Kinetic Concepts, a Texas-based medical technology company, plans to omit a shareholder proposal on eligibility grounds even though the SEC turned down its no-action request.
In January, Kinetic Concepts asked the SEC's Corporation Finance Division staff for permission to omit a declassification proposal filed by California shareholder activist John Chevedden, who is part of a retail investor network that files more than 100 resolutions each year. The Russell 3000 company argued that his supporting broker letter from Ram Trust Services (RTS) didn't comply with Rule 14a-8(b), which requires investors to provide a statement from a "record holder" that verifies that they owned at least $2,000 in company stock for at least one year.
In its no-action letter, Kinetic Concepts pointed out that a Houston-based federal judge, Lee Rosenthal, ruled in March 2010 that Apache Corp. could omit a Chevedden proposal that included a similar RTS broker letter, and that another Texas firm, KBR, had filed its own suit in the same court this year to omit a Chevedden proposal. Since the Apache ruling, the SEC staff has rejected eligibility arguments from several other companies to proposals backed by similar broker letters. Apache, which didn't file a suit or no-action request this year, also has omitted a 2011 proposal from Chevedden.
On March 21, the staff rejected Kinetic Concepts' argument that Chevedden's broker letter had not complied with Rule 14a-8(b). (The staff did agree that his resolution violated other parts of Rule 14a-8, but said those defects could be cured if the proposal was revised so as to not affect unexpired director terms).
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Kinetic Concepts, a Texas-based medical technology company, plans to omit a shareholder proposal on eligibility grounds even though the SEC turned down its no-action request.
Investors and issuers alike should take note of the Supreme Court's opinion in Morrison v. National Australian Bank as it could have major implications for their ability to sue or be sued for securities fraud in the future.
In a ground breaking decision decided yesterday the High Court in Morrison rejected years of federal jurisprudence on the extraterritorial application of US securities fraud legislation. In a scathing opinion by Justice Scalia, the Court criticized the Second Circuit's vaunted "conduct" and "effects" test for establishing subject matter jurisdiction over foreign investors trading foreign securities on foreign exchanges (the so called "foreign cubed" case). The Court found that the authority to hear a securities fraud case involving foreign investors and securities is a question of "merit" and not a question of subject matter jurisdiction. In other words, rather than diving into the particulars of the defendant's conduct or the nationality of the parties, the Court found that the question is whether Section 10(b) gives rise to a private cause of action for securities that are traded outside of the territory of the United States.
In opposition to the Second Circuit's test involving foreign securities traded on foreign exchanges, the Court promulgated the "transactional test" for determining the extraterritorial reach of US securities fraud laws. The Court held that "[T]hose purchase-and-sale transactions are the objects of the statue's solicitude...And it is in our view only transactions in securities listed on domestic exchanges, and domestic transactions in other securities, to which Section 10(b) applies."
Most comments on the January 21 US Supreme Court decision in Citizens United v. Federal Election Commission (1) have focused on the effects of direct contributions by corporations to candidates. Are such contributions invitations to corruption, or exercises of protected speech by persons associated in corporations?
But for those concerned about corporate governance or corporate accountability in any of its forms, Citizens United has a context and implications that go well beyond elections and freedom of speech. These challenge fundamentally the notion of corporate social responsibility (CSR) and socially responsible investing (SRI).
In this post and some that will follow, I want to explore how Citizens United affects what proponents of CSR and SRI have advocated.
In the aftermath of the global financial crisis, many investors have grown concerned about standards of corporate governance. In fall of 2009, the European Commission released a study of corporate governance monitoring and enforcement practices in its member states. The study was undertaken by RiskMetrics Group in collaboration with BusinessEurope, ecoDA and their affiliates, and Landwell & Associates and their affiliates.
In most EU states, national governance codes set rules with which corporations must comply, or else explain why they have not complied. The RiskMetrics study found support for "comply-or-explain" regimes, but also found "some deficiencies," including "unsatisfactory level and quantity of information on deviations by companies and a low level of shareholder monitoring."
