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 Number 4-96
Chancellor Allen addresses "real" aspects of governance Chancellor
William Allen discusses the evolution of corporate governance at Issues Update
'96.
"Corporations are legal fictions. The organizations that exist within the corporate shell are very real - real people having real interactions with others, aiming for and having real world effects." That is how Judge William Allen of the Delaware Chancery Court opened his remarks on the progress of corporate governance and the role of the courts at the Society's recent Issues Update seminar. Allen, who has been a Chancellor since 1985, has written more than 500 judicial opinions during his stay on the court, many focusing on the fiduciary obligations of corporate directors. That was also his focus during his address to seminar participants in New York. Allen noted that there are formal aspects that are fundamental to governing a corporation, but the difficult part is non-formal and generally involves fiduciary duty." It is when the fiduciary duty of officers and directors is called into play that courts can be expected to push aside the formalistic review and instead engage in substantive consideration of the motivation for corporate action or in the fairness or loyalty of board or management decisions." Allen and the other Delaware Chancery Court judges have been called on to make judgments in a number of significant cases involving director liability for failure to meet their fiduciary duties." In each case," Allen commented, "there was a more or less passive board and a powerful, indeed domineering CEO....One possible interpretation of these cases is that while respect and trust by the board for the CEO may be essential components of a productive board, where a critical corporate matter is involved, reliance on the CEO's word alone is an insufficient basis for the conclusion that an outside director has satisfied the legal duties of the office....Once a court gets the idea that [the corporate governance discussion within a boardroom] is just 'theater' - putting a preordained transaction into something that just looks real - that's when the court must decide if the men and women on the board are really trying in good faith to make a business judgment." Allen also discussed the progress of corporate governance over the past decade. "Pressure is now on managements and boards that wasn't true even 10 years ago," he said. "The growth of institutional investors has been very destabilizing. Institutional investors now have enough power but not enough economic incentive to make judgments on management beyond a very small level. So they have to rely upon the board of directors....The central idea of corporate governance is an engaged board of directors - not an advisory board, but a monitoring board. That's what institutional investors need." Allen offered some additional judgments about board structure and function, stating that each board should have a governance committee to review how the corporation is being run; that big boards invite passivity rather than participation; and that boards are also made passive by not having the right information provided to them in a comprehensible form. He noted that Corporate Secretaries can and do play a vital role in the board communication process.  FROM THE CHAIRMAN
Fellow Members:The Society's Issues Update seminar, held recently in New York, provides a good stopping-off place to reflect on what has been a very busy fall. The seminar's program included several topics that the Society's national committees and officers have been closely following in recent months - proxy distribution and costs, the anticipated 1997 proxy season, "plain English" disclosure, developments in corporate governance, and an SEC update with Brian Lane, Director of the Division of Corporation Finance. Some of these topics also came under scrutiny at Society fall conferences held around the country in September and October. I had an opportunity to attend several of these regional meetings, where I not only learned a lot but had a great time meeting Society members and guests. That's an unbeatable combination: a Society fall conference is a great place to meet friends and influential people (apologies to Dale Carnegie). The Society is also becoming more influential. In recent weeks, our Survey of Current Board Practices and opinions of Society leaders on corporate governance have been cited in articles in both The Wall Street Journal and The New York Times. In addition, reporters from several business publications attended Issues Update to get a first-hand understanding of what the Society is doing. If you have not yet done so, I urge you to look over the Current Board Practices survey report, published by the Society earlier this year. This report is the best review available on where companies stand on 34 board practices that are good subjects for discussion as a board seeks to evaluate its own structure and performance. The report is a useful tool for anyone wishing to advise the CEO and the board in setting the agenda for a discussion of governance issues. During this fall, the Society's board of directors has been working to analyze the skills the Corporate Secretary needs to add true value to his or her company in order to be successful in this most challenging and unique career we follow. Our next phase will be to work with the national committees and the staff of the national office to determine how best to focus the many resources of the Society in delivering effective assistance to the membership for achieving professional objectives and personal goals. We will report back to the membership as the year progresses.
