Corporate Securities Law Blog

In Greb v. Diamond Int’l Corp., 2013 WL 628328 (Cal. Feb. 21, 2013), the California Supreme Court unequivocally and unanimously laid to rest the assertion that dissolved foreign corporations may be sued in California after the time of the statute of limitations provided by the laws under which the foreign corporations were incorporated. In so holding, the California Supreme Court affirmed the California Court of Appeal for the First District’s dismissal of a personal injury claim against a dissolved Delaware corporation, holding that the claim was filed more than three years after dissolution of the corporation in violation of Delaware General Corporation Law Section 278 [blog article here]. In deciding that the California survival statute did not apply to foreign corporations, the Supreme Court resolved a split among California appellate courts on the interpretation of California Corporations Code Section 2010 (“Section 2010”), which governs the winding-up and survival of dissolved corporations.

In Scheenstra v. California Dairies, Inc., No. F062768, ___ Cal. Rptr. 3d ___, 2013 WL 363148 (Cal. App. 5th Dist. Jan. 30, 2013), the California Court of Appeal, Fifth District, affirmed the judgment of the California Superior Court, Tulare County, that the board of directors of defendant California Dairies, Inc. (“Cal Dairies”), a milk marketing and processing cooperative, had exceeded its discretion when it adopted a quota system that breached its contractual obligations to its members and exceed the grant of power in Cal Dairies’ Bylaws. This decision highlights that a board of director’s discretion under the business judgment rule may be limited by contractual obligations the corporation undertakes with the corporation’s shareholders/members.

Most public companies use Broadridge for shareholder voting tasks related to their annual meetings. Due to a new interpretive position being taken by the SEC, Broadridge recently informed its clients of a technical change in its online, mobile and telephonic voting platforms that may adversely affect obtaining favorable shareholder votes, particularly from retail investors.

In accordance with the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Reform Act”) for adopting regulations required by section 952 of the Reform Act, the Securities and Exchange Commission (the “SEC”) on June 20, 2012 issued a press release and published final rules (Release No. 33-9330) (the “Final Rules”) for compensation committee and compensation adviser independence requirements.

In Hermelin v. K-V Pharmaceutical Co., C.A. No. 6936-VCG, 2012 WL 395826 (Del. Ch. Feb. 7, 2012), the Delaware Court of Chancery considered whether the former chief executive officer (“CEO”) of a pharmaceutical company, against whom several regulatory and criminal actions had been brought, had been successful “on the merits or otherwise” such that he was entitled to mandatory indemnification under Section 145 of the Delaware General Corporation Law (“DGCL”) and/or under his indemnification agreement with the corporation. The court concluded that the CEO, who had pled guilty to certain criminal charges and was subjected to stiff regulatory penalties, had been successful (and thus entitled to indemnification) in only one of four underlying suits at issue. This decision provides guidance to corporate officers regarding their indemnification rights under Delaware law.

Building on months of momentum in Congress, on March 8, 2012, the U.S. House of Representatives passed the Jumpstart Our Business Startups (JOBS) Act by a bi-partisan vote of 390-23. A similar bill, S. 1933, has been introduced in the Senate and may be voted on this month. The JOBS Act is intended to address the sharp decline in U.S. public offerings during the last decade and to facilitate capital raising by smaller companies. The provisions of the JOBS Act will, if enacted, represent a watershed change to the laws and regulations governing capital raising for private companies and would create a limited, temporary and scaled regulatory compliance pathway, referred to as an “IPO on-ramp,” for companies going public and newly public companies. The IPO on-ramp is designed to reduce the costs and uncertainties of accessing public capital.

