NYSE Rule Change; Lawyers & Fraud; More

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he Securities and Exchange Commission has given the green light to a New York Stock Exchange plan to eliminate the exchange’s controversial treasury-share exception, a provision criticized for potentially allowing companies to store up large reserves of stock and significantly dilute existing shareholders without their approval at a later time.

Under a provision of Section 312.03 of the NYSE’s Listed Company Manual, companies are required to get shareholder approval before issuing stock in certain situations or in significantly large amounts, including the issuance of more than 20 percent of the current outstanding shares in any transaction other than a public offering or “bona fide” private financing. Historically, the rule hadn’t been applied to a reissuance of shares once issued, but subsequently reacquired by the company. The NYSE had taken the view that once listed, shares remain listed even if they’re repurchased by the company and taken back into “treasury.” So, when treasury shares are reissued, the NYSE doesn’t require that they be “relisted,” and the provision requiring shareholder approval isn’t triggered.

The NYSE proposed eliminating the exception last May following a vote to do so by its self-regulatory arm, spurred by a bitter fight between Sovereign Bancorp, which sought a merger with an overseas bank using the treasury-share exception, and its largest shareholder, Relational Investments, which opposed the move.

The SEC says the rule change will reduce the potential for significant dilution without shareholder approval.

Noting that “the necessity of shareholder approval of a transaction should be governed by the substantive nature of the transaction, not the status or type of shares used in the transaction,” the SEC said the rule change should promote “greater shareholder input in control transactions and other corporate actions resulting in issuances of stock involving NYSE-listed companies.” The changes also make the revised provisions consistent with the NYSE’s elimination of the treasury-share exception from its equity-compensation plan approval rules.

NYC Bar Report Calls For Stronger Lawyers’ Role in Governance

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n a push to strengthen the role of corporate lawyers in preventing corporate scandals, a task force of the New York City Bar Association has proposed that the state amend its ethical rules for lawyers to permit them to “report out” client wrongdoing to regulatory authorities such as the Securities and Exchange Commission.

Lawyers’ role in corporate governance was underscored by the recent boardroom scandal at Hewlett-Packard, where a former attorney was indicted and the general counsel resigned amid concerns about methods the company used to spy on its directors and journalists.

In a 190-page report by the association’s Task Force on the Lawyer’s Role in Corporate Governance (see box at right), the task force said the state should adopt a series of 2003 amendments to the American Bar Association Model Rules of Professional Conduct, which allow lawyers to disclose to regulatory authorities criminal or fraudulent conduct by a client company’s management, as well as clearly illegal conduct likely to cause substantial injury to the client. Such a permissive right to disclose would be recognized “only as a last resort,” after the lawyers have been unable to persuade the client’s board to act.

In a summary of the report, task force Chairman Thomas Moreland said that while lawyers didn’t cause the recent scandals, “It does appear that at least some of these scandals might have been avoided had lawyers been more assertive in questioning management and more willing to bring their concerns to boards of directors.”

The task force says lawyers shouldn’t be ethically prohibited under extraordinary circumstances from reporting wrongdoing to protect the company and its investors. It stopped short, however, of making reporting a mandatory duty.

The report also includes recommended best practices for lawyers counseling public companies, including recommendations on strengthening the general counsel’s position, as well as guidelines and recommendations for law firms conducting internal investigations for companies.

Glass Lewis Purchased By Chinese Investment Group

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nother ownership change is brewing in the proxy advisory world. This time, Xinhua Finance, a minority shareholder of Glass, Lewis & Co., announced plans to buy out the San Francisco-based proxy advisory firm.

The move comes a little more than a month after Risk Metrics Group, a risk-analysis business with strong ties to Wall Street, snapped up Glass Lewis’ rival, Institutional Shareholder Services. Risk Metrics bought ISS last November in a cash-and-stock deal estimated at $540 million to $550 million.

Shanghai-based Xinhua Finance, which purchased an initial 19.9 percent of Glass Lewis last August, said it will purchase the remaining 80.1 percent in early 2007, but it didn’t disclose the terms.

Founded in 2003 and led by former Securities and Exchange Commission Accountant Lynn Turner, Glass Lewis will continue to operate as a separate company with existing management, client services, and research teams. As part of the deal, Glass Lewis will expand its coverage of Chinese and emerging market companies and will provide investment research and proxy advisory and voting services in China.

“Since our initial investment in Glass Lewis in August 2006, we have come to realize what a great and growing opportunity there is in assisting investors to analyze and manage their financial, investment and reputational exposure to public companies,” Fredy Bush, chief executive officer of Xinhua Finance, said in a statement.

Glass Lewis said it plans to use the Xinhua investment to increase its research and client services teams, expand into Asia and other parts of the world, and enhance its technology platform.

Glass Lewis chief executive Gregory Taxin said the transaction puts Glass Lewis on “a truly global and well-capitalized platform that will greatly benefit institutional investors.”

Last September, Glass, Lewis bought Corporate Governance International Ltd., an Australian provider of corporate governance and proxy analysis services based in Sydney.