SEC compliance and disclosure - proxy rules and procedures

Research conducted by Arthur Mboue 1

SEC Compliance and disclosure- Proxy rules and procedures, series 13

ByArthur Mboue

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Regulatory required timeline for proxyActivity Months/days

prior to Annual Meeting

Deadline for submission to shareholder proposals for inclusion in proxy materials (120 days prior to the filing of the proxy materials [Rule 14a-8])

180-200 days

Search cards mailed to record holder banks ( at least 20 business days prior to the annual meeting record date [Rule 14a-13])

96 days

Notify NYSE of tentative annual meeting record date and matters to be voted upon at the meeting (notice is required at least 10 days prior to record date [NYSE §401.02]

86 days

Review officer and director questionnaires and determine if any Form 5 filings are required 80-100 days

Submit opposition statement to SEC and mail response (s) to shareholder proposal (s) to proponent (s)( (no later than 30 days before filing of proxy statement [Rule 14 a-8(m)])(www.geproxy.com/shareowner-proposals)

75 days

RECORD DATE (not more than 60 nor less than 10 days before the date of such meeting [DGCL§213(a)] 60-70 daysPreliminary form of proxy statement filed with SEC via EDGAR (10 days before filing the definitive proxy) 50 days

Mail 6 copies of definitive proxy material to NYSE – no later than date of mailing to shareholders (Section 204.28 of NYSE Listed Company Manual). Mail 8 copies to the SEC staff

40 days

Files definitive proxy material with SEC electronically via EDGAR. [§240.14a-16(a)(1)] 40 days

Research conducted by Arthur Mboue

GE 2016 DEf 14A

GE NAL 2016


Regulatory required timeline for proxyActivity Months/days

prior to Annual Meeting

Deadline to send shareholder the notice of internet availability of proxy materials [§240.14a-16(a)(1)](www.geproxy.com/notice-of-the-2016-annual-meeting-....)

40 days

Deadline to post proxy material on website under notice and access [§240.14 a-16(b)(1)](at GE, shareholder vote at investor/vote or 1800-652-vote; beneficiaries, proxyvote.com and 1800 454-VOTE)(www.geproxy.com/voting-and-meeting-information/....)

40 days

Conduct Notice & access follow up mailing to shareholders, if required 30 days

List of shareholders entitled to vote at meeting open for examination [DGCL §219(a)] 10 days

ANNUAL MEETING OF SHAREHOLDERS (April 27, 2016, Sunshine State, Jacksonville, FL)

D-DAYS

Filing of 8–K with voting results from annual meeting 4 days after t5he meeting

CEO to file with the NYSE, no later than 30 days after the annual meeting of shareholders, certifying corporate governance requirements, subject to any necessary qualification (NYSE Rule 303A 12(a))

Up to 30 days after the meeting

http://www.geproxy.com/notice-of-the-2016-annual-meeting-of-shareowners

http://www.geproxy.com/voting-and-meeting-information/voting


Preliminary materialsWhen required, a registrant must mail 5 copies to the SEC staff. Pursuant to Rule 14a-6 (a) under the exchange act, a Pre-14 must be filed unless the matters to be acted upon are:• The election of the director• The election, approval or ratification of independent auditors• A proposal by a shareholder• Ratification or approval of a new employee benefit plan or

plan amendments• Approval of executive compensation (i.e. say on pay vote or

any other shareholder advisory vote on executive compensation)

• Determination of whether the shareholder vote on executive compensation will occur every one, two or three years (i.e. frequency vote)


All items in Schedule 14 AItems NamesItem1 Date, time and place information

Item 2 Revocability of proxy

Item 3 Dissenters right of appraisalItem 4 Persons making the solicitation

Item 5 Interest of certain persons in matters to be acted upon

Item 6 Voting securities and principal holders thereof

Item 7 Directors and executive officersItem 8 Compensation of directors and executive officers

Item 9 Independent public accountants

Item 10 Compensation plans

Item 11 Authorization or issuance of securities otherwise than for exchange

Item 12 Modification or exchange of securities

Item 13 Financial and other information

Item 14 Mergers, Consolidation, acquisitions and similar matters

Item 15 Acquisition or disposition of property


All items in Schedule 14-A (next)items names

Item 16 Restatement of accounts

Item 17 Action with respect to reportsItem 18 Matters not required to be submittedItem 19 Amendment of charter, bylaws or other documents

Item 20 Other proposed actionItem 21 Voting proceduresItem 22 Information required in investment company proxy statementItem 23 Delivery of documents to security holders sharing an addressItem 24 Shareholder approval of executive compensation

Pursuant to Rule 14a-6 (b). 8 copies of the Def 14 A, proxy card and all other soliciting material must be filed and mailed with the SEC and sent or given to shareholders. A minimum of 3 copies of the Def 14 A, proxy card and all other soliciting material must be submitted to each national securities exchange


Regulations, Rules and Standards• Evolving governance regime is derived from federal

legislation, SEC rulemaking, state corporate legislation, stock exchange rules, shareholder proposals, ‘best practices’ standards and judicial decisions, principally those of the Delaware General Corporation Law and MBCA– Corporate activists often use the governance as a mean to

maximize shareholder value• Regulation of the proxy solicitation process was assigned to

the SEC in 1934• The SEC, OCC, FDIC, DOL, FINRA and OTS have implemented

proxy related rules• Fiduciary standards require implementation and records of

the proxy voting process


SEC Proxy Rules • Who must file the proxy statement? Any company whose securities

are registered under Section 12 of the Exchange Act. They must be listed on a national securities exchange or have more than $10 Million in assets and 2000 or more holders of any class of equity securities for non bank (500 or more who are not accredited investors)

