The 2012 proxy season is fast approaching. Based on our prior experience reviewing proxy statements for Maryland public companies, we would like to call your attention to certain matters of Maryland law. As in the past, we are available to review draft proxy statements for Maryland law compliance. (Because the same principles generally apply to both corporations formed under the Maryland General Corporation Law (the "MGCL") and to real estate investment trusts formed under the Maryland REIT Law, we shall refer hereafter only to corporations.)
Internet Availability of Proxy Materials. Pursuant to Regulation 14A (the "Proxy Rules"), all filers are required to post their proxy materials on a publicly accessible internet website (other than EDGAR) and may choose to (a) utilize the "notice and access" model for furnishing proxy materials to stockholders by sending a notice of internet availability complying with the Proxy Rules (the "Proxy Rule Notice") or (b) deliver a full set of paper copies of the proxy materials (including the Proxy Rule Notice). In addition to the Proxy Rule Notice, a Maryland company is required to deliver the notice of a meeting of stockholders complying with the MGCL. This notice may be combined with the Proxy Rule Notice.
Householding. Rule 14a-3(e) of the Proxy Rules provides that an annual report, proxy statement or Proxy Rule Notice, as applicable, will be considered to have been delivered to all stockholders of record who share an address so long as one annual report, proxy statement or Proxy Rule Notice, as applicable, is delivered to the shared address, and is addressed to the stockholders as a group, to each of the stockholders individually or to the stockholders in a form to which each of them has consented in writing. Certain other conditions must be met, including obtaining the affirmative written consent of the stockholders or following the procedures and meeting the requirements by which the stockholders are deemed to have impliedly consented.
Although the MGCL does not address the manner of delivery of annual reports or proxy statements, it does address the manner in which a corporation gives notice of a meeting of stockholders by providing for four types of notice: personal delivery, leaving the notice at the stockholder's residence or place of business, mailing "to the stockholder at the stockholder's address as it appears on the records of the corporation" and electronic transmission. Under Proxy Rule 14a-3(e)(1)(i)(B), the one copy of the annual report, proxy statement or Proxy Rule Notice, as applicable, that is delivered to the shared address must be addressed "to the security holders as a group . . . , to each of the security holders individually (for example, 'John Doe and Richard Jones') or to the security holders in a form to which each of the security holders has consented in writing."
Under the MGCL, as amended in 2010, a single notice is now effective as to all stockholders who share an address unless the corporation receives a written or electronic request from the stockholder that a single notice not be given. In lieu of householding, we believe that (a) the only means of delivery that is permissible under the MGCL is addressing the material to each stockholder "individually" at the shared physical or electronic address and (b) the company may deliver these materials in one package but must list the name of each stockholder-recipient on the label containing the shared address. Additionally, the company must include a separate proxy card for each individual stockholder at the shared address.
Advisory Vote on Executive Compensation. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and rules adopted by the Securities and Exchange Commission (the "SEC"), issuers for which the SEC requires compensation disclosure under the Proxy Rules and Item 402 of Regulation S-K are generally required to include a stockholder advisory vote on executive compensation in the annual meeting proxy statement at least every three years.1 Additionally, at least every six years, stockholders must be given the opportunity to hold an advisory vote on the frequency of the executive compensation advisory vote, selecting among choices of every one, two or three years or abstain.
It is important to emphasize that these provisions of Dodd-Frank and the Proxy Rules and the results of the advisory votes have no effect on a director's duties under Maryland law with respect to compensation decisions. Section 14A of the Securities Exchange Act of 1934, as amended (the "Exchange Act"), provides that the stockholder advisory votes are not binding on the issuer and, among other things, may not be construed "[t]o create or imply any change to the fiduciary duties of such issuer or board of directors or ... to create or imply any additional fiduciary duties for such issuer or board of directors."
Under Section 2-405.1(a) of the MGCL, a director's duties – to act in "good faith," with a reasonable belief that his or her action is in the "best interests of the corporation" and with "the care of an ordinarily prudent person in a like position under similar circumstances" – apply individually, director by director, and not collectively to the board. In addition, the legislative history of Section 2-405.1(a) makes it clear that these duties are not "fiduciary." We believe that the disclaimer of Section 14A of the Exchange Act applies fully to directors of a Maryland corporation.