By William Manierre

As of January 1, 2012, two new subtypes of traditional business corporations may be organized under the California Corporations Code – benefit corporations (§§14600-14631) and flexible purpose corporations (§§2500-3503). Both free their directors from having to manage strictly for the economic benefit of shareholders, enabling them to address social objectives such as preserving the environment, promoting the interests of the underserved and improving human health. Patagonia, the outdoor apparel company, became California’s first benefit corporation on January 3rd. It remains to be seen whether the new corporate forms will be popular entity choices, whether they will be effective in promoting socially desirable goals, and whether unexpected problems will arise for early adopters as a result of their untested nature. While these types of entities are new, and as a result certain tax issues associated with their use may be unclear, there does not appear to be any obvious tax benefit to the use of either structure.

On January 25, 2012, the New York Stock Exchange issued an Information Memo to its member organizations stating that effective immediately, brokers may not vote on corporate governance proposals supported by company management without instructions from their clients. NYSE’s rules affect the voting of all shares held in “street name” by NYSE member organizations, regardless of whether the vote is for an issuer listed on the NYSE. This new position follows a recent regulatory and legislative trend disfavoring discretionary broker voting. The notification is a significant departure from historical practice where brokers used their discretion to cast votes on behalf of “street name” shareholders who fail to provide voting instructions with respect to what were previously viewed as “routine” matters. The NYSE’s new position will affect the voting dynamics for company-supported governance proposals, including those that companies may put forward this proxy season to avoid shareholder proposals on similar matters.

In Espinoza v. Hewlett-Packard Co., No. 208, 2011 WL 5838882 (Del. Nov. 21, 2011), the Delaware Supreme Court held that shareholders seeking inspection of corporate books and records under Section 220 of the Delaware General Corporation Law, 8 Del. C. § 220 (“Section 220”), must demonstrate that the records sought are “essential” to the “articulated purpose for the inspection.” In so holding, the Delaware Supreme Court affirmed the Delaware Court of Chancery’s holding that a report prepared in connection with an internal investigation into sexual harassment allegations made against Hewlett-Packard’s (“HP”) former Chief Executive Officer was not “essential” to plaintiff’s “articulated purpose for the inspection.” The decision provides insight into the limits of corporate documents a shareholder may obtain pursuant to a Section 220 demand and the proper legal analysis for determining whether a shareholder is within his or her right to inspect such documents.
 

Public companies and companies registering to go public should be aware of fee rate adjustments made by the Securities and Exchange Commission that will be effective as of October 1, 2011. We originally reported on this increase on September 6, 2011. The following fee rates will be affected by the adjustment:

On September 6, 2011, the Securities and Exchange Commission confirmed that it would not seek rehearing or Supreme Court review of the decision by the U.S. Court of Appeals in Washington, D.C. partially vacating the SEC’s proxy access rules. (Click here for our blog reporting on the D.C. Circuit’s decision.) Chairman Mary L. Schapiro issued a statement indicating her continuing interest in “finding a way to make it easier for shareholders to nominate candidates to corporate boards” but suggesting no immediate SEC plans to propose new proxy access rules.
 

On September 1, 2011, California governor Jerry Brown signed Assembly Bill No. 571, which simplifies restrictions on dividends, repurchases and redemptions of shares. The restrictions are set forth in Sections 500 to 509 of the California Corporations Code, and are commonly referred to collectively as “Section 500.[1]” These provisions are designed to protect the interests of creditors and senior equity holders against transactions that might undermine their seniority in the capital structure.   Section 500 applies to companies incorporated in California and to companies incorporated elsewhere but deemed subject to the same restrictions by virtue of satisfying the requirements of Section 2115 of the California Corporations Code for “pseudo-California corporations.” Section 500 uses the term “distributions” to encompass dividends of cash or property (other than shares of the corporation) and repurchases and redemptions of shares.
 

