Related Party Transactions—Lessons from the El Paso MLP Decision

Christopher E. Austin is a partner focusing on public and private merger and acquisition transactions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Austin. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In his recent decision in In Re: El Paso Pipeline Partners, L.P. Derivative Litigation [1], Vice Chancellor Laster awarded $171 million in damages to the limited partners of a master limited partnership (“MLP”) that had challenged the MLP’s acquisition of assets from a related party. The transaction at issue—a so-called “dropdown” of assets—involved the sale to the MLP by its controller and general partner (El Paso Corporation) of certain LNG-related assets in exchange for approximately $1.41 billion in cash.

One of the important stated benefits of using MLP structures is the ability to “contract away” from normal Delaware fiduciary duty principles and instead provide that related-party transactions will be evaluated under standards specified in the partnership agreement for the MLP. The relevant standard for the El Paso MLP was on its face quite challenging for the plaintiffs. In particular, the partnership agreement simply

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CEO Visibility: Are Media Stars Born or Made?

Ed deHaan is Assistant Professor of Accounting at Stanford University. This post is based on an article authored by Mr. deHaan and Elizabeth Blankespoor, Assistant Professor of Accounting at Stanford University.

In our paper, CEO Visibility: Are Media Stars Born or Made?, which was recently made publicly available on SSRN, we investigate whether CEOs and/or their firms can use strategic disclosure to affect media coverage of the CEO. We predict that CEOs and/or firms can reduce journalists’ direct production costs via strategic “CEO promotion” in firm disclosures, where “promotion” refers to the extent to which the CEO is individually represented in the firm’s press release. Specifically, we predict that CEO promotion reduces journalists’ expected costs by providing low-cost CEO-specific content, signaling to journalists that the CEO is available for further inquiries, and better catching journalists’ attention. If the CEO and/or firm can effectively reduce journalists’ production costs, then the probability of the journalist writing about the CEO should increase, potentially increasing CEO visibility and its related benefits (Falato, Li, and Milbourn 2014).

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Lazard v. Qinetiq: Important Lessons for Structuring Earn-Outs

David W. Healy and Douglas N. Cogen are partners and co-chairs of the Mergers & Acquisitions Group at Fenwick & West LLP. The following post is based on a Fenwick publication by Mr. Healy and Mr. Cogen. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

A recent Delaware Supreme Court case authored by Chief Justice Strine upholds the literal meaning of an earn-out provision that limited the buyer from taking action “intended to reduce or limit an earn-out payment.” The court rejected the argument that buyer’s actions, which it likely knew would reduce the likelihood of an earn-out payment, met the intent-based standard the parties had agreed on in lieu of various affirmative post-closing covenants that had been rejected by the buyer. The court also rejected the seller’s argument that it could rely on the implied covenant of good faith and fair dealing to impose an objective standard and thereby avoid the burden to prove that the buyer intentionally violated such provision. The case has implications for buyers’ and seller’s negotiating strategies around post-closing operations covenants related to earn-outs and as to the impact of such covenants on the interpretation of the implied covenant of good faith and fair dealing. The case is Lazard Technology Partners, LLC, v. Qinetiq North America Operations LLC, April 23, 2015, Strine, L., 2015 WL 1880153, and it can be found at http://business.cch.com/srd/LazardTechnology-v-Qinetiq.pdf.

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Are Companies Impermissibly Bundling Proposals for Shareholder Votes?

Randall S. Thomas is a John S. Beasley II Professor of Law and Business at Vanderbilt Law School. This post is based on the article Are Companies Impermissibly Bundling Proposals for Shareholder Votes? by Professor Thomas, James D. Cox, Fabrizio Ferri, and Colleen Honigsberg. Related research from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

Recognizing that shareholders face a distorted set of choices when management “bundles” more than one separate item into the same proxy proposal, in 1992 the SEC enacted a pair of rules meant to protect shareholders from this practice. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote, and instead forces them to cast a vote on the single proposal as a whole. This management practice may force shareholders to choose between rejecting the entire proposal or approving items they might not otherwise want implemented (as with the proverbial spoonful of sugar to help the medicine go down, shareholders may be required to accept the good with the bad). To better protect the shareholder franchise, the SEC’s bundling rules prohibit joining together multiple voting items into a single proposal with a single box on the ballot. While these basic principles are easily stated, in practice the rules have been difficult to implement.

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Fed Supervision: DC in the Driver’s Seat

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Dan Weiss, Adam Gilbert, and Armen Meyer.

