosen & Katz, which represents directors and companies, noted that Delaware law “has generally limited the ability of shareholders pursuing special interests to recover their solicitation expenses.” The firm concluded that the Supreme Court would “have a strong basis to reaffirm the traditional prerogatives of the board under Delaware law to manage the business of the corporation and decide how to spend its funds.”

The Supreme Court likely will rule on the dispute quickly. CA plans to file its definitive proxy statement by July 17 for its Sept. 9 annual meeting. This case may have broad significance for U.S. companies and shareholders, as 61 percent of New York Stock Exchange and Nasdaq-listed firms are incorporated in Delaware, according to Bloomberg News. “Whatever happens, it will be precedential,” Ferlauto said.

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Wednesday, July 2, 2008

Reincorporation proposal seeks to address “major issues in corporate governance”
Submitted by: Subodh Mishra, Governance Institute

A new shareholder proposal filed this week calls on The Hain Celestial Group to reincorporate to North Dakota in light of legislation there requiring companies to provide for an advisory vote on pay, majority voting in director elections, and other shareholder-friendly measures.

“The North Dakota law is far ahead of any other state corporation law in providing rights for stockholders,” wrote proposal proponent Kenneth Steiner in the resolution’s supporting statement. “It addresses each of the major issues in corporate governance.”

The North Dakota statute, which took effect on July 1, 2007, is among the friendliest to shareholders, according to those familiar with the resolution. The law mandates the separation of the chairman and CEO positions, annual election of directors, and the right of 5 percent shareholders owning stock for two years or more to nominate corporate directors, as well as another half-dozen or so measures widely seen as empowering shareholders.

“It’s an intriguing idea and someone was bound to do it sooner or later,” said Cornish Hitchcock, an attorney for the Amalgamated Bank’s LongView fund. “It will be interesting to see how it plays out in terms of shareholder approval.”

Advocates of the North Dakota statute believe the measure will generate measurable support among investors should it come to a vote. “I would think any shareholder who understands the benefits of the North Dakota law would support this proposal,” said William H. Clark, Jr., a Philadelphia-based attorney with Drinker Biddle & Reath.

Clark, who served as president of the North Dakota Corporate Governance Council, which drafted the statute, also noted that the law required shareholders nominating director candidates not nominated by management to be reimbursed for their proxy expenses “to the extent they are successful.” That automatic right of reimbursement for solicitation expenses has gained added import in light of the Securities and Exchange Commission’s decision late last year to bar proxy access proposals and a pending decision by Delaware’s judiciary as to whether or not a reimbursement proposal filed at Long Island-based CA would violate Delaware law.

The proposal also may fare well based on support given to other recent proposals to reincorporate to another jurisdiction. The United Brotherhood of Carpenters and Joiners of America filed proposals at a handful of Ohio-based companies’ 2007 annual meetings calling for their reincorporation to Delaware. At the time, Ohio law required companies to use a plurality voting standard, and the proposals served to eventually pressure local lawmakers to amend Ohio corporate law statutes to allow for a majority voting standard in director election. The proposal was voted on at FirstEnergy, DPL, and Convergys, according to RiskMetrics records, where it received 34.9, 32.6, and 59.5 percent support of the “for” and “against” votes, respectively.

But the view that the North Dakota reincorporation resolution will be well received by shareholders is not shared by all, with some observers arguing incorporation in Delaware is more beneficial to investors. “Ultimately, it comes down to the judiciary, and the view is that the Delaware judiciary is investor protective,” said Delaware University professor Charles Elson. “There is no corporate judiciary in North Dakota dedicated to the resolution of corporate disputes.”

That underlying premise is flawed, argues Clark, because the need to rely on the Delaware judiciary effectively concedes that the Delaware corporation law is fundamentally “not protective” of investor rights. “My preference as an investor would be to make sure the law is clear, rather than having to run to the courts to establish my rights,” said Clark. “The Delaware judiciary is limited by the statute in the rights it can provide investors. There’s no way, for example, that the Delaware judiciary could create a right of proxy access, which North Dakota has.”

Hain officials did not immediately respond to requests for comment on receipt of the resolution and whether they would seek to challenge it at the SEC. Of 17 proposals relating to reincorporation over the past decade, just three were omitted at the SEC, according to RiskMetrics records. Hain held its 2007 annual meeting on April 1 of this year and will hold its 2008 annual meeting sometime this fall.

Shareholder activist John Chevedden, who worked with Steiner on drafting and filing the proposal, said he had so far not engaged in any dialogue with the company on governance concerns. Chevedden also said he will be looking into filing the proposal at other companies as deadlines approach for submissions for 2009 annual meetings.

To view the proposal, please Download file.

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Tuesday, June 24, 2008

Sovereign Wealth Funds and Emerging Governance Issues
Submitted by: Subodh Mishra, Governance Institute

Although they have been in existence for decades, sovereign wealth funds have found themselves in the spotlight in recent months. While much of the recent attention given to these funds has focused on the political implications of their investment, sovereign funds’ impact on fellow shareholders has received scant coverage. Indeed, their growing presence has sparked discussion within the global institutional investor community on how best to define, understand, interact, and potentially influence these funds.

