Tag Archives: investment

Proxies

The SEC Catches Up On New Technology In Proxy Solicitations

A quick tutorial: Proxies are the means by which public shareholders vote. The Securities Exchange Act of 1934 governs the solicitation of those proxies. The act and the regulations adopted by the Securities and Exchange Commission under the act are designed to ensure a fair process with adequate disclosure to shareholders so they may make an informed voting decision in a timely manner.

In the past year, the SEC has adopted significant rules intended to simplify, clarify and modernize proxy solicitations by use of the Internet.

In July 2007, the SEC adopted amendments that modernize the proxy rules by requiring issuers and other soliciting persons to follow the “notice and access” model for proxy materials. Soliciting persons are now required to post a complete set of their proxy materials on an Internet site and furnish notice to shareholders of their electronic availability. The Internet site must be a site other than the EDGAR (Electronic Data Gathering, Analysis and Retrieval system) maintained by the SEC. The site must be publicly accessible, free of charge and maintain user confidentiality. In addition, the materials posted must be in a format convenient for printing and for reading online. Companies must provide paper or e-mail copies, as specified by the shareholder, within three business days of a shareholder’s request.

Notice to shareholders can be provided in one of two ways: the “notice-only” option, which is simply notice of electronic availability; or the “full-set delivery” option, which is a full set of paper proxy materials along with a notice of Internet availability. Under the “notice only” option, a notice must be sent at least 40 calendar days before the date that votes are counted. Under the “full-set delivery” option, notice need not be made separate and the 40-day period is not applicable, so the notice can be incorporated directly into the proxy materials.

Under both options, the notice must include certain specific information and must be filed with the SEC. The options are not mutually exclusive, so one option can be used to send notice to a particular class of shareholders, while the other option can be used to send notice to others. Intermediaries and other soliciting persons must also follow the “notice and access” model, with some exceptions. Specifically, intermediaries must tailor notice to beneficial owners, and soliciting persons other than the issuer need not solicit every shareholder. Most large public companies were required to follow the “notice and access” model for proxy materials as of Jan. 1, 2008. All others, including registered investment companies and soliciting persons other than an issuer, can voluntarily comply at any time, but must fully comply by Jan. 1, 2009.

Effective Feb. 25 of this year, the SEC adopted further amendments that encourage use of the Internet in the proxy solicitation process by facilitating the use of electronic shareholder forums. These amendments are intended to remove some of the legal ambiguity resulting from the use of electronic shareholder forums by clarifying that participation in an electronic shareholder forum is exempt from most of the proxy rules if specific conditions are met. The new rules also establish that shareholders, companies and other parties that establish, maintain or operate an electronic forum will not be liable under the federal securities laws for any statement or information provided by another person participating in the forum.

Specifically, any participant in an electronic shareholder forum is exempt from the proxy rules if the communication is made more than 60 days before the announced date of the company’s annual or special shareholder meeting, or if the meeting date was announced less than 60 days before it was scheduled to occur, within two days of the announcement, provided that the communicating party does not solicit proxy authority while relying on the exemption. Solicitations that fall outside these relevant dates continue to be subject to the proxy rules.

Further, if a solicitation was made within the relevant dates but remains electronically accessible thereafter, the solicitation could then become subject to the proxy rules. In this regard, the SEC suggests that forum operators give posting users a means of deleting their postings or having their postings “go dark” as of the applicable 60 day or two day cut off.

While the amendments exempt solicitations from the proxy rules, they do not exempt posting persons from liability for the content of their postings under traditional liability theories, including anti-fraud provisions that may require a participant to identify himself and which prohibit misstatements and omissions of material facts. Further, the amendments extend liability protection only to shareholders, companies and third parties who create, operate or maintain an electronic shareholder forum on behalf of a shareholder or company. These persons receive protection against liability for statements made or information provided by participants in the forum, so long as the forum complies with federal securities laws, relevant state law and the company’s charter and bylaws.

Karen C. McConnell is partner-in-charge of the mergers and acquisitions/private equity group; Adrienne W. Wilhoit is a partner; and Brooke T. Mickelson is an associate at Ballard Spahr Andrews & Ingersoll, www.ballardspahr.com.

