Delaware Courts Provide Guidance on Incumbent Board Enforcement of Advance Notice Bylaws

Edward Micheletti is a Partner and Ryan Lindsay is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; and Dancing with Activists (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch.

In late 2021 and early 2022, two decisions from the Court of Chancery addressing advance notice bylaws reiterated, consistent with long-standing Delaware law, that clear and unambiguous advance notice bylaws will be enforced. These decisions also noted that application of such bylaws remains subject to equitable review to determine if the incumbent board acted manipulatively or otherwise inequitably in rejecting stockholder board nominees.[1] However, these decisions also articulated slightly different standards of review — with the court in the first decision holding that under the court’s equitable review a stockholder could prove “compelling circumstances” justifying a finding of inequitable conduct, while the court in the second decision expressly applied enhanced scrutiny, placing the burden on the incumbent board to demonstrate it acted reasonably.[2]

The Court of Chancery’s most recent decision on this topic further reiterates that clear and unambiguous bylaws will be enforced. Furthermore, the decision clarifies that enhanced scrutiny focusing on the reasonableness of incumbent board conduct is the standard of review that applies to the application of even validly enacted advance notice bylaws. Therefore, when assessing a board’s application of an advance notice bylaw, the court will analyze whether the board has identified proper corporate objectives and has justified its actions as reasonable in relation to those objectives.


Update on ESG, Stakeholder Governance, and Corporate Purpose

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, Adam O. EmmerichKevin S. SchwartzSabastian V. Niles and Anna M. D’Ginto. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto TallaritaDoes Enlightened Shareholder Value add Value (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition (discussed on the Forum here) by Mark J. Roe.

As we previously described (most recently here and here), environmental, social, and governance (ESG) topics have become prominent (and polarized) political issues in recent months.  In the two months since our last update, significant developments in the attack on ESG have occurred in a few areas, as illustrated in the examples set out below.  In providing this update, we underscore that the public and political scrutiny of ESG must not dissuade directors and officers from confronting and addressing ESG risks — to the contrary, fiduciary duties and Caremark obligations require it, and the long-term value of the corporation depends on it.

Asset Managers, ESG Funds, and Proxy Advisory Firms.  The major asset managers remained in the spotlight, with BlackRock in particular subject to continued criticism due to CEO Larry Fink’s outspoken support for ESG.  For example, Florida announced that it would begin divesting $2 billion worth of assets currently managed by BlackRock.  Louisiana, Missouri, South Carolina, Arkansas, Utah, and West Virginia made similar announcements over the course of 2022.  ESG funds have also been affected, suffering significant outflows in 2022 with more money flowing out of than into such funds for the first time in over a decade.  Finally, the proxy advisory firms have become targets of the anti-ESG coalition, joining asset managers as a punching bag for opponents of so-called “woke” capitalist policies.  In January 2023, 21 Republican attorneys general authored a letter to Institutional Shareholder Services and Glass Lewis, the two major proxy advisory firms in the United States, challenging whether their net-zero emissions policies are based on the financial interests of investment beneficiaries rather than on other social goals, and asserting that their boardroom diversity policies may violate contractual and fiduciary duties as well as state anti-discrimination laws. 


Preparing for the 2023 Proxy Season

David M. Lynn, Scott Lesmes, and John Hensley are Partners at Morrison & Foerster LLP. This post is based on a Morrison & Foerster memorandum by Mr. Lynn, Mr. Lesmes, Mr. Hensley, and Leemor Banai.

Public companies need to consider recent developments when preparing for the 2023 proxy and annual reporting season. We summarize key regulatory developments, recent guidance, important disclosure considerations and updates to the voting guidelines of the proxy advisory firms.

Pay Versus Performance

In August 2022, the SEC adopted the pay versus performance disclosure requirements that the SEC was directed to promulgate by the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act).[1] Companies (subject to certain exceptions discussed below) will need to comply with these disclosure requirements in proxy and information statements that are required to include Item 402 executive compensation disclosure for fiscal years ending on or after December 16, 2022.

New Item 402(v) of Regulation S-K requires that companies provide a new table disclosing specified executive compensation and financial performance measures for the company’s five most recently completed fiscal years. This table will include, for the principal executive officer (PEO) and, as an average, for the company’s other named executive officers (NEOs), the summary compensation table measure of total compensation and a measure of “executive compensation actually paid,” as specified by the rule. The financial performance measures to be presented in the table are:

  • Cumulative total shareholder return (“TSR”) for the company;
  • TSR for the company’s self-selected peer group;
  • The company’s net income; and
  • A financial performance measure chosen by the company and specific to the company that, in the company’s assessment, represents the most important financial performance measure the company uses to link compensation actually paid to the company’s NEOs to company performance for the most recently completed fiscal year.