On January 14, investors responsible for $13 trillion in assets jointly called for a strong policy response to global climate change. Coming on the heels of the UN Framework Convention on Climate Change (UNFCC) summit in Copenhagen, the Investors' Summit on Climate Risk showed broad private-sector support for public policy initiatives to combat climate change.
What will be the practical impact of carbon pricing for investors? A survey of RiskMetrics research shows that gaps in the existing regulatory patchwork could create perverse advantages for companies, investors and governments who avoid strong carbon regulations.
[Ed. Note: RiskMetrics analyst Mario Lopez-Alcala is attending the Copenhagen summit as an official observer.]
As the Copenhagen climate summit draws to a close, many are disappointed by the lack of progress being made here. The biggest announcement is likely to be a plan to compensate countries that preserve forests and other natural landscapes that store carbon dioxide, the main greenhouse gas tied to global warming.
While other agreements could be reached to place carbon regulations on aviation and shipping, other goals to curb industrial emissions of greenhouse gases and set new financing mechanisms to help developing countries mitigate and adapt to climate change remain elusive. Now the hope is to reach a legally binding agreement sometime next year.
Different World From a Year Ago
Still, as US Deputy Special Envoy for Climate Change Jonathan Pershing observed at Copenhagen's Bella Center last week, today's world is very different from the one we lived in a year ago when it comes to climate politics.
The Copenhagen summit has brought developing countries to the fore, with progressive proposals on mitigation, adaptation, and finance. The United States has also undergone a sharp policy reversal, with President Barack Obama here to underscore the US administration's commitment to tackling climate change. This sets the stage for a changing global regulatory environment that will benefit low-carbon investments.
The road ahead will be bumpy, however. In Copenhagen there have been heated debates on the legal outcome of two parallel negotiating paths: one under the Framework Convention on Climate Change, in which the US is a party; and one under the Kyoto Protocol, in which the US is an observer.
A bloc of Small Islands States led by Tuvalu has proposed developing a new negotiating group to work toward a binding treaty to succeed the Kyoto Protocol with even more ambitious targets. The U.S. regards this extension of Kyoto as a non-starter. Another proposal forged by the Mexican and Norwegian delegations would substantially increase the amount of predictable funding available for climate change actions in developing countries. However, beyond a commitment by the European Union to provide $10 billion annually in such funding as a down payment toward larger giving, the pledges have been few.
Significant Forest Protection Program
In any event, the forest protection program expected at Copenhagen (formally known as Reducing Emissions from Deforestation and Forest Degradation, or REDD) should not be overlooked for its significance.
Rainforest destruction and land conversion are responsible for about 20 percent of annual emissions that contribute to global warming. The REDD program puts financial incentives in place for developing countries to preserve these natural habitats effectively as a carbon-storing bank. Industrial countries would be able to purchase credits from this bank to offset emissions that exceed their own reduction targets.
The current U.S. legislative proposal as passed by the House of Representatives would allow up to one-quarter of the nation's emissions to be offset by such credits from international providers. REDD would help assure that a large bank of credits would be available at affordable prices, easing the pressure on domestic industries to achieve emissions cuts from their own operations.
REDD also could be a shot in the arm for the Clean Development Mechanism (CDM), a project-based source of carbon credits that can be used in emissions trading schemes established under the Kyoto Protocol. So far, the CDM has suffered from heavy bureaucratic oversight and limited geographic scope. However, new measures potentially could arise from talks seeking ways to lessen these drawbacks for CDM projects.
By virtue of the location of the world's rainforests, REDD could help disperse funding assistance across Asia, Latin America and Africa. Some representatives at Copenhagen are even lobbying to extend REDD's provisions to northern boreal forests, which also provide a substantial sink for carbon.
