Registrar

1
Registrar Transfer CompanyClient Seminar June
2, 2008 Proxy Trends and Corporate Governance
Updates Presented byPaul SchulmanExecutive
Managing DirectorThe Altman Group,
Inc.www.altmangroup.com
2
Presentation Outline

• Changing Environment for Director Elections
• NYSE Rule 452 (Broker Discretionary Vote)
• Notice Access
• Majority Vote
• Sub-prime Fallout
• Shareholder Proposals
• Proxy Contests / Shareholder Activism
• An environment of activism
• Who is being targeted
• Assessing your risk / How to prepare for a
  contest
• To fight or settle

3
Changing Environment for Director Elections
4
Discretionary vs. Non-Discretionary Voting

• NYSE Rule 452 allows brokers (not banks, trust
  companies, or registered holders) to vote on
  proposals deemed routine on behalf of those
  clients who do not return their proxy card.
• Routine proposals are dictated by NYSE
• Shares primarily represent retail holders.
• Applies to all companies (not just NYSE listed)
• Timely mailing (15 days prior to meeting).
• These uninstructed shares are voted with Board
  recommendation.
• Examples of routine / discretionary proposals
• Election of directors (non-contested)
• Auditors
• Increase in authorized common (unless tied to
  merger or certain other events)
• Stock Splits (general corporate purposes).
• Examples of non-routine proposals
• Approve/amend a stock plan
• Approval of merger or reincorporation
• Approve/increase preferred stock
• Shareholder sponsored proposal ( some
  exceptions)

5
Elimination of Routine Vote on Directors

• New York Stock Exchange has recommended amending
  Rule 452 to eliminate routine vote for election
  of directors.
• SEC has not yet approved NYSE recommendation.
  (Plan was initially expected to go into effect
  January 2008)
• Once implemented, companies will experience
  significant drop in shares voted for directors by
  retail holders.
• NYSE proposal has greater effect on affects
  companies with large retail shareholder base
  (i.e. companies primarily listed on NASDAQ).
• Brokers already implementing changes to their
  voting procedures
• Proportionate Voting
• What is it?
• Can it replace the NYSE proposal to eliminate
  discretionary voting (proposed to NYSE)
• Impact on vote
• OBO vs NOBO vs ABO
• Should companies have access to all shareholders?

6
Broker Actions vis-à-vis NYSE Rule 452

• Brokers that do not issue Discretionary Voting
• Allen Company LLC
• Davenport and Co. LLC
• Koonce Securities
• Mesirow Financial, Inc.
• RBC Capital Markets Corp.
• Sterne Agee, and Leach, Inc.
• Waters Parkerson and Co.
• Wells Fargo Investments LLC
• Goldman Sachs Execution Clearing
• Scottrade
• Legent Clearing
• Wedbush Morgan
• Brokers that issue Proportionate Voting
• Charles Schwab Co.
• Edward D. Jones
• Goldman Sachs
• Merrill Lynch

7
Electronic Delivery of Proxy Material

• Notice and Access mandatory for ALL companies
  for 2009
• Impact
• Less cost to issuers for printing and mailing
• Less cost for shareholder group or activists to
  launch solicitation
• Not much evidence to date (Yahoo!)
• Serious contests will still use conventional
  distribution
• Effect on voter response
• Retail holders
• Assess overall shareholder profile

8
Majority Voting

• One of the hottest corporate governance issues in
  years.
• Catalyst was the seeming failure of Proxy Access
  to get through SEC
• Now a very popular issue among shareholders
  (particularly labor unions)
• Majority Vote versus Plurality
• Increasing trend
• Over 2/3 of SP 500 companies
• Will it become the predominant standard for all
• Shareholder proposals (particularly labor unions)
• Companies adopting proactively
• Case study Washington Mutual
• Majority vote
• Change to Win targeting directors after Sub-prime
  related drop in stocks
• Resignation of director (49 Against) prior to
  meeting
• 2 others targeted received over 40 Against
• Impact of broker vote (ballot box stuffing)

9
Exempt Solicitations Just Vote No

• What is an Exempt Solicitation?
• Mailings or communications with shareholders to
  vote against management
• Types of campaigns
• Exempt Solicitation v. Proxy Contest
• SEC filing
• Proxy card
• Cost and impact
• Sub-prime Fallout
• Prime targets
• Shareholders have filed a number of proposals at
  financial firms and homebuilders aimed at
  improving disclosure/compliance
• Calls to establish committees to review lending
  operations and committees to establish new
  policies on dealings with rating agencies.