Weekly Roundup: January 20-26, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 20-26, 2023

Compensation Season 2023

Get boardroom ready: five ways to improve executive interactions with the board

Amendments to Rule 10b5-1’s Defense to Insider Trading Liability & Related Disclosures

M&A Predictions and Guidance for 2023

The CEO’s ESG dilemma

Financing Year in Review: The Tide Turns

How Twitter Pushed Stakeholders Under The Bus

ISS Updates Frequently Asked Questions for Equity Compensation Plans, Peer Group Selection and Compensation Policies

SEC Strategic Plan for Fiscal Years 2022-2026

Amendments to Rules Governing Trading Plans and Insider Filings

Oversight of Proxy Voting Advisors: US and EU Regulators Converge

Oversight of Proxy Voting Advisors: US and EU Regulators Converge

Stephen M. Davis is a Senior Fellow at the Harvard Law School Program on Corporate Governance and Chair of the Best Practice Principles Oversight Committee (OC) 2020-2022; and Konstantinos Sergakis is a Professor of Capital Markets Law and Corporate Governance, University of Glasgow, and Chair of the OC 2023-Present.

The proxy voting advisory and research industry, which includes leaders ISS and Glass Lewis, are increasingly at the center of a whipsaw debate between those who urge that investor stewardship be constrained and those who advocate for it to be enhanced. Regulators have long been drawn into the vortex. But until recently two of the world’s prominent market watchdogs—the US Securities and Exchange Commission (SEC) and the European Securities and Markets Authority (ESMA)—had taken opposite tacks on how to address the industry. Today they have converged on the same path, as first became clear in an under-reported October 2022 conference in Rome. There an SEC representative, speaking virtually, spelled out for the first time the Commission’s new, EU-like approach to proxy advisory and research firms.

Implications of this regulatory conjunction have immediate consequences for proxy advisors, as well as for companies and investors on both sides of the Atlantic. Before we address those effects, however, it is important to spotlight the two regulators’ perspectives.

ESMA’s road has been consistent. In 2013, facing issuer calls to install hard rules on proxy advisors, the Authority instead asked the industry to develop its own code of best practice. Five rival firms—ISS, Glass Lewis, Manifest, PIRC, and Proxinvest (now part of Glass Lewis)—collaborated to respond with global-scope principles that tackled service quality, potential conflicts of interest, and communications. Federated Hermes’s EOS arm later joined the original group of signatories.


Amendments to Rules Governing Trading Plans and Insider Filings

Eleazer Klein and Adriana Schwartz are Partners, and Daniel A. Goldstein is an Associate at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum. Related Program research includes Insider Trading Via the Corporation (discussed on the Forum here) by Jesse Fried.

On Dec. 14, 2022, the Securities and Exchange Commission (the “SEC”) adopted amendments to Rule 10b5-1 under the Securities Exchange Act of 1934 (the “Exchange Act”), that include, among other things, changes to Rule 10b5-1(c)(1)’s affirmative defense to insider trading liability under Section 10(b) and Rule 10b-5 under the Exchange Act. These changes are aimed at addressing concerns that have long been raised as to whether corporate insiders purport to utilize 10b5-1 plans under the affirmative defense in situations that in fact involve opportunistic trading while in possession of material non-public information (“MNPI”). As discussed below, the amendments may impact fund managers who have board representation or otherwise have access to MNPI. The SEC also adopted amendments to Forms 4 and 5 filed under Section 16 of the Exchange Act to require that filers identify transaction that have been executed pursuant to 10b5-1 plans as well requiring Forms 4 to be filed to report gifts of securities (and no longer allow for deferred reporting of gifts on Form 5).


SEC Strategic Plan for Fiscal Years 2022-2026

Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on the Securities and Exchange Commission’s Strategic Plan for FY 2022 through FY 2026.

Our Goals

Protecting the Investing Public; Maintaining a Robust, Relevant Regulatory Framework; Supporting a Skilled and Diverse Workforce

The United States has the largest, most sophisticated, and most innovative capital markets in the world. U.S. capital markets represent about 40 percent of the global capital market. Companies and investors access the U.S. capital markets at a higher rate than do market participants in other economies with their respective markets. For example, debt capital markets account for 80 percent of financing for non-financial corporations in the United States. By contrast, outside the United States, nearly 80 percent of lending to such firms comes from banks. U.S. capital markets continue to support American competitiveness on the world stage because of the strong investor protections the SEC offers.

The United States cannot take its remarkable capital markets for granted. New financial technologies continue to change the face of finance for investors and businesses. Global markets are inextricably linked, with money flowing between them in microseconds. While more retail investors than ever before are accessing U.S. markets, other countries are developing competitive markets.


ISS Updates Frequently Asked Questions for Equity Compensation Plans, Peer Group Selection and Compensation Policies

Shaun Bisman is a Partner and Jared Sorhaindo is an Associate at Compensation Advisory Partners. This post is based on their CAP memorandum. Related research from the Program on Corporate Governance includes Paying for long-term performance (discussed on the Forum here) by Lucian Bebchuk and Jesse M. Fried; and Rationalizing the Dodd-Frank (discussed on the Forum here) by Jesse M. Fried.

