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SEC: Severance Agreements Alleged to Violate Dodd-Frank Whistleblower Rule

Earlier today, the SEC settled charges with BlueLinx Holdings (NYSE:BXC) for its use of severance agreements that required employees leaving the company to relinquish their rights to file charges or complaints with the SEC or other federal agences in order to receive their severance payments and other post-employment benefits in violation of Dodd-Frank's whistleblower Rule §21F-17, which provides:

No person may take any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement…with respect to such communications.

In June 2013, BlueLinx amended its severance agreements to provide:

Employee further acknowledges and agrees that nothing in this Agreement prevents Employee from filing a charge with...the Equal Employment Opportunity Commission, the National Labor Relations Board, the Occupational Safety and Health Administration, the Securities and Exchange Commission or any other administrative agency if applicable law requires that Employee be permitted to do so; however, Employee understands and agrees that Employee is waiving the right to any monetary recovery in connection with any such complaint or charge that Employee may file with an administrative agency. (Emphasis added.)

The company agreed to pay a $265K penalty, amend its severance agreements, and make reasonable efforts to inform former employees who entered into the non-compliant severance agreements.

Appeals Court Upholds Constitutionality of SEC's Administrative Proceedings

Yesterday, in Raymond J. Lucia Cos. v. SEC, a three-judge panel of the US Court of Appeals for the DC Circuit rejected a challenge to the SEC's administrative proceedings based on the alleged unconstitutional appointment of its in-house administrative law judges. As previously reported (see, e.g., here, here and here), several constitutional challenges have asserted that the judges are deemed to be "officers" constitutionally requiring appointment by the President, courts of law, or the Commission in accordance with the Appointments Clause rather than by more junior agency representatives (the SEC's current process) and - in fact - SEC administrative proceedings have been preliminarily enjoined on these grounds (see, e.g., the Duka case Preliminary Injunction, reported on here).

The Lucia decision is based on the fact that the SEC ultimately retains full decision-making powers as noted in this excerpt from the Opinion:

Put otherwise, the Commission's ALJs neither have been delegated sovereign authority to act independently of the Commission nor, by other means established by Congress, do they have the power to bind third parties, or the government itself, for the public benefit. See 31 Op. OLC at 87. The Commission's right of discretionary review under Section 78d-1(b) and adoption of its regulatory scheme for delegation pursuant to Section 78d-1(c) ensure that the politically accountable Commissioners have determined that an ALJ's initial decision is to be the final action of the Commission.

Wachtell Lipton observes: "While other parties may continue to litigate this issue in other circuits, the Lucia decision will likely be influential and will be viewed by the SEC as a vindication of its increased use of the administrative forum."

As previously reported, seemingly in response to fairly widely publicized concerns and criticisms about the SEC's processes relating to these types of proceedings, the SEC recently adopted these amendments to its governing Rules of Practice; however, as reported here, they were generally deemed by practitioners to be inadequate.

See also this WSJ article.

US Chamber & TX Business Group Challenge New IRS Anti-Inversion Rule

The Chamber and Texas Association of Business filed suit against the IRS and the Treasury Department last week in the U.S. District Court for the Western District of Texas for adopting the IRS Multiple Acquisition Rule that disallows certain mergers that otherwise would be permitted under Section 7874 of the Internal Revenue Code in alleged violation of the APA. The Chamber's release indicates that the agencies ignored the existing numerical thresholds in IRC Section 7874 and circumvented the APA's procedural requirements in adopting the new rule upon Congress failing to grant their preceding request for authority to eliminate corporate inversions.

See also these articles from Nasdaq and Fortune.

Business Roundtable Issues Updated Governance Principles

As reported in Rants to Riches earlier this week, the Business Roundtable released its 2016 Principles of Corporate Governance (Principles) last week - last updated in 2012. Although generally consistent with the recently launched company/investor coalition Commonsense Principles of Corporate Governance (reported on here) where the two sets of guidance overlap, a few of the recommendations are particularly noteworthy, including:

• As previously reported, Nasdaq's new "golden leash" rule is a disclosure-only rule - i.e., it does not disallow third-party compensated director/director nominee arrangements, but rather only requires disclosure.

• According to Spencer Stuart's 2015 Board Index, meeting fees for the S&P 500 have continued to decline: Only 21% of S&P 500 boards paid board meeting attendance fees, down from 25% the prior year and 62% in 2005. (See additional benchmarking on our Board Practices topical page.)

• Willis Towers Watson's recent review of Fortune 500 stock plans that include directors as participants revealed a significant uptick in director equity award limit guidelines. 28% of companies include a director-specific annual award limit within their applicable stock plan.

