• amending the definition of “principal” so that it only applies to individuals “acting for himself or herself, and not as a fiduciary or as an official of any legal, governmental or commercial entity, who executes a power of attorney;"
   
• eliminating the provision of the 2009 Amendments that created a presumption that the execution of a power of attorney revokes any prior powers of attorney executed by the principal;
   
• expressly providing that the execution of a power of attorney does not revoke any power of attorney previously executed by the principal;
   
• adding a provision that a power of attorney that complies with NY-GOL 5-1501 and is executed in another state or jurisdiction by a domiciliary of the State of New York is valid in the State of New York, and a power of attorney executed in the State of New York by a domiciliary of another state or jurisdiction in compliance with the law of that state or jurisdiction or the laws of the State of New York is valid in the State of New York.

In addition, the 2010 Amendments added NY-GOL Section 5-1501(c) which provided that the following powers are not "powers of attorney" under this law:
 

1. a power of attorney given primarily for a business or commercial purpose, including without limitation:
 

(a) a power to the extent it is coupled with an interest in the subject of the power;

(b) a power given to or for the benefit of a creditor in connection with a loan or other credit transaction;

(c) a power given to facilitate transfer or disposition of one or more specific stocks, bonds or other assets, whether real, personal, tangible or intangible;
 

2. a proxy or other delegation to exercise voting rights or management rights with respect to an entity;
 

3. a power created on a form prescribed by a government or governmental subdivision, agency or instrumentality for a governmental purpose;
 

4. a power authorizing a third party to prepare, execute, deliver, submit and/or file a document or instrument with a government or governmental subdivision, agency or instrumentality or other third party;
 

5. a power authorizing a financial institution or employee of a financial institution to take action relating to an account in which the financial institution holds cash, securities, commodities or other financial assets on behalf of the person giving the power;
 

6. a power given by an individual who is or is seeking to become a director, officer, shareholder, employee, partner, limited partner, member, unit owner or manager of a corporation, partnership, limited liability company, condominium or other legal or commercial entity in his or her capacity as such;
 

7. a power contained in a partnership agreement, limited liability company operating agreement, declaration of trust, declaration of condominium, condominium bylaws, condominium offering plan or other agreement or instrument governing the internal affairs of an entity authorizing a director, officer, shareholder, employee, partner, limited partner, member, unit owner, manager or other person to take lawful action relating to such entity;
 

8. a power given to a condominium managing agent to take action in connection with the use, management and operation of a condominium unit;
 

9. a power given to a licensed real estate broker to take action in connection with a listing of real property, mortgage loan, lease or management agreement;
 

10. a power authorizing acceptance of service of process on behalf of the principal; and
 

11. a power created pursuant to authorization provided by a federal or state statute, other than this title, that specifically contemplates creation of the power, including without limitation a power to make health care decisions or decisions involving the disposition of remains.

The 2010 Amendments address the primary concerns of transactional attorneys advising clients in the shareholder proxy process, SEC filings, state blue sky filings and other commercial transactions by including the general exception for powers of attorney executed "primarily for a business or commercial purpose," as well as the more transaction-specific exceptions listed above. The retroactive effect of the 2010 Amendments means that so long as a power of attorney complies with the 2010 Amendments, it will be deemed valid and will not need to be re-executed even if it was improperly executed under the 2009 Amendments. Nevertheless, persons relying on a power of attorney in the State of New York should carefully review the amended New York State Power of Attorney Law to ensure that it complies with, or falls within a stated exception from, its provisions.

For further information, please contact Gabriel G. Matus at (212) 634-3055. Mr. Matus is a member of the Corporate Practice Group in the firm's New York office.

(a)       subcontractors under a federal prime contract and
 

(b)       bound by the provisions of the three equal opportunity clauses because the clauses were incorporated into the subcontracts by operation of law.

By way of background, prior to this decision, health care providers never believed they were, nor had they ever been treated as, subcontractors under OPM’s Federal Employees Health Benefits Acquisition Regulation (“FEHBAR”), 48 CFR 1600 et. seq. This belief stemmed from the FEHBAR definition of “subcontractor” as “any supplier, distributor, vendor, or firm that furnishes supplies or services to or for a prime contractor or another subcontractor, except for providers of direct medical services or supplies pursuant to the Carrier’s health benefits plan ….” (Emphasis added). This definition was incorporated directly into the hospital HMO’s (“hospitals”) contracts with UPMC. As the HMOs in question were, in their view, something other than subcontractors, they never considered themselves covered by the requirements of the three Equal Opportunity laws, all of which (i) mandate that non-exempt subcontracts whose values exceed various specified thresholds incorporate the applicable equal opportunity clause and (ii) are implemented by the Secretary of Labor and his delegee the OFCCP. When the three hospitals first received letters from the OFCCP advising them that their contracts were covered under the three laws and scheduling compliance reviews of their operations, their managements politely declined either to provide the documents requested or to allow the agency to conduct onsite reviews of the HMOs’ compliance with the three equal opportunity clauses.

