Tag: Boards of Directors


Delaware Court: Seating Board Designee Subject to Reasonable Conditions Not a Breach

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 authored by Mr. Epstein, Robert C. Schwenkel, John E. Sorkin, 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 Partners Healthcare Solutions Holdings, L.P. v. Universal American Corp. (June 17, 2015), the Delaware Chancery Court granted summary judgment to defendant Universal American Corp. (“UAM”), rejecting the contentions of one of UAM’s largest stockholders, Partners Healthcare Solutions Holdings (“Partners”), that UAM had breached a board seat agreement by imposing conditions on the seating of Partners’ designee to the UAM board that were not provided for in the agreement. Partners, a subsidiary of a private equity firm, acquired its stake in UAM through, and the board seat agreement had been entered into in connection with, UAM’s acquisition of a subsidiary of Partners (the “Portfolio Company”). The dispute relating to the seating of Partners’ board designee arose at the same time that UAM and Partners were involved in a separate fraud litigation arising from the Portfolio Company’s performance after the merger.

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Corporate Litigation: Disinterested Directors and “Entire Fairness” Cases

Joseph M. McLaughlin is a Partner in the Litigation Department at Simpson Thacher & Bartlett LLP. The post is based on a Simpson Thacher client memorandum by Mr. McLaughlin, and 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.

Under Delaware law, where a controlling shareholder stands on both sides of a corporate transaction that is challenged by minority stakeholders, the controller presumptively bears the burden of proving the entire fairness of the transaction, i.e. “both fair dealing and fair price.” Conversely, disinterested directors—those with no financial stake in the transaction—may be liable for breach of fiduciary duty only where they have breached a non-exculpated duty in connection with the negotiation or approval of the transaction.

Delaware General Corporation Law §102(b)(7) authorizes corporations to include a provision in the certificate of incorporation exculpating their directors from money damages claims based on breach of the duty of care, but not the duty of loyalty. Delaware courts have long held that a §102(b)(7) charter provision “entitles directors to dismissal of any claims for money damages against them that are based solely on alleged breaches of the board’s duty of care.” [1] The overwhelming majority of Delaware corporations have adopted exculpatory provisions.

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Getting to Know You: The Case for Significant Shareholder Engagement

F. William McNabb III is Chairman and CEO of Vanguard. This post is based on Mr. McNabb’s recent keynote address at Lazard’s 2015 Director Event, “Shareholder Expectations: The New Paradigm for Directors.”

I’ll begin my remarks with a premise. It’s a simple belief that I have. And that is: Corporate governance should not be a mystery. For corporate boards, the way large investors vote their shares should not be a mystery. And for investors, the way corporate boards govern their companies should not be a mystery. I believe we’re moving in a direction where there is less mystery on both sides, but each side still has some work to do in how it tells its respective stories.

So let me start by telling you a little bit about Vanguard’s story and our perspective. I’ll start with an anecdote that I believe is illustrative of some of the headwinds that we all face in our efforts to improve governance: “We didn’t think you cared.” A couple of years ago, we engaged with a very large firm on the West Coast. We had some specific concerns about a proposal that was coming to a vote, and we told them so.

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D&O Liability: A Downside of Being a Corporate Director

Alex R. Lajoux is chief knowledge officer at the National Association of Corporate Directors (NACD). This post is based on a NACD publication authored by Ms. Lajoux. 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.

One of the few downsides to board service is the exposure to liability that directors of all corporations potentially face, day in and day out, as they perform their fiduciary duties. The chance of being sued for a major merger decision is now 90 percent; but that well known statistic is just the tip of an even larger iceberg. The Court of Chancery for the state of Delaware, where some one million corporations are incorporated (among them most major public companies), hears more than 200 cases per year, most of them involving director and officer liability. And given the high esteem in which Delaware courts are held, these influential D&O liability decisions impact the entire nation.

This ongoing story, covered in the May-June issue of NACD Directorship magazine, recently prompted the National Association of Corporate Directors (NACD) to take action. Represented by the law firm Gibson Dunn & Crutcher LLP, NACD filed an amicus curiae (“friend-of-the-court”) brief in the matter of In re Rural/Metro, a complex case likely to continue throughout the summer. Essentially, the Court of Chancery ruled against directors and their advisors, questioning their conduct in the sale of Rural/Metro to a private equity firm.

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Governance Challenges Arising From “Corporate Cooperation” Concepts

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine, with assistance from Joshua T. Buchman and Kelsey J. Leingang; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

The current Department of Justice emphasis on “corporate cooperation” in the context of government investigations creates the potential for significant tension to arise between governance and executive leadership, which potential should be recognized and addressed proactively by the board.

The DOJ Criminal Division has, with notable frequency this spring, sought to increase public transparency as to the process it applies when making a decision with respect to corporate prosecutions. A principal goal of DOJ’s public effort is to clarify the parameters it considers in deciding how to proceed when made aware of alleged corporate wrongdoing. This goal includes making the value of cooperation, and the consequences of noncooperation, more clearly apparent to corporations and their advisors. [1]

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Audit Committees: 2015 Mid-Year Issues Update

Rick E. Hansen is Assistant Corporate Secretary and Managing Counsel, Corporate Governance, at Chevron Corporation.

