Unsolicited Views - MoFo's Monthly Newsletter Chronicling Developments In Hostile M+A - Financial Services

Insurgents Denied Access to Early Vote Tallies

Broadridge Financial Solutions, Inc. ("Broadridge"), the leading U.S. firm that distributes materials on behalf of banks and brokers and collects shareholder ballots, recently decided to stop sharing real-time polling information with investors that sponsor shareholder proposals.

Broadridge's announcement came only a few days before the conclusion of a highly publicized and contentious campaign to strip Jamie Dimon, the head of JPMorgan Chase & Co. ("JPMorgan"), of his title as chairman. As a result of Broadridge's decision, Dimon and JPMorgan's board of directors continued to receive updates on incoming votes, while the investors that sponsored the shareholder proposal did not.

Lyell Dampeer, a senior executive at Broadridge, said that Broadridge made the decision after it received a request from the Securities Industry and Financial Markets Association ("SIFMA"). Since brokerage firms are its clients, Broadridge felt that it was contractually obligated to comply with SIFMA's request. A SIFMA executive denied that the group asked Broadridge to change its practices.

JPMorgan came under pressure after Broadridge's decision was announced and, as a result, the bank reportedly requested that Broadridge provide interim results to the investors sponsoring the proposal. When Broadridge allegedly refused because it was not sure it had the legal authority to release such information, JPMorgan gave the information directly to the investors. However, one proponent of the shareholder proposal said that his office did not receive the information until about 36 hours before the annual meeting and that by then it was too late for the information to be of any strategic value. The final vote tally for the proposal was announced at JPMorgan's annual meeting on May 21, 2013, and the proposal to strip Dimon of his chairman title was supported by only 32.2% of shareholders.

According to news reports, JPMorgan's turnaround came after New York Attorney General Eric Schneiderman's office sent a letter to JPMorgan's general counsel raising concerns about withholding ballot information from shareholders.

Several groups have called on the U.S. Securities and Exchange Commission (the "SEC") to act. U.S. Senator Charles Schumer sent a letter to SEC Chairman Mary Jo White requesting that the SEC create "clear rules of the road" for the disclosure of vote tallies during proxy fights. Schumer said that "these disclosures should be made available to all interested parties in a fair and transparent manner, to ensure a level playing field in the proxy solicitation process."

The Council of Institutional Investors ("CII"), a non-profit association of corporate, public and union employee benefit plans, also called on the SEC to "do all in its power to put an immediate stop to this patently unfair and arbitrary change in practice." CII said that Broadridge's decision "raises deeply troubling questions about the fairness and impartiality of the proxy system." CII argued that Broadridge has an obligation to the investing public in general, and that, "[i]f Broadridge cannot demonstrate fairness to all interested parties, regulators should intervene."

Delaware Chancery Court Orders Company and Board Committee Counsel to Provide Privileged Communications to Dissident Director

The Delaware Court of Chancery, in Kalisman v. Friedman (Apr. 17, 2013), ordered the respective counsels for a company and for a special committee of the company's board of directors to provide to a dissident director copies of their communications with the company's other directors, as well as internal law firm communications. The dissident director was a member of a large stockholder that had announced an intent to nominate a competing slate of directors at the company's next annual meeting, and was a member of the special committee as well as of the board. The communications related to actions taken by the board and the special committee that might otherwise be protected from disclosure to third parties by the attorney-client privilege or the work product doctrine.

BACKGROUND

The opinion arises from the proxy contest and related litigation over Morgans Hotel Group. The dissident director, Kalisman, is a member of a large stockholder, OTK, and was first appointed to the Morgans board early in 2011. Later that year, the board formed a special committee to evaluate strategic alternatives, and Kalisman was put on the committee. No significant alternative was adopted, however, and early this year OTK announced that it would nominate a competing slate of directors for the Morgans board.

The other members of the committee then began preparing for a recapitalization that would put a large voting bloc in new hands and dilute OTK. However, the other directors did not tell Kalisman about the recapitalization until the day before the committee was to meet to approve the recapitalization; prior to that time, when Kalisman asked for information, he was told "nothing was in the works." At the meeting for the approval of the recapitalization the committee formed a subcommittee that did not include Kalisman.

Kalisman sued, and, among other things, sought documents from counsel to the company and the committee. The defendants asserted that the information could be withheld from Kalisman on the basis of attorney-client privilege and the work product doctrine. The court disagreed, and ordered the company and committee counsel to provide the documents and communications (including internal law firm e-mails) to Kalisman, at least for the period until the other directors were able to establish more formally the requisite adversity that cut off his rights to such information.

COURT ANALYSIS

The court noted that a director of a Delaware corporation has an "essentially unfettered" right to information, including a right of "equal access" to information given to other directors. Communications from a company's counsel might be protected from disclosure to third parties by the attorney client privilege or the work product doctrine; however, each director is treated as a joint client of the counsel, reflecting the responsibility of each director for the proper management of the company, and thus should have access to those communications. The court rejected cases from other jurisdictions that purportedly allowed a board majority to invoke attorney-client privilege against a director.

Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.