Earlier today, in Business Roundtable v. Securities & Exchange Commission, No. 10-1305 (D.C. Cir. July 22, 2011), the United States Court of Appeals for the District of Columbia Circuit issued its decision invalidating the SEC’s proxy access rules adopted in August 2010 with the intention that they be effective for the 2011 proxy season (see our blog here). The Business Roundtable and U.S. Chamber of Commerce filed the lawsuit in September 2010 challenging the SEC’s adoption of proxy access rules and separately requesting for the SEC to stay implementation of the rules pending the outcome of the lawsuit. The SEC granted the request for stay in October 2010 and issuers were relieved of the burdens of proxy access for the 2011 proxy season. (See our blog posts here and here.)

In Graulich v. Dell, Inc., 2011 WL 1843813 (Del. Ch. May 16, 2011), the Delaware Court of Chancery rejected a stockholder’s demand under Section 220 of the Delaware General Corporation Law (“Section 220”). Section 220 provides that a stockholder in a Delaware corporation may, under certain conditions, request that that corporation make available certain books and records, provided that the request is made for a “proper purpose.” In Graulich, the Court held that the plaintiff stockholder, who sought books and records for the purpose of investigating and possibly filing a derivative lawsuit against the company’s officers and directors, nonetheless lacked a “proper purpose” because the stockholder did not have legal standing to bring the derivative suit and the potential claims the stockholder wished to pursue were time-barred and barred by claim preclusion.
 

In Tides v. The Boeing Co., No. 10-35238, 2011 WL 1651245 (9th Cir. May 3, 2011), the United States Court of Appeals for the Ninth Circuit held that the whistleblower provisions of the Sarbanes-Oxley Act of 2002 ("SOX"), 18 U.S.C. § 1514A(a)(1), do not protect employees of publicly traded companies who disclose information to the media. Instead, the Court held, SOX protects employees only if they disclose certain types of information to the three groups identified in the statute: (1) federal regulatory and law enforcement agencies, (2) Congress and (3) employee supervisors. This case sets parameters for what is and what is not protected whistleblower activity under SOX for which an employee can receive damages under the law.

In the past year, a number of companies have amended their bylaws to require that shareholder derivative lawsuits are resolved in the Delaware Chancery Court. This recent spike in the use of company-friendly forum selection clauses comes at a time when lawsuits challenging mergers are rampant. According to Reuters, such lawsuits have tripled from 107 in 2007 to 335 in 2010, despite a decrease in deal volume.
 

In July 2010, NASDAQ OMX began permitting companies applying for listing in US markets to submit Listing Applications via its online Listing Center, moving toward its stated goal of migrating all paper-based forms to its electronic platform. Currently the Listing Center supports the electronic submission of Listing Applications and Listing of Additional Shares Notifications. The Listing Center also allows the upload of any supporting documentation, including completed Listing Agreements and Corporate Governance Certification Forms.  On January 24, 2011, NASDAQ announced that the Listing Center now supports the electronic submission of Rule Interpretation Requests, as well.
 

In King v. VeriFone Holdings, Inc., No. 330, 2010, 2011 WL 284966 (Del. Jan. 28, 2011), the Supreme Court of the State of Delaware reversed a decision by the Court of Chancery dismissing a derivative plaintiff’s action under Section 220 of the Delaware General Corporation Law seeking books and records of a Delaware corporation. The Supreme Court held that the Chancery Court erred as a matter of law when it held that the purpose of plaintiff’s demand to inspect books and records — to assist in bolstering demand futility allegations in a parallel shareholder derivative complaint filed in a California federal court — was improper. The Supreme Court explained that although the plaintiff’s simultaneous pursuit of a derivative action and a Section 220 books and records action was perhaps ill advised, it was not impermissible under prevailing Delaware law.
 

