Say-on-Pay and Golden Parachute Compensation Rule Goes Into Effect

SEC Chairman Schapiro explains Say-on-Pay

The SEC approved say-on-pay and golden parachute compensation rules last Tuesday, in effect ushering boards and shareholders into a new era of corporate governance. More information on Say-on-Pay can be found in the SEC's press release.

Posted by David Schatz

Activist Value Fund Seeking Portfolio Manager

Kicking Off the Shareholder Activist New Year with a Bang

Image Extracted from Barron's by Dan Picasso

Only ~3 weeks into the New Year and we are already seeing an explosion of shareholder activist activity. Investors kicked off 2011 with an impressive frenzy of filings. In the first week of 2011 alone there were 18 activist investments made, according to Hedge Fund Solutions' Catalyst Equity Research Report (subscribe here). Then, the next week, The Wall Street Journal ran an article that claimed "The Activists" run Wall Street (that is, they "are in the driver's seat"). In preparing for what is expected to be a milestone year for activism, boards should consider the nature of activist investing thus far and how it will evolve throughout the year in the context of a new regulatory environment.

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A taste of what's to come...

Ameron International Corporation (AMN)

Activist Investor: Barington Capital (3.8% beneficial ownership)

Seeking Catalysts: Replace the Chairman, President, and CEO; focus portfolio; contain costs; consider using large cash balances to implement a share repurchase program, among other options; and establish a slew of corporate governance improvements entailing executive compensation matters, board declassification, majority vote standards, appointing an independent Chairman, and improving corporate communication.

Ameriana Bancorp (ASBI)

Activist Investor: Financial Edge Fund (5.4% beneficial ownership)

Seeking Catalysts: Reduce non-performing assets and minimize the negative impact of credit losses; reduce overhead expenses, which appear to be excessive given the size of the Company; manage the capital structure of the holding company and the bank, including the $10 million of trust preferred securities issued by the Company; and maximize the value of the Common Stock.

ATNA Resources, Ltd. (ATN.TO; ATNAF.OB)

Activist Investor: Lloyd Miller (11.9% beneficial ownership)

Seeking Catalysts: Enhance shareholder value by possibly changing board composition.

Home Federal Bancorp of Louisiana (HFBLD)

Activist Investor: Joseph Stilwell (7.9% beneficial ownership)

Seeking Catalysts: Pay dividends; employ excess capital to share buybacks; seek board representation if the Company dilutes tangible book value per share.

H&Q Life Sciences Investors (HQL)

Activist Investor: Western Investment (4.1% beneficial ownership)

Seeking Catalysts: Declassify the board.

Immersion Corp. (IMMR)

Activist Investors: Ramius Capital (8.2% beneficial ownership); Dialectic Capital (5.2% beneficial ownership)

Seeking Catalysts: Dialectic Capital has nominated two individuals for election to IMMR's board at the 2011 annual meeting.

National Technical Systems (NTSC)

Activist Investor: Sandler Capital Management (8.09% beneficial ownership)

Seeking Catalysts: Explore a sale.

Red Robin Gourmet Burgers (RRGB)

Activist Investors: Clinton Group and Spotlight Advisors (8.95% beneficial ownership)

Seeking Catalysts: Explore a sale; remove poison pill and pledge not to adopt another one without shareholder approval.

SurModics Inc. (SRDX)

Activist Investor: Ramius Group (12% beneficial ownership)

Settlement Agreement: Company will increase board size from 10 to 12 to add two individuals recommended by Ramius; following the 2011 meeting, the board size will return to 10 members. The Company agreed to establish a committee to review strategic alternatives, which the two Ramius representatives will join.

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Perhaps one of the most noteworthy highlight so far in 2011 has been from activist shareholder Ralph Whitworth of Relational Investors. With a 3.93% ownership of the industrial conglomerate ITT Corp (ITT.N), Relational Investors successfully pushed for a breakup of the company. ITT agreed to spin-off into three separate companies, although the board claims that this decision was made with no investor pressure. Nevertheless, according to Reuters, "[t]he steps taken by ITT will likely have averted a proxy contest with Relational Investors", which had earlier nominated three directors to ITT's board.