I hope you are fully aware that all members in the Society are given the opportunity to participate at the national level. In the next few weeks, David Smith and I will be asking the chapters to give us their nominations for a Chairman-Elect for 1997-98 and eight new Society directors for the next three-year term. In addition, every member will have an opportunity to indicate an interest in serving on one of the Society's national committees. I hope you will take an active role in helping pick our new leaders and in participating directly in the vital work the Society does. Your ideas and your energy are our most valuable assets. Boston Conference: New ideas with an eye on historyThe Society will hold its 51st National Conference in Boston - a city that recently celebrated its 366th birthday. The event, scheduled for July 9-13, 1997, marks the first time the Society has held its annual meeting in New England, and National Conference Committee Chairman Nicholas Calise says the Society plans to combine a business program that provides up-to-date information and a social program that will take advantage of the Boston area's cultural and historical sites.[Members should look for a mailing in February that will include hotel and airline information as well as details on pre- and post-conference tours in New England, Cape Cod and nearby areas.] The overall theme of the conference will revolve around how Corporate Secretaries can and do "add value" within their companies. Panels will address such topics as "Skills and Talents of Successful Corporate Secretaries," "Best Practices for Boards and Committees," "Institutional Voting Trends," an "SEC Update" and "Nuts and Bolts Issues." Several outstanding speakers from corporate America, the SEC and the media have also been invited to address the conference. Calise says members should also expect some social events that are not "business as usual" For example, plans are developing for a family night clambake, a tour of historical homes on Beacon Hill and an evening event in a Boston museum. The Committee is also making arrangements for fascinating tours of sites where the Minutemen stood, witches were punished, noted authors lived and worked, and more. So mark your calendars and look for more information about the conference. Also note that this year's event is later on the calendar than usual. The Society hopes that the later date will enable some members to attend who had board meeting conflicts in the past and will also encourage others to plan their family vacations in the New England area. Securities Law Committee members meet with SEC staff The Society's
Securities Law Committee met with staff of the SEC's Division of Corporation Finance
in Washington, December 5. The annual dialogue provides an opportunity for committee
members to discuss and clarify proxy related issues before the upcoming season
begins. The meeting also enables the Society to get an inside view of current
staff projects and to offer practical views on the impact that those initiatives
may have on members' companies.
This year's meeting focused on several topics in which the Society has had direct involvement with the SEC - possible reforms to the shareholder proposals rules under Rule 14a-8 (Commissioner Wallman had outlined a reform plan at a recent meeting of the New York Chapter); plain English disclosure under the 1933 and 1934 Acts (Society members have been key pioneers in this area); Section 16 developments; and company registration. Other topics that were discussed included potential changes to shareholder communication rules; electronic dissemination of disclosure documents; the status of regulatory reform (Rule 144, S-8 changes, environmental disclosures); proposed obligations to search for lost shareholders; and possible liberalization of standards under Item 404 of Regulation S-K.
Society supports company registration approachThe Society's Securities Law Committee, in a comment letter submitted to the SEC on October 30, gave its endorsement to the efforts of the SEC's Advisory Committee on Capital Formation and the Regulatory Process to create a company registration system for new offerings of securities. At the same time, the Committee offered some caveats about whether large issuers will elect to shift from the current shelf registration system to company registration and about the need to examine proposed fees to ensure that switching to the new system will be largely cost neutral.[The Society's letter is in response to a concept release (Release Nos. 33-7314, 34-37480) issued by the SEC during the summer requesting comment on various approaches to regulatory reform, including the company registration concept that would alter the present transaction-based registration system.] Members of the Securities Law Committee have worked closely with SEC Commissioner Steven Wallman and the Advisory Committee, providing written comments and informal suggestions as the company registration project has developed (see September 1995 newsletter). The Society's comment letter notes that many of the Society's comments are reflected in the final report of the Advisory Committee. The Society's letter also predicts that the company registration system as out-lined in the release "has the potential to reduce the costs of raising capital by (1) eliminating the distinction between registered and unregistered securities, (2) shortening the period between the decision to go to the capital markets and the actual sale of securities, and (3) reducing transaction costs by dramatically simplifying the process." Nevertheless, the letter adds, several members of the Committee have questioned whether the "carrot" in company registration is large enough to induce large issuers to switch, given the facility with which capital can be raised under the existing system. The Committee, therefore, urges the SEC to adopt a pilot company registration system to see whether the system as proposed draws in issuers. If not, the staff can examine possible drawbacks and "adjust the rules to make company registration more attractive to issuers, while adhering to the essential investor protection objectives." The Committee also noted one significant "disincentive" in the proposed company registration system. This involves fees for certain offerings, such as exempt offerings, which currently are not subject to Securities Act filing fees. In particular, the letter notes, making commercial paper issuance subject to 1933 Act fees, would "virtually ensure" that many large companies would not choose to volunteer for company registration. The Society letter also focuses on other disclosure enhancements proposed in the SEC release and concludes that both company registration and disclosure enhancement should be linked as part of a voluntary program that can develop and improve over time. The Committee's comment letter is available via the Society's Fax-on-Demand system or by contacting Blanca Rosbach at (212) 681-2010 or via e-mail at brosbach@governanceprofessionals.org. Notable quotes from Issues Update '96 seminarIf you attended the recent Issues Update seminar in New York, here are some of the ideas and opinions you heard expressed by panelists and speakers. If you were not able to attend, here is some of what you missed:Looking ahead to the 1997 proxy season:"Will there be some confusion involved with proxy fees this year? Not in the process but definitely in the dollars. You're going to have to study your invoices carefully."Andrew Carrozzo, Tritech Services
"Vote tabulation may be a little like income tax reporting. There may never have been one done absolutely perfectly, if one can even determine what 'perfectly' means."
