Need to Know: September 2008

Court Denies Proxy Cost Reimbursement

The Delaware Supreme Court ruled that a bylaw proposed by AFSCME, which would have required software company CA Inc. to reimburse “reasonable expenses” if a stockholder was successful in electing at least one independent candidate to a board seat, was in violation of Delaware law.

The ruling was seen as a victory for boards, as a decision in AFSCME’s favor could have opened the floodgates for proxy contests and dissident slates. The court found that the binding bylaw, as written, went too far because it didn’t allow CA’s directors to exercise their judgment “to decide whether or not it would be appropriate, in a specific case, to award reimbursement at all.”

In cases where dissidents run proxy contests motivated by personal or petty concerns, or to promote interests that would be harmful to the company, the board’s hands would be tied, the court said.

The ruling is unlikely the last word on the issue. It could give shareholders a road map to seek other changes to the directorelection process consistent with the court’s decision. Richard Ferlauto, director of pension investment policy for AFSCME, said the focus for shareholders has to be on the Securities and Exchange Commission and the creation of an appropriate right of shareholder access at the federal level.

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Shorts on a Shorter Leash

Fearful that manipulation by short sellers could imperil the banking system in the United States, the Securities and Exchange Commission took the highly unusual step of putting restrictions on those who sell short shares of financial stocks. The steps, issued through what is called an “emergency order,” limit short trading in 19 financial services companies, including Citigroup, Lehman Brothers, and Freddie Mac and Fannie Mae. The Commission requires traders to borrow shares they wish to sell short before they actually trade them, eliminating the possibility of naked short selling (when investors sell shares short but do not borrow them by the transaction closing date). In the order enacting the change, SEC Acting Secretary Florence E. Harmon called it a response to “unusual and extraordinary circumstances.”

 

The Cost of Poor Planning: $5.2 Million

 

A study by Equilar finds that companies that are forced to go outside to hire a new CEO pay 75 percent more for a CEO than for one promoted from within. The first-year median pay package for largecap externally hired CEOs is $12.1 million, compared to $6.9 million for internally hired chiefs.

Apple Not Bitten by Backdating Charges

The Justice Department has ended its criminal investigation of Apple Inc. for backdating stock options. After two years of investigation, charges will not be brought against the company or several current and former executives, according to a report by the Wall Street Journal.

Spokespeople for the U.S. Attorney’s Office and Apple declined to comment. Apple’s former general counsel, Nancy Heinen, is still contesting civil charges brought by the Securities and Exchange Commission regarding misdated stock options awarded to Apple CEO Steve Jobs.

Apple disclosed that an internal investigation found irregularities related to option grants between 1997 and 2007. It said Jobs helped select dates for some backdated grants but argued that no wrongdoing had been done.

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Activists Win CSX Board Battle

The Children’s Investment Fund Management and 3G Capital Partners prevailed in an ongoing proxy battle with rail transportation giant CSX, successfully electing four of their nominees to the board, despite CSX’s objections. The proxy battle ended with the elections of Alex Behring, Christopher Hohn, Gil Lamphere, and Tim O’Toole to the now 12- member board.

In June, CSX sent a letter to shareholders recommending that they re-elect its directors and disregard TCI and 3G’s four nominees. In the letter, CSX Chairman and CEO Michael J. Ward urged them to choose CSX’s “experienced board” over TCI’s nominees. “TCI has violated securities laws, testified falsely in federal court, and made numerous suggestions that could have destroyed value in CSX,” he argued.