The OFCCP sought injunctive relief that was granted by the ARB, which reasoned as follows:
 

(a)        Pursuant to the Executive Order and the two statutes in question, UPMC’s contract with OPM “explicitly required” that UPMC include the applicable equal opportunity clause in every subcontract.
 

(b)        The FEHBAR (which the decision characterizes as a “FAR regulation”) and contract provisions excluding “providers of direct medical services or supplies” from the definition of subcontractor was in direct conflict with the DOL regulations implementing the Executive Order and the two statutes, which collectively express “a significant or deeply ingrained strand of public procurement policy.” The exclusion was, therefore, “invalid or void.”

Just where does this holding take us? Well, maybe nowhere. UPMC-Braddock and its sister hospitals have appealed the ARB’s decision to the U.S. District Court for the District of Columbia, arguing, among other things, that “[t]he affirmative action requirements that OFCCP seeks to impose . . . are not enforceable against a party which had never agreed to such requirements and which had never agreed to do business with the federal government.”  UPMC-Braddock v. Solis, D.D.C., Civ. A. No. 1:09-121-PLP (Complaint filed June 30, 2009). It would, of course, be refreshing if the court were to sustain the appeal and enforce the subcontracts as written, particularly since one might think that the HMOs had a justifiable basis for relying on the FEHBAR’s explicit declaration that their agreements were not “subcontracts.” The HMOs, it would seem, have both the language of their agreements and the language the FEHBAR on their side. One would hope that is enough.

But if it is not, again, where does that take us?

It is of course possible that its impact will be limited to those clauses over which the ARB has enforcement authority and that CDA tribunals will decline to extend it to every FAR clause that has ever been shoehorned into a prime contract via the Christian Doctrine. After all, four decades of silence on the issue suggests that the CDA tribunals have hardly been chomping at the bit to extend Christian. Moreover, the Government has a direct right of action against the prime contractor and can seek redress against the prime contractor for its failure to have discharged its contractual duty to flow the missing clause down into its subcontract and it would be extraordinary for a tribunal now to hold that Christian dispenses with the rule of privity in regard to Government claims against subcontractors. That is a slippery slope down which the Government may not wish to slalom if, at the bottom, it eventuates in the collateral elimination of privity as a bar to subcontractor claims against Uncle Sam.

What about prime contractor claims against subcontractors seeking to impose duties under absentee clauses via the Christian Doctrine? Well, absent the litigation of the issue under an indirect, sponsored appeal agreement, those claims will not be heard by a CDA tribunal.  State and local courts, and even federal district courts, do not live and breathe the federal common law and we would hazard a guess that the judges in those tribunals will not find the Christian Doctrine as easy a pill to swallow as do those that work every day in the sometimes arcane world of government contracts. They may well be reluctant – if not loath – to modify subcontracts for the benefit of a prime contractor that simply failed to have included certain clauses in the subcontracts in the first instance. 

All of which means – we live in a world of uncertain legal obligations. Root for the appellants.

For further information concerning our Government Contracts Practice, contact our Practice Group Leaders, Bryan Daly in Los Angeles at (213) 617-5466 and Anne Perry in Washington, D.C. at (202) 218-6875.

Authored By:

W. Bruce Shirk
202) 741-8426
bshirk@sheppardmullin.com

and

Anne B. Perry
202)218-6875
aperry@sheppardmullin.com

• These ownership and holding period thresholds represent a departure from the June 2009 proposal, which called for scaled ownership requirements of 1%, 3% and 5% based on company size and a 1-year holding period. The number of directors is consistent with the June 2009 proposal.
   
• In calculating the 3% ownership requirement of the Rule, ownership is reduced by any shares that a nominating shareholder has sold in a short sale.  Shares borrowed by a nominating shareholder are excluded from the calculation but shares loaned to others count towards the total, provided that the lender has the right to recall such shares and will do so upon being notified that its shareholder nominee(s) will be included in the company’s proxy statement. 
   
• The three-year holding period is measured from the date the shareholder files notification of its intent to use the proxy access rules on Schedule 14N (discussed below) with the SEC. The shareholder must continue to own the shares through the date of the meeting at which directors are elected, and must state its intent to continue to hold such shares after the election. If a shareholder group files, the rules are applicable to each member of the group.
   
• If 25% of the number of authorized directors is not a whole number, the number of nominees that must be included is rounded down to the nearest whole number. 
   
• The number of directors that shareholders may nominate is not reduced for a classified board election of a subset of directors. However, where any continuing directors who are not up for election in a given year were elected as a shareholder nominee pursuant to Rule 14a-11, such continuing directors will count toward the 25% maximum.

If multiple shareholders or groups propose candidates, the nominees of the nominating shareholder or group with the highest qualifying voting power percentage will be included. If that number of nominees is less than the maximum number that must be included, the nominee(s) of the next largest shareholder or group must be included, and so on until the maximum number of nominees is included. If, prior to the printing of proxy materials, a director candidate is disqualified or becomes unavailable, the same order of priority must be used to put a replacement candidate in the proxy. Once a company has begun printing its proxy materials, it does not need to include replacement nominees.

• Priority based on holdings represents a departure from the "first-in" standard in the June 2009 proposal, which would have given priority to the first shareholder or group that filed its notice of intent.