"Workplace issues in particular are gaining some force among institutional investors, particularly international workplace conditions."
Corporate governance issues:"Are we causing a shrinking of the pool of available directors through all of the debate over director time and involvement? If we stop looking in the same place, we will not see the pool shrinking. All boards want CEOs as directors, but all boards don't need CEOs. Companies can find a better diversity at the next levels down."Richard Koppes, Jones, Day, Reavis & Pogue
"We don't evaluate individual directors as a matter of philosophy not as a matter of self-protection. We believe the board is a unit.":
"When a shareholder proposal receives a majority vote, that vote is not necessarily on the specific issue but is a 'proxy' for something else being wrong in the company."
"The central idea of corporate governance is an engaged board of directors - not an advisory board but a monitoring board."
Disclosure concerns:"The SEC is not currently giving companies comments on their forward-looking information, but here is some practical advice. Ask yourself: (1) Is the cautionary statement in reasonable proximity to the forward-looking information? (Our review has shown that the two are not generally in the same location); and (2) Is the cautionary language tailored to your particular company, or is it more generic and boilerplate? It has to provide something meaningful for shareholders to understand."Gregg Corso, SEC
"We've gotten rid of 44 forms and four rules so far, and we're looking to get rid of more."
Using "plain English""Using plain English is not a process of mere translation. The part of it that really matters is fundamentally rethinking documents to see if they make sense. You want to create a document that doesn't scream 'legal,' so investors will want to pick it up and read it."Nancy Smith, SEC
"One law firm recently noted that plain English is like a freight train: you either get on it or get run over."
"The plain English release probably will not be out until the beginning of the year, so you won't have to leave a family celebration to run off to your nearest website to read the latest release. Releases on transferable options and S-8 also won't be issued until next year. We won't mandate EDGAR filing for Forms 3, 4 and 5 until EDGAR II is ready - and that's at least one to two years away." Society "receives" its first shareholder proposalThe Society has been following and reporting on the usual and unusual in shareholder proposal activity for more than 35 years. But the 1997 season will provide something new even for us. For the first time, the Society has itself been named in a shareholder proposal.John Jennings Crapo, a shareholder of Northeast Utilities in Hartford, CT, has submitted a proposal to the company to require its board to request the Society's assistance in scheduling shareholder meetings of all publicly held companies in the United States for the purpose of avoiding conflicting dates. The Society does prepare a listing of annual meeting dates and locations that it makes available to members each year, but no organization has ever taken on the monumental task of trying to schedule meetings for over 15,000 public companies in a 365-day year. (Crapo has submitted a similar proposal to another company, this time calling on it to request assistance from the Federal Reserve Bank in scheduling meetings). Northern Utilities requested no-action relief from the SEC in order to omit the proposal from its 1997 proxy statement under three different grounds: that it was a matter beyond the company's power to effectuate (14a-8 (c)(6)), that it was not a proper subject for shareholder action (14a-8(c)(1)) and that it relates to a personal claim or grievance (14a-8(c)(4)). However, the Commission staff did not concur with any of the three grounds as a basis upon which to omit the proposal. Theresa Allsop, Northern Utilities Assistant Secretary and Senior Counsel and a Society member, subsequently wrote to Society President David Smith asking the ASCS to advise the company regarding its ability and inclination to carry out the action in the proposal. In his response, Smith noted that the Society's members represent less than 20 percent of all publicly traded companies in the country and that the ASCS has no authority or influence on the managements or boards of members' companies. Thus, even if the proposal were approved by shareholders and Northern Utilities' board directed a request to the Society, "the ASCS would not and could not schedule the annual meeting or annual meetings of any or all publicly-held companies in the United States," Smith concluded. The Society will be following the progress of this and other proposals submitted during the 1997 proxy season through its "Shareholder Proposal Hot Line." Members who have questions about specific proposals should contact hotline@governanceprofessionals.org.
