Critical Issues for the 2010 Proxy Season

Latham & Watkins operates as a limited liability partnership worldwide with affiliated limited liability partnerships conducting the practice in the United Kingdom, France and Italy. ©Copyright 2009 Latham & Watkins. All Rights Reserved.

General Counsel Forum Critical Issues for the 2010 Proxy Season:

The Rise of Votes Against Director Nominees, Proxy Fights and Stockholder Proposals

November 17-18, 2009

John M. Newell, Partner, Latham & Watkins LLP

David M. Taub, Partner, Latham & Watkins LLP

Daniel H. Burch, Chairman and CEO, MacKenzie Partners Inc.

2

Agenda

• Calls for Change Hit A Crescendo• Just Vote No? The Sharp Rise of Votes Against Director

Nominees• Proxy Fights and Other Solicitations Continue Their

Upward Trend• Stockholder Proposals: It’s All About Director

Accountability• Update on the Latest Regulatory and Political Initiatives• Questions and Comments

3

Calls for Change Hit A Crescendo

• Federal Policymakers Take Control of the Governance Agenda

• Institutional Investors as the New Activists?• The Action Moves to Small and Mid-Cap Companies

4

Federal Policymakers Take Control of the Governance Agenda

• Government takes equity stakes in Citigroup, GM, GMAC, AIG, Bank of America, Chrysler

• Intense focus on executive compensation• TARP firms hold mandatory Say on Pay votes• Pay Czar cuts pay for executives at top TARP firms, an average

of 50%• Legislation to require Say on Pay votes

• SEC proposes new proxy access rule• SEC and NYSE eliminate broker discretionary voting• Legislation introduced in Congress to mandate a panoply

of corporate governance programs

5

The Old Activists Are Still Around

• Historically, corporate governance debate dominated by corporate governance activists

• “Gadflies” still around• Union pension funds,and state and local government pension funds• Council of Institutional Investors• Social groups – religious, greens

• They have tended to use 14a-8 proposals, rather than proxy fights and vote no campaigns

• Some traditional activists have increased their level of involvement

• AFSCME “vote no” campaign against 6 Citigroup directors, and litigation in support of proxy cost reimbursement bylaw proposal

6

Rise of Hedge Funds and Other Event-Driven Activists

• Using proxy fights as a way to shake up management and force an event (dividend, sale)

• Direct use of 14a-8 stockholder proposals is limited• Undeclared “alliance” of corporate governance activists

and hedge funds• Hedge funds and other activist investors support corporate

governance campaigns that weaken takeover defense and primacy of board of directors

7

Goals of Activist Hedge Funds

• Long term value creation may not be relevant to many activist hedge funds, so they push for:

• Weakened takeover defenses• Sale or restructuring of the company• Leveraging for special dividend and/or stock buy backs• Management changes• Seats on the Board

• Given the leverage used by hedge funds, their financial return from any value creation is disproportionately high as compared to the size of their investment

• In 2009 proxy season, market and liquidity constraints made dividend or sale events less viable, so the focus has shifted to corporate governance

8

Proxy Advisory Firms Continue to Wield Great Influence on Voting Decisions• Risk Metrics (aka ISS)

• Leading proxy advisory firm in terms of size and influence• >1,200 clients: mutual funds, corporate and public pension funds, trusts, other

fiduciaries• Many institutions vote their shares based solely on ISS’s recommendation• Strong focus on corporate governance, but will also evaluate strategic and

financial issues• Glass Lewis & Co.

• Significant new competitor of RiskMetrics-ISS• 8 of 10 largest mutual funds and top 5 U.S. public pension funds subscribe• Stronger focus on financial integrity and valuation issues than ISS, but significantly

less influence on vote outcomes• Proxy Governance

• Provides recommendations on an “issue-by-company” basis • Views proxy issues in the context of company-specific metrics (relative financial

performance, business environment, strength of management and corporate strategy, quality of corporate governance, etc.)

9

Institutional Investors as the New Activists?