On April 17th, the Board of Governors of the Federal Reserve System (“Fed”) issued a better-late-than-never Supervisory Letter, SR 15-7, describing its governance structure for supervising systemically important financial institutions under its so-called Large Institution Supervision Coordinating Committee (“LISCC”). [1] Though much of the structure has been in place for years, the Fed had not publicly explained in detail its supervisory process, leading some in Congress and elsewhere to criticize its secrecy.

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Guiding Principles of Good Governance

Stan Magidson is President and CEO of the Institute of Corporate Directors and Chair of the Global Network of Directors Institutes (GNDI). This post is based on a recent GNDI perspectives paper, available here.

The Global Network of Director Institutes (GNDI), the international network of director institutes, has issued a new perspectives paper to guide boards in looking at governance beyond legislative mandates.

The Guiding Principles of Good Governance were developed by GNDI as part of its commitment to provide leadership on governance issues for directors of all organisations to achieve a positive impact.

Aimed at providing a framework of rules and recommendations, the 13 principles laid out in the guideline cover a broad range of governance-related topics including disclosure of practices, independent leadership and relationship with management, among others.

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Dealing with Director Compensation

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the complete publication, including footnotes, is available here. The views expressed are the authors’ and do not necessarily represent the views of the partners of Wachtell, Lipton, Rosen & Katz or the firm as a whole. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Due to a recent Delaware Chancery Court ruling, the topic of director compensation currently is facing an uncharacteristic turn in the spotlight. Though it receives relatively little attention compared to its higher-profile cousin—executive compensation—director compensation can be a difficult issue for boards if not handled thoughtfully. Determining the appropriate form and amount of compensation for non-employee directors is no simple task, and board decisions in this area are subject to careful scrutiny by shareholders and courts.

The core principle of good governance in director compensation remains unchanged: Corporate directors should be paid fair and reasonable compensation, in a mix of cash and equity (as appropriate), to a level that will attract high-quality candidates to the board, but not in such forms or amounts as to impair director independence or raise questions of self-dealing. Further, director compensation should be reviewed annually, and all significant decisions regarding director compensation should be considered and approved by the full board.

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Delaware Court: Compensation Awards to Directors Subject to Entire Fairness

Robert B. Schumer is partner, chair of the Corporate Department, and co-head of the Mergers and Acquisitions Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss Client Memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Calma v. Templeton, the plaintiff alleged that a board of directors breached their fiduciary duties in awarding themselves restricted stock units (RSUs) pursuant to a stockholder-approved equity incentive compensation plan. The Court of Chancery held on a motion to dismiss that (i) the directors were interested in the award of the RSUs, and (ii) although the stockholders had approved the plan under which the RSUs were awarded, stockholder approval of the plan could not act as ratification because the plan did not include enough specificity as to the amount or form of compensation to be issued. The court, therefore, held that the awards were to be reviewed under the non-deferential entire fairness standard, rather than under the business judgment rule, and declined to dismiss the plaintiff’s breach of fiduciary duty claim.

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Human Rights Through A Corporate Governance Lens

George Dallas is Policy Director at International Corporate Governance Network (ICGN). The following post is based on an ICGN publication by Mr. Dallas and Lauren Compere, Managing Director at Boston Common Asset Management; the complete publication, including annexes, is available here.

Human rights [1] are attracting increasing attention from a corporate governance perspective as a dimension of both business ethics and enterprise risk management for companies. Indeed, the ethical and risk dimensions are in many ways intertwined, insofar as ethical lapses or inattention to human rights practices by companies may not only breach the human rights of those affected by corporate behaviour, but may also have material commercial consequences for the company itself. In extreme cases human rights problems can pose a franchise risk to companies [2]; in lesser cases these can increase costs and damage valuable relationships with stakeholders.

In a broad governance context human rights cannot be simply framed as a reputational or “non-financial” risk; the consequences of poor human rights practices can materially impact a company’s stakeholder relations, financial performance and prospects for sustainable value creation. Accordingly, human rights is an issue warranting greater attention from long-term investors as a matter of investment analysis, valuation and engagement with companies.

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Modernizing and Enhancing Investment Company and Investment Adviser Reporting

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning, everyone. This is an open meeting of the Securities and Exchange Commission on May 20, 2015 under the Government in the Sunshine Act.

The Commission today will consider two recommendations of the staff to modernize and augment the information reported by both registered investment companies, which include mutual funds and ETFs, and investment advisers. These proposals are part of a series of rulemakings to enhance the SEC’s monitoring and regulation of the asset management industry. We will discuss the two recommendations together and then will vote separately on each following the discussion.

The oversight of funds and advisers is one of the most important functions of the Commission. Over the past 75 years, our regulatory program for asset management has grown and adapted, guided by our mission, to address the challenges of this important, ever-evolving and growing area of our financial markets. Today, we once again are doing that.

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