Committee opposes SEC lost securityholder databaseCommenting on two recently proposed SEC rules related to lost security-holders, the Society's Securities Industry Committee agreed that issuers and transfer agents should use whatever reasonable efforts are necessary to locate lost owners but strongly disagreed that the SEC should establish a national lost securityholder database.The Committee's comments were in response to two new rules, Rule 17Ad-17 and Rule 17-24 under the Exchange Act, proposed by the Commission in Release No. 34-37595. The first rule attempts to define the term "lost securityholder," and would, among other things, require transfer agents to conduct two searches over an 18-month period for new addresses of securityholders who have been coded as lost. Under the second rule, the Commission proposes to establish a national database open to the public to help identify and locate lost securityholders and reunite them with their property. Issuers would be required to file annual reports of lost holders to be included on the database. In its letter, the Committee noted that "corporations have not only an obligation to locate lost securityholders but also strong interests in doing so." To meet this obligation, companies already spend a great deal of time and money ensuring that all communications and distributions from the companies reach their owners quickly and accurately. The Committee offered the Society's endorsement of the SEC's efforts to strengthen recordkeeping processes in order to reduce the number of lost securityholders, but added that "whatever steps are taken to locate lost securityholders and reunite them with their property should not burden other securityholders of the corporation with high costs nor pose risks involving potential fraud or misuse of the recordkeeping information." The Committee therefore proposed that once an issuer has made a reasonable effort to find a lost holder (many of whom have become lost because of their own failure to notify the company of address changes), the issuer should not be responsible for incurring additional expense required to locate the lost holder. The Committee also suggested that a de minimis threshold for assets be established so that neither issuers nor transfer agents would be expected to conduct a search that exceeds the value of the property owing to the securityholder. Commenting on the second proposed rule, the Committee strongly opposed the Commission's establishment of a national database for three main reasons: the database would be difficult to set up and costly to maintain; would duplicate, probably less completely, a similar database already proposed by the National Association of Unclaimed Property Administrators (NAUPA); and would pose too great a risk of fraud upon or invasion of privacy of securityholders. The Committee's comment letter is available via the Society's Fax-on-Demand system or by contacting Blanca Rosbach at (212) 681-2010 or via e-mail at brosbach@governanceprofessionals.org.
Membership campaign gets off to a successful startThe Society's 1996-97 membership campaign is underway, and the results have been outstanding. More than 200 new members have joined since September 1, thanks to the joint effort of the National Office Membership Task Force and the recruiting work of members who have convinced their colleagues of the value of belonging to the Society. The recruiters have a double goal in mind: to help the Society become larger and stronger and to earn one of the four vacation prizes to be awarded in the spring.The new members are listed below by company. Please extend them a warm welcome. Are there some companies in your industry group or local area not yet represented in the Society membership? The Society needs your help in contacting potential members in those companies. Contact the National Office (212-681-2014) for membership materials and information.
ACS Financial & Securities Services - Leonard Wasserman
Society Notes The
stock market is not the only thing that has been experiencing steadily rising
activity over the past six months. So has the Society's website address on the
Internet at www.ascs.org. In October, more than
1,130 hits were recorded on the website. A hit is made when a user enters the
website.Expect annual, board meeting practices surveys soonEvery year the National Office compiles information about annual meeting dates and locations, and every second year also conducts a survey of when and how often boards of members' companies meet. The annual meeting data is tabulated and printed out into a report that is available for purchase by members only. The board meeting information is available to members by contacting Blanca Rosbach in the National Office. Forms for both the annual meeting and board meeting surveys are being sent out via fax to the designated member from each Society company. Please complete them and return by mail or fax (212-681-2005) to the National Office as soon as possible.Houston Chapter hosts next "Essentials" courseMembers of the Society's