Board of Directors

(Proxy) Voting Made Easy?

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The SEC recently proposed amendments to the proxy voting rules to require parties in a contested election to use universal proxy cards that would include the names of all board of director nominees. This proposed change would eliminate the two “competing slates” cards and allow shareholders to vote for their preferred combination of board candidates, as they could if they voted in person.

The new rules would apply to all non-exempt votes for contested elections other than those involving registered investment companies and business development companies, would require management and dissidents to provide each other with advance notice of the names of their nominees, and would set formatting requirements for the universal proxy cars. As with any newly proposed SEC rule, there will be a comment period of 60 days to solicit public opinion.

Interestingly, the Commission’s vote to adopt the newly proposed rules was a split decision, with Commissioner Piwowar issuing a strongly worded dissent. According to Commissioner Piwowar, the proposed universal proxy rules “would increase the likelihood of proxy fights at public companies,” and would allow special interest groups to “use their increased influence to advance their own special interests at the expense of shareholders.” He also noted that under the new rules, dissidents are only required to solicit holders of shares representing a majority of those entitled to vote, meaning that many retail investors will not receive either the dissident’s proxy statement or disclosures about the dissident’s nominees.

When Are Directors Liable for Failing to Exercise Proper Oversight?

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Recently we discussed whether directors of public companies face potential liability for not preventing cyber attacks.  As we discussed, the answer is generally no, because absent allegations to show a director had a “conscious disregard” for her responsibilities, directors do not breach their fiduciary duties by failing to properly manage and oversee the company.

That well-established rule was again affirmed last week by the Delaware Court of Chancery in In re China Automotive Systems Inc. Derivative Litigation,  a case that concerned an accounting restatement by a Chinese automotive parts company.  Plaintiffs there alleged that the company’s directors breached their fiduciary duties by failing to manage and oversee the company’s accounting practices and the company’s auditors, who improperly accounted for certain convertible notes from 2009 to 2012.  When the error was uncovered, the company restated its financials for two years and its stock price dropped by 15%. READ MORE →

What Makes a Director “Independent”?

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Chairs Around a Table

What makes a director “independent”? That question is important, not only to investors who want to ensure that boards of directors exercise objective judgment on corporate affairs, but also to companies, who need assurance that their boards will not run afoul of exchange listing requirements, and to directors themselves, for protection against shareholder lawsuits challenging board decisions.

Listing requirements for both the New York Stock Exchange  and NASDAQ provide basic checklists for directors independence, and state generally that directors cannot be employed by the company, cannot have family members who are employed by the company and cannot have a controlling interest in the company’s substantial business partners. But the exchanges’ listing requirements also contemplate that the question of independence is far broader than any checklist. The NYSE’s listing requirements further note that directors should have “no material relationship” with the Company; NASDAQ’S requirements state directors should have no relationship which “would interfere with the exercise of independent judgment in carrying out the responsibilities of a director.” READ MORE →