NYSE Rule 452 allows a member organization (broker) to use its discretion to cast votes on behalf of “street name” shareholders who do not return the proxy card to the broker within 10 days prior to the shareholder meeting. However, such discretionary voting is not permitted with respect to “non-routine” matters. Historically, corporate governance proposals that were supported by company management were considered routine matters. Beginning in 2010, the NYSE prohibited broker discretionary voting in the context of director elections, which was codified in the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The Dodd-Frank Act also prohibited brokers from voting shares on executive compensation proposals without specific client instruction. The NYSE’s new position with respect to company-supported corporate governance proposals is the most recent limit on broker discretionary voting. When brokers do not vote a share they hold in street name because of a lack of instructions, it is referred to a “broker non-vote.”

What changed?

The Information Memo indicated the following examples of company-supported governance proposals that would no longer be considered routine:

• de-staggering a company's board of directors;
• majority voting in the election of directors;
• eliminating super majority voting provisions;
• providing for the use of written consent;
• providing rights to call a special meeting; and
• certain types of anti-takeover provision overrides.

Why is this significant?

Brokers that typically voted in favor of these type of company-supported proposals will no longer have discretion to do so. These proposals usually must be implemented through an amendment to the company’s articles or certificate of incorporation, and as such amendments typically require the affirmative vote of at least a majority of the outstanding shares, broker non-votes will have the same effect as “against” votes. Depending on the composition of shareholders, the loss of broker discretionary votes may have a material effect on the ability of a company to obtain shareholder approval for a company-supported governance proposal. The problem will be exacerbated where a proxy advisory firm recommends against the proposal. Until this rule change, discretionary broker votes countered to some degree the negative votes from holders that followed the recommendations of proxy advisory firms.

Under Delaware law, where brokers have discretionary authority to vote on any matter on the ballot, all shares they hold in street name will be considered present for quorum purposes. If brokers do not have discretionary authority to vote on any matter, shares that were not instructed on any matter are not considered present for quorum purposes. In the past, a company-supported governance proposal would be discretionary and therefore would be enough on its own to cause all street name shares to be present at a meeting for quorum purposes. That will no longer be the case.

What should you do now?

If you plan to have a company-supported governance proposal on your annual meeting agenda, it will be more important than ever to analyze the shareholder base and consider early engagement with key shareholders and the likely recommendations of the proxy advisory firms. Proxy solicitation firms can be invaluable in this analysis, and can also help to “get out the vote” of holders that may not otherwise return instruction cards.

These new rules should also be taken into account in connection with consideration of pre-empting a received or expected shareholder proposal on corporate governance matters.

Finally, if there will be other proposals on the agenda and obtaining a quorum for the meeting is a potential concern, companies might consider another proposal to support a quorum. Ratification of auditors and an increase in authorized common shares are examples of proposals that brokers may still vote uninstructed shares.

What if you have questions?

For any questions or more information on these or any related matters, please contact any attorney in the firm’s corporate practice group. A list of such attorneys can be found by clicking Lawyers; on this page.

Louis Lehot (650-815-2640, llehot@sheppardmullin.com), John Tishler (858-720-8943, jtishler@sheppardmullin.com), Edwin Astudillo (858-720-7468, eastudillo@sheppardmullin.com) and Nina Karalis (858-720-7466, nkaralis@sheppardmullin.com) participated in drafting this posting.

Disclaimer

This update has been prepared by Sheppard, Mullin, Richter & Hampton LLP for informational purposes only and does not constitute advertising, a solicitation, or legal advice, is not promised or guaranteed to be correct or complete and may or may not reflect the most current legal developments. Sheppard, Mullin, Richter & Hampton LLP expressly disclaims all liability in respect to actions taken or not taken based on the contents of this update.

On January 24, 2012, the Federal Trade Commission announced revised, higher thresholds for premerger filings under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. The filing thresholds are revised annually, based on the change in gross national product and will be effective thirty days after publication in the Federal Register. Publication is expected within a week, so the new thresholds will most likely become effective in late February 2012. Acquisitions that have not closed by the effective date will be subject to the new thresholds.