• Activist agenda at RiskMetrics and other proxy advisory firms is reflected in institutional investor voting

• Portfolio manager abdication to internal governance staff• Traditionally, institutions were not publicly active, but now

have broad political cover and activist governance views are becoming mainstream

10

Fidelity as an Example

• Votes against management in uncontested elections rose to 25.5% in 2009, vs. 16.9% in 2008

• Key issues are compensation-related actions (ie, gross ups, stock option exchanges and repricings without shareholder approval), poor attendance at board meetings, adoption of golden parachute plans, failure to follow through on promises to change corporate governance or pay practices

• Voted against all incumbents at Delta Air Lines and Google• Fidelity voted against at least one management

recommendation at 50% of shareholder meetings, up from 41% in 2008 and 38% in 2007

• Voted against 55% of all executive compensation plans in 2009

• Fidelity has its own compensation criteria and does not follow RiskMetrics criteria

11

The Action Moves to Small and Mid-Cap Companies• Corporate governance activists have tended to focus

on larger public companies• Fewer than 20% of companies in the S&P 500 have rights plans–

down from 60% as recently as 2002• Only 35% of companies in the S&P 500 have a classified board –

also down from 60% in 2002 • Small and mid-cap companies are next on list for

corporate governance activist campaigns

12

Agenda





13

Just Vote No? The Sharp Rise of Votes Against Director Nominees

• The Reasons Behind High Votes Against Director Nominees

• SEC’s Elimination of Broker Discretionary Voting• With Majority Voting as the New Standard, a No Vote

Now Has Teeth• Advising the Board Now

14

Percentage of Directors Receiving High Percentages of Opposition Votes (2007-2009)

0.0%

2.0%

4.0%

6.0%

8.0%

10.0%

12.0%

Majorityopposition

vote

40%+opposition

vote

30%+opposition

vote

20%+opposition

vote

200720082009

Source: Proxy Governance2009 data based on meetings through 8/31/09

15

Number of Directors Receiving Majority Withhold/Against Votes

2032

93

0102030405060708090

100

2007 2008 2009

Number of Directors

Source: RiskMetrics

16

Companies Where At Least One Director Nominee Failed to Achieve Majority Support in 2009

ACI Worldwide Inc HMS Holdings Southwest AirlinesAdvanced Analogic Tech Interline Brands Inc Southwestern Energy Co

Anixter Intl Inc Kansas City Southern SPSS IncAssociated Estates Rlty Corp Layne Christensen Co Swift Energy Co

Assurant Inc Lifepoint Hospitals Inc Syniverse Holdings IncCablevision Sys Corp –CL A Mariner Energy Inc Tennant Co

Catalyst Health Solutions Massy Energy Co Tetra Technologies Inc/DECheckpoint Systems Inc Mednax Inc. Thoratec Corp

Circor Intl Inc Mentor Graphics Corp Triquint Semiconductor IncCognex Corp Natco Group Inc United Online Inc

Computer Programs & Systems NBTY Inc United Therapeutics CorpDigi International Inc NV Energy Inc Valueclick Inc

Dollar Tree Inc Plexus Corp Zapata Corp

Essex Property Trust Pride International Inc Zoll Medical Corp

First Mercury Financial Corp Pulte Homes Inc

Firstenergy Corp Red Robin Gourmet BurgersHealthcare Services Group Skywest Inc

17

Some of the Reasons Behind High Votes Against Director Nominees• Increased willingness of proxy advisory firms to

recommend against candidates• Increased willingness of institutions to vote against

management• Investor frustration with financial performance• Dissatisfaction with executive compensation

• 57% of directors receiving majority opposition votes are members of compensation committee

• Failure to implement majority-approved stockholder proposals

• Corporate governance concerns• Rise of “vote no” campaigns by activist investors against

targeted nominees

18

Proxy Advisory Firms’ Recommendations Against Nominees are Increasing

• As voting policies tighten, votes against increase• Advisory firms are not giving sufficient advance warning

of changes in policy• Tax gross-ups• Other “poor pay practices”

• Employment agreements with multi-year guaranteed salary increases, equity grants

• Walk-away rights, excessive severance• Large bonuses not linked to performance

• Pay-for-performance disconnect between increased CEO pay and poor total shareholder return (relative to industry group)

19

Dissatisfaction with Executive Compensation

• Tax gross-ups (280G and perks)• Golden coffin• Poor pay practices or disclosures• Single trigger CIC payments, walk-away rights• Has Board responded to investor concerns?• Stock option exchanges and repricings

20

Pay Concerns Contributed to more than 10% Director Opposition

0

10

20

30

40

50

60

2006 2007 2008 2009

6

1824

50Number of Companies

Source: RiskMetrics

21

Option Exchanges and Repricings Without Stockholder Approval

• At Nvidia, company implemented a stock-option exchange program without stockholder consent

• One board member received 41.9% dissent• Two other board members had more than 34% opposition

• Google also established a stock option exchange program without stockholder consent

• Two directors got 11% dissent, even though Google’s officers and directors own 70.6% of the outstanding shares

22

Failure to Implement Majority-Backed Stockholder Proposals• FirstEnergy

• In 2008, three stockholder proposals won at least 67% support (to eliminate supermajority voting, reduce the threshold for calling special meetings, and adopt majority vote standard for election of directors). Board failed to implement.

