Yearly Archives: 2009

Musings: SEC’s Proposal to Report Voting Results

Posted by Broc Romanek, TheCorporateCounsel.net, on
Thursday, August 6, 2009
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This post is by Broc Romanek of TheCorporateCounsel.net.

For those that regularly read my blog, you know I was happy to see the SEC propose a requirement that would force companies to disclose the voting totals from their shareholder meetings more timely. It has always amazed me that some companies stonewall on the vote results – it’s a poor PR move as it riles shareholders (see this example) and they have to disclose it eventually. But I imagine they do this in the hope that shareholders – and the financial press – will lose interest in the story.

The SEC proposes that disclosure be made within four business days after the end of a shareholder meeting (on a Form 8-K or a periodic report). For a contested director election, the 8-K would be due within 4 business days after the preliminary voting results are determined. The proposal begs the question as to when “preliminary voting results are ‘determined'” (i.e. trigger date). Maybe I’m missing it, but there doesn’t seem to be any exception for other types of contested matters? Anyways, if it’s a contested director election, there could be two Form 8-Ks – one within four business days after the meeting’s end based on a preliminary vote and another one within four business days of the final vote being certified.

Importance of Tabulation Process

On page 44 of the SEC’s proposing release, the SEC provides its discussion of this proposal – and a cost analysis is on page 96. Understandably, there is not a detailed discussion of the tabulation process and what’s involved. But as I wrote about in the Fall ’08 issue of InvestorRelationships.com (it’s free; just need to input contact info) – in my interview with Carl Hagberg – the time is now for companies to rethink how they process their votes as well as who they hire to do it.

For starters, you probably want to hire only those inspectors that have a well-defined process about how they inspect – and you probably should hire only those inspectors whom you feel comfortable would pass muster under the pressures of litigation (eg. an entity that is independent – perhaps one is not your transfer agent). With the loss of broker nonvotes, we can expect closer elections and more litigation over voting results. You need to protect yourself and not rely on procedures that historically have been pretty loose.

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Internal Contradictions in the SEC’s Proposed Proxy Access Rules

Posted by Joseph Grundfest, Stanford Law School, on
Wednesday, August 5, 2009
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Professor Grundfest’s post is based on extracts (with footnotes removed) from his Working Paper of the same name published by the Rock Center For Corporate Governance on July 24, 2009; the complete Working Paper, including footnotes, can be downloaded from Social Sciences Research Network Electronic Paper Collection here.)

Administrative agencies are wise not to contradict themselves when rulemaking: contradictions invite courts to overturn agency action as arbitrary and capricious. Also like Charles Barkley’s claim that he was misquoted in his autobiography, contradictions spawn skepticism as to the credibility of an entire enterprise.

This simple observation strikes a death knell for the Securities and Exchange Commission’s 2009 proposed Proxy Access Rules. If adopted, these rules would dramatically transform the process by which directors of publicly traded corporations are nominated and elected. They would establish a “Mandatory Minimum Access Regime” under which corporations would be compelled, even against the will of the shareholder majority, to provide proxy access in accordance with SEC-established standards. Shareholders could, by majority vote, set less stringent access standards, but could not adopt more stringent proxy access rules.

The Commission proposes to add one new rule and amend an existing rule:

• Proposed Rule 14a-11 would provide for proxy access in the event a nominating shareholder, or group of shareholders, of a large accelerated filer have, for at least one year, held one percent or more of the company’s voting securities. Access would not be available to stockholders seeking a change in control, or to stockholders seeking more than a limited number of seats on a board. Nominating stockholders would be required to make certain disclosures, subject to the antifraud provisions of Rule 14a-9. These disclosures include representations that the nominees satisfy the objective criteria for director independence set forth in listing standards, that there is no agreement with the company regarding the nomination of the nominees, and that the nominating stockholders intend to continue holding the requisite number of shares through the date of the stockholder meeting. Disclosure would also be required of relationships between the nominating stockholders, the nominee, and the company, if any.