In Golden Telecom, Inc. v. Global GT LP, 2010 WL 5387589 (Del. Dec. 29, 2010), the Delaware Supreme Court affirmed a judgment of the Delaware Chancery Court in an appraisal proceeding under Section 262(h) of the Delaware General Corporation Law (“DGCL”). Section 262(h) provides that in the event of a merger, a stockholder of a Delaware corporation is entitled to an independent appraisal proceeding regarding the “fair value” of its outstanding shares. In affirming the Chancery Court, the Supreme Court declined to adopt two bright line rules for appraisal proceedings under Section 262(h). First, it rejected the notion that the Chancery Court must consider the merger price agreed to by the parties following arm’s-length negotiations and fair process as necessarily reflecting the “fair value” of the corporation’s shares. Second, it rejected the assertion that a corporation is bound by company-specific data included in its fairness opinion in arriving at a “fair value” under Section 262(h). This decision confirms that the Chancery Court has great flexibility, and is entitled to great deference, in conducting its independent appraisal of the value of a merger target under Section 262(h).
 

On October 21, 2010, the Securities and Exchange Commission announced enforcement actions against Office Depot, Inc. and two executive officers for violating Regulation FD by selectively conveying to analysts and institutional investors that Office Depot would not meet analysts’ earnings estimates.

On October 4, 2010, the Securities and Exchange Commission exercised its discretion to grant a stay of its controversial new proxy access rules and related amendments that were scheduled to take effect on November 15, 2010. As we previously blogged (see our posts here and here), the SEC’s disputed proxy access rules would grant shareholders who have held three percent (3%) of the outstanding stock of a company for at least three (3) years the right to include a limited number of director nominees in the company's proxy statement. For many companies, the stay could effectively delay implementation of the new proxy access rules for the upcoming 2011 proxy season. The order granting the stay can be found here.
 

Today, Business Roundtable and the Chamber of Commerce of the United States filed a Petition for Review in the U.S. Court of Appeals for the District of Columbia Circuit challenging the legality of the SEC's recently-adopted proxy access rules (See our blog posts here and here.) The proxy access rules grant shareholders who have held three percent (3%) of the outstanding stock of a company for at least three (3) years the right to include a limited number of director nominees in the company's proxy statement.

On September 16, 2010, the SEC's final rules for proxy access were published in the Federal Register.  The proxy access rules are effective 60 days after such publication, and accordingly, will be effective on November 15, 2010.  In order to take advantage of the new proxy access rules, nominating shareholders must file a Schedule 14N with the SEC no earlier than 150 calendar days, and no later than 120 calendar days, before the anniversary of the date that the company mailed its proxy materials for the prior year’s annual meeting. As such, to determine whether the new rules will affect a company’s 2011 proxy season, subtract 120 days from the anniversary of the date the 2010 proxy materials were mailed to shareholders. If the resulting date is on or after November 15, 2010, the new rules will be in effect for the company’s 2011 proxy season, provided the company is not a smaller reporting company or a foreign private issuer. See our blog SEC Adopts Mandatory Proxy Access Rule for Shareholder Director Nominations -- Applicable for 2011 Proxy Season (August 27, 2010) for additional information regarding the new proxy access rules.
 

On August 25, 2010, the Securities and Exchange Commission voted 3-to-2 along party lines to adopt a controversial proxy access regime to facilitate shareholders’ ability to nominate a limited number of candidates for election as directors. The new rules, which are primarily contained in new Rule 14a-11 promulgated under the Securities Exchange Act of 1934, will permit a single shareholder or group of shareholders owning at least 3% of the shares entitled to vote for directors to nominate, in accordance with applicable state corporate law, a number of directors up to 25% of the number of authorized directors and have such nominees included in the company’s proxy statement.
 

The practice of marketing registered public offerings of debt securities with credit ratings information and related disclosure of issuer credit ratings in SEC filings will change with the passage of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 ("Dodd-Frank").
 

Background

Prior to the enactment of the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, the definition of an "accredited investor" under Rule 215 of the Securities Act of 1933 and Rule 501 of Regulation D included a natural person with a net worth of at least $1 million, either individually or jointly with the investor's spouse, and the value of such investor's primary residence was included in the calculation of his or her net worth for purposes of determining "accredited investor" status.
 