Also particularly noteworthy are the Principles' emphasis on investors' responsibility and accountability for long-term value creation coincident with their quest for increasing influence on corporate decision-making, and rejection of investors' use of the proxy process to pursue social and political agendas:

Business Roundtable CEOs believe that shareholder engagement will continue to be a critical corporate governance issue for U.S. companies in the years to come. Further, it is our sense that there is a growing recognition in corporate America that an increase in shareholder access to the boardroom cannot come without a corresponding increase in shareholder responsibility. Here, as in many areas of corporate governance, transparency is a basic but essential element — for example, in this "age of information," a shareholder that wishes to influence corporate behavior should be encouraged to publicly disclose the nature of its identity and ownership, even in cases where the federal securities laws may not specifically require disclosure.

More fundamentally, we believe that the responsibility of shareholders extends beyond disclosure. We sense that there is a rising belief that shareholders cannot seek additional empowerment without assuming some accountability for the goal of long-term value creation for all shareholders. Moreover, we believe that shareholders should not use their investments in U.S. public companies for purposes that are not in keeping with the purposes of for-profit public enterprises, including but not limited to the advancement of personal or social agendas unrelated and/or immaterial to the company's business strategy.

We believe that this concept of shareholder responsibility and accountability will — and should — become an integral part of modern thinking relating to corporate governance in the coming years, and we look forward to taking a leadership role in discussions relating to these important issues.

The Principles otherwise support the board's retention of flexibility and discretion as to board leadership, refreshment-related policies (e.g., age, tenure), capital allocation, and board practices generally - as opposed to a one-size-fits-all approach; promote ongoing shareholder engagement; serve as a good refresher on board and committee structure and composition and the ordinary course allocation of responsibilities among and between the board and management; and reiterate the board's duty to act in the long-term best interests of the company and all of its shareholders rather than a select, more vocal few.

Nasdaq Golden Leash: Interplay with SEC Form 8-K Requirements

This new memo from Gibson Dunn on Nasdaq's new golden leash disclosure rule covers - among other things - important timing issues and the interplay between Nasdaq's rule and the SEC's Form 8-K disclosure requirements. Notwithstanding the fact that the new rule only requires disclosure as opposed to prohibiting director/nominee third-party compensation arrangements, the memo also reiterates the board's obligation to consider third-party compensation arrangements in assessing director independence under Nasdaq Rules 5605(a)(2) and 5605(d)(2)(A). Access additional resources on our Nasdaq and Director Compensation topical pages.

SOX Compliance: Most Companies Update "Related Party" Documentation

Among the many noteworthy, just-released findings from Protiviti's annual SOX Compliance Survey of more than 1,500 respondents (54% public /16% private; 64% between $500 million - $5 billion) are:

• Particularly at the upper end of the range, SOX costs vary considerably by industry, company size, and filer status. Almost 1/3 each of insurance, life sciences/biotech, telecommunications and financial services companies spent $2 million or more on SOX compliance last year.
• External audit fees increased for about half of Accelerated Filers and Large Accelerated Filers, and for more than half of companies in the $1 billion - $10 billion range.
• Of the 20% of public companies who reported being required to make a cybersecurity disclosure under the SEC disclosure guidance last year, 42% indicated that this increased the number of hours the company devoted to SOX compliance significantly - by 11% to 20%.
• Almost 45% of public company respondents "very much" believe that their auditor-required (significant) changes to SOX compliance activities last year resulted from PCAOB inspections.
• 58% of public companies were required to update their documentation to identify related parties per PCAOB AS No. 18 - with a corresponding 8% average increase in hours to do so.

See also this AccountingWEB article.

CEO-Employee Pay Ratio Disclosure: Tackling Employee Perceptions

This new post from Equilar includes some interesting data and thought-worthy considerations regarding the impending CEO-median employee pay ratio disclosure - particularly as relates to the company's preparations for communicating the information to its employees so as to mitigate potential adverse reactions. Noting the significant variations that can result from differences in approaches employed by third parties to calculating the ratio - as well as the fact that the ratio inevitably will be calculated differently within every company - the post explains the basis for company-specific gaps in the dramatic ratios reported by the publicly accessible AFL-CIO  Executive Pay Watch (which includes equity compensation and all other reported CEO pay) vs. those calculated by PayScale, which (unlike the AFL-CIO) uses an apples-to-apples comparison approach (salary/cash compensation).

PayScale's survey of more than 22,000 employees to gauge how they feel about their CEO's compensation reportedly revealed these noteworthy findings:

• 55% of employees were not aware of their CEO's compensation; among those that were, nearly 80% believed it was appropriate.
• 57% of respondents who felt that their CEO is overcompensated also reported that this negatively affects their view of the company.
• Employees at higher levels in their companies have more knowledge about and more readily approve of CEO compensation than employees at lower levels.