• Modifications to Rule 14a-8(i)(8) would recast the election exclusion so as to require that companies include in their proxy materials stockholder proposals that would amend, or propose to amend, the company’s governing documents regarding shareholder nominations. The proposals could not, however, weaken or eliminate the proxy access criteria prescribed by proposed Rule 14a-11.

Taken together, the Proposed Rules create a mandatory form of proxy access to be imposed on all publicly traded corporations subject to the rule, even if the majority of each corporation’s shareholders object strenuously to the operation of the Proposed Rules. The Proposed Rules would permit modifications making access easier for stockholder-nominated directors, but forbid modification making access more difficult. Again, the will of the shareholder majority is irrelevant to the Commission. The Proposed Rules are thus accurately described as creating a “Mandatory Minimum Access Regime.”

The text of the Proposing Release is, however, at war with the text of the Proposed Rules in a clash that generates two profound contradictions. Each contradiction is sufficiently material that there is little prospect that the Proposed Rules can withstand challenge under the Administrative Procedure Act (“APA”).

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An Analysis of ETF Voting Policies, Practices and Patterns

Posted by Andrew Tuch, co-editor, HLS Forum on Corporate Governance and Financial Regulatio, on
Wednesday, August 5, 2009
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This post is by Scott Fenn, Senior Managing Director, Proxy Governance Inc.

The Investor Responsibility Research Center Institute and PROXY Governance Inc. recently released an in-depth analysis of the proxy voting policies and recent voting records of seven of the largest exchange-traded fund (ETF) sponsors, which account for some 94% of the ETF market. Entitled “Proxy Voting by Exchange-Traded Funds: An Analysis of ETF Voting Policies, Practices and Patterns,” the study was commissioned by the non-profit IRRC Institute and conducted by PROXY Governance.

The findings indicate a considerable variation in the voting patterns and philosophies of these funds. The key research findings are as follows:

• There appear to be significant differences in the level of detail of proxy voting guidelines utilized by ETF sponsors. The ETF sponsors in the study that relied on guidelines provided by proxy advisory firms appear to have the most detailed and comprehensive, and prescriptive, guidelines. At the other end of the spectrum, Rydex has very summary guidelines that stipulate voting with management on virtually all issues.

• There is significant variation in the voting philosophies and patterns of the largest ETF sponsors, with some funds much more likely to vote against management on both shareholder and management-sponsored proposals than other funds

The three largest ETF sponsors are somewhat less likely to vote against management on shareholder and management proposals than are most of the smaller fund sponsors examined in this study. Yet, the three largest ETF sponsors, on average, appear to withhold votes from incumbent director nominees at a greater number of companies than the smaller funds, which appears to be their preferred means of expressing dissatisfaction with management or board governance rather than voting against management on specific proposals.

• The votes by the specific funds at selected 2008 annual meetings are generally consistent with the written voting policies of those funds. Case-by-case voting policies by many funds on most issues explain much of this consistency. In a few cases, however, specific votes were cast that appear to be potentially contrary to the fund’s written voting guidelines.

• Funds that rely heavily on a proxy advisory firm for voting guidelines or to make their vote decisions tend to vote against management proposals, and in favor of shareholder proposals, more frequently than those that rely on their own guidelines.

The study covers the following seven ETF sponsors – Barclays Global Investors (iShares), State Street Global Advisors (SPDRs), Vanguard Group (Vanguard ETFs), Invesco Ltd. (PowerShares), ProFunds (ProShares), Rydex Investments (RydexShares) and WisdomTree Trust (WisdomTree ETFs). (NB: Barclay’s Plc recently announced that it would sell its Barclay’s Global Investors asset management division, the single largest ETF manager, to BlackRock, Inc.)

The full report is available here and here.

Regulate financial pay to reduce risk-taking

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, August 4, 2009
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Editor’s Note: This post is based on an op-ed piece by Lucian Bebchuk published in today’s print edition of the Financial Times and available here.