ISS recently issued Frequently Asked Questions (FAQs) documents related to equity compensation plans, the peer group selection methodology and issuer submission process, and compensation policies. The equity compensation plan FAQs cover topics under the rubric of ISS’ Equity Plan Scorecard (EPSC) and the compensation policies FAQs cover compensation topics more broadly. This update highlights select new and materially updated questions.

Equity Compensation Plans FAQs

Burn Rate

As discussed in our previous CAP Alert, “ISS Publishes Proxy Voting Guidelines Updates for 2023,” dated December 6, 2022, ISS changed its calculation of burn rate and now calls it the Value-Adjusted Burn Rate (VABR), which will go into effect for meetings on or after February 1, 2023. A company’s 3-year average adjusted burn rate as a percentage of weighted average common shares outstanding, as compared to a benchmark, is a scored factor in certain models of the Equity Plan Scorecard. The VABR benchmarks are broken out by the company’s two-digit GICS group (S&P 500) and four-digit GICS group (Russell 3000, excluding the S&P 500, and Non-Russell 3000). ISS also established a de minimis benchmark threshold separately for each of these three groupings. The VABR benchmarks and de minimis thresholds can be found in the Appendix of the FAQs and are also presented below this article.


How Twitter Pushed Stakeholders Under The Bus

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School; Kobi Kastiel is Professor of Law at Tel Aviv University, and Senior Fellow of the Harvard Law School Program on Corporate Governance; and Anna Toniolo is Postdoctoral Fellow at the Program on Corporate Governance of Harvard Law School. This post is based on the authors’ recent paper. A post by the authors on their project and their take on the subject was published earlier here.

Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here); Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here), by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain (discussed on the Forum here); Stakeholder Capitalism in the Time of COVID (discussed on the Forum here); Does Enlightened Shareholder Value Add Value? (discussed on the Forum here), all by Lucian Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Response to the War in Ukraine: Stakeholder Governance or Stakeholder Pressure? (discussed on the Forum here), by Anete Pajuste and Anna Toniolo.

We just posted on SSRN a new discussion paper, How Twitter Pushed Stakeholders under the Bus.(An earlier post noting our work on this project and our take on the subject is available here.)

This paper provides a case study of the acquisition of Twitter by Elon Musk. Our analysis indicates that when negotiating the sale of their company to Musk, Twitter’s leaders chose to disregard the interests of the company’s stakeholders and to focus exclusively on the interests of shareholders and the corporate leaders themselves. In particular, Twitter’s corporate leaders elected to push under the bus the interests of company employees, as well as the mission statements and core values to which Twitter had pledged allegiance for years.

Our analysis supports the view that the stakeholder rhetoric of corporate leaders, including in corporate mission and purpose statements, is mostly for show and is not matched by their actual decisions and conduct (Bebchuk and Tallarita (2020)). Our findings also suggest that corporate leaders selling their company should not be relied upon to safeguard the interests of stakeholders, contrary to the predictions of the implicit promises and team production theories of Coffee (1986), Shleifer-Summers (1988) and Blair-Stout (1999).

Here is a more detailed overview of our paper:


Financing Year in Review: The Tide Turns

John Sobolewski and Greg Pessin are Partners and Joel Simwinga is a Law Clerk at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Sobolewski, Mr. Pessin, Mr. Simwinga, Joshua Feltman, Michael Benn, and Emily Johnson.

2022 brought a halt to a nearly unabated 12-year run of booming credit markets and “lower for longer” interest rates. Rampant inflation, fears of a recession over the horizon, and war in Europe, among other factors, led to a marked contraction in credit availability and a slowdown in deal-making across sectors and credit profiles. U.S. high-yield bond issuances were down approximately three quarters year-over-year – the lowest volume since 2008 – while newly minted leveraged loans fell nearly two-thirds from 2021 levels. Investment-grade bond issuances fared better, but were still down significantly, with new issuances falling roughly 20% year-over-year. At year end, the average price for leveraged loans was just over 92 cents on the dollar, down from 99 at the year’s beginning. And high-yield bond prices fell significantly further – with an average price of 87 cents in December, down from 103 at start of the year. Average yields for single-B bonds rose from under 4.7% on the first trading day of the year to over 9.2% on the last, and average BBB bond yields more than doubled, from 2.7% to 5.8% over the same period.

Looking ahead to 2023, with risk-free rates and credit spreads still elevated and the credit, deal making, regulatory and geopolitical environments uncertain, corporate borrowers and sponsors will need to plan rigorously to succeed on levered acquisitions and spin-offs and important refinancings. Obtaining committed financing, in particular, will require both creativity and avoiding the urge to let the perfect become the enemy of the good.


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