Shareholder Proxy Access for Director Elections. While the United States Court of Appeals for the District of Columbia Circuit vacated Rule 14a-11 on July 22, 2011, other rules adopted by the SEC in connection with its proxy access initiative became effective on September 20, 2011. Notably, Rule 14a-8 was amended to require a company to include in its proxy materials, under certain circumstances, shareholder proposals to establish a procedure in the company's governing documents for including shareholder nominees for director in the company's proxy materials.
Under the MGCL, the board may be given exclusive power over amendments to the bylaws and the bylaws of most of our Maryland public company clients so provide. Thus, shareholders of these companies are not able to amend the bylaws to establish a procedure for including shareholder nominees in the company's proxy materials. However, a shareholder who meets the existing requirements for proposals under Rule 14a-8 will be able to make a precatory proposal recommending to the board that it amend the bylaws to establish a procedure for including shareholder nominees for election as directors in the company's proxy materials. Boards may want to consider whether to adopt such procedures before shareholders propose them. We continue to reiterate our advice of past years that Maryland law specifically recognizes the right of directors to refuse to take action recommended by the shareholders, even if recommended by a substantial majority.
Ratification of Auditors. Ratification of the board's approval of auditors is, of course, generally not required by either federal or Maryland law. We believe that the reasons usually given for submitting this matter to the stockholders – e.g., getting their views, good investor relations – will in most cases support the reasonableness of a director's belief that submitting the matter to stockholders is in the corporation's best interests, as required by the MGCL. This seems particularly true in the context of enhanced scrutiny of the audit process under the Sarbanes-Oxley Act of 2002 and related SEC and stock exchange regulations. The MGCL specifically entitles a director to rely on information, opinions, reports or statements of a committee of the board on which the director does not serve, as to a matter within its designated authority, if the director reasonably believes the committee to merit confidence. This seems to us especially relevant to the auditor selection process, which under Section 301 of the Sarbanes-Oxley Act (Section 10A(m) of the Exchange Act) must be delegated solely to the audit committee. In addition, Institutional Shareholder Services Inc. ("ISS") considers the failure to submit the selection of an auditor for stockholder ratification as a negative factor which will reduce ISS's governance risk indicators for the company.
Importantly, as ratification of auditors is a routine matter under the New York Stock Exchange ("NYSE") rules, brokers are able to vote on it without instructions from their beneficial owners and thus obtaining a quorum for the meeting may be aided if there are no other routine matters on the proxy card. Including a routine matter on the annual meeting agenda has assumed greater importance in light of the amendments to NYSE Rule 452 generally eliminating the authority of brokers to vote without instructions in uncontested director elections and on executive compensation matters, and the very recent NYSE guidance further restricting the exercise of broker discretion.2
Quorum and Vote Requirements. The MGCL provides that, unless the charter (or bylaws, for certain corporations) provides otherwise, the presence, in person or by proxy, of the holders of a majority of all the votes entitled to be cast is necessary to constitute a quorum at a meeting of stockholders.
Item 21(a) of Schedule 14A of the Proxy Rules ("Schedule 14A") requires the proxy statement to disclose the votes required for the election of directors and for the approval of any other matter (except approval of auditors). For the election of directors, the MGCL provides that, unless the charter or bylaws provide otherwise, a plurality of all the votes cast at a meeting at which a quorum is present is all that is necessary for the election of a director. Many of our clients have adopted or are considering adopting one form or another of "majority voting" in the election of directors. For all actions other than the election of directors, the MGCL provides that, unless the MGCL or the charter provides otherwise, action at a stockholders meeting requires the affirmative vote of a majority of all the votes cast at a meeting at which a quorum is present. Some major actions, such as mergers, sales of all or substantially all of the corporation's assets and charter amendments, require the affirmative vote of two-thirds of all the votes entitled to be cast on the matter, but the MGCL permits the charter of the corporation to provide for this proportion to be increased or reduced to any proportion not less than a majority of all the votes entitled to be cast. For certain types of stockholder action, the rules of the NYSE or other exchanges or markets also establish various vote requirements. In addition, the board may choose to submit a proposal to the stockholders conditioned on approval by a percentage greater than that required by the MGCL.
Abstentions and Broker "Non-Votes". Item 21(b) of Schedule 14A requires the proxy statement to disclose "the treatment and effect of abstentions and broker non-votes" under state law. Questions frequently arise as to the proper disclosure of the effect of abstentions and broker non-votes on quorum or vote requirements. Accompanying this memorandum is our annual memorandum on abstentions and broker non-votes.