And all of this appears to be just the beginnings of the 2011 rise in activism. As mentioned earlier, according to a Schulte Roth & Zabel and mergermarket report,  64% of surveyed executives and 60% of surveyed activists see a rise in shareholder activism in the next 12 months following Q3 2010. Furthermore, this rise will greet more vulnerable targets than normal, thanks in part to Dodd-Frank. Although proxy access has been stayed and won't be relevant until, at the soonest, the 2012 proxy season; say-on-pay will go into effect in a matter of a few days, namely January 21, 2011. According to a poll of 135 publicly traded companies by Towers Watson, 51% of respondents expect to hold annual say-on-pay votes; 10%, biennially; 39%, triennially. 40% believe that shareholder accountability will serve as one of the greatest influences on vote-frequency recommendation. Say-on-pay will have far-reaching implications on corporate governance campaigns, as 75% of activists see that as having the greatest impact on shareholder activism over the next year among the new rules/regulations, over 17% for proxy access. 

The ongoing corporate governance campaign against Occidental Petroleum (OXY) by shareholder activists Relational Investors and CalSTRS provide a noteworthy case study on the implications of say-on-pay. On January 26, 2009, the board of Occidental Petroleum approved establishing a non-binding say-on-pay policy, which went into effect at the company's 2010 shareholders meeting. CEO Ray Irani has long been criticized for being one of the most highly paid executives, picking up a package of $857 million over the last decade--third to only Larry Ellison and Barry Diller. The result? Despite Irani producing excellent returns to shareholders over the last decade on a competitive basis to any reasonable peer group, a majority of shareholders voted against OXY executive compensation packages through a non-binding say-on-pay vote. According to Spencer Abraham, an OXY board member and the chair of its compensation committee, the negative say-on-pay vote in May was the "main catalyst for change".

It indeed was a "downhill" battle for Ray Irani following the say-on-pay vote. Relational Investors and CalSTRS collectively accumulated ~1% of Occidental Petroleum and continued to push management to cut executive compensation. The result? Ray Irani agreed to step down as CEO in 2011 and cut pay packages to make them more aligned with those of peer companies. According to Charles Elson of the Weinberg Center for corporate governance at the University of Delaware, "Investors are increasingly agitated and they have increased power to do something with that agitation… [Executive pay cuts] are going to happen more and more".

With an intense first 3 weeks of 2011 for activist plays, as well as a different regulatory environment, companies must prepare for a version of shareholder activism never seen before. Successful preparation is difficult, but attainable--for while some of the once-hailed defensive tactics are no longer relevant, there are many proactive initiatives that companies can now take to create long-term value.

Posted by David Schatz

The Activist Investor Conference: January 27 & 28

In light of a new economic and regulatory backdrop, 2011 is likely to be a pivotal year for shareholder activism. Dodd-Frank, say-on-pay requirements, looming proxy access, and a rising M&A environment are just some of the many factors that--in regards to what we have seen in the past--will set a profoundly new stage for activist investing.

Join top hedge funds, corporate law firms, private equity firms, corporate governance specialists, proxy advisors, as well as the activists themselves in DealFlow Media's The Activist Investor Conference 2011. All stakeholders should attend this conference for exclusive information surrounding shareholder activism. In addition to disclosing strategies and insights, the conference also provides an opportunity for networking among experts in the field. 

AGENDA

• The Impact of the Frank-Dodd Bill on Corporate Governance
• Case Studies: Examining Campaigns against Nabors, Abercrombie & Fitch and Dell
• Closed End Fund Activism
• International Activism: Investing in Foreign Markets
• Forward Industries: A Case Study in Small Company Activism 
• Using Good Corporate Governance to Affect Your Strategy
• A Review of the Objectives and Tactics of Hedge Fund Activists  
• Assessing the Vulnerability of a Board of Directors
• Executive Compensation: How Much is Enough?
• The Perils of Being a Lone Dissident Board Member
• The Poison Pill: Examining Successful Corporate Defenses
• Responding to Investor Activism: Running a Successful Proxy Response Campaign
• Who Wants to Be an Activist Millionaire?
• Proxy Fights in Canada: Activism North of the Border
• Retail Investor Targeting