While the filing thresholds have changed, the filing fees have not, but will be based on the new thresholds as follows: $45,000 for transactions valued at more than $68.2 million but less than $136.4 million; $125,000 for transactions valued at more than $136.4 million but less than $682.1 million; and $280,000 for transactions valued at more than $682.1 million.

The above rules are general guidelines only and their application may vary depending on the particular transaction.
 

2. Higher Thresholds For the Prohibition Against Interlocking Directorates

Also on January 24, 2012, the FTC announced new, higher thresholds for the prohibition in Section 8 of the Clayton Act against interlocking directorates. Section 8 prohibits, with certain exceptions, one person from serving as a director or officer of two competing corporations if two thresholds are met. Applying the new thresholds, competitor corporations are covered by Section 8 if each one has capital, surplus and undivided profits aggregating more than $27,784,000, with the exception that no corporation is covered if the competitive sales of either corporation are less than $2,778,400. As with HSR thresholds, the FTC is required to revise Section 8 thresholds annually based on gross national product. Section 8 thresholds become effective upon publication in the Federal Register, which is expected later this week.

This article was originally posted on Sheppard Mullin's Antitrust Law blog, which can be found at www.antitrustlawblog.com.

For further information, please contact Matthew Richardson at (213) 617-4222.

In Nicastro, the United States Supreme Court reversed the New Jersey Supreme Court’s finding of personal jurisdiction over an English manufacturer in a product liability action. The plaintiff in Nicastro had seriously injured himself while using a machine made by petitioner J. McIntyre Machinery (“J. McIntyre”). J. McIntyre made the machine in England and hired an independent distributor in Ohio to sell its machines in the United States. J. McIntyre accompanied the distributor to trade shows in the United States (although never in New Jersey). One its products ended up in New Jersey, and the New Jersey Supreme Court held that the New Jersey courts properly exercised personal jurisdiction over J. McIntyre because the company knew or reasonably should have known that its products could have been sold in New Jersey. The United States Supreme Court reversed. The Court observed that J. McIntyre did not have “a single contact with New Jersey short of the machine in question ending up in [New Jersey].” The Court held that this contact, by itself, was insufficient to show that J. McIntyre purposefully availed itself of the New Jersey market.

After discussing United States Supreme Court precedent on the limits of personal jurisdiction over foreign defendants, the California Court of Appeal in Dow Chemical directed the trial court to vacate its order denying Dow Canada’s motion to quash service of process and to enter a new order granting the motion. The Court of Appeal held that at no time did Dow Canada engage in any activities in California that revealed an intent to invoke or benefit from the protection of California’s laws. Under Nicastro, due process required that Dow Canada have engaged in some conduct directed at the forum, beyond a mere awareness that some of its products may end up California.

This decision by the Court of Appeal outlines the outer limits of personal jurisdiction in California. In order for the California state courts to exercise personal jurisdiction over a non-California manufacturer, the company must engage is some sort of purposeful conduct directed towards the forum state. The Court of Appeal identified the following examples of purposeful conduct that could lead to the exercise of personal jurisdiction by a California court: advertising or marketing in California, selling in California, selling directly to customers who are residents of California, maintaining a physical presence in California, qualifying for business in California, designating an agent of service of process in California and/or designing products to comply with regulations enacted by California. This decision provides helpful guidance to non-California corporations that manufacture products that may ultimately find their way to California.

For further information, please contact John Stigi at (310) 228-3717 or Alejandro E. Moreno at (619) 338-6664.

The SEC’s announcement stated that this new policy involves only a “minority” of its enforcement actions, and is “separate from and unrelated” to the recent rejection by the United States District Court for the Southern District of New York of its proposed $285 million settlement with Citigroup Global Markets Inc. arising from the bank’s lucrative short trading bets against a billion dollar collateralized debt obligation (CDO) composed of home loans, while it was selling the same CDO to investors as a good investment.

