The National Law Review is pleased to bring you information regarding the upcoming ABA Conference on Business Acquisition Negotiations:
When
November 01 – 02, 2012
Where
Morgan, Lewis & Bockius LLP‘s David A. Sirignano, Amy I. Pandit, and Albert Lung recently had an article regarding The SEC’s New Rules featured in The National Law Review:
On June 20, the Securities and Exchange Commission (SEC) adopted final rules directing national securities exchanges and national securities associations (collectively, the exchanges) to establish listing standards addressing the independence of compensation committee members; the committee’s authority to retain Compensation Advisers (as defined below); and the committee’s responsibility for the appointment, compensation, and oversight of its advisers. The final rules implement Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the Dodd-Frank Act), which added Section 10C of the Securities Exchange Act of 1934, as amended (the Exchange Act), and which requires the SEC to adopt rules directing the exchanges to prohibit the listing of any equity security of an issuer that is not in compliance with Section 10C’s compensation committee and Compensation Adviser requirements. The final rules also amend Item 407 of Regulation S-K to require companies to provide additional disclosures in their proxy statements on conflicts of interest of compensation consultants.
Under the final rules, the exchanges are required to propose new listing standards by September 25, 2012, and must have final rules or amendments that comply with Rule 10C-1 of the Exchange Act by June 27, 2013. Companies must provide new disclosures on conflicts of interest of compensation consultants in any proxy or information statement for an annual or special meeting of stockholders at which directors will be elected occurring on or after January 1, 2013.
New Rule 10C-1 of the Exchange Act directs the exchanges to adopt new listing standards requiring a compensation committee to be composed solely of independent members of the board of directors, and requires the exchanges to establish new independence criteria for these members. While the final rules do not require a company to have a compensation committee, the new independence criteria, as well as the requirements relating to the consideration of a Compensation Adviser’s independence and requirements relating to the responsibility for the appointment, compensation, and oversight of Compensation Advisers, are equally applicable to any board committee performing the functions typically performed by a compensation committee. In formulating the new independence standards, the exchanges are instructed to consider relevant factors, which must include the following:
The exchanges may consider additional relevant criteria, such as share ownership or business relationships with the issuer. The SEC emphasizes that the exchanges are provided with the flexibility to develop their own independence standards consistent with the nature and types of listed companies. In this regard, the SEC notes that it may not be appropriate to prohibit directors affiliated with large stockholders, such as private equity funds and venture capital firms, from serving on a compensation committee. The SEC recognizes that directors elected by certain funds may have a strong institutional belief in the importance of appropriately structured and reasonable compensation arrangements and that their significant equity ownership may align the directors’ interests with public stockholders on matters of executive compensation.
The final rules also reiterate an important distinction between the compensation committee independence requirements under Section 952 of the Dodd-Frank Act and the existing independence requirements for audit committee members under Rule 10A-3 of the Exchange Act. While the audit committee independence rules prohibit a director from serving on the audit committee if such director accepts consulting or advisory fees or is otherwise affiliated with the listed company or any of its subsidiaries, the Dodd-Frank Act does not require any mandatory exclusion of compensation committee membership due to these factors. Instead, the final rules only require that these two factors be considered in determining the independence of compensation committee members.
The following categories of listed issuers are not subject to the independence standards described above:
The exchanges may exempt from the independence requirements a particular relationship with respect to members of the compensation committee as each exchange may determine, taking into consideration the size of an issuer and any other relevant factors.
The final rules require the exchanges to adopt listing standards providing the compensation committee with full discretion and authority to retain and obtain the advice of compensation consultants, independent legal counsel, and other advisers (collectively, Compensation Advisers). The compensation committee will be directly responsible for the appointment, compensation, and oversight of Compensation Advisers, and listed companies must provide appropriate funding to the compensation committee to retain these advisers. The final rules also make clear that the compensation committee is not required to obtain the advice or recommendation of any independent Compensation Adviser or to follow its advice.
While the compensation committee is not required to retain any independent Compensation Adviser, the compensation committee is required to assess the independence of each Compensation Adviser prior to the Compensation Adviser being retained and to consider the following six factors (as well as any other factors identified by the relevant exchange):
The final rules clarify that these six factors should be considered as a whole, and no one factor is determinative or controlling. This list is not exhaustive, and the exchanges may consider other relevant factors in determining the independence assessment requirement.
The final rules also state that a listed issuer’s compensation committee is required to conduct the independence assessment outlined above with respect to any Compensation Adviser that provides advice to the compensation committee, other than in-house legal counsel.