• What required? Before soliciting proxies, management must prepare and file a Pre14 A and definitive Schedule 14 A with the SEC

• Quality of disclosure: No materially false or misleading statements. Both pros and cons of the proposals must be disclosed as required by rule 14a-9

• PS: SEC does not require a proxy but if you do, follow the rules (SEC and State)


Basic Proxy Procedures• Filing proxy statement: A definitive schedule 14 must be

filed with the SEC, post and mail to shareholders 40 days before the annual meeting according to Rule 14a-16

• Dissemination: a registrant must send proxy materials to shareholder by mail or via e-mail if it follows some guidance required obtaining affirmative consent from individual shareowners 40 days before the annual meeting. It may or may not include proxy card (it depends of options, ‘notice only’ or ‘full set delivery’ option)

• Proxy card: Must give shareholder option to vote for or against any elective matter of the meeting.


Form of Proxy• According to Rule 14a-4 under the Exchange Act prescribes the

requirements for proxy cards used by a registrant to solicit proxy votes for proposals being voted on at the annual meeting.

• Requirement language: – Bold space type– Blank space for dating the proxy card– Identify clearly and impartially each separate matter intended to acted upon

• Unauthorized Proxies– 14a-4(d) under the Exchanges Act prohibits proxy cards from conferring authority to:

• Vote for the election of any person to any office• Vote at any annual meeting other than the next meeting• Vote with respect to more than one meeting, and any adjournment thereof; and• Authorize and consent to any action other than the action proposed to be taken in the proxy

statement

• Discretionary Authority– Under Rule 14a-4(c), a proxy can confer discretionary authority to vote if

• Did not receive at least 45 days notice• Nominee is unable to serve or for good cause will not serve• Receive proxy with mistakes


Rule 14a-1: Solicitation includes:

Any oral and written request for proxy whether or not proxy form is used

Any request to execute, not execute or revoke a proxy Furnishing proxy or other information “reasonably

calculated” to result in procurement, withholding or revocation of proxy.

What is a ‘Proxy Solicitations’?


Importance of Proxy Voting • Most shareholders are not able to attend shareholder meeting• Majority of investors shares are held by Intermediaries for the

benefit of their clients• The financial crisis and revised shareholders activisms have

brought greater attention to the proxy voting process• In 2009, SEC enforced its first action for proxy voting record

violation, SEC vs one Registered investment Advisor for proxy voting – On May 8, 2009, SEC filed a case against Intech Investment

Management LLC and David Hurley for violating proxy rules• PS: Proxy holder is an agent legally authorized to act on behalf

of another party


Shareholder Proposal – Rule 14a-8Who can make a proposal? A shareholder who has continuously held at least $2000 in

market value or 1% of the securities entitled to vote on the proposal for a least 1 year by the date of submitting the proposal and must be held until the annual meeting

How many? One proposal per shareholderLength? No more than 500 wordsWhen? Not less than 120 calendar days before the annual meetingAttendance of annual meeting? This shareholder or his representative must attend the

annual meeting Grounds for company rejection? Specified in a (14a-8)(i)Can company recommend against? Yes and always doesWhat options does the company have? the company can exclude, include or

negotiate for a resolutionProcedure post rejection? Company notifies SEC and file for a “No-Action” letter

(NAL)Shareholder option post rejection and “no action” letter? Start the proxy fight with

a lawsuit for injunctive relief – argue grounds in a (14a-8)(i) applicable


Path to the Inclusion of Proposal at GEShareowner Proposals 2016 Shareowner Proposals Jump To:

Proposals for Inclusion in Next Year’s Proxy Statement Director Nominees for Inclusion in Next Year’s Proxy Statement (Proxy Access) Other Proposals or Nominees for Presentation at Next Year’s Annual Meeting

Proposals for Inclusion in Next Year’s Proxy Statement

SEC rules permit shareowners to submit proposals for inclusion in our proxy statement if the shareowner and the proposal meet the requirements specified in SEC Rule 14a-8.

When to send these proposals. Any shareowner proposals submitted in accordance with SEC Rule 14a-8 must be received at our principal executive offices no later than the close of business on November 11, 2015.

Where to send these proposals. Proposals should be addressed to Brackett B. Denniston III, Secretary, General Electric Company, 3135 Easton Turnpike, Fairfield, CT 06828.

What to include. Proposals must conform to and include the information required by SEC Rule 14a-8.

Director Nominees for Inclusion in Next Year’s Proxy Statement (Proxy Access)

We recently amended our by-laws to permit a group of shareowners (up to 20) who have owned a significant amount of GE stock (at least 3%) for a significant amount of time (at least 3 years) the ability to submit director nominees (up to 20% of the Board) for inclusion in our proxy statement if the shareowner(s) and the nominee(s) satisfy the requirements specified in our by-laws.

When to send these proposals. Notice of director nominees submitted under these by-law provisions must be received no earlier than October 12, 2015 and no later than the close of business on November 11, 2015.

Where to send these proposals. Notice should be addressed to Brackett B. Denniston III, Secretary, General Electric Company, 3135 Easton Turnpike, Fairfield, CT 06828.

What to include. Notice must include the information required by our by-laws, which are available on GE’s website (see “Helpful Resources”).


