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December 2015 Edition

Voting requirement disclosure and the proxy card; M&A settlements; Written warranties on consumer goods

Voting requirement disclosure and the proxy card

Reporting companies preparing their 2016 proxy statements should consider recent remarks made by Keith Higgins, Director of the SEC’s Division of Corporation Finance.

Annual meeting proxy statements generally must disclose the voting requirements for each proposal, including the election of directors, under state law and company organizational documents. At the annual meeting of the Business Section of the American Bar Association (ABA) in September 2015, Director Higgins noted that the SEC had received requests for SEC guidance and rulemaking regarding this disclosure and presentation of voting options on proxy cards. The requests highlighted ambiguities and inconsistencies in company proxy statements, including:

  • Mischaracterization as “majority voting” a voting standard for the election of directors where directors with the most votes were elected but expected to offer to resign if they received more votes withheld or against than votes in favor. This is commonly referred to as “plurality plus.”
  • Confusion regarding the appropriate proxy card options for majority voting as opposed to plurality voting, including the distinction between against and abstain votes and the relevance of withhold votes.

Director Higgins mentioned that the SEC staff reviewed a sample of Russell 3000 company proxy statements and found sloppy and nonsensical disclosure of voting requirements in a “nontrivial” number of them.

Companies should carefully identify the voting standards applicable to each item on their ballots and examine their proxy statement disclosure describing each standard being used. Companies that recently switched their voting standard for the election of directors should ensure that the language on their proxy card regarding against, withhold, or abstain votes reflects the appropriate voting standard.

For more information on voting requirements and proxy disclosure, see Practice Note, Proxy Statements.

M&A settlements

Another recent decision from the Delaware Court of Chancery signals a stricter approach to approving rote class action settlements related to public M&A deals.

In In re Riverbed Technology, Inc. Stockholders Litigation, the court upheld a proposed settlement for an “intergalactic release” for two main reasons:

  • The supplemental disclosures offered by the target company, though minor, did hold some value.
  • The claims being dropped by the plaintiffs were not likely to prevail, given the lack of an expert opinion that the merger price was unfair or that any pre-merger stockholders had objected to the settlement.

The court consequently found the settlement appropriate in light of the weakness of the plaintiffs’ fiduciary duty claims, though it awarded plaintiffs’ counsel a lower fee than requested.

This decision caps a two-month period in which the court has issued several bench rulings with views of varying intensity on the issue of trading settlements for intergalactic releases.

Although it upheld the settlement, the Riverbed court expressed confidence that, following the Aeroflex and InterMune rulings, the practice of trading supplemental disclosures for broad releases will be “diminished or eliminated going forward.” Making that prediction even more likely to be borne out, the court, ruling from the bench in In re Aruba Networks, Inc. Stockholder Litigation, not only rejected a settlement, but also dismissed the class action lawsuit on grounds that it was not meritorious when filed.

For more information on the Riverbed decision, see Legal Update, In re Riverbed Technology: Delaware Court of Chancery Upholds Proposed Settlement, but Predicts End to “Deal Insurance” Settlements.

Written warranties on consumer goods

A recent federal law changes the way businesses can offer written warranties on consumer products. The E-Warranty Act of 2015 amends the Magnuson-Moss Warranty-Federal Trade Commission Improvement Act (Magnuson-Moss) and explicitly permits sellers to make written warranty terms available to consumers either in a physical or digital format.

Under Magnuson-Moss, if a seller or manufacturer provides a written warranty on a consumer product that costs more than $15, the seller or manufacturer must, among other things:

  • Clearly and conspicuously disclose certain information about the warranty’s coverage.
  • Make the warranty available to the consumer before the consumer buys the product.

Before the E-Warranty Act, it was unclear whether businesses could only satisfy federal written warranty requirements with paper copies or could also do so by making a warranty’s terms electronically accessible.

Businesses can now satisfy their obligations under Magnuson-Moss if they both:

  • Make warranty terms available, in a clear and conspicuous manner, in an accessible digital format on the consumer product manufacturer’s website.
  • Tell the consumer (or prospective consumer) how to obtain and review electronic warranty terms by indicating on the product, its packaging, or in its manual the manufacturer’s:
    • website where the consumer can obtain and review those terms; and
    • phone number or mailing address, or another reasonable non-Internet-based means of contacting the manufacturer to obtain and review the warranty terms.

Under federal law, a business is not generally required to offer consumers written warranties on their purchases. However, when it does offer a written warranty, it must comply with the Magnuson-Moss requirements. The E-Warranty Act expands how consumers can access important product information and gives sellers and manufacturers more flexibility in meeting their warranty obligations.

For more information on consumer product warranties, see Practice Note, The Magnuson-Moss Warranty Act for Consumer Goods.

About Practical Law

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