The requirements relating to both the independence of compensation committees and the independence of Compensation Advisers shall not apply to the following categories of issuers:
The exchanges may also choose to exempt from the above-described requirements any further categories of issuers the exchanges determine appropriate.
In addition, the rules adopted by the exchanges must provide for appropriate procedures for a listed issuer to have a reasonable opportunity to cure any defects that would be a prohibition for listing. Such rules may provide that if a member of a compensation committee ceases to be independent in accordance with the requirements of Rule 10C-1 of the Exchange Act for reasons outside the member’s reasonable control, that person, with notice by the issuer to the applicable exchange, may remain a compensation committee member of the listed issuer until the earlier of (i) the date of the next annual stockholder meeting of the listed issuer or (ii) one year from the occurrence of the event that caused the member to be no longer independent.
The final rules amend Item 407(e) of Regulation S-K to expand the current proxy disclosure requirements regarding compensation consultants identified by listed issuers in their SEC disclosures, pursuant to Item 407(e)(3)(iii) of Regulation S-K, as having played a role in determining or recommending the amount or form of executive or director compensation. The final rules will require additional disclosures on (i) whether the work of a compensation consultant raised any conflict or interest, and (ii) if so, the nature of such conflict and how the conflict is being addressed. The new disclosure requirement applies only to conflicts of interest with respect to a compensation consultant, not to outside legal counsel or other advisers.
The final rules do not provide any definition of “conflicts of interest,” and companies should consider their specific facts and circumstances in making such a determination. However, the final rules instruct companies to consider the same six factors described above relating to the independence of Compensation Advisers in analyzing whether conflicts of interest exist.
The new disclosure requirements will be applicable to all reporting companies subject to the proxy rules, regardless of whether the company is listed on an exchange. Accordingly, smaller reporting companies and controlled companies will also be required to provide the additional disclosures, although foreign private issuers will be exempt from such requirements.
Assessment of compensation committee composition: While the new compensation committee independence requirements may not become effective until after the 2013 proxy season, companies should begin analyzing the composition of the compensation committee to determine whether the independence of any director may be affected by the new listing standards.
Review of the compensation committee charter and director and officer questionnaire: The new listing standards are likely to require companies to review and update compensation committee charters and director and officer questionnaires to reflect the new independence criteria for directors.
Analysis of Compensation Adviser independence and conflicts of interest: Given that new factors must be considered in determining the independence of Compensation Advisers, companies and compensation committees should be proactive in establishing or updating procedures for collecting the information necessary to conduct the required independence and conflicts of interest analysis. This may include new screening questionnaires for Compensation Advisers, additional interview sessions, and committee meetings to discuss independence and potential conflicts of interest. The collection of such information should be part of an enhanced disclosure and control procedure designed to ensure that companies can prepare and determine, in a timely manner, whether there are independence questions warranting further discussion regarding Compensation Advisers and if there will be conflicts of interest disclosures relating to compensation consultants in their proxy statements.
Copyright © 2012 by Morgan, Lewis & Bockius LLP
The National Law Review recently published an article by Meredith N. Reinhardt of Drinker Biddle & Reath LLP regarding Tort Law Reform in Pennsylvania:
In our June 2011 Newsletter, we discussed the status of important pending legislation in Pennsylvania (the Fair Share Act) designed to eradicate the common law doctrine of joint and several liability. As of the date of that article, the Pennsylvania House of Representatives approved the Fair Share Act (H.B. 1), and the Act was before the Pennsylvania Senate for consideration. After extensive debate, the Senate ultimately approved a bill substantively identical to H.B. 1.
On June 28, 2011, Governor Tom Corbett signed the Fair Share Act into law, effective immediately. The Fair Share Act, (42 Pa. Cons. Stat. § 7102), provides for proportionate share liability among joint tortfeasors and eliminates the common law doctrine of joint and several liability in all but a few limited situations. Under the new law, each defendant is liable for “that proportion of the total dollar amount awarded as damages in the ratio of the amount of that defendant’s liability to the amount of liability attributed to all defendants and other persons to whom liability is apportioned under subsection (a.2).” 42 Pa. Cons. Stat. § 7102(a.1)(1). Joint and several liability still applies where there is an intentional misrepresentation, an intentional tort, a claim under section 702 of the Hazardous Sites Cleanup Act, a violation of section 497 of the Liquor Code or where a defendant is liable for 60% or greater of the total liability apportioned to all parties. 42 Pa. Cons. Stat. § 7102(a.1)(3).
