2015 Proxy Season Review

Janet T. Geldzahler is of counsel and Marc Trevino is a partner at Sullivan & Cromwell LLP. This post is based on the Summary of a Sullivan & Cromwell publication; the complete publication is available here.

Our 2015 Proxy Season Review summarizes significant developments relating to shareholder proposals to date during the 2015 proxy season. Although shareholder activists pursuing strategic or management changes continue to dominate the headlines, they do not choose to wage those campaigns through shareholder proposals made under Rule 14a-8, which are addressed by the complete publication, choosing instead private or public pressure, and often a threatened or actual proxy contest. Nonetheless, the widespread governance changes brought about through successful 14a-8 proposals have played no small part in the continued growth and success of shareholder activism.

During the 2015 proxy season, proxy access has been the most significant development. Far more proposals have been made and support has been substantially stronger. There have been 82 proxy access proposals to date in 2015, as opposed to 17 in all of 2014. In 2015, shareholders have approved 48 proposals to date (as opposed to five for all of 2014), and the average votes cast in favor have risen to 55% from 33% in 2014. Perhaps most significantly, modestly more restrictive management-enacted proxy access provisions apparently did not deter shareholders from proposing, and, in many cases, winning on the now standard shareholder proposal format of 3%/3-year/25% of board.

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Dodd Frank Turns 5

Gabriel D. Rosenberg is an associate in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication.

July 21, 2015 marked the 5th anniversary of President Obama signing the Dodd-Frank Act into law. Even though the Act is more than 800 pages in length, it is the Act’s 390 rulemaking requirements and the 307 proposed and final rules issued by Federal agencies to date that make up the vast bulk of new law and regulation affecting the U.S. financial system. The 22,296 pages of rulemakings and 631 regulatory releases touch on nearly every aspect of the U.S. economy, from requiring revisions to mortgage disclosures to providing transparency in the derivatives markets.

To highlight the 5th anniversary, we have developed a stats-driven infographic looking at the implementation of the Dodd-Frank Act, to date, and have updated our quarterly Dodd-Frank Progress report.

Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs

Robert Parrino is Professor of Finance at the University of Texas at Austin. This post is based on an article by Professor Parrino; Eliezer Fich, Associate Professor of Finance at Drexel University; and Anh Tran, Senior Lecturer in Finance at City University London. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here), Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In October 2000, the SEC enacted Rule 10b5-1 which enables managers to reduce their exposure to allegations of trading on material non-public information by announcing pre-planned stock sales up to two years in advance. In our paper, Timing Stock Trades for Personal Gain: Private Information and Sales of Shares by CEOs, which was recently made publicly available on SSRN, we examine the impact of Rule 10b5-1 on the gains that CEOs earn when they sell large blocks of stock.

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Risk Management and the Board of Directors

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Daniel A. Neff, Andrew R. Brownstein, Steven A. Rosenblum, and Adam O. Emmerich.

Introduction

Overview

Corporate risk taking and the monitoring of risks have continued to remain front and center in the minds of boards of directors, legislators and the media, fueled by the powerful mix of continuing worldwide financial instability; ever-increasing regulation; anger and resentment at the alleged power of business and financial executives and boards, including particularly as to compensation during times of economic uncertainty, retrenchment, contraction, and changing dynamics between U.S., European, Asian and emerging market economies; and consistent media attention to corporations and economies in crisis. The reputational damage to companies and their boards that fail to properly manage risk is a major threat, and Institutional Shareholder Services now includes specific reference to risk oversight as part of its criteria for choosing when to recommend withhold votes in uncontested director elections. This focus on the board’s role in risk management has also led to increased public and governmental scrutiny of compensation arrangements and the board’s relationship to excessive risk taking and has brought added emphasis to the relationship between executive compensation and effective risk management. This post highlights a number of issues that have remained critical over the years and provides an update to reflect emerging and recent developments.

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Court of Chancery Upholds Customary Release in Spin-Off Transactions

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 a Wachtell Lipton publication by Mr. Katz, William Savitt, and Ryan A. McLeod. 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.

The Delaware Court of Chancery last week validated a release of liability that extinguished certain claims a recently spun-off company may have had against its former parent and its directors. In re AbbVie Inc. Stockholder Derivative Litig., C.A. No. 9983-VCG (Del. Ch. July 21, 2015). The decision confirms that the mutual releases customary in spin-off arrangements are presumptively appropriate and enforceable.

