Monday, April 10, 2017

Proposal to prevent management from seeing executive pay vote tallies gets green light

By Jacquelyn Lumb

The Division of Corporation Finance advised Celgene Corporation that it was unable to concur with the company’s view that it could omit a shareholder proposal seeking a bylaw to prevent the board from seeing a tally of votes cast on certain executive pay matters. In a supporting statement submitted by John Chevedden, he explained that management currently can monitor voting and use proxy solicitation firms to boost their self-interest at shareholders’ expense with respect to say-on-pay votes and executive pay plans.

The proposal would not prohibit management access to shareholder comments that are submitted along with ballots and it would be limited to executive pay items. The proposal also suggests that shareholders could waive confidentiality, possibly by checking a box on the ballot. Without confidential voting, Chevedden said management can do an end-run on say-on-pay votes rather than getting executive pay right, so that it incentivizes management to focus on long-term shareholder value..

Violation of Delaware law. In its no-action request to omit the proposal, Celgene included an opinion from a Delaware firm on whether the proposal would cause it to violate Delaware law. The Delaware firm Morris, Nichols, Arsht & Tunnell LLP advised that the proposal, if implemented, would conflict with Delaware law in two ways. It would limit a director’s right to access information relating to potential voting outcomes, which counsel said was an impermissible intrusion on a statutory right to information, and it would restrict the board’s exercise of its fiduciary duties.

Ordinary business. Celgene’s counsel Proskauer Rose LLP wrote that in addition to reliance on Rule 14a-8(i)(2), that the proposal would violate state law, it could also be omitted under the ordinary business rule and on the basis that it is vague and misleading. The firm wrote that the staff has repeatedly permitted the exclusion of substantially similar proposals under Rule 14a-8(i)(7) where proponents sought bylaw amendments to prevent management from seeing a running tally of votes cast prior to the annual meeting. The letters cited by Proskauer sought to prevent access to the outcome of votes on particular uncontested matters, including executive pay, proposals required by law such as say-on-pay, and shareholder proposals.

Proskauer said the principal differences in those letters is that Chevedden’s letter does not reference proposals required by law, though it does mention say-on-pay votes, or shareholder proposals. The firm added that Chevedden’s proposal would not allow management or the board to monitor preliminary votes for the purpose of achieving a quorum, among other purposes. The firm concluded that Chevedden’s proposal relates to monitoring preliminary voting results with respect to general employee matters that involve Celgene’s ordinary business. It also relates to the logistics of the annual meetings.

False and misleading. The proposal is also false and misleading, according to Proskauer. For example, the firm said the proposal claims there is no disclosure of the cost, when in fact the company is required to disclose the cost of its paid solicitors in the proxy materials provided to shareholders. Proskauer also took issue with the characterization of the solicitation as a one-way communication, when in fact Celgene actively engages with shareholders and welcomes their views. The proposal would actually hinder communications with shareholders, the firm advised.

Staff response. The staff said it was unable to concur with Celgene’s view that the proposal could be omitted on any of the three bases. With respect to the argument that it was vague and indefinite, the staff said Celgene did not demonstrate objectively that the proposal was materially false or misleading. The staff also noted that the proposal relates to the monitoring of preliminary voting results with respect to executive compensation, so it may not be omitted in reliance on the ordinary business exception.

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