2013 Securities Regulation Updates

With the 2013 annual meeting season well underway, we want to remind you of compliance deadlines, new and proposed listing rules, developments in recommendations of proxy advisory firms and other securities regulation and corporate governance matters.

Compensation Committee and Adviser Independence Rules

Listed companies have until July 1, 2013 to take actions required by new listing rules applicable to compensation committee charters.

NYSE companies must make sure their compensation committee charters address certain authorities, responsibilities and resources. Specifically, compensation committees must have the authority to retain or obtain the advice of compensation consultants, independent legal counsel or other advisers. Compensation committees shall be directly responsible for the appointment, compensation and oversight of such advisers after taking into consideration certain independence factors identified in new SEC rules.  NYSE companies must also provide funding appropriate to pay reasonable compensation to such consultants, legal counsel or advisers.

Nasdaq companies must delegate to their compensation committees generally the same authorities, responsibilities and resources by July 1, 2013.  However, this does not have to be done through charter amendments until January 15, 2014; it could be done by board resolution.  Also, any Nasdaq company without a compensation committee must establish one and adopt a conforming charter by the company’s first annual meeting of shareholders after January 15, 2014. 

Nasdaq Proposes Internal Audit Function Rule

Nasdaq has proposed rules that would require listed companies to establish an internal audit function that provides management and audit committees with ongoing assessments of risk management processes and systems of internal control. The proposed rules also require the audit committee to meet periodically with internal auditors and discuss with outside auditors the responsibilities, budget and staffing of the company’s internal audit function. If the SEC approves the proposed rules, Nasdaq companies will have until December 31, 2013 to establish an internal audit function.  The rules being proposed by Nasdaq are substantially similar to those adopted by the NYSE in 2003 which require NYSE companies to have an internal audit function.

Changes in ISS Methodology

Institutional Shareholder Services (ISS) continues to exert significant influence in the area of executive compensation during the 2013 proxy season. ISS is issuing voting recommendations against companies maintaining change-in-control arrangements with "unfavorable" features such as excise tax gross-ups. ISS also is changing its peer group determination methodologies and conducting rigorous qualitative compensation program reviews (e.g., the mix between time-based vs. performance-based long term incentives, performance metrics, benchmarking practices, etc.). ISS also is scrutinizing share pledging policies and compensation disclosures in connection with its voting recommendations on director elections and compensation programs.

Consider Putting a Shareholder Rights Plan “On the Shelf”

In light of the decrease in anti-takeover measures that has accompanied the recent shareholder activism trend, companies should again be considering the  merits of a shareholder rights plan (a.k.a., “poison pill”).  While rights plans have fallen out of favor at some companies because of concerns over negative reactions from proxy advisory firms and institutional shareholders, many companies have left themselves more vulnerable to hostile takeover attempts than necessary by not ever adopting a rights plan or by letting their old rights plan expire.

One option that companies without a rights plan should consider is putting one “on the shelf.” Putting such a plan on the shelf involves undertaking all of the adoption processes, such as considering the positives and negatives of adopting a plan, and preparing the rights plan document, but stopping short of formal board approval and adoption of the plan.  This approach requires no public disclosure and protects from all but the most aggressive of hostile takeover attempts.  Boards interested in the protection of the business judgment rule are well advised to direct their advisors to provide periodic counsel regarding the merits of rights plans. 


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