Houston Chapter are serving as faculty of the Society's next Essentials of the Corporate Secretarial Function seminar, scheduled for January 16-17 at the Omni Houston Hotel. The seminar is also being co-sponsored by Bridgeway Software, the Houston-based developer of computer software programs for corporate secretaries and corporate legal departments."Essentials" is the Society's two-day intensive course on the basic aspects of the Corporate Secretary's job - Secretary's duties and responsibilities, board and committee function and meetings, period reporting for public companies, good governance issues for private companies, shareholder meeting issues, proxy solicitation, and corporate administration. Co-chairs for the seminar in Houston are Patricia Neighbors of American General Corporation and Diane Schumacher of Cooper Industries, Inc. Program and registration information for the course has recently been mailed out and is also posted on the Society's website at www.ascs.org. Questions about the seminar should be directed to Suzanne Walker or Harriet Chabrowe in the National Office at (212) 681-2008 or (212) 681-2009. To make hotel reservations, contact the Omni directly at (800) 843-6664 or (713) 871-8181. Fraser, Waxenberg honored by YWCAEliza Fraser of General Electric Company and Susan Waxenberg of Time Warner Inc. were inducted into the YWCA's Academy of Women Achiever at a luncheon November 7. They join over 1,800 women executives worldwide who have been inducted into the Academy since its inception in 1976 as recognition of their promoting the advancement of women in the workplace through their leadership and example. Fraser is a member of the Society's Securities Law Committee and is a former President of the Fairfield-Westchester Chapter. Waxenberg joined the Society this summer. Among other Society members who have also been inducted into the Academy in recent years are Gwenn Carr of ITT Industries, Inc., Patricia Conway of the American Management Association, Jodi Kass of Time Warner Inc., Jodie King of Hearst Corporation and Kathleen Shannon of American International Group, Inc.Milwaukee Chapter's annual seminar draws 140Nearly 140 participants attended the Milwaukee Chapter's annual seminar on November 8 to learn about legal and practical considerations involved in complying with recent Section 16 rules changes, get practical advice to prepare for the 1997 annual meeting season, find out more about using electronic media for preparation and delivery of disclosure documents, and gain insights on the future of company registration. Among speakers were Section 16 expert Peter Romeo and SEC senior staff member David Sirignano. The half-day event was co-sponsored by Bowne of Milwaukee and attracted both members and nonmembers in the Milwaukee area. This was the third year the Milwaukee Chapter has held its November seminar, and this year's event drew the largest attendance ever.Society members are "plain English" pioneersSociety members Kathleen Gibson of Bell Atlantic Corporation, Margaret Foran of ITT Corporation and Susan Wolf of Baltimore Gas and Electric Company are all speaking a special language in their companies these days - "plain English." The three attorneys are pioneers in the SEC's pilot program to encourage companies to use simplified and readable English and more accessible page designs in their disclosure documents to investors (see September 1996 newsletter). In exchange, the members' companies have received considerable help from the Commission in preparing the documents and expedited review of their filings. Gibson helped to prepare disclosure documents for the recent merger of Bell Atlantic and NYNEX. The cover page and summary of their joint proxy statement and prospectus are written in plain English. Foran has filed the first shelf registration statement utilizing plain English, and Wolf is preparing both the MD&A for her company's 1996 10-K and annual report and an upcoming medium term note prospectus in plain English.Plain English was a hot topic at this year's Issues Update seminar. Nancy Smith of the Commission joined with Gibson and Foran to develop a practical tips workshop. Smith said that the Commission intends to publish a plain English handbook soon and reported that the SEC is drafting a rule that will require future prospectuses to have cover pages, summaries and risk factors written in plain English. Dunlap stirs up Florida mini-conferenceThe Society's Southeast Chapter held its first-ever Florida mini-conference, October 3-4 in Orlando. The event was designed as both an educational and networking experience for the chapter's Florida members, many of whom find it difficult to attend regular meetings in the Atlanta area. Members who attended were treated to a fiery presentation by controversial corporate executive Albert Dunlap, who has been stirring up boardrooms previously at Scott Paper Company and currently at Sunbeam Corporation. Other conference speakers focused on corporate ethics, board compensation, proxy distribution fees and vote tabulation.