SPEAKERS INCLUDE

David Rosewater, Schulte Roth & Zabel

Keith Gottfried, Blank Rome

Janice Hester-Amey, CalSTRS

Richard Swanson, Arnold & Porter

Matt Brusch, National Investor Relations

Jared Landaw, Barington Capital Group

Donna Anderson, T. Rowe Price

Jill Fisch, University of Pennsylvania Law School

Qin Tuminelli, Institutional Shareholder Services

Trevor Norwitz, Wachtell, Lipton, Rosen & Katz

Alon Brav, Duke University, The  Fuqua School of Business

Bruce Goldfarb, Okapi Partners

Arthur Crozier, Innisfree

Warren De Wied, Wilson Sonsini Goodrich & Rosati

Jeffrey Shapiro, Lowenstein Sandler

Maureen Wolff, Sharon Merrill Associates

David Robbins, Bingham Mccutchen

Adam Offenhartz, Gibson Dunn

Ray Riley, C.T. Hagberg Associates

Travis Dirks, Rotary Gallop

Riyaz Lalani, Kingsdale Shareholder Services

Artie Regan, Regan & Associates

John Keenan, American Federation of State, County and Municipal Employees

Brad Allen, Laurel Hill Advisory Group

Sander Grieve, Fraser Milner Casgrain

Jamie Moser, Joele Frank, Wilkinson Brimmer Katcher

Michael Schafler, Fraser Milner Casgrain

Peter Miterko, Pearl Meyer & Partners

Edward Ferris, Hedge Fund Solutions

Jeff Mccutcheon, Board Advisory LLC

Stephen O'Byrne, Shareholder Value Advisors

Phillip Goldberg, Foley & Lardner

Tim Brog, Locksmith Value Advisors

Eric Rosenfeld, Crescendo Partners

Richard Lashley, PL Capital

Rachel Posner, Georgeson

Amy Goodman, Gibson Dunn

Laura Bissell, Okapi Partners

Phillip Goldstein, Bulldog Investors

Sophie L'Helias, L'Helias LLC Strategic Governance Servvice

Grange Johnson, LaGrange Capital Partners

John Grau, InvestorCom

Art Lipson, Western Investment

Dan Plettner, Independent CEF Analyst and Covester Model Manager

Click here for more information and to register

Posted by David Schatz

Donald Drapkin on Activist Investing

A Historial and Legal Background of the Poison Pill

With the recently-approved low 4.99% trigger NOL poison pill (as well as the rise in shareholder activism and media buzz surrounding it), it is important to highlight the historical and legal background surrounding this controversial anti-takeover defense.

Marty Lipton, co-founder of corporate law firm Wachtell, Lipton, Rosen & Katz, provided TheDeal TV a commentary on why he invented the poison pill.  Lipton explains, "It was the age of the corporate raider. By the early 1980s, we had reached a whole new plateau of hostile takeovers… I kept probing to find something that would be useful not in preventing hostile takeovers, but in giving the board of directors of a target company an opportunity to level the playing field and have time to make a rational business judgment decision as to how to deal with a takeover".

Why Martin Lipton invented the poison pill from TheDeal TV on Vimeo.

Landmark Decisions

Cheff v. Mathes (Del. 1964) - Sanctioned greenmail by affirming the director's right to use the business judgment rule and make good faith calls to refute charges of conflicts of interest. (Short Summary).

Unocal v. Mesa Petroleum Co. (Del. 1985) - Held that takeover defenses were only legally sound when they evidence a proportionate and reasonable response to threat(s) to corporate policy. Courts would apply this test, as opposed to the business judgment rule when reviewing corporate defenses. (Short Summary).

Moran v. Household International, Inc. (Del. 1985) - Upheld the poison pill as a legal corporate defense. 

Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc. (Del. 1986). - Held that the fiduciary obligation of a board when faced with inevitable asset stripping or a sale is to maximize immediate shareholder value by securing the highest price available. That is, boards' fiduciary responsibility shifts from being "defenders of the corporate bastion to [being] auctioneers". Accordingly, corporate actions will be judicially reviewed by reasonableness, as opposed to the business judgment rule. (Short Summary).

Paramount Communications, Inc. v. Time, Inc. (Del. 1989) - Held that the Revlon test must be applied before the Unocal test. (Short Summary).

Unitrin, Inc. v. American General Corp. (Del. 1995) - Held that in applying the Unocal test, courts must first determine whether the defense is preclusive or coercive toward shareholders before determining the defense's reasonableness. (Short Summary).

Selectica, Inc. v. Versata Enterprises, Inc. (Del. 2010) - Upheld the use of a poison pill with an unusually low trigger of 4.99% to defend corporate NOLs. (Short Summary).

