United States: Proxy Statements Under Maryland Law – 2015

The 2015 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 about which we often receive questions. 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 (the "MRL"), we generally refer hereafter only to corporations.

Virtual Stockholder Meetings. We have recently seen increased interest in holding stockholder meetings on the internet. The MGCL expressly authorizes the board of directors, if it is otherwise authorized to determine the place of a meeting of stockholders, to determine that the meeting will be held solely by means of remote communication. A virtual meeting is subject to certain notice and procedural requirements set forth in the statute. The MGCL also requires that the board of directors provide a "place" for a meeting of the stockholders if requested by a stockholder. This requires only that the corporation provide a physical location for the requesting stockholders to access the meeting of stockholders on the internet. It does not require the board of directors to transform the meeting into a traditional stockholders meeting held at a single location, or update the notice of the meeting. The MRL does not contain a counterpart to the MGCL provision on shareholder meetings by remote communication and simply requires that the declaration of trust provide for an annual meeting of shareholders "at a convenient location." We believe that a real estate investment trust could provide for virtual shareholder meetings in the declaration of trust or bylaws and that it would be prudent to have those provisions generally mirror those in the MGCL.

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 shareholders 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. A Maryland corporation may combine the notice of a meeting of stockholders that is required by the MGCL with the Proxy Rule Notice.

Householding. Proxy Rule 14a-3(e) provides that an annual report, proxy statement or Proxy Rule Notice will be considered to have been delivered to all shareholders 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 (a) to the shareholders as a group, (b) to each of the shareholders individually or (c) to the shareholders in a form to which each of them has consented in writing. The Proxy Rules also require compliance with certain other conditions regarding express or implied consents by shareholders.

Although the MGCL does not address delivery of annual reports or proxy statements, it does address the manner in which a corporation may give 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 shown on the records of the corporation and electronic transmission.

Under the MGCL, a single notice is effective as to all stockholders who share an address unless the corporation receives a written or electronic request from a stockholder at such address that a single notice not be given. In lieu of householding, we believe that the only means of delivery permissible under the MGCL is addressing the material to each stockholder "individually" at the shared physical or electronic address. The corporation may deliver these materials in one package if it lists the name of each stockholder-recipient on the label containing the shared address. Additionally, the corporation must include a separate proxy card for each individual stockholder at the shared address. The MRL does not state the permissible methods of delivery of notice to the shareholders and this is customarily addressed by provision in the declaration of trust or bylaws.

Advisory Vote on Executive Compensation. Pursuant to the Dodd-Frank Wall Street Reform and Consumer Protection Act ("Dodd-Frank") and rules adopted by the United States Securities and Exchange Commission (the "SEC"), an issuer for which the SEC requires compensation disclosure under the Proxy Rules and Item 402 of Regulation S-K is generally required to include a shareholder advisory vote on executive compensation ("say on pay") in the annual meeting proxy statement at least every three years. Additionally, at least every six years, shareholders 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. Almost all public companies are now submitting say-on-pay votes to their shareholders each year.

It is important to emphasize that the executive compensation advisory votes have no effect on a director's or trustee'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 shareholder 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."¹

Shareholder Proxy Access for Director Elections. Proxy Rule 14a-8 requires a company to include in its proxy materials, under certain circumstances, shareholder proposals recommending the adoption of a procedure in the company's governing documents for including shareholder nominees for director in the company's proxy materials ("proxy access").

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, stockholders of these companies are not able to amend the bylaws directly for any purpose and so any stockholder proposal to change the bylaws of a Maryland corporation with exclusive board power over amendments could only be precatory. We continue to reiterate our advice of many years that Maryland law specifically recognizes the right of directors to refuse to take any action recommended by the stockholders, even if recommended by the holders of a substantial majority of the shares.

Ratification of Auditors. Although quite common, ratification of the board's appointment of auditors is, of course, generally not required by either federal or Maryland law. 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. Thus, if there is no other routine matter on the proxy card, including ratification of auditors on the card may assist in obtaining a quorum for the meeting.

Board Structure and Director Nominations. Item 7 of Schedule 14A of the Proxy Rules ("Schedule 14A") sets forth various requirements with respect to disclosure regarding the composition of the board and the director nomination process. Of particular note are the requirements that the proxy statement include (a) a discussion of the "specific experience, 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 any 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 shareholder-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 in full 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 in either letter or spirit. This also applies to other requirements and duties such as those involving composition of the audit and compensation committees.

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 (a) the officer or employee to be reliable and competent, (b) the expert to be acting within her or his professional or expert competence or (c) 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 guard 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, 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. Although NASDAQ does not have a similar requirement, many NASDAQ companies have adopted a board evaluation process as a matter of good corporate governance. We regularly assist clients in the design and conduct of board evaluations.

Committees. Item 7(d) of Schedule 14A and the rules enacted under the Sarbanes- Oxley Act of 2002 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 fiscal years, if the charters are not available to shareholders on the company's website. As a result, most public companies in our experience place these charters on their websites. In addition, Section 303A of the NYSE Listed Company Manual (the "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.

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Footnote

1. There are now many decisions applying the laws of various jurisdictions granting motions to dismiss cases brought after negative say-on-pay votes.

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.