• In 2009, four directors received more than 50% opposition votes• Seven other directors received more than 48% opposition

• Pulte Homes• Following successful stockholder proposals, Board failed to put

poison pill defense to a stockholder vote, and failed to declassify board

• In 2009, three directors received majority opposition• Board refused to accept director resignations• Under investor pressure, Board agreed to put poison pill to vote

next year and recommend declassification later

23

Failure to Implement Majority-Backed Stockholder Proposals (continued)

• Southwest Airlines• In 2008, Southwest Airlines investors approved majority voting for

directors by 68%, but Board failed to implement majority voting• In 2009, an outside director on nominating committee received

53.7% withhold vote• Extension of poison pill without stockholder approval

resulted in more than 40% opposition at Cameron International, Convergys and Abercrombie & Fitch

24

Other Corporate Governance Concerns

• At Massey Energy, an outside director who sits on more than six boards received 58% opposition

• “Affiliated” outside directors who sit on key committees received more than 40% withhold votes at Consol Energy, Pepco and Vornado

• Poor meeting attendance

25

Vote No Campaigns

•11 vote no campaigns in 2009; 17 in 2008•State Bancorp Inc.

•3 directors having close to 40% of votes cast withheld•Dissident later appointed to Board

•Bank of America•Campaign against all 18 directors by CalPers/CalSters•RiskMetrics recommended withhold on 5 of 18, based on concerns about Merrill acquisition•All directors re-elected, but successful stockholder proposal strips Ken Lewis of Chairman title•Lewis resigns

26

Vote No Campaigns (continued)

• Citigroup• Campaign against Audit and Risk Management Committee• RiskMetrics recommends withhold on 4 out of 14

• Dollar Tree Inc.• Campaign by CalPers to withhold on 3 incumbents• RiskMetrics recommends withhold on all 3 for failure to

implement successful declassification stockholder proposal• All 3 directors had 50% of votes withheld

27

Broker Discretionary Voting Has Historically Favored Director Nominees• On average, 20% of outstanding shares do not issue

voting instructions to brokers in uncontested director elections

• Factors contributing to increasing failure to instruct• Retail stockholders are more likely to not issue instructions• Poor financial performance can increase retail investor apathy• Notice & Access has increased the number of uninstructed shares

• Under NYSE Rule 452, if brokers do not receive voting instructions from street holders by the tenth day before the stockholder meeting, the broker has discretion as to whether and how to vote those shares on routine matters

• For most brokers, 100% of uninstructed shares have been voted in favor of the Board’s nominees

• Some brokers allocate discretionary votes in proportion to non- institutional voting instructions received

28

SEC Eliminates Broker Discretionary Voting

• In July 2009, SEC eliminated broker discretionary voting of uninstructed shares in uncontested elections (3-2 vote by Commissioners)

• Applies to shareholder meetings starting in 2010• Specifically, NYSE Rule 452 was modified to make all director

elections “non-routine”• This change impacts most public companies, because most

brokerage firms are members of NYSE and subject to its rules• SEC recognized the need for investor education to encourage

greater retail investor voting

29

Elimination of BDV Should Result in Higher Vote Percentages Against Director Nominees

• Loss of broker discretionary voting will result in loss of significant block of votes “for” company’s director nominees

• Companies with large retail holders will suffer biggest loss of “for” votes

• Companies using Notice & Access mailing will also be hit• The impact of withhold/against votes is amplified• The influence of proxy advisory firms and institutional

investors is increased

30

With Traditional Plurality Voting, A High Withhold Vote Has No Teeth

•

Under plurality voting, candidates with the most votes win•

In an uncontested election, the number of nominees would normally equal the number of Board seats available

•

If a director receives at least one affirmative vote, he or she is elected

•

As result, with plurality voting, a majority withhold vote has no legal effect on the outcome of the election (unless there is an election contest)

• However, a majority withhold vote can be a real embarrassment for directors and the company

• Some of the directors with majority withhold votes have voluntarily resigned, but resignations are not always accepted by company

• Delaware litigation over Axcelis failure to accept 3 director resignations

31

Two Types of Majority Voting

•

So-called “modified plurality”•

To give recognition to failure to receive majority vote, modified plurality standard retains plurality voting as operative legal standard but adds director resignation policy