The Fair Share Act is a significant victory for product manufacturers, insurance companies and other businesses who are often hauled into litigation because of their “deep pockets” even if they might be only minimally liable. Reactions from these groups has been overwhelmingly positive. Pennsylvania Chamber of Business and Industry Vice President Gene Barr commented that the Fair Share Act “restores fairness and predictability to the state’s legal system, encouraging business investment and job growth.”1 The Chairman of the Insurance Agents & Brokers of Pennsylvania further praised the new law: “The act is a win for consumers, businesses and the insurance industry, which all carry the financial burdens of such a litigious environment.”2
As a practical matter, passage of the Fair Share Act will likely decrease the frequency “deep pocket” defendants with minimal liability are brought into litigation. Even if such defendants are joined in litigation, the Fair Share Act will reduce the possibility of inequitable judgments. As time passes, product manufacturers, insurance companies and other business who are often co-defendants in various litigations will continue to see the benefits of this significant tort reform.
1 Press Release, Gov. Corbett signs Chamber members’ No. 1 lawsuit abuse reform priority (June 28, 2011) (on file with author and available at: http://www.pachamber.org/www/news/press_releases/2011/Gov%20Corbett%20signs%20Chamber%20members%20No%201%20lawsuit%20abuse%20reform%20priority.php)
2 Press Release, IA&B applauds Pennsylvania lawsuit-abuse reform (June 28, 2011) (on file with author and available at: http://www.iabgroup.com/press_center/releases/2011/06_28_tort_reform.html).
The National Law Review recently published an article by Jason B. Sims of Dinsmore & Shohl LLP regarding Ohio LLC’s:
If you are thinking about forming an LLC in Ohio for your new business, you may want to think again. And if you are a member of an existing Ohio LLC, the Ohio legislature just signed you up for a non-compete agreement with that LLC. On May 4th, the provisions of House Bill 48 related to Ohio LLCs went into effect. House Bill 48 was a legislative initiative that made several changes to the Ohio corporate statute and LLC statute. While the Bill made many positive changes, the Ohio legislature made some changes to the LLC statute that seriously bring into question if an Ohio LLC is a viable option any more for selecting what type of entity that a new business will operate under. Here is a brief summary of the important changes that House Bill 48 made to Ohio’s LLC statute:
Members have fiduciary duties of loyalty and care to other members. Members also have an obligation of good faith and fair dealing when discharging the member’s duties to the LLC or the other members. The statute already set out the fiduciary duties of managers that were similar to the standard for directors of a corporation. However, if a member is a manager these manager specific fiduciary duties only apply if the member was appointed in writing and the member has agreed in writing to serve as a manager; otherwise the member’s fiduciary duties are the same as those of the members (duty of loyalty, care and the obligation of good faith and fair dealing).
While Ohio courts have adopted many of these duties for members, they have never included an express obligation to refrain from competing with the LLC. With these changes, Ohio now goes in the opposite direction of Delaware, which expressly permits the elimination of fiduciary duties for managers and members.
These additional duties would not provide any significant problems if the members of an LLC could opt out or alter them to meet the particular needs of the members and the LLC. However, the new provisions of the statute prohibit members of an Ohio LLC from eliminating the duties of care, loyalty and good faith and fair dealing in the LLC’s operating agreement. Also, these express duties apply to all members regardless of the size of their equity interest or involvement in the operation of the LLC. In many instances, an operating agreement for an LLC will expressly permit competition as there is a recognition that members may come together to invest in a specific opportunity but otherwise want to be free to pursue their other interests without any restrictions.
As to the idea that you can carve out some items from the duty of loyalty that are not “manifestly unreasonable”, in my nearly 20 years of practice I have never figured out exactly what manifestly unreasonable means. It is one of those legal terms that sounds important and fair, but in practice makes it nearly impossible for lawyers to provide concrete guidance to their clients. So, while businesses look for certainty, they are left with a “I know it when I see it” standard. Members of LLC’s will be able to carve out certain items from the duty of loyalty, but as to exactly what items, who knows?
The concept of an LLC was founded on the basic principal of freedom of contract. As a result, LLC’s provide great flexibility to its members on how to conduct their affairs in operating the business of the LLC. While I am sure the Ohio legislature did not intend to do this, one result of these changes is to restrict this flexibility. So, if you are in Ohio and want to form an LLC with multiple members for your new business, you should consider forming a Delaware LLC or an LLC in some other state and qualify to do business in Ohio as a foreign company.
© 2012 Dinsmore & Shohl LLP
