The Standard of Review for Dell’s IPO

Jeffrey L. Kochian and Stuart E. Leblang are partners and Jason Sison is an associate at Akin Gump Strauss Hauer & Feld LLP. This post is based on their Akin Gump memorandum. Related research from the Program on Corporate Governance includes The Perils of Dell’s Low-Voting Stock, by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Dell Technologies Inc. (Dell) has been planning to eliminate its tracking stock (Class V common; NYSE: DVMT) through a merger with a wholly-owned subsidiary that effectively converts the outstanding DVMT shares into a new class of publicly traded Dell common stock. Each DVMT share (which collectively track about half of VMware Inc. [1]) will be cancelled and converted into the right to receive, at the election of the holder, either: (1) 1.3665 shares of Dell Class C common stock, which will be listed on the New York Stock Exchange, or (2) $109 in cash, without interest (subject to a $9 billion cap) (the DVMT Exchange). [2]

However, many tracking stock holders have been reluctant to support the DVMT Exchange. [3] On October 15, activist shareholder Carl Icahn released an open letter to DVMT shareholders disclosing that he had increased his stake from 1.2 percent (as of June 30) to 8.3 percent and that he will do everything in his power “to stop this proposed DVMT merger” including, possibly, offering “a competing partial bid that provides partial liquidity without forcing a merger.” [4]

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Women in the Boardroom and Cultural Beliefs about Gender Roles

David McLean is Associate Professor of Finance and Anderson Faculty Fellow at the McDonough School of Business at Georgetown University; Christo A. Pirinsky is an Associate Professor at the Department of Finance of the UCF College of Business; and Mengxin Zhao is a Financial Economist at the U.S. Securities and Exchange Commission. This post is based on their recent paper.

In our study, we ask whether cultural beliefs about gender roles can help explain variation in the representation (or lack thereof) of women in corporate leadership roles. Female corporate leadership varies a good deal across firms, both internationally, and in the U.S. As examples, during the period 2000-2016, in an international sample of 42 countries, on average 9.2% of corporate board members are female (excluding country-years that require female board membership), while the 25th and 75th percentiles are 0% and 17%. Similar effects exist within the U.S, where on average 10.2% of corporate board members are female, and the 25th and 75th percentiles are 0% and 16.7%. In this paper, we ask whether some of this variation can be explained by regional differences in cultural beliefs towards the role of women in society.

We measure cultural beliefs about gender roles using two country-level surveys conducted by the University of Michigan (The World Values Survey) and Hofstede (1980). We create a comprehensive country-level gender-egalitarian index that is based on the standardized values of the two surveys, and test whether it explains variation in female corporate leadership.

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Implementing Internal Controls in Cyberspace—Old Wine, New Skins

Keith Higgins is chair of the securities and governance practice and Marvin Tagaban is an associate at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

On October 16, 2018, the SEC issued a Section 21(a) investigative report (the “Report”), [1] cautioning public companies to consider cyber threats when designing and implementing internal accounting controls. The Report arose out of an investigation focused on the internal accounting controls of nine public companies that were victims of “business email compromises” in which perpetrators posed as company executives or vendors and used emails to dupe company personnel into sending large sums to bank accounts controlled by the perpetrators. In the investigation, the SEC considered whether the companies had complied with the internal accounting controls provisions of the federal securities laws. Although the Report is in lieu of an enforcement action against any of the issuers, the SEC issued the Report to draw attention to the prevalence of these cyber-related scams and as a reminder that all public companies should consider cyber-related threats when devising and maintaining a system of internal accounting controls.

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A Brief Survey of Environmental, Social, and Governance Disclosure in Canada

Ravipal S. Bains is an associate at McMillan LLP. This post is based on a McMillan memorandum by Mr. Bains. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

  • Regulators, investors, and other stakeholders have increased their expectations of board oversight and disclosure on environmental, social and governance (ESG) matters.
  • Quality of ESG disclosure will be a factor in recommendations by proxy advisory firms.
  • Enhancing ESG disclosure (particularly, climate-related risks) should be a management priority.

As 2018 draws to a close, certain recent developments, including new policy prescriptions from regulators, guidance from stakeholders, and adoption of environmental accounting frameworks, call for a review of the landscape of environmental, social, and governance (ESG) disclosure in Canada. Management and boards should also tailor future efforts to address these developments and this post offers certain suggestions to do so.

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Drafting Considerations from the MAC Decision

Gail Weinstein is senior counsel, and Steven Epstein and Matthew V. Soran are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Soran, Robert C. SchwenkelDavid L. Shaw, and Andrew J. Colosimoand is part of the Delaware law series; links to other posts in the series are available hereRelated research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

In Akorn v. Fresenius (Oct. 1, 2018), the Delaware Court of Chancery found for the first time ever that a target company had suffered a “material adverse effect” (MAC) between the signing and closing of a merger agreement, which entitled the acquiror to terminate the agreement. The 246-page opinion by Vice Chancellor Laster also serves essentially as a primer on how the court may interpret certain standard provisions in merger agreements and in corporate contracts generally.

Below, we provide (i) a summary of Key Points relating to the decision; (ii) a summary of the factual background and the court’s holdings; and (iii) a review of the court’s discussion of various agreement provisions. We also offer practice points, including specific drafting considerations, that arise from the opinion. We note that the decision is being appealed, thus further explication of these issues may follow.