•

Director resignation policy requires director to resign if does not receive a majority of votes cast, and Board then determines whether to accept resignation

•

True majority voting•

Must receive majority of votes cast to be elected; failure to receive majority vote means candidate is not elected

•

Typically coupled with director resignation policy (as above) to overcome holdover problem (arising because incumbent stays in office until successor duly elected)

•

Corporate governance activists have prevailed in making true majority voting combined with director resignation policy “best practice”

32

Majority Voting Has Become the New Standard in Recent Years• Most of S&P 500 has adopted majority voting

• Over half of S&P 500 companies have adopted “true majority” voting and another 18% have adopted “modified plurality”

• However, three-quarters of Russell 3000 companies still use plurality standard

• Many companies have adopted majority voting voluntarily as a best corporate governance practice, others in response to a 14a-8 proposal

• Shareholder proposals to adopt majority voting picked up in 2009

• Over 100 such proposals were submitted in 2009• Majority voting proposals routinely get support well above 50% of

the votes cast

33

With Majority Voting as the New Standard, a No Vote Now Has Teeth

• Under true majority voting, failure to get majority vote means director is not re-elected

• Holdover following conclusion of term addressed with director resignation requirements

• Consequences if no directors are re-elected• Poison put considerations

34

Advising the Board Now

• Advise the Board now as to the new voting risks created by the rise of withhold/against votes and elimination of broker discretionary voting

• Analyze stockholder base (retail holders) and voting profiles of key stockholders

• Review voting policies at institutions and proxy advisory firms • Do corporate governance policies and compensation-related issues

violate policies?• Determine how influential proxy advisory firms will be given your

stockholder base• Monitor corporate actions year-round with an eye towards proxy

advisory firm policies• Consider whether to use Notice and Access for proxy mailing• Handling 14a-8 proponents

35

Agenda





36

Proxy Fights and Other Solicitations Continue Their Upward Trend

7542

56

100 108125 137

0

30

60

90

120

150

2003 2004 2005 2006 2007 2008 2009

Proxy Fights

Source: FactSet

TrueCourse

through 11/10/09 meeting dates

37

Primary Campaign Types (2009)

Board Representation

62%

Remove Director(s), No

Dissident Nominee to Fill Vacancy

1%

Board Contro l27%

Vote for a Stockholder

Proposal4%

Vote Against a M anagement

Proposal1%Withhold Vote for

Director(s)3%

Vote / Activism Against a M erger

2%

Source: FactSet

TrueCourse

through 11/10/09 meeting dates

38

Success Rates for Proxy Fights Are Increasing

44 4636

4855 57

49 5156

0

25

50

75

100

2001 2002 2003 2004 2005 2006 2007 2008 2009

Success Rate*Rate (%)

Source: FactSet

TrueCourse

2009 figures based on data through 11/10/09 meeting dates.

*Number of outright victories, partial victories or settlements by the dissident as a percentage of all proxy fights where an outcome has been reached.

39

Proxy Contest Evaluation Criteria

• RiskMetrics focuses on two central questions: • Have the dissidents met the burden of proof that change is warranted at the company?• If so, will the dissidents be better able to effect such change versus the incumbent board?

• Criteria for Board control:• Dissidents must have:

• Well-reasoned, detailed business plan• Transition plan describing how change of control will be effected• Identification of qualified and credible new management team

• RiskMetrics will compare the dissident’s and incumbent management’s plans, board and management team in order to arrive at their vote recommendation

• Criteria for minority Board position:• Burden of proof RiskMetrics imposes on the dissidents is lower than in the case of control

• Dissidents detailed plan of action not required• Dissidents do not have to prove that their plan is superior• Dissidents must prove that change is preferable to the status quo and that the dissident

slate will add value to board deliberations by considering the issues from a different viewpoint than the current board members

40

Consent Solicitations

• Proxy fights are usually conducted at annual stockholder meetings (i.e. once a year)

• However, 38% of Russell 3000 companies allow stockholders to act by written consent outside of a stockholder meeting

• The ability to act by written consent can be an important factor in any proxy fight

• No need to wait until next annual meeting• Speed• Element of surprise

• Ability to run a consent solicitation can be a powerful tactic in a hostile bid