Board Committee Composition: Statutory Requirements

Allen Matkins Partner and Society member Keith Bishop's recent post includes this convenient table summarizing the statutory board committee composition requirements for California, Delaware and Nevada. As he notes, subject to certain related requirements/limitations, Nevada allows non-directors to serve on these committees, which may be granted the power to exercise the authority of the board.

For those incorporated elsewhere, the table serves as good reminder to review your governing law when establishing board committees.

Board Evaluations: Design, Content & Follow-Through

This new publication - Optimizing Board Evaluations - from Simpson Thacher and Nasdaq provides a nice overview of the overarching considerations relevant to board evaluation design - which evolve over time, as well as an overview of the most common alternative approaches to each design aspect including whether to include individual directors in the scope, the "how" (oral/written) and the "by whom" (externally/ internally facilitated). The memo also includes a convenient checklist of key topics recommended for inclusion in the evaluation (however conducted); guidance on mitigating the potential for documentation-related litigation; and suggested follow-up/follow-through action steps.

Access additional resources on our Board/Director Evaluations topical page.

What's New on Rants to Riches?

See these new recent Rants to Riches posts:

• D&O Insurance Basics: A recent memo from McDermott Will & Emery: "D&O Insurance—Issues to Consider Before a Claim Arises" identifies the most common D&O coverage concerns and how they can be addressed at the policy initiation or renewal stages in a manner understandable to in-house and law firm counsel and corporate secretaries - regardless of prior insurance expertise.
• Board Cybersecurity Oversight at the Big Picture Level: PwC's new "Cybersecurity and the Board: 8 Issues Keeping Directors up at Night" identifies the key, big picture aspects of cybersecurity that boards should consider so as to effectively carry out their  oversight responsibilities - regardless of company-specific facts and circumstances.
• Cybersecurity Information Sharing: Cost-Effective Data Security Tool: A recent Corporate Counsel article: "What In-House Counsel Should Know About Cybersecurity Information Sharing" provides a helpful overview - geared toward non-cyber experts - of the various types of government and private sector cyber information-sharing mechanisms, the types of cyber threat information that are commonly shared or sought to be shared, the most common company concerns about information-sharing, and related protections designed to mitigate those risks. 

CalPERS: Q2 Proxy Campaign Update

Of its proxy votes cast at 7329 meetings worldwide during the second quarter (April - June 2016), CalPERS supported 89% of management proposals and 79% of shareholder proposals in accordance with its Global Governance Principles. Its Proxy Campaign Update reveals the following noteworthy developments and trends:

• Management proposals are increasingly common on these topics that have historically been actively promoted by investors: board declassification, special meeting, majority vote for director elections, elimination of supermajority vote requirements, written consent, and proxy access.
• 278 of the 300 US companies CalPERS has engaged on majority voting since 2010 have adopted or agreed to adopt majority voting for director elections. CalPERS is currently engaging with the remaining 22 companies, and will select an additional 50 to engage for the 2017 proxy season.
• The average support for climate risk reporting shareholder proposals increased from 21% in 2015 to 35% in 2016.

See the graphic on page 4 illustrating the level of shareholder support for the most prevalent Russell 3000 corporate governance shareholder proposals.

2016 Proxy Season: Deep-Dive Into Major Proposals 

In each of these new 2016 proxy season memos, Simpson Thacher addresses by proposal type any noteworthy recent developments, SEC no-action letter requests and responses, proxy advisor and large institutional investor positions/policies, and voting results and other trends:

• Proxy Access Proposals (inclusive of the most recent H&R Block proxy access bylaw no-action letter - reported on here)
• Independent Chair Proposals 
• Special Meeting Proposals   
• Climate Change, Sustainability and Other Environmental Proposals   
• Political Contributions and Lobbying Proposals  

Access additional resources on our 2016 Proxy Season, Shareholder Proposals, and Institutional Investors topical pages.

PRI May "Delist" Non-Compliant Investor Signatories

The Principles for Responsible Investment, or PRI, reportedly is planning to develop a process to effectively "delist" signatories (asset owners, investment managers, service providers) that are not acting in a manner that is consistent with implementation of the organization's voluntary, aspirational ESG principles. Each of the six principles that signatories commit to is accompanied by a series of suggested potential  action items to help effectuate that principle. For example, among the possible actions relating to Principle 3: "We will seek appropriate disclosure on ESG issues by the entities in which we invest" are these:

• Ask for standardised reporting on ESG issues (using tools such as the Global Reporting Initiative).
• Ask for ESG issues to be integrated within annual financial reports.
• Ask for information from companies regarding adoption of/adherence to relevant norms, standards, codes of conduct or international initiatives (such as the UN Global Compact).
• Support shareholder initiatives and resolutions promoting ESG disclosure.

