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Questions and Answers with Marty Dunn

January 1, 0001
Jen: What do you think are the most important recent developments in corporate governance law?

Marty: The most important thing to happen in the last few months is the proxy access decision, no question about that. Until that decision came down, public companies were faced with the very real possibility that in next year’s proxy season, they’re going to have to include shareholder nominees in their proxy materials. Now, admittedly, large shareholders, but still shareholder nominees. And the D.C. circuit court struck that down in a very strongly worded decision which, interestingly to me, did more than just knock down proxy access. It had a second effect, which is it laid out where the SEC failed in considering the economic factors; and, if you look at that standard that they laid out, I think it’s going to be very difficult for the SEC to adopt very many rules.

The immediate effect is, for the 2011-2012 proxy season, there will not be a Federally-mandated proxy access, which means that there is also the SEC Rule 14(a)(i)(8) that they changed, which allows private ordering and allows shareholder proposals to create individual proxy access programs at companies, and that was stayed along with the proxy access rule, because the Commission’s word was that they were “intertwined.” The day that the decision came out, the director of the Division of Corporation Finance, Meredith Cross, issued a statement saying, “We note that this doesn’t change anything related to our 14(a)(8) rulemaking.” I think that was a clear hint that they’re going to lift the stay on 14(a)(8)(i)(8) and require companies to include shareholder proposals that would create different shareholder proxy access programs at each public company if it was voted for by the shareholders. So I think public companies very realistically need to think about the fact that they’re going to get shareholder proposals this year with the intent to create a proxy access process at that company and about how they should respond to these proposals. I think the next item for work at a lot of board meetings is going to be making the board aware of this development.

Jen: Recently, you and I have talked a bit about Delaware choice-of-forum provisions in company charters. What have you seen happening recently with these provisions?

Marty: Well, this is actually interesting, because it’s a new trend that comes off of the choice-of-forum agreements in contracts. And those are always upheld because the parties to agree to it. The choice-of-forum question that you’re seeing with Delaware companies now is that they’re putting provisions in their charter or their bylaws that say that any litigation that stems from, fiduciary duties, something under the bylaws, traditionally state law issues, etc., will be litigated in Delaware. Companies started doing this about two years ago after the Revlon decision, where Vice-Chancellor Lassiter held that as long as the shareholders agree, a company can decide where it wants to have its matters litigated. And then you saw this decision in California Federal court, in a case called Galaviz that involved Oracle. Oracle had stuck one of these choice-of-forum provisions in its bylaws and the court there threw it out because Oracle had put it in after the allegedly offensive behavior and the shareholders had not agreed to it. That case now has everybody trying to figure out whether these provisions are going to be enforceable outside of Delaware. You see people scrambling a little bit and what most of them are coming up with is that shareholders need to agree to the provision somehow or another.

For companies that are not yet public, I think a good argument can be made that if you put the choice-of-forum provision your charter or by-laws and disclose it in your prospectus when you go public, shareholders can’t argue “I didn’t know about it.” Other folks are putting them up to a vote of shareholders, and I think you’ll see boards putting it in their bylaws and then asking for shareholder ratification the next time they vote. And so it really is up in the air right now. There’s a great deal of uncertain because the Galaviz decision, but a lot of public companies are starting to socialize the concept with their board of “Should we do

Jen: Are there are certain trends you are seeing in what the SEC is focusing on this year?

Marty: What you’re seeing most this year from the SEC is a focus on what they announced in February, that they were going to be looking at loss contingencies, particularly for litigation settlements. The standard has always been if a loss is reasonably possible or probable and the amount is a reasonably estimable, then you have to reserve for it. And if it’s not reasonably estimable, but it’s one of those other two things, you have to describe it and say you can’t reasonably estimate the amount. And so companies have always just said for years and years, “We’ve got all this litigation going on. We don’t know how much it’s going to cost. It’s not reasonably probable or reasonably estimable. We’re not gonna reserve.” The SEC decided it was going to get stricter about that, and so they’ve started really going back to folks a lot on these comments and saying, “Why isn’t it reasonably estimable? Isn’t there some range you can give?” Now, of course, companies don’t want to do that, because they don’t want to give away what they view the value of it is while they’re trying to negotiate a settlement. And so this is not a good situation for companies. The SEC has gotten a lot of the financial institutions to do the disclosure by saying, “You can aggregate all of your litigation—very broad aggregation—and just give us a number.” Well, if you’re a huge financial institution, that can be hundreds of millions of dollars, if not billions, and people aren’t going to be able to tell in one particular litigation what you think the value of it is, because they know you’ve got thousands of litigations. If you’re a small company with two, you know, two cases that matter, and one is a bet-the-company case, then, it’s pretty obvious and that puts you in a bad spot, and the SEC staff has not been great at being understanding about that. And so they’ve been raising the comment a lot, and where you see it most is where a company announces a big settlement and doesn’t have a reserve the month or the quarter before. The SEC will hit you with a comment that said, “Hey! You know, how is this not reasonably probable or reasonable estimable three weeks ago? And now you’re settling for X million dollars or X percent of your assets.” And coming back to companies and asking them to justify. And so you’re seeing a lot of companies spending a lot of time explaining that “Two months ago, this is where we were; we didn’t know. You know, this all comes up very quickly.” That is the biggest trend, and it’s hitting a lot of companies, and you’re seeing a lot of companies change their disclosure in anticipation of this.

Jen: Lastly, I know you are a big Jimmy Buffett fan. I want to know why you think Jimmy Buffet is relevant in 2011?

Marty: You know why Jimmy Buffet’s relevant in 2011? Because when you sit at the beach and you listen to “Trying to Reason with Hurricane Season,” you absolutely know what he’s talking about. You absolutely feel it; you know exactly what he means; and when he says, “Because it cleans me out so then I can go on,” that’s why you go on vacation, you know? You need that little bit of time, because, otherwise, you can’t recharge, and even though his voice is nowhere near as good now as it used to be and he doesn’t tell the same kind of stories he used to, the stories he tells kind of take you away a little bit and let you recharge. I think it’s incredibly important.