• Requires a charter amendment to remove right• Activist investors and proxy advisory firms strongly support right to act

by written consent

41

What You Can Do to Prepare Now for a Possible Proxy Fight or Consent Solicitation• Review vulnerability to hostile takeover in conjunction

with proxy fight to remove Board• Proxy fights and consent solicitations are typical tactics in

hostile takeover bids• Used to neutralize poison pill and “just say no” defenses• Used to amend corporate governance procedures that would

impede a hostile bid• Update bylaws for latest advance notice procedures

• Address 2008 Delaware court decisions• Include disclosure of derivative positions and other dissident

information• If action by written consent is permitted, adopt bylaws

to regulate consent process• Bylaws should provide for an orderly, defined process, similar

to those used in advance notice bylaws

42

Agenda





43

Stockholder Proposals: It’s All About Director Accountability

• Stockholder Proposals Continue to Climb• Current Hot Topics in 14a-8 Proposals• Current Strategies for Handling Stockholder Proposals

44

Stockholder Proposals Continue to Climb

357409 403 408

466

550 563 560

478517 502 528

774

847

725

947

11681119

260

1145

607

0

200

400

600

800

1,000

1,200

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

YTD

Source:*IRRC (1989 to 2005), ISS (2005 to 2007) and RiskMetrics Group (2007-2009) Corporate Governance Bulletin, ISS 2005 Postseason Report, ISS 2006 Postseason Report, and RiskMetrics Group ‘09 Proxy Season Trends and a Look Ahead. From 1989 to 1996, IRRC tracked the shareholder proposals of 1,500 companies. In 1997, IRRC tracked the shareholder proposals of 1,800 companies. From 1998 to 2009, IRRC (after 2005, ISS then RiskMetrics Group) tracked the shareholder proposals of 2,000 companies. 2009YTD as of 6/1/09.

Trend in Proposals Submitted by Shareholders (1989-2009)

Proposals

45

Background of 14a-8 Proposals

• Rule 14a-8 permits shareholders to place proposals in company proxy materials

• Historically, province of “corporate gadflies,” who could be nuisances but rarely had substantive impact

• Now, used by pension funds, labor, activists, hedge funds• 14a-8 process has been transformed by corporate

governance activists• Cohesiveness of activists and informal alliances with RiskMetrics

and other proxy advisory firms, internal corporate governance experts at fund complexes, hedge funds, etc.

• Facilitated by SEC bias in favor of permitting shareholder proposals to be placed on ballot

• E.g., SEC Staff Legal Bulletin 14E (Oct. 27, 2009) reverses position and allows proposals relating to risk, and CEO succession planning

46

Binding and Non-binding Stockholder Proposals

• Shareholder proposals under Rule 14a-8 take two basic forms

• Recommendations for board action which are not binding (precatory)

• Proposed bylaw amendments, which if adopted by requisite vote of shareholders are binding and take effect immediately

• In 2009, 13 proposals were cast as binding bylaw provisions

47

Putting Teeth into Non-binding Proposals

• More frequent and more successful campaigns against incumbent directors are being used to “discipline” boards that do not implement successful non-binding proposals

• Typically results in a multi-year campaign against board• First year is majority vote for non-binding stockholder proposal• If board does not implement proposal, it may be subjected to

RiskMetrics and other proxy advisory firms recommending “against” reelection of incumbent directors

• Possibility of a “vote no” campaign in following years

48

Current Hot Topics in 14a-8 Proposals• Executive compensation

• Say on Pay• Vote on executive death benefits (golden coffins)• Require that equity awards be held through retirement• Disclose information about compensation consultants

• Corporate Governance• Majority voting for directors• Independent Board Chair• Right to call a special meeting• Board declassification• Adopt cumulative voting• Eliminate supermajority vote provisions

• Social Policies• Issue sustainability report• Set greenhouse gas emissions goals• Adopt principles for health care reform• Adopt sexual orientation anti-bias policy

• Coming Soon? 14a-8 Proposals on Proxy Access

49

Say on Pay What is it?

• Say on Pay is an annual advisory vote by shareholders at annual meeting on senior executive compensation

• No set formulation for Say on Pay advisory vote• Sometimes articulated as approval of CD&A section in proxy• Sometimes as approval of compensation policies for all Named

Executive Officers• Other variations are used or have been suggested

• Even if not legally binding, a negative vote would have significant consequences in board room

50

Say on Pay Proposals Stalled in 2007 and 2008

• In 2007 and 2008, Say on Pay was not gaining significant traction among traditional institutional investors

• Most Say on Pay shareholder proposals under Rule 14a-8 failed• However, over 30 companies have “voluntarily” adopted

annual non-binding Say on Pay votes, most as a result of either successful shareholder proposals or pressure from governance activists