However the REDD program works out, it will be a while before the aid starts flowing. Details that remain to be worked out include setting exact targets and timetables for emissions reductions, and what systems should be used to measure and verify carbon storage of various habitats.
Climate Clock Keeps Ticking
Meanwhile, the climate clock keeps ticking. Scientists presenting at Copenhagen stressed the importance of bringing global emissions to a peak within the next decade and then starting a fast decline, led by a 25- to 40-percent reduction by industrial countries from 1990 levels by 2020. Each year of delay heightens the pace at which emissions reductions must be achieved thereafter.
United Nations Secretary General Ban Ki-moon admonished Copenhagen delegates in an address on Dec. 15 as they moved into their final days of negotiations. "We do not have another year to deliberate," he reminded them. "Nature does not negotiate."
Mario Lopez-Alcala is a member of RiskMetrics Group's Climate Risk Management team.
As part of RiskMetrics' involvement with the COP15 climate conference in Copenhagen, I spoke on a United Nations Environment Program Finance Initiative (UNEP FI) panel called "Construction Counts for Climate." I represented UNEP FI's Property Working Group (on which RMG's Mario Lopez-Alcala has served for two years), and was joined by the Finnish Minister of Housing and other UNEP representatives.
"Construction Counts," as the built environment is responsible for at least 40% of global CO2 emissions, according to the Intergovernmental Panel on Climate Change. This actually represents a great opportunity for emissions reduction, as buildings' emissions can be reduced drastically by making better use of existing technology. COP15 participant Jens Laustsen, senior energy policy analyst (buildings) at the International Energy Agency (IEA), estimates that 75% of the energy used in most buildings can be saved.
Today's Investments Embedded in Long-lived Buildings
Unfortunately, energy efficiency is not always a top priority for property owners, and current construction can embed wasteful practices for decades.
The UNEP FI Property Working Group believes that the building sector will only embrace efficiency with steady guidance from investors and regulators. The Group includes around 20 of the world's largest institutional real estate investors, including AXA, CalPERS, Sumitomo Trust, and UBS. In my presentation, I explained how more aggressive building codes, combined with investor interest due to global carbon pricing, would put needed pressure on property owners worldwide.
The Empire State Building: Once Again, the Latest Thing
Some governments have already acted, including New York City, which just passed one of the nation's most stringent efficiency standards. The most prominent example of its potential is the skyline's most famous landmark: the 78-year-old Empire State Building. Its recent $500 million renovation is a case study of how much can be achieved with current technology.
This renovation includes a package of 8 major programs including chiller replacement, tenant space redesign, new windows, and other projects. These investments resulted in a 38% reduction in CO2 emissions and a net present value savings of about $20 million over 15 years.
"Make No Little Plans"
These tangible, quantifiable returns are too big for investors to ignore. This explains why the 2009 Investor Statement on the Urgent Need for a Global Agreement on Climate Change has attracted support from 191 institutions representing $13 trillion in assets. The construction sector has also committed to efficiency through the World Business Council for Sustainable Development's Energy Efficiency in Buildings program.
Architect Daniel Burnham, leader of the early 20th century "City Beautiful" movement, famously said, "Make no little plans – they have no magic to stir men's' blood." If more governments follow New York's lead, then the Empire State Building could inspire builders to think green, as well as big.
Hewson Baltzell heads ESG product development at RiskMetrics Group. He is a co-founder of Innovest and was president of the firm before it became part of RiskMetrics in 2009. Prior to Innovest, Mr. Baltzell was a commercial and investment banker specializing in corporate finance and real estate.
This week, world leaders meet in Copenhagen to coordinate their efforts to address global climate change. As summed up by a RiskMetrics fact sheet on the event, the summit's daunting goal is to set fair, achievable emissions reduction targets for both developed and developing nations.
The Financial Times' Martin Wolf has succinctly stated why this will be so difficult:
"…Where [greenhouse gas emissions] abatement occurs must be separated from who pays for it. Abatement needs to happen where it is most efficient. That is why emissions of developing countries must be included. But the cost should fall on the wealthy. This is as much because they can afford it as because they produced the bulk of past emissions."