As such, RiskMetrics Group's new report, Sovereign Wealth Funds & Emerging Governance Issues, is intended to: (1) provide an overview of sovereign wealth funds; (2) identify key and emerging issues of interest to institutional investors; and (3) explore potential solutions to concerns related to the transparency practices of sovereign investors.

Key takeaways from the paper include the following:

* Sovereign wealth funds are firmly established. There are now roughly 40 such funds—half of which came into being since 2000—collectively managing assets in the range of $1.9 to $2.9 trillion. Macroeconomic trends, including a weak U.S. dollar, tightening of credit, growth in commodity prices, and market volatility suggest that sovereign investment, and its influence, will only grow.

* Traditional institutional shareholders are seeking to understand the investment objectives and strategies of these potential power brokers. The International Monetary Fund is now involved in consultations with more than two dozen sovereign wealth funds in an effort to develop a code of conduct for their transparency, and market regulators across the globe are considering guidelines for disclosure and related issues. Mainstream investors will wish to monitor and potentially influence these efforts.

* There are concerns that sovereign funds will primarily be “disengaged” investors in equities. Some traditional investors have suggested that they will ride the coattails of other shareholders who press underperforming management for change through governance activism; or that their proclivity for non-voting stakes could help to entrench or otherwise insulate underperforming management.

* Substantial investment from sovereign funds could lessen pressure on governments and corporations in developing economies to raise corporate governance standards in such markets.

* Sovereign wealth investors with long-term investment horizons may serve as a stabilizing force in the market, however. Most are not bound by the constraints of many traditional investors who may have to withdraw capital on short notice for income or liquidity needs. Moreover, sovereign investors have demonstrated their willingness and ability to expeditiously shore up the capital base of distressed companies.

* There is no standard disclosure model for sovereign wealth investors. But some sovereigns may be more comfortable with disclosure models other than that of Norway’s fund—widely viewed as the gold standard for transparency—and traditional institutional investors may wish to promote alternatives such as Temasek’s approach to transparency. Temasek, a Singapore-based fund, is an active investor disclosing key investment objectives and strategies though does not disclose its full portfolio or voting record.

* Pressure from lawmakers and regulators for sovereign investors to meet elevated standards of disclosure could have unintended consequences. Such pressure might lead to the funds avoiding direct investment in corporate issuers and allocating more of their capital to private equity and hedge funds, potentially leading to greater acquisition activity and proxy fights.

To access RiskMetrics new paper, Sovereign Wealth Funds and Emerging Governance Issues, please visit here.

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Friday, June 13, 2008

CSX Proxy Fight Preview
Submitted by: L. Reed Walton, Publications

Questions of shareholder value, board competency, and transparency continue to drive the high-profile proxy contest between rail company CSX and two hedge funds.

The Children’s Investment Fund (TCI), a London-based equity group, and Cayman Islands-based 3G Capital Partners say they’re seeking board seats because CSX has refused to engage in dialogue about the firm’s business model. Together, TCI and 3G own 8.7 percent of the Jacksonville, Fla.-based company, and have an additional 12.3 percent stake through stock swaps.

The June 25 proxy contest will be the 30th challenge to go to a vote at a U.S. company this year. The fight for CSX has received the most media attention after Carl Icahn’s proxy bid at Internet firm Yahoo!, which is slated for an Aug. 1 vote. TCI’s decision in December to seek five seats on CSX’s 12-member board has led to a war of words in the press, legal actions on both sides, and even Congressional hearings.

The dissident slate includes TCI Managing Partner and founder Chris Hohn; Gilbert Lamphere, a former director at Canadian National; Timothy O’Toole, managing director of the London Underground subway system; Gary Wilson, former board chair at Northwest Airlines; and Alexandre Behring, managing director at 3G and former CEO of Latin American rail company America Latina Logistica. TCI aims to replace the four longest-tenured directors: Elizabeth Bailey (18 years); Robert Kunisch (17 years); William Richardson (15 years); and Frank Royal (14 years). The fifth targeted director, Jacksonville-based contractor Steven Halverson, has only one year of board service; TCI contends that he lacks experience with both CSX and with railroad management.

Hohn said his fund, which is CSX’s second-largest shareholder with a 4.4 percent stake, has tried unsuccessfully for over a year to engage the firm in a productive dialogue about the company’s future. The proxy contest was a last resort, but “it is impossible for us to effect the change we see as possible if we don’t change the board,” Hohn told Risk & Governance Weekly.

Though Hohn has said repeatedly that his dissident slate does not want to take over the company or oust management, CSX Chairman and CEO Michael Ward told Financial Week on May 21 that the proxy contest is specifically aimed at removing him. CSX maintains that it repeatedly agreed to meet with TCI representatives and offered board seats, lead director Ned Kelly said at a June 9 forum hosted by RiskMetrics Group.