• Include: Apple, Hewlett-Packard, Intel, Verizon, Pfizer

51

Say on Pay Stockholder Proposals Gain New Life in 2009

• Proxy advisory firms will recommend in favor of stockholder Say on Pay proposals

• Stockholder-sponsored Say on Pay proposals gain greater support in 2009

• 44% of votes cast in favor in 2009, vs. 39% in 2008 and 2007• 13 out of 66 votes receive a clear majority of votes cast

52

Say on Pay Company-sponsored Say on Pay Advisory Votes

• Under the 2009 Stimulus Act, each entity that had previously received TARP assistance must submit a non- binding Say-on-Pay resolution to stockholders

• 300 companies were required to hold votes• At most companies, resolutions received over 90% approval• All proposals received a majority of votes cast in favor

• Say on Pay votes at non-TARP companies received similar support

53

Say on Pay Will Institutions Continue to Support Say on Pay Advisory Votes?

• Did institutions cut TARP firms slack in extraordinary circumstances?

• Is a vote against pay a better way to send a message than a vote against compensation committee members?

• As Say on Pay becomes more common, institutions will be able focus on what level of disclosure is required, and what compensation practices are acceptable

54

Say on Pay What to do now?

• Expect more Say on Pay stockholder proposals under 14a-8 for the 2010 proxy season

• Will early adopters get credit?• Consider triennial or biennial advisory votes as an

alternative to annual votes• Microsoft announces triennial votes; Prudential Financial adopts

biennial votes• Monitor Say on Pay legislation progress• Begin to prepare for inevitable enactment of Say on

Pay, including reevaluation of hot button executive compensation packages

55

Other Executive Compensation Stockholder Proposals• Approve or limit executive death benefits• Require equity to be retained• Disclosure of executive compensation• Restrict supplemental retirement plans• Link pay to performance• Approve future golden parachutes

56

Majority Vote to Elect Directors

• Shareholder proposals to adopt majority voting picked up in 2009

• Over 100 such proposals were submitted in 2009• Majority voting proposals routinely get support well above

50% of the votes cast• Most companies that receive a majority voting proposal

will settle and adopt it

57

Independent Board Chair

• Before 2009, most stockholder proposals sought a lead independent director

• In the 2009 proxy season, there was fault line shift from proposals for lead independent directors to proposals for separate independent board chairs

• In 2009, 43 proposals sought independent chairs vs. 34 in 2008

• Support is also up: 35% in 2009 vs. 28% in 2008• Approximately 45% of S&P 1500 have already separated the CEO and

board chairs• RiskMetrics and other proxy advisory firms will recommend in favor of

separation proposal, with limited exceptions

• Political and regulatory support• Pending legislation would mandate independent board chair• SEC proposed disclosure rules would focus disclosure on this issue

58

Right to Call Special Meetings

• 46% of S&P 500 and 49% of S&P 1500 companies already give shareholders right to call special meeting

• Shareholder proposals would amend bylaws to • Add a stockholder right to call a special meeting• Or lower threshold to enable as few as 10% of shareholders to

call a special meeting • Creates constant threat of a possible proxy contest rather than limiting it

to once a year at annual meeting• How high a threshold will institutions accept?• RiskMetrics will support a 10% threshold even if the company has

already adopted a 20% threshold• Right to call special meeting proposals have increased

• 63 proposals in 2009 vs. 45 in 2008• Support is up as well: 56% in 2009 vs. 45% in 2008

59

Declassification• Proposals to declassify boards are a perennial favorite

of corporate governance activists and still very much in fashion

• Number of proposals held steady in 2009• 76 in 2009 vs. 88 in 2008

• When on the ballot, declassification routinely wins• 75% support in 2009 vs. 73.5% in 2008

• RiskMetrics and other proxy advisory firms will recommend in favor

• Classified boards are on steady decline• Only 35% of S&P500 companies have classified board, down

from 60% in 2002• Schumer bill would mandate board declassification at

listed companies

60

Proposals to Watch for in 2010

• Allow stockholders to recover proxy contest costs• Litigated by AFSCME at CA Inc.• Adopted by HealthSouth in October 2009

• CEO succession planning• SEC 2009 Staff Legal Bulletin 14E (SLB 14E) reverses course, and

succession planning proposals will now be allowed• Social policy resolutions

• SEC 2005 SLB 14C found that social policy resolutions could be omitted as “ordinary business operations” if they involve an “internal assessment of risk or liabilities that the company faces as a result of its operations that may adverse affect the environment or public health.”

