Tag: Shareholder rights


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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Are Companies Impermissibly Bundling Proposals for Shareholder Votes?

Randall S. Thomas is a John S. Beasley II Professor of Law and Business at Vanderbilt Law School. This post is based on the article Are Companies Impermissibly Bundling Proposals for Shareholder Votes? by Professor Thomas, James D. Cox, Fabrizio Ferri, and Colleen Honigsberg. Related research from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

Recognizing that shareholders face a distorted set of choices when management “bundles” more than one separate item into the same proxy proposal, in 1992 the SEC enacted a pair of rules meant to protect shareholders from this practice. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote, and instead forces them to cast a vote on the single proposal as a whole. This management practice may force shareholders to choose between rejecting the entire proposal or approving items they might not otherwise want implemented (as with the proverbial spoonful of sugar to help the medicine go down, shareholders may be required to accept the good with the bad). To better protect the shareholder franchise, the SEC’s bundling rules prohibit joining together multiple voting items into a single proposal with a single box on the ballot. While these basic principles are easily stated, in practice the rules have been difficult to implement.

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Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims

The following post comes to us from Mark Lebovitch and Jeroen van Kwawegen of Bernstein Litowitz Berger & Grossmann 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.

The Delaware Supreme Court’s May 8, 2014 Opinion in ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP”) marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. The article, Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims, asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Accordingly, the authors support the March 6, 2015 proposal from the Delaware Corporation Law Council to legislatively prohibit the use of fee-shifting provisions in the public company context. Rather than simply criticize ATP and support the legislative proposal, we propose a carefully tailored answer to frivolous litigation, which mitigates abuses, conforms to longstanding legal principles, and preserves the benefits of board accountability and meritorious stockholder litigation.

First, the article argues that directors must not be permitted to use their corporate and fiduciary powers as a weapon to avoid accountability to the stockholders whose assets they manage. The authors detail the policy and legal problems with the concept of allowing directors to impose fee shifting bylaws, putting in question the relationship between stockholders and boards that forms the foundation of the modern public corporation. If ATP applies to public corporations, the Delaware Supreme Court, sub silentio, reversed several bedrock principles of Delaware corporate law and upset the balance of powers between stockholders and boards that has been in existence for decades.

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Shareholders in the United Kingdom

The following post comes to us from Paul L. Davies, Senior Research Fellow at Harris Manchester College, University of Oxford. He was the Allen & Overy Professor of Corporate Law from 2009 to 2014 at University of Oxford, Faculty of Law. Work from the Program on Corporate Governance about lobbying includes Investor Protection and Interest Group Politics by Lucian Bebchuk and Zvika Neeman (discussed on the Forum here).

The United States and the United Kingdom are lumped put together as ‘dispersed shareholder’ jurisdictions and contrasted with the concentrated shareholdings found in the rest of the world. This paper, Shareholders in the United Kingdom, argues that it would be better to view the UK, at least over the past half century, as a semi-dispersed rather than as simply a dispersed shareholder jurisdiction, and that there are interesting contrasts between the UK and the US experience.

Whilst the typical company listed on the main market of the London Stock Exchange certainly lacks a single (or even a cohesive small group) of shareholders with legal control, neither does the typical company display atomised shareholdings, for example, where no single shareholder holds more than 1% of the voting rights. Typically, a coalition of six or so of the largest shareholders can put together enough votes to have a fighting chance of carrying a resolution at a shareholder meeting against the wishes of the management. The question thus becomes one of the incentives and disincentives for those shareholders to coordinate their actions.

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Proxy Advisors Clarify Proxy Access and Bylaw Amendments Voting Policies

The following post comes to us from Ariel J. Deckelbaum, partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

On the heels of SEC Chair White’s direction to the Division of Corporation Finance to review its position on proxy proposal conflicts under Exchange Act Rule 14a-8(i)(9), both Institutional Shareholder Services (“ISS”) and Glass Lewis have issued clarifying policies on proxy access, entering the fray of what is becoming the hottest debate this proxy season. The publication of ISS’s updated policy in particular means that market forces may have outpaced the SEC’s review process. In order to avoid risking a withhold or no-vote recommendation from ISS against their directors, many companies will be faced with the choice of (i) including any shareholder-submitted proxy access proposal in their proxy materials (either alone or alongside a management proposal) (ii) excluding the shareholder submitted proposal on the basis of a court ruling or no-action relief from the Division of Corporation Finance on a basis other than Rule 14a-8(i)(9) (conflict with management proposal) or (iii) obtaining withdrawal of the proposal by the shareholder proponent.

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2015 Benchmark US Proxy Voting Policies FAQ

Carol Bowie is Head of Americas Research at Institutional Shareholder Services Inc. (ISS). The following post relates to ISS’ 2015 Benchmark Proxy Voting Policies.

ISS is providing answers to frequently asked questions with regard to select policies and topics of interest for 2015:

Proxy Access Proposals

1. How will ISS recommend on proxy access proposals?

Drawing on the U.S. Securities and Exchange Commission’s (SEC) decades-long effort to draft a market-wide rule allowing investors to place director nominees on corporate ballots, and reflecting feedback from a broad range of institutional investors and their portfolio companies, ISS is updating its policy on proxy access to generally align with the SEC’s formulation.