Telephone proxy voting may save companies moneyDuring the 1996 proxy season, several corporations took advantage of a new proxy voting process, offering their shareholders the option of voting on routine meeting matters via touch-tone telephone.Telephone voting offers several advantages, according to Charles Purcer, whose Proxy Services Corporation has pioneered the new system. One is a potential cost savings. Purcer says the average cost per vote can be less than return postage and that rates should go down as volume increases. The system also interfaces easily with most tabulating systems, so that vote counts can be obtained efficiently. In addition, companies may be able to realize a greater vote return, particularly in the last days before a meeting. "The heaviest voting comes in the first ten days after proxy materials are received and then it slows down - by mail or phone," Purcer says. "However, we have noticed that with phone voting percentages go up again about eight days before a meeting. We figure that some shareholders find their proxy in a pile of mail. They realize that they can't vote on time by mail, but the phone still offers them a chance. Those are votes that companies probably wouldn't have gotten in otherwise." Telephone voting is still in the early stages of being tested and accepted. Some states, Delaware in particular, permit telephone voting, while others, such as Pennsylvania, do not. Because the system has not been put into widespread use yet, it can be employed only in connection with routine meetings and not in proxy contest situations. Here is how the process works. The company includes telephone voting instructions with its proxy form, along with a personal identification number (PIN) that will serve as the voter's "electronic signature." The PIN contains a "check digit" within the sequence that confirms the caller's identification. Purcer says that companies have seen the best results when they have printed the proxy items and phone instructions on one 8 1/2" by 11" form. The shareholder will hear the same instructions after dialing an 800-number also noted on the form. Following a recorded message, shareholders are usually given two voting options: (1) They can press one number to vote either for all items as recommended by the company's board or against all items; or (2) they can choose to vote on each proxy item separately. Purcer says that if voters choose the one-key voting option - as over 90 percent generally will - the average cost per vote can be approximately 26 cents (or less if volume increases), well below the 34 cent return mail rate. For those who vote items separately, the phone call will probably take longer, and the costs may go up. The three companies that used the phone voting system in 1996 noted mixed results. Vote totals did increase, and as much as a quarter of those votes came in via the telephone. However, one company that chose to offer voters only the option of voting either all for or all against management, received complaints from a proponent who had a shareholder proposal on the proxy and felt that some telephone voters would have supported the proposal if they could have split their votes. As a result, Purcer says that his firm now recommends that companies always offer voters the option of voting for each proxy item separately. The Society will follow the progress of phone voting during the 1997 season and report results in a later newsletter. For those interested, a sample telephone proxy voting form utilized by Proxy Services Corporation is available via the Society's Fax-on-Demand system or by calling Blanca Rosbach at the National Office at (212) 681-2010. Purcer's number is (860) 651-2210. New securities law may reduce regulation and costsby Paul D. Borja, Esq.Mr. Borja is an Associate in corporate and securities law with the firm of Reinhart, Boerner, Van Deuren, Norris & Reiselbach, P.C. in Washington, DC. Companies and their large stockholders planning to offer securities in public and private offerings may be pleasantly surprised to find that certain types of securities and offerings are no longer subject to registration or supervision under both federal and state securities laws. Rather, under the National Securities Market Improvement Act of 1996, which was signed into law on October 11, specified offerings will be subject only to federal regulation. The Act, introduced last year by Rep. Jack Fields (R-TX), will help companies:
Federal preemption of state lawThe new Act offers three provisions by which state law is preempted by federal law. These provisions are available only to categories of securities or transactions in such securities that satisfy specific requirements.Under the first of these provisions, the Act pre-empts state laws and "blue sky" regulations that require registration or qualification of securities or securities transactions or that limit or impose any condition on the use of offering documents. As a result, companies offering securities that fall into any of the specified categories will not have to register or qualify those securities with a state's securities department, file notices or comply with any other state law (not just state securities law) with respect to the security or offering. Second, the Act pre-empts state laws that prohibit, condition or limit the use of stock offering documents or other types of securities-related documents filed with the SEC. States have used this power in unexpected ways, such as conditioning approval of a prospectus on the removal of anti-takeover provisions from a company's certificate of incorporation. This power has also caused confusion at times, such as when a state requires language in the prospectus that is contrary to SEC direction or policy. Third, the Act prohibits states from conducting a "merit review" of an offering. Because this comprehensive review often generates regulatory questions that must be resolved by the issuer before the state approves the prospectus, it can delay an offering and add significantly to its overall cost. These protections are rather broad and therefore provide a strong incentive to structure offering using securities that fall within one of the following categories:
Continuing state powersEven though states no longer have the ability to require registration of certain securities, the Act expressly provides that states retain the authority to enforce their anti-fraud laws. Thus, a company should expect states to continue to monitor all offerings made within them, even if the company has managed to avoid state registration or other filings.Also, except for offerings involving securities listed on the two national exchanges and Nasdaq, a state may still require issuers to file notices upon the commencement and completion of the offering in that state and to pay related fees. In addition, for the first three years following enactment of the Act, a state can require a company to register its securities with the state if the company refuses to pay these state fees. To prevent companies from becoming inadvertently subject to state registration in this manner, a mere delay in payment or underpayment of state fees may not be treated as a refusal to pay. The Act also addresses several other securities topics intended to improve the securities market. For instance, the Act imposes an overall reduction over the next nine years of SEC fees to register securities to ensure that fees collected are just enough to meet the SEC's costs. The Act also includes limits on state regulation of broker-dealers, requires the SEC to look into privatizing the EDGAR system, and divides supervisory responsibility for regulating the nation's 22,500 investment advisers between the SEC and the states. Overall, companies should find provision of the Act a welcome relief from the previous system of overlapping jurisdiction and duplicative supervision.