Abbott Laboratories spun off AbbVie, its research-based pharmaceutical subsidiary, in January 2013. Before the spin, Abbott was a defendant in a False Claims Act action alleging unlawful off-label marketing of an AbbVie product. As part of the spin-off, AbbVie broadly released all claims it might have against Abbott or any Abbott affiliate relating to assets transferred to AbbVie, including liability for the False Claims Act claim.

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Binding Spincos to Parent Obligations Requires Specificity

Matt Salerno is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Salerno, Christopher Condlin, and Christina Prassas. 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 Miramar Police Officers’ Retirement Plan v. Murdoch [1] the Delaware Court of Chancery dismissed plaintiff’s claims, refusing to hold that an “unambiguous” boilerplate successors and assigns clause operated to bind a spun-off company to the terms of a contract entered into by its former parent company. The contract at issue generally restricted the former parent company from adopting a poison pill with a term of longer than one year without obtaining shareholder approval. The decision will serve as a reminder to practitioners to carefully consider the impact that significant corporate transactions could have on their clients’ contractual rights and obligations.

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Delaware Court of Chancery Rejects M&A Litigation Settlement

Ariel J. Deckelbaum is a partner and deputy chair of the Corporate Department 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 Acevedo v. Aeroflex Holding Corporation, in connection with a stockholder suit that challenged the sale of a company with a controlling stockholder to a third party, the Delaware Court of Chancery rejected a settlement which provided a global release of claims in exchange for a reduced termination fee and a shortening of the matching-rights period by one day, holding that these deal protections were not impediments to competing bidders and therefore were insufficient to support a global release.

In 2014, Aeroflex agreed to sell itself to a third-party and a class-action challenging the transaction was subsequently commenced. After engaging in discovery and consulting with third-party experts, the plaintiff concluded that the consideration offered to the Aeroflex stockholders fell within a range of reasonable value for Aeroflex’s shares, but that the proxy omitted certain material facts. The parties agreed to a settlement where the plaintiff granted the defendants a global release of all possible claims in exchange for modifying the deal protections by (i) reducing the termination fee by over 40% from $32 million to $18 million, and (ii) shortening the matching rights period from four business days to three business days. Additionally, the defendants agreed to make certain supplemental disclosures in the proxy.

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Appraisal Arbitrage—Is There a Delaware Advantage?

Gaurav Jetley is a Managing Principal and Xinyu Ji is a Vice President at Analysis Group, Inc. This post is based on a recent article authored by Mr. Jetley and Mr. Ji. The complete publication, including footnotes, is available here. 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.

Market observers have devoted a fair amount of attention to possible reasons underlying the recent increase in appraisal rights actions filed in the Delaware Chancery Court. A number of commentators have connected such an increase to recent rulings reaffirming appraisal rights of shares bought by appraisal arbitrageurs after the record date of the relevant transactions. Other reasons posited for the current increase in appraisal activity include the relatively high interest rate on the appraisal award and a belief that the Delaware Chancery Court may feel more comfortable finding fair values in excess of, rather than below, the transaction price.

In our paper Appraisal Arbitrage—Is There a Delaware Advantage?, we examine the extent to which economic incentives may have improved for appraisal arbitrageurs in recent years, which may help explain the increase in appraisal activity. We investigate three specific issues.

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Outsourcing: How Cyber Resilient Are You?

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Bruce Oliver, Roozbeh Alavi, Garit Gemeinhardt, Amandeep Lamba, and Joe Walker.

Cyber attacks on financial institutions continue to increase, both in number and impact. While the industry’s defenses against cyber criminals have been improving, recent high-profile breaches indicate that many cyber risk areas remain under addressed.

Regulators are particularly concerned that the industry’s third-party service providers are a weak link that cyber attackers can exploit. [1] Financial institutions have become increasingly reliant on the information technology (IT) services these providers offer, either directly through the outsourcing of IT or indirectly through outsourced business processes that heavily rely on IT (e.g., loan servicing, collections, and payments). [2] Regardless, banks remain ultimately responsible—they own their service providers’ cyber risks.

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Boardroom Perspectives: Oversight of Material Litigation in Four Practical Steps

Jeff G. Hammel is a partner and member of the Litigation Department at Latham & Watkins LLP. This post is based on a Latham publication by Mr. Hammel, Steven B. Stokdyk, Joel H. Trotter, and Jenna B. Cooper.

Public companies in the United States are subject to litigation in various areas, including: shareholder litigation; government investigations and enforcement actions; environmental litigation and intellectual property disputes. While certain litigation may be frivolous or merely routine, other claims may be costly and potentially damaging to the company’s bottom line, reputation, or both. It is important that boards be equipped to manage and mitigate risks associated with litigation deemed material to the company. The following tips are designed to give boards a framework from which to approach litigation oversight.

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