Board Structure and Director Nominations. Item 7 of Schedule 14A sets forth various requirements with respect to disclosure regarding the composition of the board and the director nomination process. Of note are the relatively new requirements that the proxy statement include (a) a discussion of the "specific experiences, qualifications, attributes or skills" that led to the conclusion that the nominee or incumbent director should serve as a director, (b) a discussion of the leadership structure of the board, including, among other things, disclosure indicating why the company has determined that its leadership structure is appropriate and the role of the board in risk oversight, (c) the role of compensation consultants and potential conflicts of interest and (d) whether the board or nominating committee considers diversity in identifying board nominees, whether the board or nominating committee has a diversity policy and, if so, how it is implemented and its effectiveness assessed. Regarding the foregoing, there are three important issues under Maryland law:
First, (a) any policy and/or procedures relating to the consideration of stockholder-recommended candidates for director and (b) any specific minimum qualifications for recommendation by the nominating committee for election as a director should be drafted, adopted, disclosed and applied with a full awareness of, and coordination with, any existing provisions in the charter or bylaws relating to substantive qualifications for election (e.g., minimum or maximum age or ownership of company stock) and procedures for nomination (e.g., advance notice to the company) and with any corporate governance guidelines. With the proliferation of policies, processes, committee charters, guidelines and principles – in addition to already existing corporate charters and bylaws – it is important that the provisions of all these documents not conflict either in letter or spirit.3 This applies not only to director nominations but also to other requirements and duties such as those involving the audit and compensation committees.
We note in this regard that several public companies have adopted lead director charters, a relatively recent addition to the mix of corporate governance charters and policies.
Second, the MGCL permits a director "to rely on any information, opinion, report, or statement . . . prepared or presented by" an officer, employee, lawyer, accountant, other expert or board committee on which the director does not serve if the director reasonably believes the officer or employee to be reliable and competent, the expert to be acting within her or his professional or expert competence or the committee to merit confidence, as the case may be. This right to rely applies not only to determinations of independence and other matters relating to director nominations but also to any other determination that a director must make. Thus, the availability and presentation of information and advice can be an important element in a director's substantive performance and in protecting him or her from liability. However, directors should be cautioned against over-reliance, especially in the current corporate governance environment. Appropriate reliance can be an important aid to – but is not a substitute for – the proper exercise of business judgment. The MGCL specifically provides that the board's delegation of authority to a committee does not relieve the directors who are not members of the committee of their duties under the MGCL.
Finally, while it has always been a recommended practice, the additional disclosure requirements, including the need to continuously evaluate the qualifications of all directors for service in such capacity, highlight the importance of an annual board self-evaluation (required by the NYSE) in which each director actively participates. We regularly assist clients in the design and conduct of board evaluations.
Committees. Item 7(d) of Schedule 14A, as well as rules enacted under the Sarbanes-Oxley Act and by the stock exchanges, require various disclosures in the proxy statement concerning the audit, compensation and nominating/corporate governance committees, their charters and their members. Item 7(d) currently requires a public company to include these committees' charters as appendices to its annual meeting proxy statement at least every three years, if the charters are not available to security holders on the company's website. In those years in which a committee charter that is not available on the company's website is not included as an appendix, the proxy statement must disclose the prior fiscal year in which it was included. In addition, Section 303A of the NYSE Listed Company Manual requires the charters of the audit, nominating and compensation committees, the corporate governance guidelines and the code of business conduct and ethics to be posted on the company's website.
All committee reports included in the proxy statement should have actually been reviewed and signed by each member of the committee and submitted to the board and made a part of the board and committee records. Although not required, you may want to consider dating these reports. Most importantly, each committee report should be carefully reviewed to confirm that the committee actually did what the report says was done.
Adjournment and Postponement. We believe that the chair of the meeting has broad power to conduct the meeting of stockholders, including recessing and adjourning it, especially if this authority is specifically conferred by the bylaws. We have developed a form of bylaw provision delegating express power to the chair in this regard. In addition, proxy cards have traditionally conferred authority on the proxy holders to vote in their discretion on matters incident to the conduct of the meeting. There is also a tendency to include a separate proposal for adjournment in connection with an extraordinary action such as a merger. Section 2-511(d) of the MGCL expressly permits postponement of a meeting of stockholders before it is convened.
Indemnification/Advance of Expenses in Derivative Suits. In addition to the requirements of Item 7(b) of Schedule 14A, including Item 404 of Regulation S-K, the MGCL requires any Maryland corporation to report in writing to its stockholders, prior to, or with the notice of, the next meeting of stockholders, any indemnification of or advance of expenses to a director or officer in a suit by or on behalf of the corporation.
