As most public companies enter their fourth fiscal quarter and look ahead to filing their Form 10-Ks and proxy statements, a recent settlement agreement announced by the Securities and Exchange Commission (the SEC) serves as a cautionary tale about director independence and SEC disclosure requirements.
On September 30, the SEC announced that it settled charges against James R. Craigie, a former CEO, chairman, and board member of Church & Dwight Co. Inc., for violating proxy disclosure rules by standing for election as an independent director without informing the company’s board of his close personal friendship with a senior Church & Dwight executive. According to the SEC’s complaint, Craigie frequently vacationed with the executive and the executive’s spouse and even paid more than $100,000 for them to join Craigie and his spouse on several of these vacations.
Failure to Disclose Relationship Leads to SEC Action
The SEC also alleged that Craigie never disclosed his relationship with the executive to Church & Dwight and encouraged the executive to conceal the relationship. As a result, the company’s board was unaware of Craigie’s personal relationship with the executive, and the company’s proxy statements identified Craigie as an independent director. Once Church & Dwight learned of Craigie’s relationship with the executive, it determined that he was not an independent director. Without admitting or denying the SEC’s allegations, Craigie agreed to resolve the SEC’s charges, in part through the payment of a civil penalty of $175,000. If the settlement is approved by the U.S. District Court for the Southern District of New York, he will also be subject to a five-year officer-and-director bar.
The announcement comes as a timely reminder as many public companies begin preparing director and officer questionnaires and planning for the upcoming proxy season—the SEC monitors proxy disclosures and will bring enforcement proceedings based on disclosure failures.
Director Independence and Disclosure Requirements
So, which specific rules and regulations did Craigie seemingly violate? SEC Rule 14a-9, promulgated under the Securities Exchange Act of 1934, states, in relevant part, that no nominee to a public company board may cause any statement to be included in the company’s proxy materials which, at the time and in the light of the circumstances under which it is made, is false or misleading with respect to any material fact.
Under the applicable U.S. Supreme Court precedent, a fact is material “if there is a substantial likelihood that a reasonable shareholder would consider it important in deciding how to vote.” While the SEC does not generally impose independence standards on directors, each public company must disclose information about the independence of its directors in compliance with Item 407(a) of Regulation S-K in their Form 10-Ks and proxy statements. Item 407(a), in turn, references the independence standards established by the national stock exchanges.
Given those standards as well as the ones imposed by various institutional investors and proxy advisory firms, the SEC likely felt confident that it could prove that a reasonable shareholder would consider Craigie’s independence (or lack thereof) important in deciding how to vote shares in Church & Dwight.
More specifically, both the New York Stock Exchange (NYSE) and Nasdaq require that a majority of the directors of a company listed on their exchanges be independent, subject to limited exceptions. Under Section 303A.02(a)(i) of the NYSE Listed Company Manual, which is the listing standard applicable to Church & Dwight, an “independent” director is one who the board affirmatively determines has no material relationship with the company, either directly or as an officer, partner, or stockholder of a company that has a relationship with the company.
Similarly, a director is “independent” under Nasdaq Rules 5605(b)(1) and 5605(a)(2) if the director is not an executive officer or an employee of the company and, in the opinion of the board, does not have a relationship that would interfere with exercising independent judgment in carrying out a director’s responsibilities. In addition, most large institutional investors and proxy advisory firms consider director independence in deciding how to vote their shares and in making recommendations as to how their clients should vote theirs—some of these large institutional investors and proxy advisory firms even apply stricter standards than NYSE and Nasdaq. For example, former CEOs will not generally be considered independent by Vanguard or ISS.
Takeaway: Review Compliance Policies and Procedures
In light of Craigie’s alleged efforts to conceal the relationship in question, the SEC also likely felt confident that it could prove that Craigie caused Church & Dwight’s proxy materials to falsely identify him as an independent director. Director independence is a fact-intensive inquiry that public companies and their boards must proactively undertake. Now would be a great time for public companies to review their compliance policies and procedures, including director and officer questionnaire forms and executive and board training materials.
If you have a question not answered above, please email the authors directly or, if applicable, contact your primary Bass, Berry & Sims relationship attorney.