10
Case Studies

• Can all of this really have an impact?
• Washington Mutual
• Majority vote
• Change to Win targeting directors after sub-prime
  related drop in stocks
• Resignation of director (49 Against) prior to
  meeting
• 2 others targeted received over 40 Against
• Impact of broker vote (ballot box stuffing)
• Other Cases
• Morgan Stanley
• CVS Caremark

11
Director Elections No longer a worry-free
process!

• Drop in retail voting due to e-proxy
• Elimination of discretionary vote on directors
• The rise in director against and withhold votes
  exempt solicitations
• Majority vote requirements for the election of
  directors
• Limited ability to communicate with objecting
  beneficial owners of stock
• The Perfect Storm

12
Hot Issues Majority Vote Say on Pay
13
Majority Vote

• Universally supported by proxy advisors-
  RiskMetrics (ISS), Glass Lewis.
• Generally supported by institutional holders.
• Total number of proposals decreased in 2007 as
  many companies felt compelled to address the
  issue rather than fight.
• So far in 2008, roughly two-thirds of proposals
  calling for a majority vote have been withdrawn
• Majority voting proposals continued to achieve
  high shareholder support.

14
Shareholder ProposalsMajority Vote

• 2007
• Total Proposals40
• Passed 16 (40)
• Failed 24 (60)
• Average Support 50.5

• 2008
• Total Ballots 23
• Pending 21
• Passed 1 (50)
• Failed 1 (50)
• Too early to determine trend in average support
  levels

15
Majority Voting - Variations

• Pfizer Model
• Plurality vote with Director Resignation Policy
• Beginning in 2005, used by companies to defeat
  Majority vote proposals
• Amendment to corporate governance guidelines
• Any director receiving more Withhold votes than
  For votes must submit his/her resignation to the
  board.
• The Board will decide how to act on the
  resignation within 90 days
• Intel Model
• This policy amends a companys bylaws
• Director must receive more For votes than Against
  votes in order to be elected
• Addition of the Against vote rather than just
  For and Withhold voting options
• A director up for re-election would be required
  to submit his/her resignation to the board. The
  board will then follow a process similar to the
  holdover logistics of the Pfizer model.
• Companies that have adopted Pfizer model has been
  successful in defeating majority vote proposals.
• RiskMetrics (ISS) and Glass Lewis will support
  Majority Vote proposal even if company has
  adopted a Pfizer type resignation policy.

16
Say on Pay

• What is Say on Pay?
• An annual, non-binding advisory vote on executive
  compensation.
• A thumbs up or a thumbs down approach.
• American Federation of State, County and
  Municipal Employees (AFSCME) largest sponsor of
  Say on Pay proposals with 90.
• So far this year, 30 proposals have been voted
  on, and support has averaged 42 percent .

17
Proxy Contests / Activism
18
Proxy Contests / Activism at Banks

• Some of the activity seen thus far in 2008
  includes
• Vote No Campaigns
• Historic Vote at WaMu Change to Win
• Citigroup no organized campaign, but
  broad-based institutional anger- one director
  received 33 percent opposition.
• Morgan Stanley unsuccessful vote no campaign
  (90).
• 1st Century Bancshares hedge fund proxy fight
  for board seats
• Century Bancorp hedge fund SEC filing
  expressing dissatisfaction
• Sierra Bancorp individual shareholder fight for
  board seats
• Cape Fear Bank individual shareholder fight for
  2 seats
• South Financial Group institution SEC filing to
  hire investment bank
• MASSBANK Corp. hedge fund proxy contest for
  board seats
• Croghan Bancshares individual holder proxy
  fight for Board seats
• Bancorp Rhode Island hedge fund proxy fight for
  Board seats
• BNC Corp. individual holder SEC filing that he
  desires a board seat
• FNB Corp. individual holder proxy fight against
  merger
• Ohio Legacy Corp. Individual holder SEC filing
  expressing dissatisfaction
• Vineyard National Bancorp group including
  former CEO consent fight to amend by-laws then
  proxy fight for board seats.