A bill requiring federal regulators to draw up rules for compensation structures in the   financial sector was passed by the US House of Representatives on Friday and will be taken up by the US Senate. Such pay regulations, which authorities around the world are considering, will meet stiff resistance from financial institutions. Yet the case in their favour is compelling.

While the need to reform pay arrangements is now widely accepted, many believe that such reforms should be left to corporate boards and that government intervention should be limited to ensuring the adequacy of corporate governance processes. The Basel committee on Banking Supervision has urged boards to be closely involved in pay-setting; and the bill passed on Friday mandates “say on pay” shareholder votes and bolsters the independence of compensation committees. Would improvements in governance obviate the need for regulating pay structures? Not at all.

Outside the financial sector, government intervention should indeed be limited to improving internal governance, leaving choices over pay structures to shareholders and the directors elected by them. But financial institutions are special, and their special circumstances warrant a broader role for government.

Regulation of pay in financial institutions is justified by the very same moral hazard concerns that provide the basis for existing regulation of the sector. Because the failure of such companies imposes costs on taxpayers that shareholders do not internalise, shareholders’ interests are served by more risk-taking than is socially desirable. For this reason, financial institutions have long been constrained by a substantial body of rules that restrict private choices with respect to loans, investments and capital reserves.

Shareholders’ interest in more risk-taking implies that they could benefit from providing executives with excessive incentives in this direction. Executives with such incentives can use their informational advantages, and whatever discretion they have been left by existing regulations, to increase risks. Regulation of pay structures is a way to counter this. It would make the executives of financial companies work for, not against, the goals of financial regulation.

Opponents of such regulation will argue that the government does not have a legitimate interest in telling shareholders how to spend their money. But it does. Given the government’s interest in financial companies’ stability, intervention in pay structures is as legitimate as the traditional forms of financial regulation.

Opponents may also argue that regulators are at an informational disadvantage when assessing pay arrangements. Yet more informed players inside financial companies lack incentives to internalise the interests of depositors and taxpayers when setting pay structures. Furthermore, limiting structures that incentivise risk-taking is not more demanding in terms of information than regulators’ traditional intervention in investment, lending and capital decisions.

In addition, opponents may argue that pay regulation will drive talent away. But the proposed rules would apply to pay structures and not total compensation, which financial institutions would be free to set at the levels necessary to retain employees.

The regulation of pay structures is considered against the background of news that compensation in the financial sector is returning to the lofty levels of before the crisis. It is thus worth stressing that, while the regulations under consideration would address concerns about incentives, they would not, nor are they intended to, address concerns about overall compensation amounts. Their goal is to promote the safety and soundness of the financial system, not to address shareholder concerns about excessive levels of pay. In the US, such concerns would be best addressed by supplementing the mandated “say on pay” votes with a substantial strengthening of shareholder rights.

Regulating compensation structures should become a critical instrument in financial regulators’ toolkits. It would help prevent in the future the excessive risk-taking that contributed to the current crisis.

Why Do Sellers (Usually) Prefer Auctions?

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, August 3, 2009
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This post comes to us from Jeremy Bulow of the Graduate School of Business, Stanford University, and Paul Klemperer of Nuffield College, University of Oxford.

In our paper Why Do Sellers (Usually) Prefer Auctions?, which was recently accepted for publication in the American Economic Review, we focus on comparing the two dominant methods for selling public companies – a simple “plain vanilla” simultaneous auction and an equally simple model of a sequential sales mechanism – when the seller has realistically-limited power and information. (Similar alternative ways of selling are observed for many other assets.) In both processes we model, an unknown number of potential bidders make entry decisions sequentially, before learning their values. In an auction, no credible bidding is possible until all entry decisions have been taken. In a sequential mechanism, potential bidders arrive in turn. Each one observes the current price and bidding history and decides whether to pay the entry cost to learn its value. If it does, and if it succeeds in outbidding any current incumbent (who can respond by raising its own bid), it can also make any additional “jump bid” it wishes to attempt to deter further entry. In both processes, we assume the seller does not have the power or credibility to commit to a take-it-or-leave-it minimum (reservation) price above a buyer’s minimum possible value.