PRI's managing director cited large asset managers as among those signatories failing to act consistently with the principles.

CII Continues Pursuit of Majority Voting at Russell 1000

CII reportedly sent letters to 186 Russell 1000 companies (the majority voting "holdouts") - including those with resignation policies - earlier this month, urging them to adopt majority voting standards for uncontested director elections. The post cites FactSet data indicating that 71% of the Russell 1000 have already adopted majority vote standards.

CalPERS Governance Strategic Plan: ESG Reporting & Board Diversity

CalPERS Investment Committee plans to recommend at its upcoming August 15th meeting that the Board adopt this Global Governance 5-year Strategic Plan. As previously reported, the Plan includes Key Performance Indicators for each of six strategic initiatives - including two pertaining to board diversity and corporate ESG disclosure/reporting.

S&P 500 companies will have three years from adoption of the Strategic Plan to become "diverse" - a broadly interpreted term keyed to CalPERS' Global Governance Principles (Section B.9):

Diversity & Inclusion

- Objective: Enhance Total Fund performance by increasing corporate board diversity

- Key Performance Indicators:

• All public companies in which CalPERS invests have a dimension of board diversity
• Track financial performance of companies with diverse boards

- Timeline: 3 years for the S&P 500; 20 years for all public equity holdings

The ESG initiative is less circumscribed - presumably due to the current state of reporting and standardization:

Data & Corporate Reporting Standards

- Objectives:

• Initial voluntary corporate reporting including enhanced disclosure of ESG considerations in periodic filings globally
• Adoption of enhanced mandatory reporting of ESG in periodic filings globally

- Key Performance Indicators:

• Benchmark and track the progress of integrated reporting globally
• Mandatory standards adopted globally

- Timeline:

• Review voluntary standards: 5 years
• Mandatory standards to be adopted globally: 20 years

Study: Pay Differences on the Board

This new Harvard Law post on a recent paper: "Racial and Gender Inequality in the Boardroom" authored by University of Missouri, Columbia Matthew Souther and Adam Yore, discusses race and gender differences in pay among directors within the same board based on the evaluation of a huge sample set over a period of seven years. Key findings include:

• Minority and female ("diverse") directors earn systematically lower compensation than their peers serving within the same board - despite having higher qualifications on average.
• The lower compensation is largely a function of board responsibilities. Although diverse directors are more likely to serve on certain committees, they are less likely to serve in key leadership positions associated with higher levels of pay such as committee chairs, lead director, or board chair.
• The lower compensation also reflects differences in pay not attributable board leadership or service on the primary committees. Diverse directors are significantly less likely to participate in assignments associated with additional compensation (e.g., consulting fees; matched charitable contributions, life insurance and other perks), and they earn 6.2% less than their director peers in this compensation category.

Access additional studies, surveys and other relevant resources on our Board Diversity and Director Compensation topical pages.

This week's highlighted question from the Huddle is:

A member company is interested in determining whether other public companies have the Board approve the minutes of the annual meeting of shareholders.  If so, who signs the minutes after approval?

This question generated a lot of activity and many excellent answers (too many to note here) including:

Our practice is: The Board reviews and approves the minutes of the stockholders' meeting and then they are signed by the chairman and the secretary of the meeting, who should be the Chairman of the Board and the company Secretary.  Our practice is to have both presiding officer and meeting secretary sign minutes, whether of a committee, the full Board or the shareholders, though many companies have only one of those.

Editor's Note: See the Society's publications Corporate Minutes (IX. Reviewing & Finalizing Minutes), and Planning & Preparing for the Annual Meeting (XI. After the Meeting is Over).

Check out the Society Huddle.

• Activist Pressures Ratner Family to Relax Control of Forest City
  The Wall Street Journal, August 10, 2016
• Wall Street Pushes Back on Proposed Rules on Executive Compensation
  The Wall Street Journal, August 9, 2016
• Appeals Court Upholds SEC's In-House Court as Constitutional
  The Wall Street Journal, August 9, 2016
• Some Small-Business Owners Trim Expansion Plans, Cite New Labor Law
  The Wall Street Journal, August 5, 2016
• Business Groups Sue U.S. Government Over Tax-Inversion Rules
  The Wall Street Journal, August 4, 2016

See other recently posted Articles of Interest.

Also, just a reminder that you can find additional topic-specific articles and other resources here.