Mutual fund companies have traditionally argued that they are exempt from the whistleblower protections of the Sarbanes-Oxley Act (“SOX”) because the funds themselves do not have any employees. Massachusetts District Court Judge Douglas P. Woodlock soundly rejected that argument in a ruling issued March 31 and, in so doing, may have opened the door to a tidal wave of whistleblower suits against mutual fund companies.
 

In Hertz Corp. v. Friend, No. 08-1107, 2010 U.S. LEXIS 1897 (Feb. 23, 2010), the United States Supreme Court reversed the United States Court of Appeals for the Ninth Circuit’s holding that New Jersey-based Hertz Corporation (“Hertz”) was a citizen of the State of California for purposes of federal court diversity jurisdiction, rejecting the Ninth Circuit’s “business activities” test and instead adopting the corporate “nerve center” standard used by numerous other Circuits. In doing so, the Supreme Court established a single, uniform and clear interpretation of the phrase “principal place of business” for purposes of deciding a corporation’s citizenship status in disputes over whether diversity exists among parties to a lawsuit.
 

Directors of California corporations have, for years, struggled to understand the scope of their fiduciary duties when a corporation is insolvent versus when a corporation is in the “zone of insolvency.” While other states (particularly Delaware) have provided some recent guidance in this area[1], the California Court of Appeal recently provided some much needed clarification – including providing comfort to the decision making processes of directors who are considering various alternatives when a corporation enters into a zone of insolvency.

On November 12, 2009, the SEC announced that it had settled charges against SafeNet, Inc. and some of its former officers, employees and accountants, in connection with earnings management and options backdating schemes. This case represents the SEC's first enforcement action brought under Regulation G, and it provides important reminders to issuers on financial reporting practices.

The Internal Revenue Service (the "IRS") has issued final regulations regarding the information return and information statement requirements under Section 6039 of the Internal Revenue Code.  Section 6039 was amended in 2006 to require corporations to file an information return with the IRS (the "Return") and furnish a written information statement (the "Statement") to each employee who exercises incentive stock options ("ISOs") or sells or otherwise transfers shares acquired under an employee stock purchase plan ("ESPP") by January 31 following the year in which such transactions occur.  As we reported in our July 23, 2008 blog article, the IRS issued proposed regulations relating to these requirements in July 2008, which, among other things, relieved corporations of the requirement to file a Return for stock transfers that occurred during the 2007 and 2008 calendar years.
 

Corporations, including publicly-traded companies may wish to review their procedures for addressing unclaimed stock in light of a recent California Supreme Court decision. In Azure Limited v. I-Flow Corp (Dkt. No. S164884, July 16, 2009), the Court held that a corporation holding unclaimed stock, which failed to send a shareholder notice of potential escheat prior to issuing a duplicate stock certificate to the state controller in accordance with the Unclaimed Property Law (Cal. Civ. Proc. Cd. §§1500-1582) (the "UPL"), was liable for damages equal to the difference between the amount for which the controller sold the stock and the stock's value at the time of the shareholder's claim for return.
 

In Biltmore Assocs., LLC v. Twin City Fire Insurance Co., 2009 WL 1976071 (9th Cir. July 10, 2009), the United States Court of Appeals for the Ninth Circuit applied the “insured versus insured” exclusion, common in directors’ and officers’ insurance policies (“D&O insurance”), to prevent a creditors’ trust from collecting on a D&O insurance policy under a claim assigned to it from a debtor-in-possession. The Ninth Circuit held that a post-bankruptcy debtor-in-possession should be treated as the same entity as a pre-bankruptcy corporation for purposes of the D&O insurance policy. Because the underlying claim was brought by the debtor-in-possession against directors and officers of the company, the “insured versus insured” exclusion prevented any assignee of the debtors’ claim against the insurance company from collecting. The court held that the trustee of the creditors’ trust stood in the debtor’s shoes for the purposes of the action and, because the debtor-in-possession was still an insured under the D&O policy, the trustee could not collect on the claim.

