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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Effective Regulatory Oversight and Investor Protection Requires Better Information

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It is said that, “knowledge is power.” Knowledge, however, requires information. And there is no doubt we live in an age of information. The advent of the Internet and the breathtaking technological advances we have witnessed over the last few decades have given us access to more information than at any time in history. The available data seems to be limitless—and all available at the touch of a fingertip.

Yet, when I joined the Commission, it quickly became apparent that the SEC did not have the breadth and quality of information necessary to do its job effectively. As our country experienced the worst financial crisis since the Great Depression, and, as things began to unravel, I sought data and information to analyze the impact of what was occurring—only to find that much of the information available to the Commission was missing, stale, or incomplete.

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The Importance of Merger Price and Process in Delaware Appraisal Actions

Jason M. Halper is partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Gregory Beaman. 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.

On April 30, 2015, the Delaware Court of Chancery issued a post-trial opinion in which it rejected an attempt by dissenting shareholders to extract extra consideration for their shares above the merger price through appraisal rights. See Merlin Partners LP v. AutoInfo, Inc., Slip. Op. Apr. 30, 2015, Case No. 8509-VCN (Del. Ch. Apr. 30, 2015). Vice Chancellor Noble’s decision in AutoInfo offers important lessons for companies, directors and their counsel when considering strategic transactions and/or defending against claims that they agreed to sell the company at an inadequate price. AutoInfo reaffirms that a negotiated merger price can be the most reliable indicator of value when it is the product of a fair and adequate process.

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More than 300 Research Papers Have Applied the Entrenchment Index of Bebchuk, Cohen and Ferrell (2009)

This post relates to an article by Lucian Bebchuk, Alma Cohen and Allen Ferrel, What Matters in Corporate Governance, available here and discussed on the Forum here. Lucian Bebchuk is William J. Friedman and Alicia Townsend Friedman Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Alma Cohen is Professor of Empirical Practice, Harvard Law School. Allen Ferrell is Greenfield Professor of Securities Law, Harvard Law School.

As of May 2015, more than 300 research studies have applied the Entrenchment Index put forward in a study published by Lucian Bebchuk, Alma Cohen and Allen Ferrell, What Matters in Corporate Governance. The papers using the Entrenchment Index, including many papers in leading journals in law, economics and finance, are listed here.

The Bebchuk-Cohen-Ferrell paper, first circulated in 2004 and published in 2009 in the Review of Financial Studies, identified six corporate governance provisions as especially important, demonstrated empirically the significance of these provisions for firm valuation and put forward a governance index, commonly referred to as the “Entrenchment Index,” based on these six provisions. The paper has been cited by more than 650 research studies, and more than 300 of these studies made use of the index in their own empirical analysis.

The Bebchuk-Cohen-Ferrell paper putting forward the Entrenchment Index is available for download here.

DuPont’s Victory in the Proxy Fight with Trian

Francis J. Aquila is a partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Aquila, H. Rodgin Cohen, Melissa Sawyer, and Lauren S. Boehmke. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

On May 13, 2015, E. I. du Pont de Nemours and Company, a major chemical company with a market cap of approximately $68 billion, defeated a proxy campaign run by Trian Fund Management, L.P., the activist fund led by Nelson Peltz that owns approximately 2.7% of DuPont. Trian was seeking four seats on DuPont’s board of directors. DuPont announced this morning that all 12 of its incumbent directors were reelected at DuPont’s annual meeting of shareholders. Although the two most influential proxy advisory firms, Institutional Shareholder Services Inc. and Glass Lewis & Co., both supported Trian’s slate of director nominees, DuPont’s three largest institutional shareholders, The Vanguard Group, Blackrock, Inc. and State Street Corporation, all voted in favor of DuPont’s slate.

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Delaware Court Strengthens Protections for Independent Directors

J.D. Weinberg is a partner at Covington & Burling LLP. The following post is based on a Covington publication authored by Mr. Weinberg and Daniel Alterbaum. 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 Supreme Court held last week that a plaintiff seeking monetary damages from an independent, disinterested director protected by an exculpatory charter provision must specifically plead a non-exculpated claim against the director to survive a motion to dismiss. [1] This rule applies regardless of the standard of review applied to the board’s conduct in respect of a challenge to a corporate transaction and includes directors of any special committee negotiating a transaction with a controlling stockholder. As a result, for any corporation whose charter includes a director exculpation clause that mirrors Section 102(b)(7) of the Delaware General Corporation Law, an independent director can obtain dismissal of any claim seeking only monetary damages that does not specifically allege a breach of the fiduciary duties of loyalty and good faith or the prohibition against self-dealing.

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Supporters of Transparency Should Work with the SEC, Not Take it to Court

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

In July 2011, we co-chaired a committee of ten corporate and securities law experts that petitioned the Securities and Exchange Commission to develop rules requiring public companies to disclose their political spending. As reflected on the SEC’s webpage for comments filed on the petition, the SEC has now received more than 1.2 million comments on the proposal—more than any rulemaking petition in the SEC’s history. Earlier this week, a suit was filed in the federal court for the District of Columbia, relying in part on our petition and the broad support it has received, seeking an injunction requiring the SEC to initiate rulemaking on the subject. As explained below, this litigation is unhelpful to the broadly supported effort to obtain disclosure that would shed light on corporate political spending.

To be sure, we are disappointed that the SEC has not yet started the rulemaking process urged by our petition. At the end of 2012, the Director of the SEC’s Division of Corporation Finance acknowledged the widespread support for the petition, and the Commission placed the proposal on its regulatory agenda for 2013. Unfortunately, Chairman Mary Jo White faced considerable political pressure from Congress not to develop rules that would require disclosure of corporate spending on politics, and the Commission has thus far delayed any further consideration of rules in this area. As we explained in earlier posts on the Forum (see, for example, posts here and here), we view the delay as unfortunate and unwarranted in light of the compelling arguments for disclosure, the breadth of support that the petition has received, and the weakness of the objections that opponents have been able to raise.

While the SEC would do well to initiate rulemaking without further delay, we view the attempt to force the Commission to act through court action as unhelpful for two reasons. First, while the SEC’s delay in initiating rulemaking is regrettable, the SEC’s behavior thus far does not come close to satisfying the demanding conditions for judicial intervention. The court should thus not be expected to provide the injunction requested by the lawsuit.

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  • Programs Faculty & Senior Fellows

    Lucian Bebchuk
    Alon Brav
    Robert Charles Clark
    John Coates
    Alma Cohen
    Stephen M. Davis
    Allen Ferrell
    Jesse Fried
    Oliver Hart
    Ben W. Heineman, Jr.
    Scott Hirst
    Howell Jackson
    Robert J. Jackson, Jr.
    Wei Jiang
    Reinier Kraakman
    Robert Pozen
    Mark Ramseyer
    Mark Roe
    Robert Sitkoff
    Holger Spamann
    Guhan Subramanian

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    William Ackman
    Peter Atkins
    Joseph Bachelder
    John Bader
    Allison Bennington
    Richard Breeden
    Daniel Burch
    Richard Climan
    Jesse Cohn
    Isaac Corré
    Scott Davis
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    Larry Hamdan
    Carl Icahn
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    Paul Rowe
    Rodman Ward