Private Lenders and Investors in a "Pivotal Position"
How can the global economy equitably share the costs and benefits of climate-related adaptation? Parties to Copenhagen will tackle this problem – eventually – with regulation, taxation and subsidies for carbon-abating investment. Private investors, however, can act now to direct capital towards projects that will thrive in a carbon-constrained economy.
The financial sector will play a crucial role in putting developed-world wealth to work in emerging markets, according to Dr. Peter Thimme and Doug Cogan. In an October Responsible Investor op-ed, they explained why:
"To complete the transition to a low-carbon economy, up to $50 trillion in renewable energy and energy efficiency investments will be required over the next 40 years, mainly in emerging markets. This puts financial institutions in developing and transition economies in a pivotal position: either they find ways to gain from these climate-friendly investment opportunities or face growing adaptation costs that sap available returns."
Best Practices in Emerging Markets
Mr. Cogan, RiskMetrics Director of Climate Risk Management, authored "Addressing Climate Risk: Financial Institutions in Emerging Markets," commissioned by Dr. Thimme's firm, DEG, for shareholder coalition Ceres. As summed up in the RI piece, most of the 64 surveyed firms acknowledge the challenge of climate risk. Far fewer firms are factoring climate risk into their lending and investing.
Still, "Addressing Climate Risk" is subtitled "a best practices report," and it does present instructive examples of climate-focused lending and investing. These examples can be grouped in two broad categories:
1) Focused investment in "clean-tech" projects that reduce emissions, conserve energy, or replace carbon-heavy processes.
2) Research and evaluation of the social and/or environmental impact of all projects seeking financing from the institution.
Examples of the first group include renewable energy investments in Kenya, Romania, and India, and an Argentine firm's conservation of 15,000 acres of forest to offset the impact of a paper mill.
Adding ESG Standards to Risk Management Systems
Beyond these clean-tech plays, there may be greater potential impact from the second approach to climate risk. While only five surveyed firms explicitly study climate risk, 53 of 64 have established a risk management system that addresses overall environmental, social and governance (ESG) risk factors.
"Addressing Climate Risk" presents more details on the risk management system of Mexico's Grupo Finterra, a firm focused on lending in the agribusiness sector. The firm acknowledges that this sector is especially vulnerable to climate change, and its risk rating system reflects this:
"…The rating system assigns clients a grade of A, B, C according to their compliance with a range of environmental and social standards [including climate change-related risks]. Ratings are tailored to the specific project and agricultural activity to capture key risks relevant to the client's business. The company also provides recommendations to help clients increase their scores and comply with the company's standards. These recommendations are tailored to address specific risks to a client's business activities."
Most importantly, the system has teeth: "Low-scoring clients will not receive financing unless these requirements are met," according to the study.
Forging the Missing Link
With an eye on Copenhagen, "Addressing Climate Risk" does assess respondents' involvement with the Clean Development Mechanism (CDM) established by the Kyoto Protocol. So far, trading of such credits has been dominated by developed-world brokerages. Even fewer of the emerging-market firms trade credits than measure climate risk. The prevalence of ESG risk management systems among lenders and investors, however, suggests that these firms already have the tools to account for such risks.
Dr. Thimme and Mr. Cogan believe that the private sector should capitalize on Copenhagen, even if governments fail to do so. As they wrote in RI, "Whatever else comes out of Copenhagen, financial partnerships must be forged to support the huge flow of investment capital intended for the developing world."
The final version of the Walker Report on corporate governance of UK banks and financial institutions was published on Nov. 26. The Prime Minister requested the report, which was issued by the Treasury. Sir David Walker chaired the report team. He is a prominent City banker who has had stints at Lloyd's and Morgan Stanley.