Since its founding in 2003, TCI has sought to find “great companies with underperforming shares,” and attempt to engage with directors to turn performance around, Hohn said at the June 9 forum. TCI has a history of prompting action at its portfolio companies, recently catalyzing board and management change at German stock exchange holding company Deutsche Börse and bringing about the sale of Dutch financial firm ABN Amro to a consortium of European banks.

CSX, the third-largest U.S. railroad, argues that it does not need a turnaround. The company’s share price has risen more than 270 percent since January 2004. TCI counters that most of the stock gains stem from rising prices and productivity in the rail industry as a whole, rather than just at CSX. North America’s largest railroad companies have all posted stock price growth during the same period--Union Pacific (131 percent), Norfolk Southern (185 percent), Burlington Northern Santa Fe (257 percent), and Canadian National (154 percent)--though none as pronounced as CSX’s share gain.

Continue reading "CSX Proxy Fight Preview
Submitted by: L. Reed Walton, Publications" »

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Friday, June 6, 2008

RiskMetrics Group to Hold Governance Forum Webcast on the Proxy Contest at CSX Corporation

On Monday, June 9 at 11 a.m. EDT, RiskMetrics Group will host a special Governance Forum on the proxy contest being waged at CSX Corporation. On this webcast, executives from both CSX Corporation and the dissident shareholders, The Children’s Investment Fund (TCI) and 3G Capital Partners, will make their cases for their respective slates. The Jacksonville, Florida-based railroad operator’s annual meeting is June 25, 2008.

Christopher Young, head of M&A Research for RiskMetrics Group, will moderate the forum, which will run two hours in order to provide both sides with ample time to speak and field questions from the audience. To register for this governance forum, please visit here.

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Tuesday, June 3, 2008

Proxy Season Preview: Japan
Submitted by: Marc Goldstein, Director of Governance Research-Japan

“Poison pills” and other takeover defenses will once again dominate the agenda at Japan’s corporate meetings this year.

The vast majority of Japanese companies hold their shareholder meetings over a two-week period in late June. This year, the largest number of annual meetings will take place on June 27--when companies such as beauty products firm Kao, electronic manufacturer TDK, and Mitsubishi UFJ Financial Group will hold meetings--although many will be held on June 18-20, and June 24-26. A few meetings, such as those at electronics firm Idec and construction toolmaker Trusco Nakayama, will be held as early as the week of June 9.

The most controversial issue this year will again be the introduction and renewal of various types of anti-takeover measures. In the wake of takeover attempts at Hokuetsu Paper, Bull-Dog Sauce, and Sapporo Holdings, and the belated legalization in May 2007 of stock-swap acquisitions by foreign firms (called “triangular mergers”), many Japanese firms are in a state of near-panic over the possibility of being acquired.

Their fears may be overblown, however. Triangular mergers are used overwhelmingly for friendly acquisitions, not hostile takeovers; and the difficulties of successfully managing a company after a hostile acquisition will help to ensure that the number of such cases will be limited. Also, some of the firms implementing pills are not especially vulnerable, because founding families, business partners, or other insiders own more than a third of outstanding shares. This is enough to veto any special resolution, such as an article amendment or a merger, severely limiting what a hostile bidder could hope to accomplish.

Nevertheless, several hundred companies will introduce or renew pills this year. One in seven Japanese companies likely will have a pill in place by the end of June. Since 2006, the vast majority of poison pills have been so-called “advance warning-type” plans. With these pills, the board announces a set of disclosure requirements it expects any bidder to comply with, plus a waiting period between receipt of information and the bid, before any offers are made. Advance warning defenses do not require shareholder approval, but in most cases, companies are choosing to put them to a shareholder vote, believing that doing so will put the company in a stronger position in the event of a lawsuit. As long as the bidder complies with the rules, the company “in principle” will take no action to block the bid, but will allow shareholders to decide.

Exceptions are usually allowed when the bid is judged to be clearly detrimental to shareholder interests. These include cases involving “greenmail” (when the bidder buys enough shares to threaten a takeover and forces the company to buy the shares back at a premium to avoid a buyout), a possible stripping of company assets by the bidder, or coercive two-tier offers. Usually, judgments on shareholder harm are made by a “special committee” or “independent committee,” which may or may not include members of the board, but the committee’s decision is usually subject to being overruled by the board. At some companies, the decisions are made by the board with no committee input at all.

Many of the poison pills introduced in the past few years will be up for renewal in 2008. Shareholders at Shin-Etsu Chemical and Sharp, for example, will vote on takeover defense renewals this year. Some companies, while not putting a poison pill on the ballot, will seek to pave the way for the eventual introduction of a pill through measures such as increasing authorized capital. Investors also will be asked to approve other article amendments designed to ward off hostile takeovers, such as the elimination of vacant board seats that could be filled by shareholder nominees, and the tightening of procedures for removing a director from office.

Continue reading "Proxy Season Preview: Japan
Submitted by: Marc Goldstein, Director of Governance Research-Japan" »

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