Popular Shareholder Proposals Require majority vote in the election of directors Repeal classified board Independent chairman of the board, separate chair from the CEO

duties Redeem or require shareholder vote on poison pill approval Independent directors Cumulative voting Eliminate supermajority voting Required shareholder approval of parachutes Allow for or decrease requirement to call special meeting Social, political, cultural issues (major concerns for company and board

of directors) Political contribution Human rights Board diversity Environmental issues


Included Proposal will come with GE Recommendation

Shareowner Proposals What are you voting on? The following shareowner proposals will be voted on at the annual meeting only if properly presented by or on behalf of the shareowner proponent. Some of these proposals contain assertions about GE that we believe are incorrect, and we have not tried to refute all of the inaccuracies. The Board recommends a vote against these proposals for reasons that we explain following each proposal. Share holdings and addresses of the various shareowner proponents will be supplied promptly upon oral or written request.

Introduction

Shareowner Proposal No. 1





2016 Shareowner Proposals

17Research conducted by Arthur Mboue

Rule 14a-8(i) Grounds for Excluding Shareholder Proposals Rule 14a-8 requires a registrant to include a shareholder proposal in its proxy materials

if the submitting shareholders has complied with certain eligibility and procedural requirements (in its Q & A format)

1. Is not a proper subject for action by shareholders under the laws of the corporation’s jurisdiction of incorporation

2. Would, if implemented, cause the corporation to violate any state, federal or foreign law to which it is subject, or that is contrary to any of the proxy rules

3. Relates to a personal claim or grievances against the corporation or any other person, or that is designed to result in a benefit to the shareholder submitting the proposal that is not shared by the corporation’s shareholders at large

4. Relates to operations that account for less than a specified percentage of the corporation’s total assets, net earnings and gross sales for its most recent fiscal year, or is not otherwise significantly related to the corporation’s business

5. The corporation does not have the power or authority to implement6. Relates to an election for membership on the corporation’s board of directors; 7. Directly conflicts with one of the corporation’s own proposals to be submitted to

shareholders at the same meeting;8. The corporation has already substantially implemented

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Rule 14a-8(i) grounds for Exchange Shareholder proposal

9. Substantially duplicates another proposal previously submitted to the corporation by another proponent that will be included in the proxy materials for the same meeting

10. Deals with substantially the same subject matter as another proposal that was previously included in the corporation’s proxy materials within the preceding five calendar years and received fewer than a specified number of votes at the meeting

11. Relates to the payment of cash or stock dividends, or to the corporation’s ordinary business operations

12. Can only exclude the proposal if the shareholder fails to adequately remedy the deficiency

13. Can exclude the proposal if it is related to resubmitted application

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Steps follow by the no action letter

Company disclosure executives decide that they need to get the SEC involved in a complex disclosure

The Company General Counsel assigns this task an insider counsel or hire an outside counsel firm for help

The inside counsel or outside counsel research the case in detail to determine how to request the relief . He researches previous letters, applicable laws and regulations and other sources. He prepares a draft letter and send it to the company Chief Securities and General Counsel

The draft is reviewed by the Chief Securities and General Counsel who make needed corrections. It is returned to the counsel after approval and then sign and send to the concerned CCO. (amendment to the filing may be requested, 60 days within receipt of comment)

The letter is received by the SEC and assigned to a particular staff attorney. He reviews the letter in detail to determine the question posed and the relief requested. Then, they research previous aces and letters, applicable laws and regulations and other sources. They can contact the requester for clarification and additional information (no oral no action letter)

They discuss their preliminary results with the special counsel, assistant Chief Counsel and Chief Counsel. If the written response is appropriate, next step (pre-filing conference can be ordered with the filing of written summaries)

Staff attorney will prepare a draft and forward it to the special counsel and assistant chief counsel

Special Counsel and assistant chief counsel review the draft, make any needed revisions and forward it to the Chief Counsel for review

After the Chief Counsel reviews and approve the draft, the staff attorney will write its ending with contact addresses and sign this letter. He sends this copies to the SEC library, selected commission staff, public reference office (Federal Register) and SEC post office (to the requester)

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Last Step

• It takes days (up to 15) for the application to be posted on the Federal Register giving interested parties the opportunity to request a hearing on the proposed relief or rules.

• The notice period typically lasts from between 25 and 28 days

• If no hearing has been requested by or by the commission acting on its own motion, the order will typically be granted within two days after the notice period expired



Forbidden words in the shareholder proposals1. Violence /profanity2. Partial nudity3. Sexual act/text4. Xxx pictures/text5. Intolerance6. Satanic or cult7. Drug culture8. Militant/extremist9. Sex education10. Alcohol, Drug and Tobacco (‘ADT’)


State of proposals to GE, 2016Shareowners proposals excluded Shareowners proposals included

Timothy Roberts proposals Lobbying Report, Brad Woolworth proposal

Alexander Lehman proposals Independent Chair, Kenneth Steiner proposal

Robert Fredrick proposals Holy land Principles, Sisters of St Dominic of Caldwell, Mary Beth Gallagher*Cumulative Voting, Martin Harangozo proposal*Performance Based Options, James Jensen*

Human Rights Report- the National Center for Public Policy Research proposal*

* GE did attempt unsuccessfully to exclude these proposals. After a series of NAL, the staff side with the authors of these proposals. The staff, special counsel Evan Jacobson, did waive the 80 day requirement in order to require GE to include Martin Harangozo proposals


The Notice & Access Model

• Provides companies with the alternative of mailing a one page Notice of Internet Availability of Proxy Materials (“Notice”) and providing proxy materials electronically through an Internet web site instead of traditional paper delivery of all proxy materials under Rule 14a-16.

• Three Options for Compliance:– Notice-Only Delivery

• Proxy materials posted on web site and only the Notice mailed to shareholders

– Full Set Delivery• Hard copies of all proxy materials mailed to shareholders, with

Notice information incorporated in proxy statement and proxy card and proxy materials posted on web site and mailed to the shareholders

– Hybrid Delivery• Notice-only delivery to some shareholders and Full Set delivery to

others.


