February 2005

SEC’s Open Ballot Proposal Officially Dead

The SEC’s decision to issue “no action” letters concerning shareholder proposals at Verizon, Qwest and Halliburton appears to signal the final death of the SEC proposal to grant shareholder access to the corporate proxy for the purpose of nominating directors in very limited circumstances. American Federation of State, County and Municipal Employees, a Qwest retiree association, as well pension funds in Connecticut and New York had relied on a footnote in the original proposal that allowed shareholder to submit proxy proposals to nominate directors while the agency was deliberating on final rules.

Alan L. Beller, director of the SEC’s Corporation Finance Division, wrote in the letters, “Given the passage of time since the proposal, we will not recommend enforcement action to the commission” if the companies omitted the shareholder proposals from their proxy materials.” While Donaldson remains committed to making changes to the proxy rules to give shareholders greater access, there has been absolutely no movement. (S.E.C. Rebuffs Investors on Board Votes, New York Times, 2/7/05)

Gerald McEntee, chairman of the American Federation of State, County and Municipal Employees pension plan, criticized the decision, saying that “it is disingenuous for the SEC to first establish an interim process to allow shareholders to offer advisory proxy access proposals and then take away that right because they have taken too long to make their own decision.” (SEC Allows Halliburton To Omit Proxy Proposal, Dow Jones, 2/7/05)

A press release from the $3 trillion Council of Institutional Investors laments, “Not only is the staff decision troubling, but so is the Commission’s failure to finalize a meaningful access reform. Corporate scandals continue to top the headlines, but shareowners continue to lack a cost-effective, meaningful way to influence who is nominated to represent them on corporate boards.” They urge the SEC to finalize meaningful access reform to the director nomination process. (The Council of Institutional Investors Opposes SEC Staff Decision on Shareowner-Sponsored Access Proposals, 2/7/05)

Lawsuits Expand Access

ISS reports that Ashland and Microtune settlements allow shareholder limited access to director’s nomination process. Ashland agreed to solicit director candidates from major shareholders and to nominate a qualified candidate for election to the board. Columbia professor John Coffee will serve as the arbitrator for the shareholder nomination process, and will issue a binding decision concerning any dispute arising out of the shareholder nomination process.

The Ashland pact calls for the following other significant governance provisions:

• No director can serve more than 15 years or after turning 70.
• All directors must accept at least 50% of their director fees in Ashland common stock and defer at least 50% of their director fees into hypothetical common stock units of Ashland common stock .
• Senior executives’ bonuses will be linked to achieving certain financial goals.
• The company must appoint a lead independent director.
• Directors and officers who acquire shares from the exercise of options must retain 50 percent of the net shares acquired for at least 12 months.

Shareholders of Microtune can nominate one director beginning in 2005 at the annual meeting and a second director at the annual meeting in 2006. The deal also calls for the plaintiffs’ attorney to select a corporate governance consultant, who along with a member of the board will identify potential directors. The consultant will contact every shareholder who owns at least 1 percent of the company’s stock for at least nine months and who has never been an officer or director of Microtune, to provide names of candidates.

Microtune also agreed to put forward a binding shareholder resolution to declassify the board, to set a term limit of 15 years for directors, and require all directors to attend the Vanderbilt Directors College. ISS further reports that TXU agreed to sweeping governance changes but stopped short of allowing shareholders to nominate directors. (Guest Column: Ashland Will Allow Investors to Nominate Directors, ISS Governance Report)

Hanover Compressor and Broadcom previously agreed to settlements providing limited access. Apria Healthcare voluntarily did so, without a lawsuit.

Last Minute Planning for the Proxy Season

2/8/05 webcast – “Last Minute Planning for the Proxy Season” – will feature Amy Goodman of Gibson, Dunn; Karl Groskaufmanis of Fried Frank; David Katz of Wachtell Lipton; and Michael Ullman of Johnson & Johnson. Make sure you haven’t overlooked anything this proxy season. No charge for subscribers of TheCorporateCounsel.net. Just go toTheCorporateCounsel.net for the live webcast, audio archive or transcript. The cost for non-subscribers is $295. However, if you are not a subscriber and are interested in the program, take advantage of their no-risk trial to access the program. You can sign up for this no-risk trial online, send us an email at info@thecorporatecounsel.net – or call the at 925.685.5111. Tell them you learned about the event on CorpGov.net.

Possible Shift From Plurality Vote Elections

An American Bar Association committee has been convened to examine whether provisions of the ABA’s “model” business law addressing director elections should be updated, according to a report in the Wall Street Journal. They will be looking at a provision in the model act says that: “unless otherwise provided in the articles of incorporation, directors are elected by a plurality of the votes cast by the shares entitled to vote in the election at a meeting at which a quorum is present.”

That provision, followed in most states and by the vast majority of companies, allows uncontested management nominees to be elected even with a single vote, giving shareholders little real power in an election, according to investor activists. A task force chaired by Peggy Foran, vice president of corporate governance and corporate secretary at Pfizer Inc. (PFE) and A. Gilchrist Sparks, a partner at Morris, Nichols, Arsht & Tunnell in Wilmington, Del. It will report back to the full committee at the end of March.

The Securities and Exchange Commission has made no further progress on its rule to give shareholders a right to nominate directors on a corporate proxy under certain circumstances. (ABA Task Force Opens Door To Possible Board Vote Changes, 2/4/05)

Schwarzenegger Appointees Join in Opposing Privatization

The Sacramento Bee reports that four of the governor’s six appointees on the 12-member CalSTRS board joined 10 others in voting against pension privatization legislation and embraced by Schwarzenegger. Maybe they are taking their fiduciary duty seriously.

CalSTRS, with 750,000 members and $125 billion in assets, becomes the first major California pension fund to oppose Schwarzenegger’s proposal to end guaranteed pensions for all public emplloyees in the state. Sponsors claim the measure will save taxpayers money.

Analysis by a CalSTRS consultant predicts the state and school districts would wind up paying $5.9 billion more over the next decade to fund benefits for future employees as well as to close a $23 billion long-term shortfall in the teachers’ fund. State Finance Department officials said the $5.9 billion estimate may be too high because it doesn’t account for a 17.4% stock market gain by CalSTRS last year. (Pension fund to governor – no deal, 2/4/05) In other words, because CalSTRS is doing so well, we can better afford to eliminate it.

WorldCom Settlement Crumbles

The New York Times reports that the agreement to have 10 former WorldCom directors pay $18 million from their own pockets to investors was illegal because it would have limited the directors’ potential liability and exposed the investment banks that are also defendants in the case to greater damages. The 1995 Private Securities Litigation Reform Act provides that directors involved in such a case are responsible only for their part of the fault, as determined by a jury. The New York State Common Retirement Fund and the lead plaintiff in the lawsuit, argued the amount of liability assigned by a jury to the remaining defendants should not be reduced by a percentage of blame assigned to the directors, but rather by the directors’ net worth or their ability to pay. (A WorldCom Settlement Falls Apart, 2/3/05)