Tag: Board independence

Delaware Courts and the Law Of Demand Excusal

Justin T. Kelton is an attorney specializing in complex commercial litigation at Dunnington, Bartholow & Miller, LLP. 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. 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.

Delaware courts have recently issued critical guidance regarding the contours of the demand excusal doctrine. The following cases outline the Delaware courts’ recent analyses on the issue.

Delaware Supreme Court Clarifies Analysis For Determining Director Independence

In Del. Cty. Emps. Ret. Fund v. Sanchez, Del. No. 702, 10/2/15, the Delaware Supreme Court clarified that, in considering whether a complaint has sufficiently pleaded a lack of independence, the Court of Chancery should not parse facts pled regarding personal relationships and those pled regarding business relationships as categorically distinct issues. Rather, the Court of Chancery must “consider in fully context” all of the “pled facts regarding a director’s relationship to the interested party.” Taking all of the facts together, the Delaware Supreme Court found that the plaintiff’s allegations that “a director has been close friends with an interested party for a half century” was sufficient to raise a pleading stage inference of interestedness because “close friendships of that duration are likely considered precious by many people, and are rare.”


Quadrant v. Vertin: Determining Rights of Creditors

Steven Epstein is a partner and Co-Head of the Mergers & Acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Epstein, J. Christian Nahr, Brad Eric Scheler, and Gail Weinstein. 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 Quadrant Structured Products Company, Ltd. v. Vertin (Oct. 20, 2015), the Delaware Court of Chancery, in a post-trial decision, rejected Quadrant’s challenges to transactions by Athilon Capital Corp., with Athilon’s sole stockholder (private equity firm Merced), after Athilon had returned to solvency following a long period of insolvency. Merced held all of Athilon’s equity and all of its junior notes; and both Quadrant and Merced held the company’s publicly traded senior notes. Quadrant challenged Athilon’s (i) repurchases of senior notes held by Merced (the “Note Repurchases”) and (ii) purchases of certain relatively illiquid securities owned by Merced (the “Securities Purchases”). A majority of the Athilon board that approved the challenged transactions was viewed by the court as non-independent (with two directors affiliated with Merced; the Athilon CEO; and two independent directors). Vice Chancellor Laster, applying New York law, rejected (i) Quadrant’s claims that the Note Repurchases (a) were prohibited by the indenture and (b) were fraudulent conveyances; and (ii) Quadrant’s derivative claim that the Note Repurchases and the Securities Purchases constituted a breach of the directors’ fiduciary duties.


Corporate Governance Responses to Director Rule Changes

Cindy Vojtech is an Economist at the Federal Reserve Board. This post is based on an article authored by Dr. Vojtech and Benjamin Kay, Economist at the U.S. Treasury’s Office of Financial Research.

Much of the corporate governance literature has been plagued by endogeneity problems. In our paper, Corporate Governance Responses to Director Rule Changes, which was recently made publicly available on SSRN, we use a law change as a natural experiment to test how firms adjust the choice and magnitude of governance tools given a floor level of monitoring from independent directors. Through this analysis, we can recover the structural relationship between inputs in the governance production function. We study these relationships with a new board of director dataset with a much larger range of firm size.

In 2002, U.S. stock exchanges and the Sarbanes-Oxley Act established minimum standards for director independence. These director rules altered firm choice of other tools for mitigating agency problems. On average, treated firms do not increase the size of their board, instead inside directors are replaced with outside directors.


Director Independence and Risks for M&A Financial Advisors

Jason M. Halper is a 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 September 28 and October 1, 2015, the Delaware Court of Chancery issued decisions in Caspian Select Credit Master Fund Limited v. Gohl, C.A. No. 10244-VCN and In re Zale Corporation Stockholders Litigation, C.A. No. 9388-VCP. On October 2, 2015, the Delaware Supreme Court decided Delaware County Employees Retirement Fund v. Sanchez, No. 702. The outcome for the director defendants in each case differed: the claims against the Zale directors were dismissed, the claims against directors in Caspian largely survived at the pleading stage, and the claims against the directors in Sanchez, where the Chancery Court had granted the defendants’ motion to dismiss, were reinstated when the Supreme Court reversed. These contrasting results largely are attributable to the existence in Zale of an independent board of directors, whereas the pleadings in Caspian and Sanchez sufficiently alleged that a majority of the boards of the companies at issue lacked independence. In addition, the Zale decision underscores again the risks confronting financial advisors to sellers in merger transactions, since the aiding and abetting fiduciary breach claim against the board’s financial advisor survived even though the fiduciary duty claims against the directors themselves were dismissed.


2015 Corporate Governance & Executive Compensation Survey

Creighton Condon is Senior Partner at Shearman & Sterling LLP. This post is based on the introduction to a Shearman & Sterling Corporate Governance Survey by Bradley SabelDanielle Carbone, David Connolly, Stephen Giove, Doreen Lilienfeld, and Rory O’Halloran. The complete publication is available here.