OF INTERESTNACD issues report on director professionalismOne topic that generated considerable attention at the Society's recent Issues Update seminar was a new report issued by the National Association of Corporate Directors (NACD) that focuses on board function and director professionalism. The report was developed by a "blue ribbon" commission of corporate directors, executives and attorneys empaneled by the NACD and chaired by New York attorney Ira Millstein and Yale School of Management professor Eugene Williams. It focuses on four key questions: (1) What should directors do? (2) How should boards fulfill their responsibilities? (3) Who should be directors? and (4) How should directors be evaluated?In seeking to answer these questions, the NACD commission sets forth a number of key recommendations in its report. The overall responsibility of the board, the report notes, is to work with the CEO to clearly define its role, considering both legal responsibilities to shareholders and the needs of other constituencies, provided shareholders are not disadvantaged. To carry out this responsibility, the board should establish an independent governance committee; create independent leadership roles for directors; participate in setting board and committee agendas; actively participate in the processes of selecting and compensating directors and the CEO; determine a level and timetable of stock ownership for each director; establish effective and independent methods for evaluating the CEO, the board and individual directors; hold regular executive sessions without management present and take a role in selecting advisors to the board. The report also attempts to specify personal qualities that should be sought in all directors and core competencies the board needs as a whole. Noting the commitment of time and effort board members must make to carry out their responsibilities, the commission recommends that boards consider formally limiting the number of positions directors may take on other boards, subject to individual exceptions. For example, CEOs and senior executives of the company should be limited to service on only one or two other boards, fully employed outside directors should serve on no more than four boards, and others should be on no more than six boards. Finally, the report presents examples of board evaluation mechanisms and several definitions of director independence excerpted from a variety of sources. Copies of the report are available from the NACD (202-775-0509). The cost is $50 for NACD members and between $50-$100 for nonmembers, depending on how many copies are ordered.
Delaware court rules on annual meeting requirementAs annual meeting season approaches, members should note a recent Delaware Chancery Court ruling that the requirement of Delaware General Corporation Law (DGCL) Section 211 that an annual meeting be held to elect directors is mandatory and is not satisfied by shareholder written consent action, purporting to elect a new board or reelect an old one (Hoschett v. TSI International Software Ltd., Del ChancCt, Civil Action No. 14601, 7/19/96).The case arose when a shareholder of TSI, a Delaware corporation based in Wilton, CT, sought an order to compel the company to hold an annual meeting. Previously, the company had received written consent representing a majority of stockholders for the election of its five directors and believed that this action satisfied the need to hold an annual meeting. The court ruled that while Section 228(a) of the DGCL authorizes any action to be taken at an annual meeting or special meeting to be taken by written consent of the shareholders, it does not affect the Section 211 obligation to hold the annual meeting. Shareholders may remove holdovers and fill vacancies on the board through exercise of the consent power, if the company's certificate of incorporation and bylaws so provide, the court noted, however, such directors hold office only until the next annual meeting of shareholders.
SEC reduces certain feesUnder provisions of the recently enacted National Securities Markets Improvement Act (see article in this newsletter), registration fees under Section 6(b) of the 1933 Act will gradually be lowered over a 10-year period so that by the year 2007, the fees collected by the SEC will approximate the cost of operating the agency. In a separate action on the omnibus appropriations bill (PL 104-208), Congress lowered Section 6(b) fees from the 1996 fiscal level of 1/29th of one percent to 1/33rd of one percent for fiscal 1997. And in still another action, the SEC in Release Nos. 33-7331, 334-37692, announced that it was eliminating certain filing fees for annual reports, proxies and various forms. Those fees, according to SEC Chairman Arthur Levitt represented just two percent of the total fee revenue collected by the SEC in 1995 but required an inordinate amount of cost and effort to collect.
Commission tightens Reg SThe SEC adopted rule changes in early October to require companies to file current reports of sales of unregistered equity securities, including securities sold in reliance on Regulation S. The Reg S offshore sales will have to be reported within 15 days of sale on Form 8-K. In a related action, the Commission adopted rules changes to streamline disclosure requirements concerning financial statements of recent or contemplated acquisitions. According to SEC Chairman Arthur Levitt, the changes "should diminish any need reporting companies with recent acquisitions feel to sell securities abroad under Reg S exemption."Regulation S, adopted in 1990, provides safe harbors from 1933 Act registration requirements for specific offers and sales conducted offshore. The Commission had felt that some companies were abusing Reg S by placing securities offshore temporarily to evade registration requirements. The new rules are designed to curb such abusive practices.