A recent Delaware Court opinion, Bay Center Apartments Owner, LLC v. Emery Bay PKI, LLC, Case No. 3658-VCS (Del. Ch. Apr. 20, 2008), provides important guidance regarding whether and to what extent managers and members of a limited liability company (“LLC”) organized in Delaware owe duties to the LLC and its members. Section 18-1101(c) of the Delaware Limited Liability Company Act provides that “To the extent that…a member or manager...has duties (including fiduciary duties) to a limited liability company,…the member’s or manager’s duties may be expanded or restricted or eliminated by provisions in the limited liability company agreement; provided, that the limited liability company agreement may not eliminate the implied contractual covenant of good faith and fair dealing.” However, in Bay Center, the Chancery Court held that where the LLC is silent or ambiguous as to the duties members and managers owe to each other, they will be subject to the traditional fiduciary duties that directors of a Delaware corporation owe. It also imposed the duties of good faith and fair dealing on the manager of the LLC to perform its management functions in good faith. Therefore, the Bay Center decision is important in that it underscores the necessity of LLC participants that do not want to be subject to traditional fiduciary duties to clearly and unambiguously modify or eliminate these duties in the LLC operating agreement.

Governor Schwarzenegger today vetoed AB2944. The bill would have provided that directors may consider the interests of specific corporate constituencies in addition to the shareholders. For a more detailed description of this legislation, see our earlier article here. In his veto message to the California State Assembly, the Governor noted that        "[w]hile this bill proposes a new model of corporate governance consisting of a package of many intriguing concepts, it is just that; a package of concepts that could produce unknown ramifications and the need for which have not been fully demonstrated." For further information, please contact Peter M. Menard at (213) 617-5483.

The NYSE and Nasdaq each recently amended the definition of "independent director" to increase from $100,000 to $120,000 the amount of compensation that an independent director may receive from a listed company in a 12-month period.  In addition, the NYSE amended the definition of "independent director" to allow an immediate family member of an independent director to be employed by the company's auditor provided the immediate family member is not a partner of the auditor or working on the company's audit.

Seven Sheppard Mullin Corporate Partners have been named Best Lawyers in America for 2009.  David Bosko, Larry Braun, Robert Copeland, Tom Hopkins, Richard Kintz, Peter Menard and Mike Moore received this distinguished honor.  In addition to our Corporate Partners, 39 Partners from our Antitrust; Entertainment, Media and Technology; Finance and Bankruptcy; Government Contracts and Regulated Industries; Intellectual Property; Labor and Employment; Land Use and Natural Resources; Litigation; Real Estate; Tax and White Collar Practice Groups were named Best Lawyers in America for 2009.

In Schoon v. Troy Corporation, 948 A.2d 1157 (Del. Ch. 2008), the Delaware Chancery Court held that a former director is not entitled to advancement rights where a later board-approved amendment to the corporation’s by-laws cut off such rights. This case is important for all directors and officers who are concerned about liability coverage after leaving a company or resigning from the board of directors.

Proposed legislation in California would expressly provide that directors may consider the interests of specific corporate constituencies in addition to the shareholders.  This legislation seeks to promote corporate social responsibility by removing the threat of shareholder lawsuits against directors who consider the interests of certain constituencies which may be inconsistent with the interests of the corporation's shareholders.  The bill further seeks to clarify the directors' standard of care in connection with acquisitions.  However, the bill is ambiguous as to whether it applies only to corporations formed under the laws of California or also applies to so-called "quasi-California corporations," corporations with significant ties to California.

A recent Stanford University study casts doubt on the validity of the corporate governance ratings provided by Institutional Shareholder Services (ISS) and its principal competitors.

Governance rating firms seek to measure the effectiveness of a public company's corporate governance.  They maintain that this rating is predictive of the company's future performance.