CDRates

CD Rates Inching Higher Again

Bank-issued certificates of deposit rates are inching up, but if your one-year CD is maturing, you’re probably not going to like what’s being offered. That’s because CD rates took a dramatic drop in the past year as the Federal Reserve marched through a series of reductions starting last summer. The downward spiral was triggered by a belt-tightening credit crunch and a pervasive housing downslide.

Rates plunged as much as 325 basis points in the past year, dropping to as low as 2 percent from 5.25 percent.

Early last summer, it was not uncommon to see banks offering 5 percent interest or more on certificates of deposit. Then came the steady stream of rate cuts, and CDs were paying in the neighborhood of 2 percent. Now we’re seeing rates flirting with 3 percent, and teasers that are a tempting couple of percentage points higher.

Does the move to higher ground indicate that an economic turnaround has begun? Not necessarily, say banking experts.

“Rates are down considerably from what a consumer could have gotten last summer,” says Herb Kaufman, professor of finance and vice chair of the Department of Finance at Arizona State University’s W. P. Carey School of Business. “Now they’ve come back a little bit. They’re trending up as banks try to rebuild their deposit base and retain the deposits they have.”

Kaufman and Rick Robinson, regional investment manager for Wells Fargo Wealth Management Group, agree that one of the reasons for the modest increase is the perception that the Fed is not likely to reduce interest rates anytime soon. Another factor is inflation.

Robinson says the Fed is taking a wait-and-see approach to determine how the economy responds to seven rate cuts and whether inflation will remain somewhat subdued or will increase.

Kaufman notes that inflation, fueled by gasoline and food prices, appears to be accelerating.

“As that happens — and the feds are very conscious of that — you can expect banks will have to reflect the rise in inflation with their CD rates,” Kaufman says.

A significant improvement in the credit market adds to the likelihood of CD rates continuing to drift upward through summer, Kaufman says. He expects to see CD rates somewhat higher than they were last spring.

Is the inching up of CD rates a good or bad sign for the economy?

“I’d say it’s a little bit of a good sign,” Kaufman says. “It wouldn’t happen if the Feds weren’t comfortable with the credit market. Concerns have eased. Banks are comfortable to bid up rates, which means some of the constipation in the credit market has eased.”

The rise in interest rates could be tied to various factors.

“It’s usually a signal that the economy is beginning to do well or that the Federal Reserve wants to slow down the economy,” Robinson says. “Or it could mean that interest rates go higher because of supply and demand, because of inflationary pressures.”

But Robinson cautions: “A small uptick in rates is not a signal that we’re out of the woods or that economic growth is turning around. I still think it will be subdued in the second half of 2008. We expected low growth for the first portion of this year, and we expect to pick up the pace slightly in the second half.”

Another word of caution for investors: “Some banks might offer teaser rates of 5 percent for three months,” Robinson says, “but when it matures and resets, the rate will be consistent with what other banks are offering. Any bank in Arizona must remain competitive with the bank on the opposite corner.”

The creep upward of CD rates is a good sign for aging investors who rely on income from these investments to maintain their lifestyle. Conversely, the drastic decrease in rates since last summer was hurtful, especially for seniors.

“There is less money in their pocket,” Robinson says. “As their CDs matured, if they reinvested their money they’re more likely earning less than they earned previously. They have less to live on.”

Kaufman, too, says the increase is a good sign for retirees, so long as the rise does not pose a threat to economic recovery. Because of the roller-coaster ride the stock market has been on, some investors seeking a safe haven switched to CDs covered by the FDIC.

The collapse of investment bank Bear Stearns & Co. in March spawned some movement to CDs and safer, less volatile investments, including government-backed bonds. Robinson calls it “a flight to quality.”

“In the summer of 2007, banks went through a confidence crisis,” Robinson says. “Investors were worried. Some banks experienced an outflow of deposits, given investor concerns over their viability. That concern seems to have lessened. As the crisis grows longer, more information becomes available, which lessens the panic. People can understand the viability of their institution.”