American institutions have European impactAmerican institutional investors are having a growing influence on corporate governance in European companies, according to a study conducted by Deminor, a Belgium-based shareholder advisory firm. The study examined annual reports, bylaws and other publicly available data from 140 corporations listed on stock exchanges in the United Kingdom, France, Germany, The Netherlands and Belgium to determine corporate governance progress in those companies. The five categories examined were: rights and duties of shareholders, anti-minority measures and practices, information to shareholders, corporate structure and directors, and board committees.From its study, Deminor determined that English companies rank first in terms of their corporate governance advancement, followed by France, Germany, Belgium and The Netherlands. Deminor also noted that some corporate governance issues are generally neglected by companies in all five countries: e.g., disclosure standards about board independence, meeting attendance, meeting schedules and issues debated by the board. On other issues, national standards seemed to diverge widely. For example, British companies tend to disclose much more information about board compensation than do companies in the other four countries. British and French companies also seem far ahead of those in the other European countries in establishing specialized committees of the board. The "one share, one vote" principle also varies widely. In France and The Netherlands, multiple voting rights are common. In analyzing the study results, Deminor predicts that European companies wishing to compete for international capital need to establish higher corporate governance standards by improving shareholder communications on how their boards function, simplifying voting procedures and eliminating certain anti-takeover measures and practices. Direct registration pilot underwayA pilot program to test the effectiveness of book-entry registration and transfer of securities got underway in mid-November. The pilot involves three issuers and three transfer agents. If all goes well with the pilot, more companies and agents are expected to come onto the direct registration system after the first of the year."We joined because we figure it's the wave of the future," said Gordon Garney, Assistant Secretary of Mobil Corporation, one of the pilot participants. "We also feel that direct registration will help us get more shareholders of record." Joining Mobil as pilot participants are Control Data Systems and First Chicago NBD Corporation. Each issuer is paired with a transfer agent. Mobil with ChaseMellon Shareholder Services, Control Data with The Bank of New York, and First Chicago with First Chicago Trust Company of New York. The direct registration system combines some aspects of street-name ownership and some of company dividend reinvestment programs. Investors can buy and sell stock through brokers or banks, but they are registered on the books of the issuer. Companies mail investors statements at least once a year and within two business days of any transaction. All transfers are handled electronically, thus avoiding the need for certificates. (Certificates are no longer required of issuers, thanks to a change the New York Stock Exchange made in its rules in October.) Electronic transfer speeds the process. In fact, if requests are made before 2 p.m. EST, transfers can be made on the same business day, according to Garney. The system not only provides convenience for investors but potential savings in money, time and effort for issuers and transfer agents. Companies don't have to pay for printing, storing and mailing certificates, nor deal with insurance bonds for lost certificates. They can also avoid some of the fees paid to brokers or banks to relay proxy and other mailings to shareholders. "We volunteered to be in the pilot as soon as it became available," said Garney, who also proudly noted that the first transfer in the whole system was a Mobil account. "This is the first step in cutting transaction time and costs. It's equivalent to banks doing away with passbooks and going to statements. This puts a system in place if and when we go from T+3 to T+1 or even T." The Corporate Secretary is published throughout the year as a service to members of the Society of Corporate Secretaries and Governance Professionals. Articles or statements appearing herein do not constitute legal opinion, advice or judgment and should not be relied upon as such. Inquiries regarding information contained in this newsletter should be directed to Geoff Loftus, at (212) 681-2000 or by e-mail: gloftus@governanceprofessionals.org. Inquiries regarding membership or publication orders should be addressed to: Membership Publications Deborah Fox Olga Holmes (212) 681-2014 (212) 681-2015
Society of Corporate Secretaries and Governance Professionals membership
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Society members came away from the two-hour working session with a number of
ideas for future committee projects. The committee will begin work soon on the
agenda for its spring meeting with the full Commission and staff. Additional
information about both the December meeting with the staff and the spring meeting
will be posted on the Society's website 
Answering
Milwaukee members' questions about new Section 16 developments at the chapter's
annual seminar are (l to r) Kathryn Coates from Quarles & Brady, Peter Romeo
from Hogan & Hartson L.L.P. and Eric Fonstad from Harnischfeger Industries,
Inc.