Nominee Eligibility

No intent to influence control

A nominating shareholder or member of a group may not use Rule 14a-11 if it holds any of the company’s securities with the purpose or the effect of changing control of the company or to gain a number of seats on the board that exceeds the maximum number of nominees permitted under Rule 14a-11. Each nominating shareholder or group member must certify to the absence of such intent in the Schedule 14N. The SEC clarified in the final rule that the absence of an intent to change control of the company is a condition for use of Rule 14a-11. Accordingly, a company that believes that a nominating shareholder or group member has an intent to change control or to pursue further nominees, has the opportunity to exclude the nominees using the SEC’s informal process (discussed below) or litigation.

No agreements with the company

In addition, a nominating shareholder or member of a group may not have an agreement with the company regarding director nominations prior to filing a Schedule 14N.  This rule is designed to prevent collusion among the company and friendly shareholders to nominate candidates that the board approves. This rule does not prohibit negotiations among the nominee, the nominating shareholder or group and the nominating committee or board of directors of the company regarding the nominee’s inclusion in the company’s proxy statement as a company supported nominee, where those negotiations are unsuccessful, or negotiations that are limited to whether the company is required to include the shareholder nominee in the company’s proxy statement in accordance with Rule 14a-11.  

Independence requirement and violations of applicable law

Companies whose securities trade on a national securities exchange or a trading system subject to national securities association rules need only include a shareholder nominee in the proxy statement if the nominee meets the exchange’s objective criteria for independence. NYSE and Nasdaq also have subjective criteria for independence, and heightened independence requirements for audit committee members,[1] but nominees do not need to meet these criteria as a condition to inclusion in the company’s proxy statement.

A company may also exclude a nominee if it believes the nominee's inclusion on the board of directors would violate federal, state or foreign law, or the rules of the applicable national securities exchange, other than rules related to independence (which are addressed as described above).

Companies may not exclude nominees that do not meet director qualification requirements set forth in the company’s organizational documents. If a nominee does not meet such requirements, the company can include that fact or belief in the proxy statement, which presumably would influence the vote on that nominee. If a nominee who does not meet qualification requirements is nonetheless elected, then under state law, the nominee would not in fact take a board seat, and applicable state law would govern what happens with respect to that seat. Although governing document qualifications cannot disqualify a nominee from being named in the company’s proxy statement, governing document qualifications may still be a powerful tool for companies to ensure that directors meet minimum standards important to the company.

Exclusion Procedure

The SEC will have an informal procedure for companies to use when they believe a purported Rule 14a-11 nominee may be excluded. No later than 14 calendar days after the close of the nomination window period, an issuer must notify the nominating shareholder(s) of a determination not to include one or more nominees. The nominating shareholder(s) will have 14 days after receipt of such notice to respond and, where applicable, cure any defects in the nomination. No later than 80 calendar days before filing its definitive proxy statement with the SEC, the company must notify the SEC of its intent to exclude a Rule 14a-11 nominee and the basis for its determination. The company may (but is not required to) seek a no-action letter from the SEC staff to support its determination. Nominating shareholder(s) will have 14 days after receipt of the company’s notice to the SEC to submit a response to the SEC staff. If requested by the Company, the SEC staff may at its discretion and as soon as practicable provide an informal statement of its views to the company and the nominating shareholder(s). Promptly following receipt of the SEC staff’s views (if provided), the company must provide notice to the nominating shareholder(s) whether it will include or exclude the nominee.

Schedule 14N

Nominating shareholders and groups will be required to provide a notice on Schedule 14N to the company of an intent to exercise nomination rights under the Rule. 

• The Schedule 14N must be delivered to the company and to applicable securities exchanges and concurrently filed with the SEC.
   
• Disclosure required by Schedule 14N includes information evidencing that the nominating shareholder(s) and the nominee(s) satisfy the eligibility requirements of Rule 14a-11, the extent and nature of relationships between the nominating shareholder(s) and the nominee(s) and the beliefs of the nominating shareholder(s) as to whether the nominee(s) satisfy any board qualification requirements in the company’s governing documents.  There are no restrictions on relationships between the shareholder(s) and the nominee(s). However, we would expect that shareholders who wish to avoid restrictions on trading in the company’s securities would avoid proposing a nominee who would make the shareholder subject to the company’s insider trading policy or to reporting and short-swing liability under Section 16 of the Exchange Act.
   
• Schedule 14N may include a supporting statement not longer than 500 words per nominee, which the company must include in its proxy statement. A company will not be subject to any liability under the securities laws for incorrect information contained in the supporting shareholder statement.
   
• The Schedule 14N must be filed 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. If the company did not hold an annual meeting during the prior year, or if the date of the meeting has changed by more than 30 calendar days from the prior year, the company will be required to disclose the filing date, which must be reasonable, in a Form 8-K filed pursuant to new Item 5.08 within four business days after the company determines the anticipated meeting date.