The reason for the subtle increase in CD rates is anybody’s guess.

“Some banks might be willing to take a loss on deposits to shore up their capital base,” Robinson says. “They may want to increase deposits because they see opportunities to make loans. There are myriad reasons why rates go up, fluctuating in small increments of five to 10 basis points. It could be strategic or market related.”

Bad business partners

What To Do When Bad Business Partners Happen To Good People

“He is robbing you blind.” Business owners are never emotionally prepared to hear these five words, but they should be poised for action to protect their own interests and those of their companies’ when business relationships turn hostile.

Recently in Arizona, the owner of a residential property rental company found this out the hard way when she was told by a former employee that the manager of her company’s 150 properties was stealing from the company. A widow nearing retirement, she had made a series of business mistakes, including giving the manager stock in the company without proper legal documentation, as both a reward for past service and to motivate and compensate him for future work. The once loyal employee began to take control of the owner’s $25 million investment under the guise of “handling the details” of the business. He took control of the accounting software program, the company credit cards and kept details from the owner by misinforming her of the time for meetings with the company accountant. She was dumbstruck when she received the phone call from the former employee, but, on reflection, it all made sense. Her business acumen for finding deals on distressed properties and turning them into rentals had not prepared her for the complexities of dealing with a business divorce. As a business owner you need to protect yourself. The following provides some tips you should keep in mind if you believe a business divorce is imminent.

Gain Control
When there is a shift in the business relationship, as owner your first step should be to get back your position of power. You will need to separate yourself immediately from the person causing the conflict in your business. In this case, the property owner fired the manager, changed the locks on the doors, cancelled credit cards and changed passwords to all the computer systems. You will need to take this even further to protect your intellectual property and files. Talk to your IT and file room staff about securing access and tracking of information and control of passwords.

If you are fortunate enough to have your company running well today, this is the perfect time to make sure confidentiality policies are in place and have a lawyer review your company documents. It makes more sense to manage risk and resolve conflicts before they start to touch your bottom line.

Stop Talking
It is tempting to unload your frustrations on your accountant, your tax advisor, other employees and even your next door neighbor. But the truth is those comments could come back to cost you money, leverage and possibly your business reputation. While there are some exceptions, as a general rule, conversations you have with someone, other than your lawyer, can be used in court. Make your attorney your sounding board, confidant, champion and warrior. What you tell your attorney is protected by attorney-client privilege. It is the bedrock of your right to have effective counsel; without it, lawyers could not effectively represent their clients.

Keep Original Documents
This property owner had a bad habit of giving away original documents. When it came time to organize her case, this made the task even more challenging for attorneys, expert witnesses and even business advisers. Making a copy of a document is fine, but make sure you keep the original. Be sure to maintain the integrity of original documents by keeping them free of extraneous handwritten notes. If you write on these documents, you may make your case more difficult. If you want to make a note about a business matter, grab a Post It note.

Hire a Lawyer
You may know your business, but your expertise is in the company, not the law. A good lawyer needs to be the captain of your ship as you navigate a business divorce. Your lawyer may recommend a business adviser to get your company back on track. While this is a “divorce” of sorts, it isn’t the job for a family law attorney; you need an experienced business attorney who has dealt with breakups in the business arena. Get referrals through people you know in the business community, professional organizations or your local bar association. Do not be afraid to ask a lawyer if he/she has ever done this type of work. In some cases, a team of lawyers may be necessary. You may need experience in several different areas to get the matter resolved.

Turning the Tide
How did the widowed property owner fare with her business on shaky ground and her future retirement threatened? Through a mediation process, she was able to regain control of her company and tocarve her co-owner out of the business. The woman is now back in a take-charge position, buying and managing properties. Most importantly, her future is in a more secure place.

Like a marital divorce, a business divorce is never easy but, once resolved, you’ll be able to run the company instead of letting bad employees or unsuitable business partners run you.

Leon Silver and Dan Garrison are shareholders at the law firm of Shughart Thomson & Kilroy. They lead the firm’s Business Divorce team. They can be reached at 602-650-2000.