Notice & Access Model

40 days before the annual meeting

Web-PostingProxy materials on a specified IR web site pages

MailingFor notice only nor

full set of proxy materials

to shareholders

File with the SECProxy materials,

Including Notice, with the SEC

( file DEF 14A)


Who Can Use Notice & Access Model?A proxy statement is intended to provide shareholders with the information necessary to make an informed voting decision proposals for which proxies are solicited • Available for issuers, intermediaries and soliciting

persons other than the issuer • Specific model used at the annual shareholder

meeting– Proxy holders do not have to follow shareholder

recommendation


Delivery of the Notice• If Notice-only or Hybrid delivery is used, the Notice must be sent at

least 40 calendar days prior to the annual meeting date– Note that the Notice must actually be completed 55-60 days

prior to the meeting date to give intermediaries time to create the voting instruction cards for beneficial holders

• Only two things can accompany (or be combined with) the Notice:– Notice of meeting required by state law (if permitted under state

law)• For example, Section 222 of DGCL requires a registrant to give

shareholder 10 or 50 days of notice prior to the meeting– Reply card to request paper or e-mail copies of proxy materials

• For any Notice-only deliveries, a proxy card cannot be sent with the first Notice


Ability to VoteRule 14a-3 of the Exchange Act prohibits solicitation of a shareholder proxy unless the shareholders has been provided with a written proxy statement containing the information required by Schedule 14-A• Concurrently with delivery of the Notice, the issuer must provide

a means of voting – but not without access to proxy materials– Electronic voting platform linked to the Web site– Telephone number on the Web site

• For Notice-only delivery – hard copy of proxy card can be sent 10 calendar days or more after the Notice

• For full set delivery-Must be accompanied with another copy of the Notice or with the proxy materials


Content of the Notice – Required• Plain English text• Bold-face legend with web site address and recommended deadline for requesting

paper copies• Date, time and location of the annual shareholder meeting• Clear and impartial description of matters to be voted on and issuer’s

recommendations – but no supporting statements• Indication that the communication is not a form of voting and presents only an

overview of the more complete proxy materials, which are available by internet or mail

• List of proxy materials available on the web site• Toll-free phone number, e-mail address and Internet address for requesting paper

or e-mail copies (not required for Full Set delivery)• Any identification numbers needed to vote• Instructions on how to access the proxy card – no execution of proxy without

access to proxy materials• Information about attending the meeting and voting in person and any

identification the shareholders needs to enter the meeting


Optional content and its delivery• Optional content of the notice

– State law meeting notice– Advisory statement that is no personal – All required Information – Picture, logos, design (mostly brevity) that is not misleading

• Upon request, paper or e-mail copies must be sent to shareholders who receive Notice-only delivery:– Until the conclusion of the meeting, materials must be sent

within 3 business days of request and, if paper is requested, they must be sent by first class mail (or similar prompt service)

– Paper or email copies can be requested up to one year after the meeting – but only “prompt” delivery is required

– Request can be made for the particular meeting or for all future solicitations


Web Site Posting• Direct access to materials on publicly accessible web

site• Materials accessible on the site at no charge from the

time the Notice (or full set of materials) is sent until the end of the meeting

• Materials must be:– Readable and readily searchable on screen– Printable like a paper copy (pdt)

• Amended/additional materials posted (and filed) no later than the day they are first made public


Rule of Delivery for Beneficial Owners

• Intermediary must request materials from issuer within 3 business days of owner’s request

• Issuer must send to intermediary within 3 business days of intermediary’s request

• Intermediary must send to shareowners within 3 business days of receipt

Issuer

Intermediary

shareowner

3

3

3Right to request and receive Materials

request

send

sendNo required

days to request


Third Parties in a Proxy Voting Process

• Transfer Agent• Proxy Service Providers• Proxy Solicitors• Vote Tabulators• Proxy Advisors


Concerns Raised by the Notice & Access Model

• Misuse of shareholder personal information• Over/Underestimation of number of printed

copies• Timing and coordination• Additional solicitation efforts• New or uncertain costs


Last Hurrah Campaign


Corporate Activists and their demands Issues Will ask for M & A • The sale of the company

• The breaking up of the company (too big)• The spin off of the company (too complex)

Balance Sheet • The increase in Dividend payout• More shares buyback• More profit and higher margin

Operational • The resignation of the CEO• The removal of the CFO• The change in leadership structure in order to make it more focus on the

shareholder value (their fiduciary duties) Governance • Resignation of some directors (not quite independent)

• The appointment of more accountable board members (are they ‘do nothing’!)

• Appointment of more independent directors (less conflict of interests!)


Shareholder Activism in M&A Situations•Shareholder reaction to announced transaction

•Wait and see•I do not sell•I will exercise my appraisal right (most Delaware company)

•Activist’s opportunity during M&A• Supermajority shareholder approval requirements• Class votes• Appraisal rights and its various games (DGCL 622,…)• Third party consents as a condition• Special regulatory approvals

– Analyze the situation clearly– Is there any shareholder value added? good argument against

activists• Prove a merger of equal or will the target synergy materialized, payback time?