Amendments to Rule 14a-8 (Shareholder Proposals)

Prior to the adoption of these new rules, the so called 'election exclusion' provided by Rule 14a-8 permitted companies to exclude shareholder proposals to amend the company's organizational documents to establish procedures for the inclusion of shareholder director nominees in the company proxy materials proposals. Rule 14a-8 will be amended to remove that basis for exclusion.  Accordingly, a shareholder may propose amendments to charter documents providing for more liberal rules of proxy access, such as reduced ownership thresholds, reduced holding periods, and the like. If the proposed amendments are to the bylaws, under Delaware and other state laws, the action may be direct rather than advisory.

Amendments to Rule 14a-2 (Proxy Solicitation Rules)

The SEC also amended Rule 14a-2 to permit shareholders to solicit other shareholders to form a nominating group for Rule 14a-11 purposes and to campaign for shareholder nominees without running afoul of the proxy rules.

Rule 14a-2(b)(7) provides an exception from proxy solicitation prohibitions for oral and written communications solicitations by or on behalf of any shareholder in connection with the formation of a nominating shareholder group. To be eligible to use this exemption, a shareholder cannot be holding the company’s securities with the purpose, or with the effect, of changing control of the company or to gain a number of seats on the board of directors that exceeds the maximum number of nominees that the company could be required to include under Rule 14a-11.

Written communications may include no more than a statement of the shareholder’s intent to form a nominating shareholder group, identification of and a brief statement regarding the potential nominee(s) (or, where no nominee(s) have been identified, the characteristics of the nominee(s) that the shareholder intends to nominate, if any), the percentage of voting securities that each soliciting shareholder holds or the aggregate percentage held by any group to which the shareholder belongs, and contact information. Such written information must be filed with the SEC under cover of Schedule 14N on the day first used.

The exception also covers oral solicitations, which are not limited in content. In order to rely on the exception for oral solicitations, the shareholder must file a notice of commencement of oral solicitations on Schedule 14N.

Rule 14a-2(b)(8) provides an exception from proxy solicitation prohibitions for solicitations by or on behalf of a nominating shareholder or group in support of its nominee(s). The exception may be used only when the speaker is not seeking proxy authority. Written solicitations must include specified disclosures, including the identity of the nominating shareholder or group, a description of his/her/its direct or indirect interests, by security holdings or otherwise, and a specified legend. These written communications must be filed with the SEC under cover of Schedule 14N on the day first used. There is no filing requirement for oral communications in support of nominees. A shareholder may begin these communications immediately upon being notified that such shareholder’s nominee(s) will be included in the company’s proxy statement.

Neither rule discussed above provides an exemption for communications in connection with non-Rule 14a-11 proxy contests, such as those that occur under the director nomination provisions of a company’s governance documents. Moreover, both rules provide the exemption will be lost retroactively if the shareholder or group subsequently engages in a non-Rule 14a-11 nomination or solicitation in connection with the subject election of directors. The retroactive loss of the exemptions is designed to prevent exempt Rule 14a-11 solicitations from being used as a first stage in a more aggressive proxy contest.

No Preliminary Proxy Statement for 14a-11 Nominees

The inclusion of shareholder nominees in a proxy statement pursuant to Rule 14a-11 will not, on its own, require the filing of a preliminary proxy statement.

Additional Deadline Disclosure under Rule 14a-5

In addition to the shareholder proposal and advance notice bylaw deadlines already required to be disclosed under Rule 14a-5, companies must disclose the deadline for submitting nominees for inclusion in the company’s proxy materials for the company’s next annual meeting.

Continuation of Use of Schedule 13G

A shareholder eligible to report beneficial ownership on Schedule 13G rather than the longer form Schedule 13D will not be precluded from using Schedule 13G merely because a holder engages in a Rule 14a-11 process to nominate a director for inclusion in the company’s proxy statement.

No Effect on Section 16 or Affiliate Status

The standards for determining whether a shareholder is subject to reporting under Section 16 of the Exchange Act by virtue of being the beneficial owner of 10% or more of a class of voting securities registered under the Exchange Act will not change as a result of the new rules. Accordingly, joining a Rule 14a-11 nominating group may be considered for purposes of determining whether a holder is part of a “group” (as defined under Section 13(d) of the Exchange Act) that is a 10% or greater beneficial owner.

Similarly, there is no “safe harbor” associated with Rule 14a-11 activities for determination of whether a shareholder is an “affiliate” for purposes of the securities laws. Accordingly, Rule 14a-11 activities may be taken into account in the facts and circumstances determination of whether a shareholder is an affiliate. The lack of a safe harbor from the affiliate definition is a departure from the June 2009 proposal.

No Limitation on Repeated Nominations

The new rules contain no limitations on the ability of shareholders to nominate previously unsuccessful candidates. A 3% or greater shareholder is free to nominate the same candidates every year despite unsuccessful prior elections, provided the conditions of Rule 14a-11 are satisfied each year.

What will be the effect of the Rule?

The ramifications of the proxy access rules are likely to be significant.

It is unclear the extent to which institutional investors that have not previously pursued proxy contests will avail themselves of Rule 14a-11. It is also unclear whether individual investors will be able to organize groups large enough to meet the 3% ownership threshold, and if they do, whether larger investors will step in and propose nominees that “trump” the nominees of smaller investors for the limited Rule 14a-11 space on the proxy statement.