Posted by David Schatz

Wachtell Lipton Highlights "Some Thoughts for Boards of Directors in 2011"

Esteemed corporate law firm Wachtell Lipton recently published "Some Thoughts for Boards of Directors in 2011" to highlight the key issues companies must address in the upcoming year. In 2011, companies will have greater difficulty in implementing corporate governance "best practices" that are geared toward building long-term shareholder value particularly due to, WLRK argues, "one-size-fits-all" regulation and increased shareholder activism. Among the latest concerns are: "pending rules regarding proxy access, say-on-pay, enhanced SEC disclosure requirements, compensation clawbacks, board structure", and so forth. WLRK addresses the following in the report:

Proxy Access

Although proxy access is currently stayed (with the case expected to be resolved by late spring 2011), companies are still vulnerable to activists "pursu[ing] shareholder proposals and bylaw amendments to impose proxy access on a company-by-company basis" regardless of the ruling.

WLRK provide a detailed approach to handling proxy access here. They recommend that companies engage discussions with major shareholders, particularly those who have owned 3% of the company continuously for at least 3 years and are now eligible to use proxy access. Firms should proactively monitor their shareholder bases well before any Schedule 14N filing. In addition, firms should take note of the fact that shareholders can "aggregate their holdings in order to meet the 3% minimum ownership threshold". At the same time, companies must be wary of that any communications concerning director nomination will result in the nomination not counting toward the 25% cap. Other considerations involve revising bylaws, director qualifications, board size and dynamics, etc.

In the event that a director is elected by a shareholder initiative under proxy access, "boards will need to work to minimize the potential for adverse effects on board stability, collegiality and effectiveness".

Executive Compensation

New SEC regulations and Dodd-Frank provisions have opened a floodgate of new executive compensation issues for companies.

- Companies holding a shareholder annual meeting on January 21, 2011 or later will need to have a "non-binding say-on-pay resolution seeking shareholder approval of named executive officer compensation", as well as a resolution on how often the say-on-pay vote will occur. WLRK argues that holding the say-on-pay vote once every three years more properly aligns the initiative with long-term goals. With that said,  many proxy advisory firms have recommended an annual say-on-pay vote. 

- Companies will need to disclose "golden parachute" plans via tender offer materials and merger proxy statements, in addition to seeking a non-binding vote on the matter.

- Companies will need to disclose information concerning executive compensation and its relationship to company performance in their proxy statements. Disclosure on stock hedging will be required, as well.

- Companies will need to disclose "the ratio of the median annual total compensation of the company's employees (excluding its CEO) to the annual total compensation of its CEO". This could entail "substantial administrative costs".

- Companies will need to disclose incentive-based compensation and follow newly expanded compensation clawback requirements.

In light of the regulatory and public focus on executive compensation, companies will need to focus on discouraging short-term risk-taking and be careful of allocating so-called "excessive" pay packages, while retaining talented long-term-minded executives.

Risk Management

Recent unfortunate events, like the Gulf of Mexico oil spill and Toyota product recalls, have revealed, and furthered, the importance of proper risk management. New regulation has also sought to establish greater transparency in companies risk management practices.

- "[B]ank holding companies with total assets of $10 billion or more, as well as certain other non-bank financial companies" will be required "to have a separate risk committee which includes at least on risk management expert with experience managing risk at large companies".

- The Federal Reserve Board might require smaller bank holding companies to take similar measures to the one described above.

- Required discussion of board risk oversight and leadership in proxy statements and annual reports.

- Companies must describe how compensation aligns with proper risk management.

Wachtell Lipton advises that directors not involve themselves in risk management on a day-to-day basis. Instead, directors should ensure "that the risk management policies and procedures… are consistent with the company's corporate strategy and risk appetite, that [they] are functioning as directed, and that necessary steps are taken to foster a culture of risk-aware and risk-adjusted decision-making throughout the organization". The CEO and senior executives should be the ones "fully engaged in risk management".

To read more, click here.

Board Composition and Director Qualifications

Wachtell Lipton recommends that companies find a "well-rounded board"--a task, the firm argues, that is being challenged by proxy advisor, regulator, and shareholder activist requests for independent directors. The law firm further states, "one of the 'lessons learned' from the financial crisis is that the tremendous complexity of the businesses and risks facing financial institutions warranted more industry expertise and insider knowledge in their boardrooms." Companies must seek to strike a happy medium between independence and insider knowledge in their boards. This is no easy task due to the nature of those with industry expertise having affiliations with other knowledgeable executives in the field. The NYSE's Commission on Corporate Governance only partially recognizes this when they state, "a properly functioning board can include one non-independent director". Wachtell Lipton argues that "there should be no complaint about adding additional inside directors to a board so long as a majority of the board consists of 'independent' directors".

Click here, to read "Some Thoughts for Boards of Directors in 2011".

Posted by David Schatz