(trouble or peace the future will tell, but you may still retire with a lot of compensation packages; Al Dunlap did win them in court, FL)

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Activists Response to a merger


Peri-activism checklists: preemptive conflict strategies • Put a basic strategy in place

– Hire management, lawyers, bankers, IR/OPR, proxy solicitors– Conduct regular update calls and surveys

• Assess and address vulnerabilities– Operational/ strategic weaknesses– Structural defenses– Corporate governance policies and key proxy deadlines

• Focus on comparable method– Track peer performance

• Key metrics include; 1, 2, 3, 5 years, stock performance, ROI, executive compensation comparisons, governance policies (number of BoD,…)

• Roadshow campaign– Make presentation about company result of operation, strengths– Use planned events (e.g earnings) to reinforce progress against benchmarks, metrics and competitors– Consider increasing frequency of momentum (positive) announcements, conferences and festivals

• Operating milestones, key hires, new guidance, new policies, etc. for awareness and support from media and 3rd parties

• Target 3rd party supporters– Build strong friendship with institutional investors, sell-side/industry analysts, customers, business partners,

business/trade organizations, corporate governance gurus (Prof Bebchuck, John Coffee,..)

• Increase media (4th power) relationships– Conduct interviews about your company’s performance or other easy topics (events) to get news headlines

• Identify media spokespeople– Train the best people, give microphone to your independent board of directors (as independent insider

talking for the company)


Advanced preparation is critical– Stay one step ahead

• Hedge fund and other strategy to get board seat expose management missed target or board conflict of interests

– See your company in the eyes of a short term investors• What past decisions (e.g., acquisitions) is the activist likely to focus

on?• What data does the activist value? what approach does the activist

propose last years?• Analyze “capital allocation” strategies and all its alternatives

(parameters strategies)• Much better if done before any proxy fight

– Build and maintain credibility with shareholders and analysts before activists show up for a fight

– Consider the takeover landscape in your industry• Who might be tempted to acquire your company for operational or

synergy reasons or as a result of industry dynamics?40


Warning Signs– Be alert to early warning signs, such as:

• Recent investor or company events with too many questions from the audience

• Analyst and media reports suggesting structural changes• Changes in shareholder base – clandestine agreements

between your shareholders for strong block• Review past events and news from corporate activist for

hints

– Be ready for the first phone call• Be polite, clear and firmed for your first conversation• Establish internal and external teams, including advisors

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Pressure strategy from hedge fund and other corporate activists

• Send private letters threatening public action– Company executives and board members are under activists microscope– Greater scrutiny by investors and media of BoD and executives– Directors and Top executives are open to public criticism

• Demand board seat• Request meetings with management and/or board of director and

issue open letters to the board• Buy full page of newspaper for advertisement of its demands• Become aggressive with management on analyst calls,…• Threaten ‘withhold the vote’ campaign• Threaten to agitate against Board’s preferred strategic alternatives or to vote

against board approved M&A activity• Team up with other institutional and/or corporate activists shareholders• Seek to stir-up 3rd party interest and rally with other investors• Disclose to shareholders management personal e-mails, address, cars and/or

homes


What can the Board and Executives do?– Opposing strategy

• No strategy or statement goes unchallenged in the media– Political alike campaign

• Battle for shareholder support / votes• Increasing use of rhetoric and manifestations• Third party advocates needed to counter attacks• Strategic and “rapid response” communications required

• Ready for ‘rapid response’ to any public criticisms

– Control the forum for good message delivery• It is o.k to show anger to trained agent provocateur in order to

succeed or media will label you as a weak and incompetent

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What can the Board and management do?– Roadshow for public relations strategy

• Need to maintain consistency of message along with rapid response to dissident attacks with good headlines (Taiwan style not Japanese)

• Public ad to solicit shareholders support does not require SEC filing (if done by 5+% owners), long Island lighting company vs Barbash (Maurice) and al, (2d Cir. 1985). ‘SEC regulations do not prevent such ad, nor could they w/o violating fundamental 1st amendment rights of free speech’

– Board will be kept informed of dissident activity and proxy communications• Press releases, media coverage, analyst reports, SEC filings, etc.

– Independent Board representatives should join management in attending ISS meeting and bringing the management message to the media, shareholders and 3rd party

– Screen phone calls (office and cell) and house address• Be ready to respond calls from dissidents, they will get the number. You can find them

sitting in front of your door early in the morning– Board meeting calendars should remain confidential– Individual directors may be targets of attacks

• Give independent director microphone to defend their peers

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IR Tactics and Considerations

– Regular, targeted one-on-one meetings• Major vehicle for communicating with investors and sell-side analysts (invite

them to call you for follow-ups, keep a lot of your business cards with you all the time)

• No substitute for in-person meeting with a CEO and / or executive team• Controlled forum for delivering messages

– Good protocol: hand up, line, 10 min for a question,…

– Large format or group meetings must be carefully considered• Limit group meetings with representation of all groups (including dinners and

lunches meetings)• Level of control is significantly shifted to you• Fight “godfather/ mob’ mentality, bloodless coup d'état alike

– Sell-side needs to be educated• Focus on SWOT- strength, weakness, opportunity and threat when holding

meeting with them

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Key documents in a proxy contest– Shareholder “fight” letters

• Shareholder proposals sent by dissident and Company to shareholders multiple times, accompanied by “fight letters”

• Can be used as press releases or 8-K filings• Consider whether Company letters can be also used for PRs to send to reporters

– SEC filings• Letters, press releases (FWP), presentations, statements can all be filed as 8-K (Company),

13-D / 13-G (dissident, 5+% of stock owner) or 14A (Company)• 8-K filings (consider filing item 8.1)

– Presentations• Used in meetings with investors and proxy advisory firms• Helps educate media and other key constituencies about your company data

– Press release• Fast and furious method to reach all audiences and directly communicate key messages

against activists– Standby statements

• Responsive (talking to media corps)– Ancillary communication materials

• Company websites (letter to/from government officials, community leaders, 3rd party, retirees, others)

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Typical Proxy Fight Timeline45 To 40 days before the annual meeting

Filing of definitive proxy materials, issuing a press release with first fight letter, mailing the ‘stop, look, listen’ letter