We are pleased to share Shearman & Sterling’s 2015 Corporate Governance & Executive Compensation Survey of the 100 largest US public companies. This year’s Survey, the 13th in our series, examines some of the most important governance and executive compensation practices facing boards today and identifies best practices and merging trends. Our analysis will provide you with insights into how companies approach governance issues and will allow you to benchmark your company’s corporate governance practices against the best practices we have identified.


Seven Myths of Boards of Directors

David Larcker is Professor of Accounting at Stanford University. This post is based on an article authored by Professor Larcker and Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford University. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen, and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang.

Corporate governance experts pay considerable attention to issues involving the board of directors. Because of the scope of the board’s role and the vast responsibilities that come with directorship, companies are expected to adhere to common best practices in board structure, composition, and procedures. Our paper, Seven Myths of Boards of Directors, which was recently made publicly available on SSRN, reviews seven commonly accepted beliefs about boards of directors that are not substantiated by empirical evidence.


ISS Global Policy Survey 2015-2016

Stuart H. Gelfond is a partner in the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Gelfond, Amy L. Blackman, Donald P. Carleen, and Jared Heady.

Recently, Institutional Shareholder Services Inc. (“ISS”) released the results of its global policy survey for 2015-2016 (the “Survey”). [1] The Survey reflects the results of 421 responses from a combination of institutional investors, corporate issuers, asset managers, pension funds, mutual funds, endowments and others. Each year, ISS typically considers the results of its annual global policy surveys when formulating proposed amendments to its Proxy Voting Guidelines. Below, we discuss some of the highlights of the Survey which may be a prelude to changes to be made by ISS to its Proxy Voting Guidelines in its next update.


Delaware Court Refinement of Director Independence Analysis

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 by Mr. Deckelbaum, Justin G. Hamill, Stephen P. LambJeffrey D. Marell, Frances Mi, and Matthew D. Stachel. 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 Delaware County Employees Retirement Fund, et al. v. Sanchez, et al., the Delaware Supreme Court held that stockholder plaintiffs in a derivative action adequately alleged facts to support a pleading-stage inference that a director was not independent from an interested director due to their close, 50-year friendship and significant business relationships consistent with that friendship. The court thus reversed the Delaware Court of Chancery’s holding on the defendants’ motion to dismiss that the plaintiffs had failed to adequately plead demand excusal. The court emphasized that Delaware courts must analyze all the particularized facts pled by the plaintiffs “in their totality and not in isolation from each other.”


Delaware’s Respect for Informed Stockholder Approval of Mergers

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Ryan A. McLeod, and Nicholas Walter. 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 an important ruling last week, the Delaware Supreme Court reaffirmed that control of Delaware companies lies in the boardroom and held that the deferential business judgment rule is the “appropriate standard of review for a post-closing damages action” when a third-party merger “has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015) (en banc).

The ruling affirms the Court of Chancery’s dismissal of a case challenging KKR’s $2.6 billion acquisition of KKR Financial Holdings LLC (“KFN”), about which we previously wrote. Attacking the trial court’s ruling, stockholder plaintiffs argued that KKR was KFN’s controlling shareholder (notwithstanding its small equity stake) because a KKR affiliate managed KFN’s day-to-day operations pursuant to a management agreement. The Supreme Court disagreed and confirmed that a minority stockholder will not be considered a controller without “a combination of potent voting power and management control such that the stockholder could be deemed to have effective control of the board without actually owning a majority of stock.” Because KKR was not a controlling stockholder, the transaction was not subject to entire fairness review.


Can Institutional Investors Improve Corporate Governance?

Craig Doidge is Professor of Finance at the University of Toronto. This post is based on an article authored by Professor Doidge; Alexander Dyck, Professor of Finance at the University of Toronto; Hamed Mahmudi, Assistant Professor of Finance at the University of Oklahoma; and Aazam Virani, Assistant Professor of Finance at the University of Arizona.

In our paper, Can Institutional Investors Improve Corporate Governance Through Collective Action?, which was recently made publicly available on SSRN, we examine whether a collective action organization of institutional investors can significantly influence firms’ governance choices. Growth in institutional investor ownership over the last few decades puts these investors in the position to have significant influence, particularly if they can work collectively and coordinate their efforts. But we have very limited evidence whether institutional investors are able to overcome the obstacles to collective action. We focus on the Canadian Coalition for Good Governance (CCGG), an organization of institutional investors whose mandate is to promote good governance. We use proprietary data on its private communications and find that its private engagements between owners and independent directors influenced firms’ adoption of majority voting and say-on-pay advisory votes, improved compensation structure and disclosure, and influenced CEO incentive intensity.


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