Most majority voting provisions provide that they do not apply in contested elections for directors. Accordingly, one effect of Rule 14a-11 will be to restore plurality voting for directors in most elections where shareholders avail themselves of Rule 14a-11.

It is clear that proxy access presents a significant change to the prevailing order of the board nomination process. Where a Rule 14a-11 candidate is elected, board communications will likely be affected, at least at the outset. The traditional board nomination process allows management and the continuing directors significant opportunity to get to know a new board member. That process usually involves the existing directors and the new director getting comfortable that they will operate harmoniously together. Rule 14a-11 directors that were opposed by the current board will lack the trust built through the traditional nomination process, and depending on the nature of the campaign, may be affirmatively distrusted and even disliked by the other directors. Of course, this kind of disruption is not new - boards that have seen successful activist shareholder campaigns have been through it. Rule 14a-11 has the potential to expand the universe of boards that experience such a shift to include more companies and particularly companies that in the past were not at significant risk of activist shareholder attack.

The risk of shareholder nominees could affect future management decisions. That is, management at some companies might find incentive to make decisions to satisfy the concerns of small constituencies of shareholders who might otherwise disrupt the proxy process by nominating dissident directors. It remains to be seen whether directors hostile to management or otherwise unwelcome by other board members will improve corporate governance, accountability and performance, as the SEC hopes. In any case, incumbent boards and company management will likely be required to spend significant additional time and resources on the director nomination and election process. Some, including dissenting Commissioner Kathleen L. Casey, argue that this new proxy access regime may reduce the competitiveness of U.S. corporations.

When is the New Rule Effective?

The new rules will become effective 60 days after publication in the Federal Register. The publication date is uncertain, but the new rules should be in effect approximately November 1, 2010. Smaller reporting companies will be exempt from the Rule until three years after the effective date. 

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 the effective date of the new rules, the new rules will be in effect for the company’s 2011 proxy season. For example, if a company released its proxy statement to shareholders on March 1, 2010, the new rules will apply to the company’s 2011 annual meeting if the new rules become effective by November 1, 2010.

What should you do now?

We recommend that companies subject to the new rules quickly evaluate the impact of the new rules, considering the following:

• Who are the company’s 3% or greater shareholders and which might be interested in nominating a director?
   
• Which shareholders below 3% might be expected to solicit for formation of a 14a-11 group to nominate directors?
   
• Are the company’s advance notice bylaws compatible with Rule 14a-11, including its notice provisions and information requirements?[2] 
   
• Does the company have director qualification requirements in its charter or bylaws, and are such requirements sufficient to prevent persons unsuitable to serve from joining the board?
   
• Will majority voting provisions cease to apply in a Rule 14a-11 contested election of directors, and if not, are the procedures for majority voting in a contested election workable?

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 and securities practice group.

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.

• The SEC staff clarified that for non-asset-backed issuers, NRSRO consent is not required if credit ratings information is included in a registration statement or a statutory prospectus only for the purpose of satisfying disclosure requirements. This means that issuers may use credit ratings without obtaining NRSRO consent when the disclosure of the credit rating is related only to changes to an issuer's credit rating, the issuer's liquidity, the issuer's cost of funds or the terms of agreements that refer to credit ratings, which information is classified by the SEC as "issuer disclosure-related information."  Specific examples of "issuer disclosure-related ratings information" include ratings information disclosed: (i) in the context of a risk factor discussion regarding the risk of failure to maintain a certain rating and the potential impact a change in credit rating would have on the issuer; (ii) when an issuer refers to or describes its credit ratings in the context of its liquidity discussion in the MD&A section of its periodic SEC reports; and (iii) when an issuer discusses credit ratings in its description of debt covenants, interest or dividends that are tied to credit ratings or potential support to variable interest entities.[3]
   
• The SEC staff indicated that issuers not subject to Regulation AB (for asset-backed securities) may rely upon Rule 401(a) under the Securities Act to allow continued use, for the limited period permitted under Rule 401(a), of a registration statement declared effective before July 22, 2010 that contains or incorporates by reference credit rating information beyond "issuer disclosure-related information," without NRSRO consent. This relief applies only to information and reports filed before July 22, 2010, and only until the next post-effective amendment to such registration statement. Reports incorporated by reference after July 22, 2010 should not contain credit ratings information other than "issuer disclosure-related information." The filing of the issuer’s next annual report on Forms 10-K, 20-F or 40-F is deemed to be a post-effective amendment of any registration statement on Form S-3 or F-3. Upon such filing, prior periodic reports and Form 8-Ks filed prior the beginning of the issuer’s fiscal year then in progress will no longer be incorporated by reference.[4]
   
• The SEC issued a no-action letter to Ford Motor Credit Company on July 22, 2010 stating that it would not recommend enforcement action against an issuer that omitted credit ratings disclosure otherwise required in a prospectus that is part of a registration statement relating to an offering of asset-backed securities.[5] This no-action position expires with respect to any registered offerings of asset-backed securities commencing with an initial bona fide offer on or after January 24, 2011.

