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Shareholder Proposals: The SEC Staff's New Health Care Position?

By broc

Shareholder Proposals: The SEC Staff's New Health Care Policy Position?

As usual, a number of shareholder proposals requesting companies to adopt healthcare policy principles were submitted to companies this proxy season. Unlike prior years, it appears that Corp Fin is permitting the inclusion of some of these proposals - in past years, they were universally viewed as "ordinary business" and exclusion was permitted. In fact, it appears that the SEC Staff generally has lightened up on social proposals this season.

We have posted some of these health care proposals (and SEC Staff responses) in our "Shareholder Proposals" Practice Area. Note that the CVS proposal was permitted to be excluded - the distinction likely is that the CVS proposal asks the company to report on its implementation of the proposal; the other proposals do not.

The New Business Combination Accounting

As I learn more about the impact the FASB's new business combination rules on deals, I truly believe that this is the "sleeper" of the year. Did you know that lawyers won't be able to capitalize their fees in deals anymore (and what that means for documentation of hours billed)? Learn more during tomorrow's DealLawyers.com webcast - "The New Business Combination Accounting" - and hear from these experts:

- John Formica, Partner, PricewaterhouseCoopers LLP in the National Professional Services Group
- Michael Holliday, Securities Counsel (retired), Lucent Technologies
- Brenna Wist, Partner, KPMG in National Department of Professional Practice

Forfeiture Provisions in Stock Purchase Plans

From Keith Bishop: Recently, the California Court of Appeal upheld Citigroup's restricted stock purchase plan against a challenge that it violated California's Labor Code (here is a copy of the opinion). Under the plan, an employee could elect to use a portion of their annual earnings to purchase shares in the company’s stock at a price below the stock’s price. If the participating employee resigns or is terminated for cause within a two-year vesting period, the employee forfeits the stock as well as the money used to purchase it.

An employee challenged the program as violating California Labor Code Sections 201 and 202. These statutes require an employer to pay its employee all earned but unpaid compensation following the employee’s discharge or his or her voluntary termination of employment. The Court of Appeal upheld the plan, stating: "As a matter of economic reality, employees who elect to participate in the plan’s stock-purchase program are paid all the wages they designate to invest in company stock. Thus, the plan’s forfeiture provisions do not violate the Labor Code; and the trial court in this case properly granted summary judgment in favor of the brokerage company."

My Ten Cents: Citigroup’s plan is pretty unique - and there are few companies that have a plan or forfeiture provisions like this. Also, this is a situation where legally you might be able to have this sort of provision - but does it really make sense? Having this kind of provision in their plan must significantly impact their participation rate: I’d be surprised if it is higher than 5% to 10%.

Stock is already a risky investment, then Citigroup has increased the risk further by requiring employees to forfeit their entire investment if for some reason they have to leave their jobs before the vesting requirements are met. Unless the discount is substantial enough to mitigate the risk of a loss in the stock (and if the discount is too high, at some point you start to run into constructive receipt issues), it seems "out there" to even think about participating in a plan like this.

- Broc Romanek

Full post as published by The Corporate Counsel.net Blog on March 10, 2008 (boomark / email).