Board audit committee agendas continue to evolve as companies are faced with a rapidly-changing global business landscape, the proliferation of standards and regulations, increased stakeholder scrutiny, and a heightened enforcement environment. In this post, I summarize current issues of interest for audit committees.

The Audit Committee And Oversight

During her remarks at the Stanford Directors’ College in June 2014, SEC Chair Mary Jo White observed that “audit committees, in particular, have an extraordinarily important role in creating a culture of compliance through their oversight of financial reporting.” [1] Since then, various Commissioners of the SEC and its Staff have reinforced this message by reminding companies of the audit committee’s duties under federal securities laws to:

  • oversee the quality and integrity of the company’s financial reporting process, including the company’s relationship with the outside auditor;
  • oversee the company’s confidential and anonymous whistleblower complaint policies and procedures relating to accounting and auditing matters; and
  • report annually to stockholders on the performance of these duties.

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Failing to Advance Diversity and Inclusion

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; 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.

Today [June 9, 2015], the Securities and Exchange Commission failed to take meaningful steps to advance diversity and inclusion in the financial services industry, as required by Section 342 of the Dodd-Frank Act. Accordingly, I have no choice but to dissent from the Final Interagency Policy Statement Establishing Joint Standards for Assessing the Diversity Policies and Practices of Entities Regulated by the Agencies (the “Final Policy Statement”) that was issued today by the SEC and a number of other financial regulators.

The financial services industry has a long history of failing to promote diversity in its workforce. The industry has consistently failed to recruit and retain a diverse workforce over the years, and the need is particularly acute at the executive and senior management levels. This lack of diversity has persisted despite the mounting evidence that diversity makes the American workforce more creative, more diligent, and more productive—and, thus, makes U.S. companies more profitable.

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Brain Drain or Brain Gain? Evidence from Corporate Boards

Mariassunta Giannetti is Professor of Economics at the Stockholm School of Economics. This post is based on an article by Professor Giannetti; Guanmin Liao, Associate Professor of Accounting at the School of Accountancy, Central University of Finance and Economics; and Xiaoyun Yu, Associate Professor of Finance at Indiana University, Bloomington.

Development economists have long warned about the costs for developing countries of the emigration of the best and brightest that decamp to universities and businesses in the developed world (Bhagwati, 1976). While this brain drain has attracted a considerable amount of economic research, more recently, arguments have been raised that the emigration of the brightest may actually benefit developing countries, because emigrants may eventually return with more knowledge and organizational skills. (See The Economist, May 26, 2011.) Thus, the brain drain may actually become a brain gain.

In our paper, Brain Drain or Brain Gain? Evidence from Corporate Boards, forthcoming in the Journal of Finance, we demonstrate a specific channel through which the brain gain arising from return migration to emerging markets may benefit the overall economy: the brain gain in the corporate boards of publicly listed companies. Specifically, we highlight the effects of individuals with foreign experience joining the boards of directors on firms’ performance and corporate policies in China.

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“Dead Hand Proxy Puts”—What You Need to Know

F. William Reindel is partner and member of the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Reindel, Stuart H. Gelfond, Daniel J. Bursky, 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.

There has been much recent concern and confusion over the inclusion of “dead hand proxy puts” (and even proxy puts without a “dead hand” feature) in debt agreements. Dead hand proxy puts (sometimes called “poison puts” or “board change of control provisions”) provide a type of change of control protection that banks, as well as parties to many types of non-debt commercial agreements, have frequently utilized, without controversy. Nonetheless, dead hand proxy puts are now under attack. While proxy puts without a dead hand feature are generally not being challenged, based on recent case law, these provisions in most cases will not permit a bank to accelerate the debt on a change of control of the borrower’s board (as explained below).

Dead hand proxy puts. A proxy put permits the lender to accelerate debt if a majority of the borrower’s board becomes comprised of “non-continuing directors” over a short period of time (usually one or two years). “Continuing directors” are persons who were on the board when the debt contract was entered into or replacement directors who were approved by a majority of those directors or their approved replacements. The “dead hand” feature provides that any director elected as a result of an actual or threatened proxy contest will be considered a non-continuing director for purposes of the proxy put.

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Practice Points Arising From the El Paso Decision

John E. Sorkin is a partner in the corporate practice at Fried, Frank, Harris, Shriver & Jacobson LLP. The following post is based on a Fried Frank publication authored by Mr. Sorkin, Philip Richter, Abigail Pickering Bomba, 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.

The Delaware Chancery Court recently ruled, in In re El Paso Pipeline Partners, L.P. Derivative Litigation (Apr. 20, 2015), that the general partner of a master limited partnership (MLP) was liable to the MLP for the $171 million by which the court determined that the MLP had overpaid for liquefied natural gas (LNG) assets purchased from its parent company for $1.4 billion in a typical “dropdown” transaction. In a separate memorandum (available here and discussed on the Forum here), we have discussed the decision and our view that it will have limited applicability given the unusual factual context. We note that the court’s extremely negative view of the conduct of the conflict committee and its investment banker offers a blueprint for how not to conduct a conflict committee process. We offer the following practice points arising out of the decision.

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