What should you do now?

For non-asset-backed issuers:

1.  No action is needed if credit ratings information included or incorporated by reference in an already effective registration statement is "issuer disclosure-related ratings information."
    
2.  If a registration statement includes or incorporates by reference any credit rating information beyond what is considered "issuer disclosure-related ratings information" in an SEC filing before July 22, 2010, no amendment is required until the next post-effective amendment to such registration statement. However, this position applies only if no subsequently incorporated periodic or current report contains credit ratings information other than "issuer disclosure-related ratings information." Thus, assuming consent from the NRSRO is not available, an issuer will have until the filing of the next post-effective amendment or annual report on Form 10-K, 20-F or 40-F to amend the registration statement to remove the consent. In many cases, such amendment will occur merely by filing the Form 10-K, 20-F or 40-F with no credit ratings information other than “issuer disclosure-related ratings information.”
    
3. Make certain that any registration statements and Exchange Act reports filed in the future limit references to credit ratings to "issuer disclosure-related ratings information."  
    
4. For takedowns of rated securities, if disclosure of credit ratings information is desired, disclose the credit rating for the particular issue in a free writing prospectus, which would generally be a term sheet or Bloomberg screen, or in a Rule 134-compliant press release, rather than in the prospectus supplement.

For asset-backed issuers subject to Regulation AB:

1. The SEC no-action letter to Ford Motor Credit Corporation was written for application to all asset-backed issuers, and until January 24, 2011, issuers of registered asset-backed securities may rely on it to omit credit ratings disclosure otherwise required in prospectus or prospectus supplement.
    
2. For offerings to be commenced on or after January 24, 2011, watch for SEC rulemaking or further Congressional action.
    
3. If your offering may not commence until January 24, 2011 or thereafter, consider structuring your offering of asset-backed securities as a private placement under Rule 144A or offshore under Regulation S as an alternative to a registered offering.
    
4. Follow the guidance in paragraphs 3 and 4 above for non-asset-backed issuers.

How will this impact the market for bond issuances?

While it is too early to draw conclusions as to how the market will react to the repeal of Rule 436(g), a potential consequence may be that more issuers elect to issue securities in private placements pursuant to Rule 144A or offshore pursuant to Regulation S, particularly issuers of asset-backed securities.  For issuers of non-asset-backed securities in registered offerings, the result may simply be that credit ratings information is moved from the registration statement to a free writing prospectus that complies with Securities Act Rule 433, which would generally be a term sheet or Bloomberg screen, or to a Rule 134-compliant press release.

When is the new law effective?

The repeal of Rule 436(g) by Dodd-Frank Section 939G is effective now.

Are additional changes to be expected?

Further Congressional action or SEC rulemaking should be expected to clarify the use of credit ratings, particularly in registered offerings of asset-backed securities after January 24, 2011.

What if you have questions?

For any questions or more information on these or any related matters, please contact Louis Lehot, John Tishler, Camille Formosa or any attorney in the firm’s corporate and securities practice group.

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.

• Shareholder empowerment;
• Independent decision-making and use of independent advisers;
• Linkage between executive pay and company performance.

Below is a brief overview of provisions in the Reform Act that affect executive compensation and the related corporate governance aspects.

SHAREHOLDER EMPOWERMENT AND PROTECTION

Shareholder Say on Pay

• What: (Section 951 of the Reform Act). Proxy statements for annual (and other) shareholder meetings will require a separate shareholder vote on the compensation of a company's named executive officers ("Say on Pay"). Such Say on Pay votes must occur no less frequently than once every three years. Moreover, at least once every six years, shareholders will get to vote on whether the frequency of their company's Say on Pay vote should occur every 1, 2, or 3 years. The Say on Pay vote is not binding on the company and does not overrule decisions made by the company's board of directors. The Securities and Exchange Commission ("SEC") may exempt certain companies, such as smaller reporting companies, from Say on Pay. Certain institutional investment managers will be required to disclose, at least annually, how they voted on Say on Pay.
• When: The Say on Pay vote and the shareholder vote regarding the frequency of such Say on Pay vote shall be required for a company's first meeting of shareholders occurring after six months after the enactment of the Reform Act.

Shareholder Approval of Golden Parachutes

• What: (Section 951 of the Reform Act). Proxy statements in which shareholders will be asked to approve a company's acquisition, merger or disposition of all (or substantially all) assets (each, a "Corporate Transaction") will require disclosure of golden parachute arrangements and Corporate Transaction-related compensation for the company's named executive officers along with the triggering conditions for payment of such compensation. The proxy statement will also require a separate shareholder vote on the golden parachute arrangements/compensation unless such arrangements were previously subject to a Say on Pay vote. The golden parachute shareholder vote is not binding on the company and does not overrule decisions made by the company's board of directors. The SEC may exempt certain companies, such as smaller reporting companies, from the golden parachute shareholder vote. Certain institutional investment managers will be required to disclose, at least annually, how they voted on the golden parachute vote.
• When: The shareholder vote approving golden parachutes shall be required for a company's meeting of shareholders (which is being held to approve a Corporate Transaction) occurring after six months after the enactment of the Reform Act.

