Category Archives: Practitioner Publications

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.

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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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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What the Allergan/Valeant Story Teaches About Staggered Boards 

Arnold Pinkston is former General Counsel at Allergan, Inc. and Beckman Coulter, Inc. This post comments on the work of institutional investors working with the Shareholder Rights Project, (discussed on the Forum here, here, and here) which successfully advocated for board declassification in about 100 S&P 500 and Fortune 500 companies.

Until March 2015, I was the Executive Vice President and General Counsel of Allergan, Inc. For much of 2014 my job was to address the hostile bid launched by Valeant and Pershing Square to acquire Allergan.

With that perspective, I followed with interest the debate surrounding staggered boards, and in particular the success of institutional investors working with the Shareholder Rights Project in bringing about board declassification in over 100 S&P 500 and Fortune 500 companies. From my perspective, the debate did not seem to fully reflect the complexity of the relationship between a company and its shareholders—i) that each company and each set of shareholders is unique; ii) that destaggering a board can affect the value of companies positively, negatively or hardly at all; and iii) that shareholders, each from their own unique perspective, will be searching for factors that will determine whether annual elections are in their own best interests—not the company’s. For that reason, I respectfully offer my thoughts regarding the campaign to destagger boards.

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The Changing Dynamics of Governance and Engagement

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here. 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.

As anticipated, the 2015 proxy season has been the “Season of Shareholder Engagement” for U.S. public companies. Activist attacks, high-profile battles for board seats, and shifting alliances of major investors and proxy advisors have created an environment in which shareholder engagement is near the top of every well-advised board’s to-do list. There is no shortage of advice as to how, when, and why directors should pursue this agenda item, and there is no doubt that they are highly motivated to do so. Director engagement is a powerful tool if used judiciously by companies in service of their strategic goals. As companies and their advisors study the lessons of the recent proxy season and look ahead, it is worth examining recent shifts in corporate governance dynamics. With an awareness of the general trends, and by taking specific actions as appropriate, boards can prepare and adapt effectively to position themselves as well as possible to achieve their strategic objectives.

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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
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