• In SEC SLB 14E, Staff reversed position. Rather than focusing on whether the proposals relates to an evaluation of risk, the Staff will focus on “the underlying subject matter to which the risk relates.”

• Will this allow resolutions on climate change, HIV/AIDS, importation of drugs from Canada and various environmental questions?

61

Coming Soon? 14a-8 Proposals on Proxy Access

• Under current SEC interpretations, a stockholder proposal requiring proxy access is excludible under Rule 14a-8 because it relates to an election contest

• Part of the SEC’s proxy access proposal includes an amendment to Rule 14a-8 to permit stockholders to submit proxy access proposals

• Although it is possible that this rule change will be adopted before comprehensive proxy access rules are adopted, it is not likely

62

Agenda





63

Update on the Latest Regulatory and Political Initiatives

• SEC Proposed Rules for 2010 Proxy Statements• The Status of Proposed Proxy Access Rules• Political and Legislative Developments

64

Proposed Enhanced Governance and Compensation Disclosures for 2010• On July 1, 2009, SEC (5-0 vote) proposed rules to expand

disclosures relating to public companies’ governance structure• Would require disclosure focused on the company’s board leadership

structure, and why structure is appropriate for company• If applicable, would call for explanation of why the company combines

chair and CEO positions• Would also require explanation of board’s role in risk management and

effect on the company’s leadership structure• Disclosures in practice likely to become somewhat standardized, but SEC

is counting on “embarrassment” factor to stimulate governance changes in both areas

• Would also require additional disclosures about each nominee’s specific experience and skills “qualifying” him/her for service on board and specific board committees, prior directorships and legal proceedings involving the nominee

65

Proposed Enhanced Governance and Compensation Disclosures (continued)

• Change in tabular disclosure of equity grants to NEOs and directors (SCT and DCT)

• Under current rules, disclosed amounts reflect the expense recognized in the covered year under FAS 123R

• Proposed rules require disclosure of the total grant date fair value of awards granted during the year, computed in accordance with FAS 123R.

• Will increase sticker shock value of grants• Proposed rules require enhanced disclosure of

compensation consultant services and fees• Expectation is that new disclosure rules will be adopted in

November and effective for 2010 proxy season

66

Proposed Rules Regarding Compensation and Risk Creation

• Requires disclosure of compensation policies or practices that could incentivize any employee to take on excessive amounts of risk

• Currently, CD&A is limited to compensation programs and policies for NEOs

• Disclosure of risks arising from compensation practices is required only if the risks may have a material effect on the company

• Proposed rules do not require an affirmative statement if company determines that no disclosable risks exist, but the SEC has requested comments on this issue

67

Proposed SEC Proxy Access Rules

• Potentially one of most significant corporate governance issues of decade

• Current regime• Only company’s nominees for election to board are included in

company’s proxy materials• If shareholder wants to nominate opposition candidates, it must prepare,

pay for and distribute separate proxy materials• Proposed shareholder proxy access regime

• Would allow shareholders of public company to include in company’s proxy materials (proxy statement and proxy card) candidates for election to the board, nominated by shareholders, in opposition to board’s candidates

• Result would be a proxy contest for election of directors• Only handful of companies have voluntarily adopted proxy access to date

• Includes RiskMetrics, LSB Industries and Carl Icahn-controlled American Railcar

68

Status of Proposed Proxy Access Rules

• On May 20, 2009, SEC (by 3-2 vote) proposed new proxy access rules

• Would require companies to include shareholder nominees for directors in company’s proxy materials under SEC-prescribed circumstances

• To be eligible to make nomination, a shareholder or shareholder group would be required to own for a year at least 1% of companies with market capitalizations in excess of $700 million, 3% of companies between $700 and $75 million, or 5% of smaller market cap companies

• Total number of shareholder nominated directors would be capped at 25% of full board (rounded down)

• Multiple shareholders or groups could submit nominations, but total still capped at 25% and priority would be allocated on a first-in-time basis

• SEC proposals would also allow shareholders to insert proposals regarding proxy access matters in company proxy materials under Rule 14a-8

• In October 2009, the SEC announced it had deferred action on the proposed rule until early 2010, so proxy access will not apply for the 2010 proxy season

69

Proxy Access What Should Companies Be Doing Now?

