SEC Adopts New Rules to Facilitate Director Nominations by Shareholders

By Final Rule adopted August 25 and to be effective 60 days after publication in the Federal Register, companies will be required to include a shareholder nominee for director in company proxy materials if the nominating shareholder or shareholders acting together own at least 3% of the voting power of securities that are entitled to vote and the shares have been continuously held for at least three years.  Shareholders may not use the rule for the purpose of changing control of the company or in an attempt to obtain a number of seats on the board that exceeds that number allowable under new Exchange Act Rule 14a-11.

The rule applies to all Exchange Act reporting companies, including investment companies, other than companies whose only public securities are debt securities.  "Smaller reporting companies" are subject to the rule, but it does not apply to them until after a three-year phase-in period.  Foreign companies that come within the definition of "foreign private issuer" are not currently subject to the SEC's proxy rules and would not be subject to these new rules. Foreign companies that do not qualify as foreign private issuers would be subject to the rules.

Companies Prepare for Dodd-Frank Clawback Provisions

Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Sections 201 et seq.) establishes a mechanism for the orderly liquidation of large, failing financial institutions that threaten U.S. financial stability.  Section 210(s) of the Dodd-Frank Act authorizes the FDIC to recoup compensation from senior executives and directors who were responsible for the failure of the covered financial company.  The FDIC has yet to promulgate regulations to implement the requirements of this subsection.

Argo Group International Holdings, Ltd. executed an employment agreement with its president and CEO on August 10 which includes a clawback provision that explicitly references the requirements of the Dodd-Frank Act.  Section 23 of the agreement provides that the payments and benefits provided under the agreement shall be subject to a clawback to the extent necessary to comply with the requirements of Dodd-Frank or any Securities and Exchange Commission rule. The executive employment agreement is filed as Exhibit 10.1 to the Form 8-K filed on August 13 (file no. 001-15259).

In Item 11 Executive Compensation disclosure of the Form 10-K Amendment filed by ADPT Corp. on July 28 (SEC file no. 000-15071), ADPT notes that the compensation committee of the board of directors will be re-evaluating its compensation policies going forward and plans to consider the potential merits of early implementation of a clawback policy, consistent with Dodd-Frank provisions.

Employment Offer Letters filed with Dell's Cash Tender Offer for 3Par Inc.

Pursuant to an Agreement and Plan of Merger dated August 15, Dell Inc. is offering to purchase for cash all outstanding common shares of 3Par at $18 per share, or an aggregate of approximately $1.14 billion.  On the same day that Dell filed its formal tender offer, Hewlett-Packard Co. (HP) announced an unsolicited proposal to acquire 3PAR for $24 per share in cash pursuant to a tender offer followed by a merger.  The Dell and HP Schedule TO filings on August 23 bear SEC file no. 005-83579. 

Dell and each of twelve executive or other officers of 3PAR have entered into offer letters describing the terms and conditions of their employment following the completion of Dell’s prospective acquisition of 3PAR. The offer letters state the job title to be held by each individual upon completion of the merger, as well as the annual base salary, annual target bonus (expressed as a percentage of base salary), and value of projected Dell long-term incentive grants expected to be granted in March 2012 (as applicable).  In addition, Dell has promised to grant seven executives new Dell restricted stock units upon the closing of the merger, and to grant five executives cash awards upon closing.

Each of the offer letters is included as an exhibit to Dell's Schedule TO, as well as a form of employment agreement that all employees of Dell sign regardless of position.  The form employment agreement includes a number of acknowledgments by the transferred employee regarding (among other things) (i) at-will employment status, (ii) obligations regarding the use and development of intellectual property, inventions and copyrightable materials and (iii) responsibilities relating to the non-disclosure of confidential information, proprietary information and controlled technology and software.

BHP Billiton Launches $40 Billion Hostile Takeover Bid for Potash Corp.

BHP, the world’s largest diversified natural resources company, has offered to purchase all outstanding common shares of fertilizer producer Potash Corporation of Saskatchewan Inc. at $130 in cash per share.  The tender offer and circular is the first exhibit to the Schedule TO filed on August 20 (SEC file no. 005-44283).

The offer is conditioned on certain regulatory approvals, waiver or invalidation of the Potash poison pill (shareholders rights plan), and a sufficient number of shares being tendered by the expiration date that enables BHP to obtain control of the issuer.  The offer is not subject to any financing condition.

On August 18, BHP entered into a new multicurrency term and revolving facility and subscription agreement with the original lenders to, among other things, meet the potential funding requirements in relation to the tender offer.  The facility and subscription agreement is included as Exhibit (b)(i) to the Schedule TO. 

The facility agreement is in a form commonly used for loans arranged in the international loan market. It contains representations and warranties, covenants and events of default, each with applicable qualifications or carve-outs. The covenants include requirements relating to the financial indebtedness of Potash Corp. and, among other matters, place certain restrictions on the ability of the BHP Billiton Group to dispose of its assets or incur financial indebtedness in BHP subsidiaries.

Coal Companies Note Increased Exposure to Black Lung Benefit Liabilities

The Patient Protection and Affordable Care Act enacted in March 2010 contained an amendment to the Black Lung Benefits Act (BLBA) which reinstates provisions that had been removed in 1981.  The amendment provides that an eligible miner can be awarded total disability benefits if he can prove he worked 15 or more years in or around coal mines and has a totally disabling respiratory impairment.  In addition, the amendment provides for an automatic survivor benefit to be paid upon the death of a miner with an awarded federal black lung claim without the requirement to prove that the miner’s death was due to black lung disease.

Form 10-Qs filed by mining companies in August to report the fiscal quarter ended June 30 discuss the new legislation in the Risk Factors section, including Patriot Coal Corp. (SEC file no. 001-33466), Westmoreland Coal Co. (001-11155) and James River Coal. Co. (000-51129). 

Patriot Coal states it has evaluated the changes to the BLBA that provide for automatic extension of awarded lifetime benefits to surviving spouses and the changes to the legal criteria used to assess and award claims.  Patriot Coal estimates the impact to its current population of beneficiaries and claimants results in an estimated $11.5 million increase to its benefit obligation.

Westmoreland indicates that through the first three months of the amendment’s effectiveness, it has experienced an increase in black lung claims over similar periods, including the automatic award of certain widow claims that fall under the new provisions. Westmoreland states it has incomplete information to determine whether this increase in claims constitutes a one-time spike or represents a future trend in black lung claims and eventual awards.

James River accrues amounts for benefit obligations based on the present value of expected future costs.  At June 30, an independent actuary estimates James River obligations of $43.9 million for coal workers’ black lung benefits and $60.8 million for workers’ compensation benefits.  These obligations are unfunded and the company notes it could be required to expend greater amounts than anticipated if its assumptions are incorrect.