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Reforming the Community Reinvestment Act Regulatory Framework

Gregory W. Meeks is U.S. Representative (D-NY). This post is based on a recent comment letter addressed to Comptroller Joseph M. Otting (Office of the Comptroller of the Currency) authored by Congressman Meeks and joined by his New Democrat Coalition colleagues who serve on the House Committee on Financial Services.

The undersigned Members of Congress serve on the House Committee on Financial Services and are part of the New Democrat Coalition, an organization of forward-thinking Democrats who are committed to pro-economic growth and pro-innovation policies supporting Main Street workers and entrepreneurs.

We recognize the Community Reinvestment Act’s (“CRA”) regulatory framework is due for modernization and we conceptually support the federal banking regulators undertaking a reform effort to update and improve consistency in CRA examination, crediting, and remedial standards. Nonetheless, we encourage the Office of the Comptroller of the Currency (“OCC”) to incorporate the principles below to strengthen banks’ affirmative obligation to meet the credit needs of their communities in a safe and sound way, including the needs of financial consumers and small business entrepreneurs located in low- and moderate-income (“LMI”) communities.

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MFW’s “Ab Initio” Requirements for Business Judgement Rule Review

Joshua Apfelroth, Jason Halper, and William Mills are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Apfelroth, Mr. Halper, Mr. Mills, and Chelsea Donafeld. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here); Adverse Selection and Gains to Controllers in Corporate Freezeouts by Lucian Bebchuk and Marcel Kahan; and The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In Flood v. Synutra Int’l Inc., the Delaware Supreme Court clarified its holding in Kahn v. M&F Worldwide Corp. (“MFW”). In MFW, the Court held that the business judgment rule—rather than the entire fairness standard—applies to a controlling stockholder transaction if such transaction is conditioned “ab initio,” or at the beginning, upon approval of both an independent special committee of directors and the informed vote of a majority of the minority stockholders (the “MFW Conditions”). At issue in Flood was whether the Court of Chancery properly applied the business judgment rule to a controlling stockholder acquisition of Synutra International even though the controlling stockholder did not include the MFW Conditions in its initial proposal to acquire Synutra, but instead included such conditions in a follow-up letter sent two weeks later. Chief Justice Strine, writing for the majority, affirmed the Delaware Court of Chancery’s decision, which held that the MFW Conditions need not be included in the controlling stockholder’s initial expression of interest for the transaction to be afforded business judgment protection; instead, business judgment protection will be afforded so long as the MFW Conditions are in place before any substantive economic negotiations occur between the special committee, the board of directors and the controlling stockholder.

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The Perils of Dell’s Low-Voting Stock

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and Senior Fellow at Harvard Law School Program on Corporate Governance. This post is based on their recent paper, The Perils of Dell’s Low-Voting Stock. The paper is part of the work of the Research Project on Controlling Shareholders of the Harvard Law School Program on Corporate Governance. The Project’s related work includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

Dell Technologies Inc. (“Dell”) is planning a “backdoor-IPO” transaction that would bring it back to the public market with a multiclass structure. In a short paper we recently placed on SSRN, The Perils of Dell’s Low-Voting Stock, we identify and analyze three governance risks and costs that Dell’s IPO structure would create for public investors holding Dell’s low-voting stock:

  • Lifetime entrenchment of Michael Dell (“MD”): He would be able to retain control indefinitely even after he ceases to be a fitting leader and even if he becomes disabled or incompetent.
  • Small-minority controller: Although MD would initially hold a majority of the equity capital, Dell’s structure would enable him to unload most of his shares and still retain control even with a small equity stake, and his status as small-minority controller would be expected to produce substantial governance risks and costs.
  • Midstream changes: Dell’s governance structure would enable MD to adopt subsequent changes in governance arrangements, without any support from public investors, which would increase Dell’s governance risks beyond the risks associated with a small-minority controller.

Each of these governance risks can be expected to both (i) decrease the expected future value of Dell by increasing agency costs and distortions, and (ii) increase the discount to a per-share value of Dell at which low-voting shares of Dell can be expected to trade. Both types of effects would operate to reduce the value at which the low-voting shares of public investors would trade and therefore should be taken into account in assessing the risks to such investors posed by Dell’s planned structure.

Below is a more detailed account of our analysis:

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The Proxy Process Roundtable

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent remarks at the Proxy Process Roundtable, available here. The views expressed in the post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning and thank you to the Divisions of Corporation Finance and Investment Management for organizing this roundtable. I hope that everyone here will take this opportunity to engage in a thoughtful, meaningful discussion on the proxy process. If the process were perfect, we would not be here today [Nov. 15, 2018]. The topics on the agenda have the tendency to get emotional. Trust me, we know where most, if not all, of you stand on the issues. You have a platform today and I hope you use it to provide us with specific examples, data, and facts rather than generalities or anecdotes. With the knowledge you gather today, you can then submit data to the comment file based on these discussions. We look forward to these submissions and your suggestions on how the SEC can make changes to improve the process.

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Weekly Roundup: November 9-15, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of November 9–15, 2018.



Decoding Quant ESG


The Limits of Mutual Fund Obligation to Shareholders


Investment Bank Liability for M&A Services



The SEC’s New Shareholder Proposal Guidance


Lessons from the CBS-NAI Dispute, Part V: “Independent” Directors at Controlled Corporations


Private Equity Indices Based on Secondary Market Transactions


The 2018 U.S. Spencer Stuart Board Index


What the Tesla Settlement Means for Other Companies


CFO Pay Stagnancy


The Untenable Case for Keeping Investors in the Dark




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