19
Hedge Fund Activism Overview

• Overview
• 8,000 hedge funds worldwide.
• 1.1 trillion in assets.
• Some estimates say hedge funds are responsible
  for 40 of the trading activity.
• What are Hedge Funds Demanding?
• Board Seats by far the most common demand.
• Increased Dividend.
• Stock Repurchase Program.
• Company to Sell Itself.
• Corporate Governance Changes
• In 2006, The Altman Group tracked 59 cases of
  hedge fund activism
• In 2007, The Altman Group tracked 108 cases of
  hedge fund activism
• In 2008, The Altman Group is currently tracking
  over 150 cases of HF activism

20
Hedge Fund Activism

• Why the surge in activism by hedge funds.
• Huge inflows of into hedge funds
• Less concerns about perceptions v. traditional
  institution
• Concentrated holdings
• Activism as an investment approach
• Increased competition for performance
• Compensation structure of hedge funds
• Success breeds success

21
Hedge Fund Activism 2007 Track Record

• For the 108 cases tracked in 2007
• 50 involved a proxy fight or contested situation.
  
• In 36 cases Management won
• In 14 cases the Hedge Fund won
• 58 activism cases were settled.
• In 31 of the settlements the Hedge Fund received
  board seats
• In 13 cases management met the Hedge Funds
  demands
• In 3 cases the company was acquired and the Hedge
  Fund walked away
• In 6 cases the Hedge Fund withdrew its activism
• 5 cases involved various other forms of
  settlement
• Bottom line for 2007
• 62 (57.4) were won by the dissident either in
  a fight or settlement.
• Management won 46 cases (42.6).
• Cases of activism resolved in 2008 so far.
• 20 cases of a settlement with dissident obtaining
  board representation.

22
Assessing your Vulnerability

• Know your shareholder base
• Activists
• Retail institutional hedge fund mix
• Voting patterns
• Company Performance
• Activists do not just target poor performers
• Use of cash
• Industry consolidations
• Trading patterns
• Lead activist acquiring stake
• Disclosure (13D filing, press release etc.)
• Wolf pack piles in / loyal shareholders selling
• Corporate governance check-up
• Balancing protection v. increased likelihood of
  activism due to anti-takeover provisions
• Engagement by hedge funds
• More aggressive and demanding access to CEO and
  Board
• Discuss, and if, appropriate address criticism
• Proactive versus reactive
• Engage in dialogue

23
Proxy Fight Action Plan

• A proxy solicitation firm will generally provide
  the following services and advice in preparation
  for a proxy fight
• Develop shareholder profile and proxy contact hit
  list
• Ongoing monitoring for potentially hostile
  accumulations
• Develop Vote Projection to assess vulnerability
• Explain fight mechanics, proxy voting logistics
  and vote requirements
• Develop proxy contest strategy / timeline
• Retail solicitation
• Mailings
• Institutional visits, calls
• Assignment of responsibility (management,
  solicitor, other advisors)
• Advise on role and likely influence of
  RiskMetrics (ISS) and Glass Lewis
• Message development
• Understand the decision drivers of the major
  holders
• Craft the message likely to maximize support from
  the key shareholder constituencies
• Determine the avenues to best deliver the message

24
Proxy Fight Strategies

• Timeline advantages
• Phone solicitations
• Fight letters
• Multiple votes
• Tailor message to proxy advisors if necessary

25
Settling Issues to Consider

• Assess likelihood of success
• Avoid embarrassment of defeat
• Avoid significant costs associated with fight
  (solicitation, legal, print, mail)
• Get concessions from activist (standstills,
  support in future votes)
• Directors willingness to have dissident on the
  Board
• Realize that dissident would also rather avoid
  expense of contest
• Dissidents often willing to settle for minority
  (1 or 2 seats)
• History of dissidents resigning if unable to
  influence rest of Board
• Terms of settlement company concessions
• Generally board seats for dissident (how many,
  will incumbents be removed, terms of continued
  representation.)
• Explore strategic alternatives
• Distribute cash or buy back shares
• Corporate governance changes

26
Questions Answers