The Report includes, among its recommendations (no. 17, p. 17), one that would require fund managers to adopt the Code on the Responsibilities of Institutional Investors announced by the Institutional Shareholders Committee (ISC) on Nov. 16. The Code, which Walker suggests be renamed the "Stewardship Code," would require, among other things, that managers commit to engagement or explain why they didn't.
The renaming of the Code seems important. Its original name is undescriptive and passive. "Stewardship" implies action, taking charge of assets entrusted to the manager. It is a word of rich significance to mission- and faith-based investors. The oldest UK SRI mutual fund is the Friends Provident Stewardship Fund.
The Walker Report in total has come in for a good deal of criticism from people the Guardian refers to as "campaigners." Nonetheless, in governance and engagement Walker seems a step forward. How large a step will be up to Parliament.
Below are links to the Walker Report, the ISC Code press release, and some background on Walker and the controversy surrounding his work.
A Review of Corporate Governance in UK Banks and Other Financial Industry Entities [PDF]
Press Release from Institutional Shareholders Committee on the Code on the Responsibilities of Institutional Investors [PDF]
A new securities class action filed last week in the Southern District of California caught our eye, and the more we dug, the curiouser things became.
The complaint (here) was filed against Avanir Pharmaceuticals, Inc. (NASDAQ: AVNR) and several current and former officers and directors of Avanir. Much of the allegations are standard run-of-the-mill allegations for a securities class action against a smaller pharmaceutical company, namely they involve FDA approval (or lack thereof) of a new drug. Some of the allegations center around alleged breaches of fiduciary duty by Avanir's former CEO and president, Gerald Yakatan.
But what really made us sit up and say "hmm," is the class period that is alleged in the complaint, the date the complaint was filed (10/30/09), and the relationship of that class period (and the filing date) to the applicable statutes of limitations and repose. The complaint was filed on behalf "of all those who purchased the Common Stock of Avanir...between July 1995 and October 31, 2006, the date the Company filed its form 10-K with the SEC for its fiscal year ending 2006."
As Kevin LaCroix has noted, there has been a recent surge of '34 Act securities class actions filed at or near the two year statute of limitations for bringing such claims, but this one seems to push the envelope a bit further.
Prior to the enactment of the Public Company Reform and Investor Protection Act of 2002 (a/k/a Sarbanes-Oxley), 28 U.S.C. § 1658(b), there was no congressionally created limitations period for federal securities fraud claims arising under section 10(b) of the '34 Act. The pre-Sarbanes-Oxley statutes of limitations and repose were one year and three years, respectively. But instead of a congressionally created limitations period, both the statutes of limitation and repose resulted from the Supreme Court's decision in Lampf, Pleva, Lipkind, Prupis & Petigrow v. Gilbertson, 501 U.S. 350 (1991). The Lampf Court viewed the then 3-year
limit as a "period of repose," intended to impose an "outside limit" on the cause of action, not subject to tolling principles.
Sarbanes-Oxley of course extended the statutes of limitations and repose for '34 Act claims to two and five years, respectively.
The application of the extended statutes has been a heavily litigated issue, with a number of appellate decisions having been handed over the ensuing years.
But no court that we are aware of has yet ruled that the extended statutes of Sarbanes-Oxley will reach 14 year old conduct, or save a case that was filed two years and 364 days after the end of the class period, which coincides with the "discovery" of the alleged fraud in the Avanir case.
The complaint was filed by two San Diego based law firms, the Dreher Law Firm and Aguirre, Morris & Severson LLP, both names that were initially unfamiliar to us. After a quick review of their respective websites, we have some interesting tidbits to report. Scott Dreher (the eponymous owner of the Dreher firm) left what was then known as Milberg Weiss Bershad Hynes & Lerach to found his own firm back in 1996. Dreher counts Bill Lerach among his mentors, and bears a stunning resemblance to Jimmy Neutron: Boy Genius.
UPDATE: Kevin LaCroix also has a post on the Avanir complaint, here.