Our central result is that the straightforward, level-playing-field competition that an auction creates is usually more profitable for a seller than a sequential process, even though the sequential mechanism is always more efficient in expectation (as measured by the winner’s expected value less expected aggregate entry costs). Bidders, by contrast, usually prefer to subvert an auction by making pre-emptive “jump bids” when they can. The sequential process is more efficient because although it attracts fewer bidders in expectation, it attracts more bidders when those bidders are most valuable – the existence or absence of early bids informs subsequent entry decisions and attracts additional bidders when the early ones turn out to be weak. But buyers’ ability to make pre-emptive jump bids, which inefficiently deter too many potential rivals from entering, harms the seller.

We identify several factors that may cause the expected revenue between the auction and the sequential mechanism to differ. First, even in the most favorable circumstances, a sequential process could only be superior if the queue of potential bidders is sufficiently longer than the number that would compete in an auction. Second, in a sequential mechanism bidders who deter entry choose a price where the expected distribution of winning values is such that an additional entrant would expect to earn zero. These two factors would be nullified with an infinite stream of potential bidders, and when parameters are such that the expected profits of the marginal bidder who does not enter the auction is exactly zero. The third factor is therefore crucial: the value of the winning bidder is generally less dispersed in the sequential process, because that process is more likely to attract one high-value bidder but will never attract more than one. But entrants prefer more dispersion in the value they have to beat, because dispersion makes the entrant’s option to buy more valuable. Therefore, the expected value of the top bidder in the auction must be higher than in the sequential mechanism to deter entry.

Thus, contrary to our usual instinct that auctions are profitable because they are efficient, it is precisely the inefficiency of the auction – that entry into it is relatively ill-informed and therefore leads to a more random outcome – that makes it more profitable for the seller.

The full paper is available for download here.

The Regulatory Reform Marathon

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Sunday, August 2, 2009
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This post is based on a client memo by Randall Guynn, Arthur Long, Annette Nazareth, Margaret Tahyar, Robert Colby, Courtenay Myers and Reena Agrawal Sahni of Davis Polk & Wardwell LLP.

The Obama Administration is currently on the legislative leg of the regulatory reform marathon that began earlier this year with the release of its Rules of the Road and continued with its White Paper on Financial Regulatory Reform. The Obama Administration released last week its legislative text to implement many elements of the White Paper. Overall, the Administration’s proposed legislation hews closely to the White Paper, though it provides important details in a number of areas where the White Paper was more general. The proposal would expand the Federal Reserve’s powers to include those of a systemic risk regulator, and create a new interagency Financial Services Oversight Council to assist the Federal Reserve in its new mission.

No sooner had the proposed legislation been released, however, than critics began to pull apart the proposals in commentary and through counterproposals. FDIC Chairman Sheila Bair criticized aspects of the proposal to appoint the Federal Reserve as systemic risk regulator, and SEC Chairman Mary Schapiro argued that a council of federal regulators, on which the SEC would have a seat, should have enhanced authority. The House Republicans proposed their own regulatory reform legislation, which contained a number of alternative proposals, including to limit the Federal Reserve’s authority to overseeing monetary policy, to transfer all of the Federal Reserve’s current regulatory authority to a new financial institutions regulator, and to fundamentally reform Fannie Mae and Freddie Mac. House Financial Services Committee Chairman Barney Frank argued that the federal thrift charter should not be abolished, even if the OTS were merged into the OCC in the form of a new national bank supervisor.