Stanford's study claims to be the first objective analysis of the predictive value of corporate governance ratings.  It examined more than 15,000 ratings of 6,827 separate companies from 2005 to 2007.

In In re Netsmart Technologies, Inc. Shareholders Litigation, C.A. No. 2536-VCS (Del. Ch. Mar. 14, 2007), Vice Chancellor Strine held that the shareholder plaintiffs demonstrated a probability of success on the merits of their claim that the Netsmart board of directors failed to fulfill their Revlon duties in considering and approving a cash sale of the company to two private equity firms.  The Court determined that the board’s decision not to conduct a broad market canvass for strategic acquirers, and instead focus the search for acquirers solely on private equity firms, did not appear to be reasonable under the circumstances.  The Court also held that the post-signing “market check” recommended by the company’s financial advisers was not appropriate for a small-cap company like Netsmart, thus was far too passive to have been effective in mitigating the narrowness of the pre-signing market canvass.  This decision provides guidance to boards when considering a sale to a private equity firm — an increasingly common situation affecting boards of directors of public companies throughout the country.

The SEC and PCAOB have taken significant new steps to implement promised reforms to the implementation of Section 404 of the Sarbanes-Oxley Act, which has been widely perceived to be unduly expensive and burdensome.  On May 23, 2007, the SEC approved new interpretive guidance for management’s assessment of internal controls, and amendments to certain Section 404 related rules.   The new guidance provides a principles-based framework intended to help public companies strengthen their internal control over financial reporting while reducing unnecessary costs, particularly for smaller companies.  On May 24, 2007, the PCAOB voted to adopt Auditing Standard No. 5 to replace its previous internal control auditing standard, Auditing Standard No. 2.

The SEC today announced that the staff would recommend an amendment to the proxy access rules to respond to the issues raised in AFSCME v. AIG, and scheduled an open meeting on October 18 to consider the recommendation. In making the announcement, the chairman of the SEC noted that shareholder rights in the proxy process "are best secured under a consistent national application of Rule 14a-8 to shareholder proposals" and that the SEC would schedule public comment and final consideration of the proposal "to allow a final rule to go into effect in time for the 2007 proxy season."

In AFSCME v. AIG, the Court of Appeals for the Second Circuit today provided a powerful impetus to the efforts of institutional shareholders to expand proxy access. The court’s decision does not directly grant shareholders the right to present their own slates of director nominees in the company’s proxy statement. However, it does challenge the long-standing interpretation of Rule 14a-8(i)(8) as permitting a company to exclude a shareholder proposal granting shareholders increased proxy access. If the SEC fails to respond to the court’s decision by clarifying or amending Rule 14a-8(i)(8), shareholder activists predict a surge in shareholder proposals to establish liberal proxy access procedures on a company-by-company basis.

The U.S. Sarbanes-Oxley Act of 2002 ("SOX") requires audit committees of public companies to establish procedures for the anonymous submission by employees of that company of concerns related to accounting and financial matters. Multinational corporations, however, have to be careful to consider data protection, labor and human rights legislation in the EU and other countries in the design of their whistleblower programs. 

In January 2006, the SEC staff rejected the argument of Hewlett-Packard Company that it could exclude from its proxy statement a stockholder proposal to adopt a majority vote standard in the election of directors. Hewlett-Packard had argued that it could exclude the proposal under the SEC proxy rules because its existing voting policy "substantially implemented" the proposal. At its annual meeting on March 15, 2006, 53.0% of the votes present voted against the proposal, 43.5% voted for the proposal and 3.5% abstained.

Senator Richard Alarcon (D: San Fernando Valley) has introduced a bill that would require a company incorporated in California to elect directors by a majority of the votes cast in an uncontested election. The bill codifies a majority vote standard similar to those already adopted by Intel Corporation, Dell Inc., PepsiCo, Inc., Texas Instruments and others.

Two standards are emerging in the push to replace the current plurality vote standard in the election of directors.