39 to 32 days Mailing a second fight letter, issuing a press release

31 to 24 days Mailing the 3rd fight letter, issuing a press release

23 to 14 days ISS meetings; Glass-Lewis decisions outreach; issuing press release with the fourth fight letter

14 to 7 days ISS, Glass-Lewis decisions; both parties issuing press releases when decisions are made

10 to 7 days Mailing the fifth fight letter, issuing a press release

5 to 2 days Issuing open shareholder letters as press release

Day 0 Annual shareholder meeting

Adapted from the corporate board, Rachel Posner


Dealing with Corporate Activism Effectively– Continue to focus on the business– Renew focus on investor Communication– Anticipate threats– Review advance notice deadlines for shareholder proposals and

nominations to strike the right “balance”– Financial preparedness, know your company weak data and be

prepared to justify them- readiness!– Implement legal/structural preparedness– Focus on the activist’s agenda, 13D and track their record, it will give

you advantages against activists– Be prepared to expose fight; do not allow activists to frame the public

agenda with bad news– Litigation is commenced infrequently (rarely sue, bad PR, be ready to

defend yourself against some shareholder proposal lawsuits)– Negotiation may be a productive path – settlement should avoid

admission of guilt

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Responding to the Corporate Activist’s Attacks

• Known when and when not to respond to activist attacks• Think ahead• Establish a single contact and maintain unified front• Stay focused on the facts• Know your company weaknesses and prepare a defense, you must

be consistent and speak with one voice from a previous closed door meeting

• Do not ignore activists, communicate and be flexible and listen to them

• Be willing to negotiate and/or negotiate when circumstances warrant, but do not let ‘godfather’ mentality to intimidate you

• Exit questions:– Have dissidents met their burden of proving that board or other changes

are warranted?– If so, is the dissident proposal more likely to help maximizing shareholder

value?

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Fiduciary Responsibilities of a Board When Responding to Corporate Activists

– Board as negotiating representative• Board cannot be passive –should be active and engaged• Smith v. Van Gorkom: a shareholder vote does not absolve the Board• To negotiate effectively, you must know how far is too far and have the power to

extinguish the negotiation• Directors’ duty in context of a decision to sell control is to obtain the highest value

reasonably available for shareholders (the Revlon rule)

• I will add that independent board members are well positioned to represent the company because they are perceived as outsider and impartial negotiator with insider knowledge

– Takeover defenses enhance Board’s negotiating power– When the Board responds to activists and proposals not seeking a takeover, it

must focus on due care and business judgment rule. BoD must be able to take into account the long term interests of the corporation while maximizing shareholders value

– If an activist investor gains minority representation on the Board, the Board still should attempt to make decisions collectively and collegially, and act as a group – board secretary (company counsel) can play a critical role in healing after ugly proxy fight 51

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Target Director Fiduciary Duties• For Delaware court, the BoD has the right to adopt

defensive measures– It is not governed by BJR– It is test for enhanced scrutiny standard

• Directors must show that:– Reasonable ground for believing a threat to the operation or

policies of the corporation exists and– The defensive measure was reasonable in relation to the threat

(defenses that preclude other offers or coerce shareholders are generally considered unreasonable in relation to a threat)

– Must show affirmative duty to adopt defensive measures when doing so would protect the interests of the corporation and its shareholders value Research conducted by Arthur Mboue

53Research conducted by Arthur Mboue

GE Board strategic Team

Although most of the GE directors are labeled as independent, my review did uncovered CEOs of firms, GE directors with huge contractual agreements with GE; and also, Directors with family members working at GE in the decision making position


GE Directors Qualification


Hostile Take-over Different Strategies

Level of Hostility

Casual pass toehold Bear hug Dawn Raid Open Market Purchase/street sweep

Tender Offer Proxy Fight litigation

• Informal first contact to target company to test the CEO reactions

• Could alert target CEO

• Initial accumulation of shares

• Reduces number of target shares that must be purchased at a costly premium

• Public disclosure of terms of unsolicited offer after a futile or frustrating private approach

• Buying shares of the target through brokers. The acquirer/bidder marks its identity and intent

• More likely to be effective if shareholding is concentrated. Legal limit how much one can purchase w/o making Tender offer disclosure

• Tender offer for cash

• Tender offer for stock exchange

• Seek support of the target shareholders at next annual meeting

• Special meeting called by them, or

• consent solicitation

• Lawsuit• Regulatory

complaint

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Analysis of the Structural Defense

• Review the company’s existing structural defenses to hostile takeovers and shareholders activism

• Adoption of unilateral bylaw amendments to gain tactical advantages in any confrontation

• Evaluate the advisability of bylaw amendments or a poison pills adoption with outside counsel, proxy solicitor and PR firm


What Are the Risk of a Hostile Approach

• Might damage bidder’s reputation as trustworthy deal partner• Rating agencies and credit markets will undervalue the

company• Limited to no ability to perform due diligence• Management distraction during the pendency of the hostile

bid• Limited ability to pursue other deal while outcome of hostile

bid is uncertain• Lack of support by target or bidder’s shareholders• ‘White knight’ bidder emerges as preferred counterparty of

target


Collaborating with Activist Hedge Funds• Description

– Bidder can solicit votes, campaign and financial support from activist hedge funds (including joint bid)

• Advantages– Its supports can give enhanced credibility to the bid– If the activists have stake in the target, they could form a

formidable toehold (by agreement) for a proxy contest or consent solicitation

• Disadvantages– Any open collaboration with activist hedge funds might make

it more difficult for hostile bidder to obtain a friendly deal– Collaboration increases the risk that a ‘group’ is not formed for