Shareholder Nomination of Directors

• What: (Section 971 of the Reform Act). The Reform Act provides the SEC with the authority to establish rules and procedures permitting shareholder nominees for the board of directors to be included in the proxy statement for the election of directors to the board. The SEC may exempt certain companies, such as smaller reporting companies, from such requirements.
• When: No specific time frame is mandated for if/when any SEC rulemaking must occur.

Broker Voting

• What: (Section 957 of the Reform Act). Brokers holding shares in street name will not be permitted to vote such shares, absent voting instructions received from the underlying beneficial owner, or executive compensation matters, or for the election of directors, or for any other significant matters as determined by SEC rulemaking.
• When: The Reform Act does not expressly state when the broker voting requirement is effective but it could be read to be effective now.

Disclosure of Employee/Director Hedging

• What: (Section 955 of the Reform Act). The SEC is expressly directed to adopt rules that companies must disclose in their proxy statement whether employees/directors (or any of their designees) are permitted to purchase financial instruments that are designed to offset decreases in the value of company securities that they hold.
• When: No specific time frame is mandated for when the SEC rulemaking must occur.

Insider Reporting Under Section 16(a) of the Securities Exchange Act of 1934

• What: (Section 929R of the Reform Act). The SEC is expressly permitted to adopt rules shortening the time period for when a Form 3 must be filed with the SEC under Section 16(a) for persons who become a director, officer or 10%+ shareholder of a publicly-held company. Currently, a Form 3 must usually be filed within ten days of the reporting triggering date.
• When: No specific time frame is mandated for if/when any SEC rulemaking must occur.

GREATER INDEPENDENCE

Compensation Committee Members

• What: (Section 952 of the Reform Act). Other than with respect to controlled companies and certain other exempted entities, the SEC is directed to adopt rules compelling the national securities exchanges to prohibit the listing of companies which do not require that each member of their compensation committee be an independent director. These rules will specify that "independence" must consider various relevant factors such as the source of any compensation paid to a director and whether the director is otherwise affiliated with the company. The SEC may permit the exchanges to exempt certain companies, such as smaller reporting companies, from these requirements.
• When: The SEC is required to issue rules, directing the exchanges to prohibit listing of non-compliant companies, within 360 days of the enactment of the Reform Act.

Independent Advisers to Compensation Committee

• What: (Section 952 of the Reform Act). Compensation Committees may only select their consultants, legal counsel or other advisers (each, a "Committee Adviser") after taking into account factors affecting the independence of the potential Committee Adviser as enumerated by SEC rules. These factors shall include, among other things: other services which are provided, amount of fees that are paid, business or personal relationships, company stock held by the Committee Adviser, and conflicts of interest policies and procedures.
• When: The SEC is required to issue rules, directing the exchanges to prohibit listing of non-compliant companies, within 360 days of the enactment of the Reform Act.

Compensation Committee Authority to Retain Compensation Consultant and Independent Legal Counsel

• What: (Section 952 of the Reform Act). Compensation Committees shall have sole and discretionary authority to retain and obtain the advice of a compensation consultant and be directly responsible for their appointment, compensation and oversight. Compensation Committees will not be required to follow the advice of their compensation consultant. For shareholder meetings occurring on or after one year after the enactment of the Reform Act, companies will need to disclose in their proxy statements whether a compensation consultant was retained by the compensation committee and whether the consultant's work raised any conflict of interest and how such conflict was addressed. Similar rules apply with respect to the compensation committee's authority to retain independent legal counsel (or other advisers) except without the proxy statement disclosure requirement. Companies will be required to provide funding to pay for the reasonable compensation of Committee Advisers.
• When: The SEC is required to issue rules, directing the exchanges to prohibit listing of non-compliant companies, within 360 days of the enactment of the Reform Act. However, independent of the timing of the publication of the SEC rules, the requirement to provide disclosure regarding the utilization of compensation consultants and any related conflict of interest appears to be effective for shareholder meetings occurring on or after one year after the enactment of the Reform Act.

Relationship between Chairman of Board and CEO

• What: (Section 972 of the Reform Act). Companies will be required to disclose in their annual proxy statements either why the same person is serving as Chairman and Chief Executive Officer or why different persons are serving in such roles.
• When: The SEC is required to issue rules within 180 days of the enactment of the Reform Act.

PAY FOR PERFORMANCE

Pay versus Performance Disclosures

• What: (Section 953 of the Reform Act). The SEC is directed to issue rules requiring companies to disclose in their proxy statement the relationship between paid executive compensation and the company's financial performance. Such disclosure would need to among other things consider a company's stock price changes and dividends.
• When: No specific time frame is mandated for when SEC rules must be issued.

Internal Pay Equity

• What: (Section 953 of the Reform Act). The SEC is directed to amend their existing executive compensation disclosure regulations to provide that a company's executive compensation disclosures will also need to include the: (i) median annual total compensation of all employees other than the CEO, (ii) annual total compensation of the CEO and (iii) ratio of (i) to (ii). Annual total compensation will be determined in the same way that it is currently displayed in the Summary Compensation Table for named executive officers.
• When: No specific time frame is mandated for when SEC rules must be issued.