Old Recommendation: ISS supports proxy access as an important shareholder right, one that is complementary to other best-practice corporate governance features. However, in the absence of a uniform standard, proposals to enact proxy access may vary widely; as such, ISS is not setting forth specific parameters at this time and will take a case-by-case approach when evaluating these proposals.

Vote case-by-case on proposals to enact proxy access, taking into account, among other factors:

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Say on Pay in Italian General Meetings

The following post comes to us from Sabrina Bruno at University of Calabria and Fabio Bianconi at Georgeson Srl.

Our paper, Say on Pay in Italian General Meetings: Results and Future Perspectives, provides an analysis of the empirical data of shareholders’ say on pay in Italian general meetings in 2012, 2013 and 2014. Say on pay, a shareholders’ advisory vote on a company’s remuneration policy, was introduced in Italy following the European Commission (EC) Recommendations N. 2004/913/EC, N. 2005/162/EC, N. 2009/384/EC and N. 2009/385/EC, which allowed member States to choose between implementing a binding or non-binding advisory shareholder vote on a company’s remuneration policy. Like most European states, Italy has opted for the “weaker” non-binding option. Reference is made to both approval votes (by controlling shareholders) and dissenting votes sometimes casted by minority shareholders (mainly, foreign institutional investors). The dissenting vote, in particular, shows a paramount critical value as originating by shareholders who are independent from the directors involved by the resolution—unlike the controlling shareholders who have nominated and subsequently elected the directors (to whom may often be linked by family or economic ties). In recent years, a significant increase in voting by minority shareholders, mainly foreign institutional investors, regarding—but not limited to—remuneration policies has been noted. This is a direct consequence of the procedural changes introduced by the Shareholder Rights’ Directive n. 36/2007/EC (e.g. record date, reduction of threshold to call special meeting, relaxation of proxy voting and solicitation rules, extension of time—prior to general meeting—to release relevant information for the items of the agenda and translation of documents into English, etc.).

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Governance Issues in Spin-Off Transactions

The following post comes to us from Stephen I. Glover, Partner and Co-Chair of the Mergers & Acquisitions practice at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn M&A Report by Mr. Glover, Elizabeth Ising, Lori Zyskowski, and Alisa Babitz. The complete publication, including footnotes, is available here.

Spin-off transactions require a focused, intensive planning effort. The deal team must make decisions about how best to allocate businesses, assets and liabilities between the parent and the subsidiary that will be spun-off. It must address complex tax issues, securities law questions and accounting matters, as well as issues related to capital structure, financing and personnel matters. In addition, it must resolve a long list of governance issues, including questions about the composition of the spin-off company board, the importance of mechanisms for dealing with conflicts of interest and the desirability of robust takeover defenses.

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SEC Allows Exclusion of Conflicting Proxy Access Shareholder Proposal

The following post comes to us from Yafit Cohn, Associate at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

On December 1, 2014, the Securities and Exchange Commission (“SEC”) issued a no-action letter, much awaited by the corporate community, to Whole Foods Market, Inc., concurring with the company that it may omit a proxy access shareholder proposal from its 2015 proxy materials. [1] The shareholder proposal, submitted by James McRitchie pursuant to Rule 14a-8, asked the Whole Foods board to amend the company’s governing documents to allow any shareholder or group of shareholders collectively holding at least three percent of the company’s shares for at least three years to nominate directors, which the company would then be required to list on its proxy statement. The proposal added that parties nominating directors “may collectively make nominations numbering up to 20% of the Company’s board of directors, or no less than two if the board reduces the number of board members from its current size.”

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Radical Shareholder Primacy

The following post comes to us from David Millon, the J.B. Stombock Professor of Law at Washington and Lee University.

My article, Radical Shareholder Primacy, written for a symposium on the history of corporate social responsibility, seeks to make sense of the surprising disagreement within the corporate law academy on the foundational legal question of corporate purpose: does the law require shareholder primacy or not? I argue that disagreement on this question is due to an unappreciated ambiguity in the shareholder primacy idea. I identify two models of shareholder primacy, the “radical” and the “traditional.” Radical shareholder primacy makes strong claims about both shareholder governance rights, conceiving of management as the shareholders’ agent, and also about corporate purpose, insisting that corporate law mandates shareholder wealth maximization. Because there is no legal basis for either of these claims, those who deny that shareholder primacy is the law are correct at least as to this model. However, the traditional version of shareholder primacy accords to shareholders a special place in the corporation’s governance structure vis-à-vis the corporation’s nonshareholder stakeholders, for example, with respect to voting rights and the right to bring derivative suits. Beyond this privileged position in the horizontal dimension, there is no maximization mandate and corporate law does very little to provide shareholders with the tools necessary to exercise governance powers; there is no primacy in the vertical dimension or on the question of corporate purpose. Nevertheless, this conception of shareholder primacy—modest as it is—is enshrined in corporate law. Those who deny that shareholder primacy is the law need to acknowledge this fact, but once it is understood that traditional shareholder primacy has little in common with the radical version there is no reason to be reluctant to do so.

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