Section 13 D purposes and disclosure is required


Monitor the Shareholders Base

• Insider ownership: assured votes for the board and management

• Institutional shareholders: open to be persuaded by a hostile bidder, but influenced by proxy advisory firms

• Retail shareholders: traditionally management-friendly, but typically lower turnout

• Hedge Funds & Arbitrageurs: almost certain to support hostile bidder


Factors that the BoD Should Consider in Assessing the Merits of an Unsolicited Offer

• Long term prospects of the company on an independent basis• Whether it is an advisable time to consider a sale of the

company• Management’s and the company’s financial advisor views as

to the adequacy of the offer• Current industry, economic and market conditions and trends• Current market valuation of the company (including any

recent stock price decline and frequency of fluctuations)• Likelihood of consummation (including financing and

regulatory impediments)


Defensive Tactics that Do Not Need Shareholders Approval

• Anti-trust law suits• Greenmails, targeted repurchase with handsome

premium• Classified Board• Poison Pills, measures of true desperation to make

the company unattractive to bidders. They reduce shareholder wealth– One example of a poison pill is giving the shareholders of a

target company the right to buy shares in the merged company at a bargain price, contingent on another company acquiring control


Litigation Against the Board• Description:

– Bidder could bring legal action against target’s board by claiming that it breached its fiduciary duties by (1) refusing to properly consider proposal or (2) adopting defensive measures

• Advantages– A lawsuit can add pressure to a target board/management to negotiate a

deal with hostile bidder– Pleadings give bidder a forum to criticize BoD actions and forces board to

justify actions based on its BJR– Many companies have limited resources and this adds another problem to

the target’s list• Disadvantages

– In absence of conflict of interest and BJR violations, these cases are difficult to win, since courts recognize a target board’s right to ‘just say no’


Influential & “independent” outsiders are often key voices in determining outcomes

– Institutional Shareholder Services (ISS) • Leading proxy advisory firm in terms of size and influence • More than 1,100 clients: institutions, mutual funds, corporate and public pension funds, hedge funds, college

endowments and other ISS followers• Many institutions strictly follow ISS recommendations when voting their shares• Reviews issues separately with both sides in a proxy contest before releasing its recommendation to clients• 10-14 days before annual shareholder meeting, it issues its report• This year, it seems it will be about executive compensation• Scheduled events include look ahead 2016 proposal, fulfill your 2016 PRI reporting and Forecasting key issues

for 2016 proxy – Glass Lewis & Co.

• Owned by Ontario Teachers’ Pension Plan Board• Major competitor of ISS• 1,200 clients include mutual funds, index and public pension funds• 200,000+ research reporting annually with 360+ employees• In 2010, Glass Lewis merged with Proxy Governance• His public forum called “Proxy Talk” is a major public debate, this year, 2016 proxy season previews• Glass Lewis can influence 10% or more of the vote in a proxy contest• It favors minority representation for dissident and influence a lot of voters like ISS

– Egan-Jones Proxy Services• Established in 2002 by Egan-Jones Rating Co• Provides proxy research, voting recommendations and proxy services on a few companies• Unlike Glass Lewis it does not automatically make recommendation against ISS; at the same token, it does not

hold any public contest forum• It is conference calls oriented

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ISS and Glass Lewis & co proxy fights factors for examinations

– Long-term performance (Total Shareholder Return vs. market and peers)

– Earnings and cash flow trends– Strong Board oversight (vs. an “royal” CEO)– Board accountability (e.g., anti-takeover provisions, ignoring

proposals from shareholders)– Corporate governance “best practices”– Nominee experience, track record, independence and conflict of

interest– Ability to work constructively with activists after the proxy fight– Length of ownership (“owners managers align with residual

claimants interests ” versus “renters employees align with low risk)”

– Does the market reaction to dissident fight with a change in price therefore change in value?

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Achieving Success at the Regulatory Agencies

• Have a plan• Avoid delay and 2nd phase (including litigation)• Have a good team• Get the data• Get an articulate and media connected corporate PR• Answer all issues• Do not delay your SEC filing, it will create more problems• Use data to build arguments, do not take it personal• Settle when it is in a best interest of your shareholders and

dictated by BJR (it’s business)


A Strong Defense Requires a Multi-Talented Team• Management-leads the defense and keeps the board informed of the events• Board of Directors-Directors must work hard and attend all meetings;

review all minutes and understand them or ask questions and make decision based on informed BJR

• Investment bank-analyzes the bidder’s offer, assists with the target’s response to the offer and the development of the defense campaign platform, strategy and tactics

• Law firm-briefs the BoD on fiduciary duties, ensures compliance with the federal securities laws and state corporate law, reviews all communication, drafts any proxy/tender offer materials, and handles any litigation

• Proxy solicitor- analyzes the prospectus for success, identifies the shareholders, sets up investor meetings, organizes meetings and calls with proxy advisory firms, and tracks the flow of tenders or votes

• Financial PR firm- drafts press releases, ‘fight’ letters and other communications, and works with the media (4th power)

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Other legal considerations in offering (next)Types Section DescriptionsSEC Reporting laws Forms • Sch TO and Sch TO/A, SC 14A, SCH 14 C, PRE and Def

• S-4• Sch 14D-1

RESEARCH REPORTSResearch by offering participants covering other types of securities