While the “neither admit nor deny” practice has been followed for many years, its application has attracted negative attention recently, particularly in cases arising from the 2008 financial crisis. The SEC has defended the practice because it saves considerable expense and avoids potential failures by settling with companies rather than fighting them in court. And it claims that it can recover just as much money in settling as in litigating, thereby enabling investors to recover sooner.

In the end, a company that has admitted its liability in a criminal case has little to gain for its defense of shareholder suits by insisting that it not admit the same facts a second time in settling the SEC’s enforcement action.

For further information, please contact Bob Rose at (619) 338-6661.

Plaintiffs brought numerous claims against Rio Tinto under the ATS, which confers federal jurisdiction over tort actions brought by aliens for violations of the law of nations, or “customary international law.” Rio Tinto argued, among other things, that plaintiffs’ claims were nonjusticiable political questions and that plaintiffs could not file an ATS suit in federal court without first exhausting local remedies in Papua New Guinea. The district court found no such exhaustion requirement but agreed that plaintiffs’ claims were nonjusticiable political questions and dismissed all of them. Both sides appealed. On appeal, Rio Tinto argued that it could not be liable because the scope of liability under the ATS does not extend to corporations.

The Ninth Circuit rejected Rio Tinto’s argument that the ATS does not allow for corporate liability. Whereas Rio Tinto had argued that treaties establishing international tribunals for criminal trials have not explicitly provided for corporate liability, the Court concluded that the more appropriate inquiry was to look at the statute itself. Noting that the text of the ATS contains no express language limiting the scope of liability to individuals and that the legislative history of the statute contains nothing to suggest otherwise, the Court found no basis for holding that such a limitation on liability exists. In determining whether international law extends the scope of liability for a violation of a given norm to the perpetrator being sued, the Court concluded that the proper inquiry is “not whether there is a specific precedent so holding, but whether international law extends its prohibitions to the perpetrators in question.” Thus, the Court attached little significance to the Second Circuit’s assertion in Kiobel that no international tribunal has ever held a corporation criminally liable, reasoning that this in itself would not prohibit any such tribunal from holding a corporation criminally liable under customary international law.

With Rio Tinto, the Second Circuit’s decision in Kiobel is increasingly becoming an outlier among ATS cases ruling on corporate liability. The District of Columbia Circuit, the Seventh Circuit, the Eleventh Circuit and federal district courts in Maryland and Virginia have all held that the ATS does not bar corporate liability. The circuit split will be resolved by the Supreme Court, which granted certiorari to Kiobel last month and will decide the case during its current 2011-2012 term. Petitioners’ brief is due December 14, 2011, and respondents’ brief is due January 27, 2012.

For further information, please contact John Stigi at (310) 228-3717 or Dan Brooks at (202) 469-4916.

1. Negotiations can be material non-public information, despite the uncertainty of a final result
    
2. Do not rely upon the debtor’s view of what is material.  Each noteholder had an obligation to obey the securities laws and cannot use the debtor’s view as a shield.
    
3. Negotiating creditors may become insiders, at least temporarily, by their in-depth participation in discussions and receipt of confidential information.
    
4. There is no guarantee that engaging outside counsel with attorneys’-eyes-only agreements will be accepted at face value.
    
5. If you want to sit at the negotiating table, then it’s not asking too much to restrict trading or construct an ethical wall between traders and negotiators.

Among the lessons to be learned from the WaMu decision are that insider trading rules apply in bankruptcy, that creditors and debtors have independent obligations and that not even confidentiality agreements with “cleansing” provisions will guarantee the elimination of exposure.  The risks include disallowance of claims, but also the serious sanctions, fines and penalties of insider trading claims.  (And there’s still no approved reorganization plan, after three years in the courts.)

For further information, please contact Bob Rose at (619) 338-6661.