This memorandum, The Regulatory Reform Marathon, available here, builds on the analysis in our memorandum on the White Paper, A New Foundation for Financial Regulation?, by discussing the Obama Administration’s proposed legislation and the Republican counterproposal. Specifically, the memorandum discusses the Administration’s proposals for managing systemic risk, including the revised proposal for resolution authority and the proposal to designate certain large, systemically important financial companies as Tier 1 FHCs, subject to enhanced supervision and regulation by the Federal Reserve. The memorandum also discusses the Administration’s proposal to merge the OTS and the OCC, to eliminate the thrift charter, and to expand interstate branching; to expand bank and bank holding company regulation to include holding companies of insured depository institutions that have not otherwise been regulated as bank holding companies; and to enhance standards applicable to, and restrictions on, banks and bank holding companies. The memorandum also contextualizes other proposed regulatory enhancements, including the Administration’s proposal to give the Federal Reserve additional authority over payment, clearing and settlement systems and activities; the proposed reform of the asset-backed securitization markets; and the proposal to create an Office of National Insurance within the Treasury Department.

SEC pursues unprecedented Sarbanes-Oxley “Clawback”

Posted by John F. Savarese, Wachtell, Lipton, Rosen & Katz, on
Saturday, August 1, 2009
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This post is by John F. Savarese of Wachtell, Lipton, Rosen & Katz. It was written together with his colleague Wayne M. Carlin.

In a recently filed case, the SEC is for the first time seeking to “claw back” incentive-based compensation from a former CEO who is not accused of any wrongdoing. The case is emblematic of the new aggressiveness of the SEC’s enforcement program, and is an unfortunate contribution to the overheated atmosphere surrounding executive compensation generally.

The SEC is seeking a court order directing Maynard L. Jenkins, the former CEO of CSK Auto Corporation, to pay back to CSK over $4 million in bonuses and stock sale proceeds that Jenkins received during a period for which CSK’s financial statements were later restated. SEC v. Jenkins, No. CV 09-1510-PHX-JWS (D. Ariz. July 22, 2009). Earlier this year, the SEC brought a settled fraud case against CSK and a separate case charging four former CSK executives with fraud and other violations, all relating to the accounting practices from 2002 to 2004 that led to CSK’s restatement. The SEC has not charged Jenkins – either in the earlier enforcement actions against the company and other executives, or in the new clawback proceeding – with any involvement in or knowledge of accounting improprieties, or any other wrongdoing.

Section 304 of the Sarbanes-Oxley Act requires a CEO or CFO to return incentive-based compensation to an issuer in the event of a financial restatement that occurs “as a result of misconduct . . . .” The statute is at best ambiguous as to whether this obligation arises only where the “misconduct” has been committed by the CEO or CFO in question. As a result of that ambiguity, it has always been an open question whether the SEC would use this weapon against a CEO or CFO who did not personally engage in misconduct, and whether such an aggressive claim would be sustained in litigation.

The SEC’s decision to depart from its prior reasonable restraint in using Section 304 is a regrettable policy choice. Clearly, the SEC believes fraud occurred at CSK, but apparently can find no basis to assert that the CEO was culpable in it. The SEC has not even pursued any of the lesser charges that would be available against a blameworthy executive in these circumstances, such as a negligence-based administrative case. In these circumstances, it is difficult to discern what conduct by similarly situated CEOs the SEC may think this case will deter or encourage. It also remains to be seen whether a federal agency may constitutionally deprive a person who is not alleged to have violated any law of compensation that was lawfully received, particularly where the statute’s intended reach is ambiguous.

Finally, it is far from clear that the SEC’s policy choice in this case is well tailored to the goals of Section 304. Under Section 304, recovered compensation is paid back to “the issuer.” CSK, however, was sold in July 2008 and is now a wholly owned subsidiary of another company. The acquirer presumably paid what it thought CSK was worth one year ago, and the shareholders of CSK received that consideration at that time. The SEC now seeks to recover $4 million from a CEO that it cannot accuse of wrongdoing, in order to pay that money over to a company that was not harmed.