Recoupment of Incentive Compensation (Clawback)

• What: (Section 954 of the Reform Act). The SEC is directed to adopt rules requiring the national securities exchanges to prohibit the listing of companies that do not have a policy: (i) disclosing their policy on incentive compensation which is based on financial statement information and (ii) which, in the event of a financial accounting restatement due to material noncompliance with any financial reporting requirement, would recover from current/former executive officers any incentive compensation (including stock options) that would not have been paid under the restated financials. This recoupment of compensation will apply to any executive officer even if he/she was not personally culpable with respect to the company having to restate their financial information. Incentive compensation provided during the three years prior to the date when the company is required to prepare the accounting restatement would need to be subject to recoupment.
• When: No specific time frame is mandated for when SEC rules must be issued.

Incentive Compensation at Large Banking Institutions

• What: (Section 956 of the Reform Act). The appropriate Federal regulator(s) will prescribe regulations/guidelines requiring covered banking and financial institutions to disclose the structures of all of their incentive compensation arrangements so that the regulator(s) can determine whether excessive compensation is being provided or whether such arrangements could lead to material financial loss to the institution. There will also be rules established that prohibit incentive-based payment arrangements which encourage inappropriate risk taking. Covered financial institutions with assets of less than $1,000,000,000 would not be subject to the above requirements.
• When: The Federal regulators must prescribe their rules/guidelines within nine months of the enactment of the Reform Act.

What Next?

While companies may be already familiar with a number of the tenets promoted by the Reform Act (for example, many publicly-held companies have already voluntarily adopted a clawback policy or conducted a Say on Pay shareholder vote), companies will nevertheless need to ensure that they comply with all of the specific requirements of the Reform Act and the related regulations that will be promulgated by the SEC and other regulators. Companies will therefore want to monitor (and comment on as appropriate) future regulatory actions that are taken in connection with the Reform Act.

Moreover, as we have commented in our prior blogs, companies should regularly evaluate their compensation programs and practices and seek to improve them if/as needed. The Reform Act provides further impetus to continue to perform this important recurring function. In particular, companies may want to consider: 

• Reviewing their golden parachute arrangements and determine if such arrangements are appropriate and defensible;
• Preparing to adopt a clawback policy if they do not already have one and companies with a clawback may need to prepare to make modifications to it;
• Examining and perhaps expanding their shareholder communications processes with respect to executive compensation given the enactment of Say on Pay;
• Reviewing their existing Compensation Discussion and Analysis section to ensure that it provides clear and comprehensive disclosure;
• Preparing draft new executive compensation disclosures in anticipation of the expanded disclosure information that will need to be provided.

Companies will also want to review their existing internal systems/processes and governance documents (such as for example, the compensation committee charter and insider trading policy) and determine what modifications may be needed in order to comply with the Reform Act's new governance and executive compensation disclosure requirements.

And, perhaps more importantly, companies and their boards should evaluate their compensation advisers in light of the Reform Act's enhanced independence rules. A company whose compensation committee has retained the services of truly independent compensation consultants and outside counsel presumably can provide executive compensation disclosures that may be more favorably received by shareholders and corporate governance advocates. The inclusion of qualified independent advisers may also result in improved compensation programs which is ultimately the objective of the Reform Act's executive compensation provisions.

If you have any questions regarding this information, please contact Greg Schick at (415) 774-2988.

I recognize that by applying the unified standard, I reach a different conclusion than the recent [In re Cox Radio, Inc. Shareholders Litigation, 2010 WL 1806616 (Del. Ch. May 6, 2010)] decision, which opted to follow [In re Pure Resources Shareholders Litigation, 808 A.2d 421 (Del. Ch. 2002)].  The choice among [Kahn v. Lynch Communications Systems, Inc., 638 A.2d 1110 (Del. 1994)], Pure Resources, and Cox Communications implicates fundamental issues of Delaware law and public policy that only the Delaware Supreme Court can resolve.  Until the Delaware Supreme Court has the opportunity to address Lynch and [In re Siliconix Inc. Shareholders Litigation, 2001 WL 716787 (Del. Ch. June 19, 2001)] definitively, I believe the unified standard from Cox Communications offers the coherent and correct approach.

On July 5, 2010, Vice Chancellor Laster granted defendants’ motion to certify the matter for an interlocutory appeal to the Delaware Supreme Court. As the Chancery Court explained, “[w[hether a unilateral two-step freeze-out merits these adjectives constitutes but one of several issues upon which trial court precedents conflict and which only the Delaware Supreme Court can resolve.” Nevertheless, on July 8, 2010, the Delaware Supreme Court declined to grant the petition for interlocutory appeal [here]. The Court held that “appellants’ application for interlocutory review should be refused based upon the current state of the record.  The issues raised in this application should be addressed after the entry of a final judgment.” In the unlikely event the case does not settle, then the Delaware Supreme Court will finally address this important issue.

For further information, please contact John Stigi at (310) 228-3717.