Proxy Cards. The proxy card is the critical document under state law by which most votes are generally authorized to be cast. In complying with Maryland law in this regard, it is important to note that "stockholder" is defined by the MGCL as "a person who is a record holder of shares of stock in a corporation . . . ." Under the MGCL, the proxy must be written and must be signed by the stockholder of record or by the record stockholder's authorized agent. The MGCL provides that the signing may be (a) by actual signature by the stockholder or the stockholder's authorized agent or (b) by the stockholder or the stockholder's authorized agent causing the stockholder's signature to be affixed to the writing by any reasonable means, including facsimile signatures.
Among the requirements of Proxy Rule 14a-4(a) and (b), the proxy card must state in boldface type who is soliciting the proxies, must list the names of nominees for election as directors and must provide an opportunity for the stockholder to withhold authority to vote for individual nominees. Proxy Rule 14a-4(b)(2) also provides that if the proxy card provides a means for the stockholder to vote for all nominees as a group, then it must also provide a means to withhold authority to vote for the group.
Electronic Voting. While the MGCL does not yet permit direct voting by telephone or other electronic means, it does permit the transmission by these means of authorization for another person to act as proxy. In recognition of the fact that corporations often hire proxy solicitors and other intermediaries to assist in soliciting proxies, the MGCL permits a stockholder not only to authorize another person to act as a proxy but also to authorize an intermediary, e.g., a proxy solicitor, to authorize another person to act as a proxy. Either of these authorizations may be done "by telegram, cablegram, datagram, electronic mail, or any other electronic or telephonic means." In other words, a stockholder may effectively cast votes by telephone or internet.
Deadlines for Stockholder Proposals for Next Annual Meeting. Proxy Rule 14a-5(e) requires the proxy statement to disclose, "under an appropriate caption," (a) the deadline for submitting stockholder proposals for inclusion in the proxy statement and proxy card for the next annual meeting, calculated in the manner provided in Rule 14a-8(e) (Question 5), and (b) the deadline for submitting notice of a stockholder proposal for consideration at the meeting, calculated as provided in Proxy Rule 14a-4(c)(1), or under an "advance notice provision, if any, authorized by applicable state law."
(a) Inclusion in Proxy Statement and Proxy Card. If the stockholder's proposal is submitted for inclusion in the proxy statement and proxy card for a regularly scheduled annual meeting, then under Proxy Rule 14a-8(e)(2) it must be received by the company at its principal executive office not less than 120 calendar days before the first anniversary of the date of the proxy statement released to stockholders for the prior year's annual meeting (which is interpreted by the SEC as the date that the proxy statement is first sent or given to stockholders).
(b) Presentation at the Annual Meeting. A stockholder may opt not to submit a proposal for inclusion in the proxy statement and proxy card but still want to present it at the meeting. The MGCL specifically permits the charter or bylaws to require minimum advance notice for stockholder nominations and new business proposals before a date or within a period of time provided in the charter or bylaws.
Finally, we have made changes to our form of advance notice bylaw provision, principally to increase the information required to be submitted by a stockholder proponent of director nominees or other business. These provisions can be important in giving the board the necessary time and information to properly consider stockholder nominations and proposals, especially in light of increased stockholder activism. You may want to consider presenting these changes for board adoption so that they may be incorporated in bylaws (and possibly the 2012 proxy statement) for application to the 2013 annual meeting of stockholders.
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As discussed above, it is important that the various elements relating to the governance of the corporation – the charter, the bylaws, the board committee charters and policies – be consistent with one another. A comprehensive review of these documents should be a part of the preparation for each annual meeting. Additionally, in light of the current environment, the board should review the status of the company's defenses against an unsolicited takeover bid.
Other proxy solicitation issues involving Maryland law also frequently arise. We are available to discuss any questions you may have concerning Maryland law as it applies to your meeting notice, proxy statement and proxy card.
Footnotes
1 In a very recent Compliance and Disclosure Interpretation, the SEC Staff set forth three acceptable versions of the proposal for advisory approval of executive compensation on the proxy card and voting instruction form.
2 In its Information Memo to members and member organizations, dated January 25, 2012, the NYSE stated that it would no longer treat certain corporate governance proposals as matters for which brokers could vote without instructions from beneficial owners. The cited examples included proposals relating to (1)
declassification of the board, (2) majority voting in the election of directors, (3) supermajority voting requirements, (4) the use of consents, (5) rights to call a special meeting and (6) anti-takeover provision overrides.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