• Companies should stay focused on proxy access because SEC is intent on making some kind of change in 2010

• Make sure the Board and management is briefed about proxy access in general and updated on developments

• Although comment on the SEC proposal is closed, the SEC appears willing to continue the dialog with interested parties

• Proxy access legislation is pending in Congress, so lobbying could still be productive

• If the SEC allows companies to opt-out (i.e. proposed their own versions of proxy access), companies should consider what alternatives they might propose to stockholders

70

Legislative Developments

• Senator Schumer’s “Shareholder Bill of Rights”• Would direct SEC to establish proxy access• Would also make other fundamental changes in corporate

governance—declassification, mandatory independent chair• Mandatory Say on Pay votes

• Similar bill by Rep. Gary Peters• Senator Dodd’s Financial Reform Bill

• Covers majority voting, declassification, proxy access, independent chairman, clawbacks, Say on Pay, golden parachutes, and independent consultants and counsel

• Recent changes to state corporation law• Delaware corporate law amended to specifically authorize

companies to adopt bylaw provisions permitting proxy access• Model Business Corporation Act (sponsored by ABA) being

amended to same effect

71

Latham & Watkins LLP

Founded in 1934, Latham & Watkins has grown into a fullFounded in 1934, Latham & Watkins has grown into a full--service internationalservice internationalpowerhouse with approximately 2,000 attorneys in 27 offices aroupowerhouse with approximately 2,000 attorneys in 27 offices around the world.nd the world.The founders of Latham & Watkins instilled an ethic of hard workThe founders of Latham & Watkins instilled an ethic of hard work, commitment, commitmentand quality that flourishes today and has nurtured the firm's drand quality that flourishes today and has nurtured the firm's dramatic growth intoamatic growth intoone of the world's premier business law firms. one of the world's premier business law firms.

Latham consistently ranks among the best transactional and finanLatham consistently ranks among the best transactional and finance practices ince practices inleading legal publications such as leading legal publications such as The American LawyerThe American Lawyer, , mergermarketmergermarket,,ChambersChambers and and Asia Legal BusinessAsia Legal Business and earns praise worldwide for work onand earns praise worldwide for work onhighhigh--profile and groundbreaking deals.profile and groundbreaking deals.

Latham's dedication to excellence extends to pro bono and publicLatham's dedication to excellence extends to pro bono and public service. As aservice. As aSignatorSignator to the Law Firm Pro Bono Challenge, we have a longstandingto the Law Firm Pro Bono Challenge, we have a longstandingcommitment to providing pro bono legal services, financial suppocommitment to providing pro bono legal services, financial support and volunteerrt and volunteertime to charitable organizations and to individuals most in needtime to charitable organizations and to individuals most in need throughout thethroughout theworld.world.

72

MacKenzie Partners, Inc. is a fullMacKenzie Partners, Inc. is a full--service proxy solicitation, investor relations and service proxy solicitation, investor relations and corporate governance consulting firm specializing in mergerscorporate governance consulting firm specializing in mergers--andand--acquisitions acquisitions and proxy contest related transactions. The firm has offices inand proxy contest related transactions. The firm has offices in New York City, New York City, Los Angeles, Palo Alto and London.Los Angeles, Palo Alto and London.

MacKenzie's services include MacKenzie's services include –– in addition to traditional proxy solicitation in addition to traditional proxy solicitation –– corporate governance consulting, securityholder solicitations, icorporate governance consulting, securityholder solicitations, information agent nformation agent services for tender and exchange offers, beneficial ownership idservices for tender and exchange offers, beneficial ownership identification, entification, market surveillance and associated financial, investor and mediamarket surveillance and associated financial, investor and media relations relations services. We work in close partnership with our client's attornservices. We work in close partnership with our client's attorneys, investment eys, investment bankers and other consultants, providing advice and counsel at ebankers and other consultants, providing advice and counsel at each stage of ach stage of the transaction.the transaction.

PALO ALTO 228 HAMILTON AVE

PALO ALTO, CA 94301 PH: (650) 798-5206 FX: (650) 798-5207

NEW YORK105 MADISON AVE

NEW YORK, NY 10016PH: (212) 929-5500FX: (212) 929-0308

LOS ANGELES 1875 CENTURY PARK EAST

LOS ANGELES, CA 90067 PH: (310) 284-3110 FX: (310) 360-2420

LONDON 17 CAVENDISH SQUARELONDON W1G 0PH UK PH: +44 (0)20 3178 8057 FX: +44 (0)20 7504 8665

73

Questions & Comments

David M. Taub, Partner Latham & Watkins LLP

213.891.8395 (direct) [email protected]

John M. Newell, Partner Latham & Watkins LLP


Daniel H. Burch, Chairman & CEO MacKenzie Partners Inc.


Contact Information:

Investor Relations

Critical Issues for the 2010 Proxy Season