Rule 138

Research by brokers/dealers that are offering participants permitted if:• On a reporting issuer current in its Exchange Act reports or certain foreign private

issuers as currently permitted• Confined to a different type of security; and• Broker/dealer previously published research reports on the types of securities covered

in regular course of businessFor instance, if a registration statement has been filed for a non-convertible bond or a non-convertible preferred stock, a broker/dealer, who is a participant in a distribution of the securities, may in the normal course of business issue recommendation, information or opinions relating to the issuer’s common stock or a convertible securities. If the registration statement convers common stock or a convertible securities of the issuer and broker dealer may only issue recommendation, information or opinions relating to the issuer’s non convertible debt or preferred stock• Applies in Rule 144 A and Regulation S

Research by non offering participants

Rule 137

Research by brokers/dealers that are not offering participants permitted on all issuers. They may issue recommendations, information or opinions regarding securities that are in the registration as long as they did not receive compensation from the issuer, selling shareholder or any other participant

Research by Offering participants covering issuer or any class of its securities

Rule 139

Underwriter participating in a distribution of securities by certain seasoned issuers can publish on going research about the issuer and the securities without being deemed to offer those securities by way of its research reports. Rule 139 research can take the form of issuer specific reports, or more general reports covering an industry or sector

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Other legal considerations in offering (end)

Types Section DescriptionsResearch by offering participants covering issuer or any class of its securities

Rule 139

• Issuer -specific research by brokers/dealers that are offering participants permitted if:• On an issuer eligible to use Form S-3 or F-3 for primary offerings or certain foreign

private issuers as currently permitted• Broker/dealer publishes research reports in regular course of business; and• Broker/dealer previously published research reports on issuer or its securities

• Industry research permitted if:• On a reporting issuer or certain foreign private issuers as currently permitted• Broker/dealer publishes research reports in regular course of its business; and• Includes similar information about issuer or its securities in similar reports (but

may contain a more favorable recommendation than prior recommendation)• Permits initiation of coverage on a new class of issuer securities if research reports

on issuer or any class of securities previously published• Applies in Rule 144A and Regulation S Offerings

List of actions prohibited to Researchers• Publish research reports concerning the securities of an issuer immediately following its IPO or expiration of any lock-

up agreement• Publish research reports concerning issuers that are the subject of any public offering of common equity securities

even if the firm is participating in the offering• Participate in meetings with representatives of an issuer, attended by Investment Banking personnel• Contact potential investors in an issuer’s IPO• Make public appearances concerning the securities of an issuer• Solicit business for Investment Banking personnel• Engage in communications with potential investors in the presence of Investment Banking personnel• Share price targets and ratings with an issuer prior to the launch of a deal• Be compensate based on Investment Banking revenue


Form 8-K• A company is required to file under item 5.07 the results of a

shareholder vote within 4 business days• Requirements:

– Indicate date of the meeting and whether it was annual or special meeting

– Provide name of each director elected at the meeting– Describe briefly each matter voted upon at the meeting– Disclose the number of votes cast for, against or withheld– Disclose the number of abstentions and broker non-votes– Provide a tabular representation with respect to each nominee for office– Describe terms of any settlement between the registrant and any other

participant terminating any solicitation including cost or anticipated cots to the registrant

• After 150 days after the nonbinding shareholder vote of say on pay, the company must file Form 8-K under item 5.07


SEC Comments• Trends in SEC comments:

– Peer group and benchmarking • describe how peers are selected and data is used; disclose where

actual payments fell in range

– Performance targets • disclose any material performance targets; identify the specific

targets; disclose actual results

– Compensation Discussion and Analysis • “how” and “why” • The SEC staff questions the use of the simplified method when

historical data appears to be available or the characteristic of the awards are not plain vanilla

– Related party transactions– Policies and procedures– Transactions involving indebtedness


References Reg 14ARule 14a-1 definitions

Rule 14a-2 Solicitations to which Rule 14a-3 to Rule 14a-15 apply

Rule 14a-3 Information to be furnished to security holders

Rule 14a-4 Requirements as to proxy

Rule 14a-5 Presentation of information in proxy statement

Rule 14a-6 Filing requirements

Rule 14a-7 Obligations of registrants to provide a list of, or mail soliciting material to security holders

Rule 14a-8 Shareholder proposals

Rule 14a-9 False or misleading statements

Rule 14a-10 Prohibition of certain solicitations

Rule 14a-11 [Reserved]

Rule 14a-12 Solicitation before furnishing a proxy statement

Rule 14a-13 Obligations of registrants in communicating with beneficial owners

Rule 14a-14 Modified or superseded documents

Rule 14a-15 Differential and contingent compensation in connection with roll-up transactions

Rule 14a-16 Internet availability of proxy materials


References Reg 14a (end)Rule 14a-17 Electronic shareholder forums

Rule 14a-18 Disclosure regarding nominating shareholders and nominees submitted for inclusion in a registrant’s proxy materials pursuant to applicable state or foreign law or a registrant’s governing documents

Rule 14a-20 Shareholder approval of executive compensation of TARP recipients

Rule 14a-21 Shareholder approval of executive compensation, frequency of votes for approval of executive compensation and shareholder approval of golden parachute compensation

Rule 14a-102 [reserved]

Rule 14a-103 Notice of exempt solicitation, information to be included in statements submitted by or on behalf of a person pursuant to Rule 14a-6(g)

Rule 14a-104 Notice of exempt preliminary roll-up communication, information regarding ownership interests and any potential conflicts of interests to be included in statements submitted by or behalf of a person pursuant to Rule 14a-1(b0(4) and Rule 14a-6(n)

Rule 14b-1 Obligation of registered brokers and dealers in connection with the prompt forwarding of certain communications to beneficial owners

Rule 14b-2 Obligation of banks, associations and other entities that exercise fiduciary powers in connection with the prompt forwarding of certain communications to beneficial owners


This NAL will not be empty at GE in the future, the investor communication is in great shape at GE and perfecting itself.