Financial Crisis Advisory Group Reviews Standard-Setting Activities Following Global Financial Crisis

Posted by Harvey Goldschmid, Columbia Law School and Weil, Gotshal & Manges LLP, on
Friday, July 31, 2009
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This post by Harvey Goldschmid of Columbia Law School is based on the Final Report of the Financial Crisis Advisory Group of the Financial Accounting Standards Board.

On July 28, 2009, The Financial Crisis Advisory Group (FCAG), a high level group of recognized leaders with broad experience in international financial markets, published its recommendations related to accounting standard-setting activities, and other changes to the international regulatory environment following the global financial crisis.

The FCAG was formed at the request of the International Accounting Standards Board and the US Financial Accounting Standards Board to consider financial reporting issues arising from the crisis. Co-chaired by Hans Hoogervorst, Chairman, AFM (the Netherlands Authority for the Financial Markets) and Harvey Goldschmid, former Commissioner, US Securities and Exchange Commission, the FCAG met six times from January to July 2009.

The report of the FCAG (the “Report”) articulates four main principles and contains a series of recommendations to improve the functioning and effectiveness of global standard-setting.

The chief areas addressed in the Report are:
1. Effective financial reporting
2. Limitations of financial reporting
3. Convergence of accounting standards
4. Standard setter independence and accountability

Mr. Goldschmid said “As our Report emphasizes, improved financial reporting will help restore the confidence of financial market participants and thereby serve as a catalyst for increased financial stability and sound economic growth. The independence and integrity of the standard-setting process, including wide consultation, is critical to developing high quality, broadly accepted accounting standards responsive to the issues highlighted by the crisis.”

The Report includes a number of recommendations relating to each of the four principles, which are set out below. READ MORE »

Corporate Governance and Liquidity

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, July 31, 2009
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This post comes to us from Kee H. Chung of the State University of New York (SUNY) at Buffalo, John Elder of North Dakota State University and Jang-Chul Kim of Northern Kentucky University.

In our paper, Corporate Governance and Liquidity, which was recently accepted for publication in the Journal of Financial and Quantitative Analysis, we examine how corporate governance affects stock market liquidity. We conjecture that corporate governance affects stock market liquidity because effective governance improves financial and operational transparency, which decreases information asymmetries between insiders (e.g., mangers and large shareholders) and outside investors (e.g., outside owners and liquidity providers), as well as among outside investors. Governance provisions may improve financial transparency by mitigating management’s ability and incentive to distort information. These provisions make it less likely that management, acting in its self-interest, does not fully disclose relevant information to shareholders or discloses information that is less than credible.

We examine the effect of corporate governance on liquidity using an index of governance attributes that are likely to affect financial and operational transparency. Our governance index, which is based on data compiled by Institutional Shareholder Services (ISS), consists of 24 such governance attributes. Our measures of liquidity include quoted spreads, effective spreads, and an index of market quality for a large sample of NYSE/AMEX and NASDAQ stocks. To examine the relation between corporate governance and information asymmetries more directly, we also estimate two measures of information-based trading, the price impact of trades and the probability of information-based trading.

Our results show that stocks of companies with better governance structure exhibit narrower quoted and effective spreads, higher market quality index, smaller price impact of trades, and lower probability of information-based trading. The estimated improvement in liquidity is economically significant, with an increase in our governance index from the 25th to 75th percentile decreasing quoted spreads on NASDAQ by about 4.5%. Our results are robust to different estimation methods (including fixed effects and error component model regressions), across markets, and alternative measures of liquidity. In addition, we find that changes in our liquidity measures are significantly related to changes in governance scores over time. These results suggest that firms may alleviate information-based trading and improve stock market liquidity by adopting corporate governance standards that mitigate information asymmetries.

The full paper is available for download here.

Delaware Amends Alternative Entity Statutes

Posted by A. Gilchrist Sparks, Morris, Nichols, Arsht & Tunnell LLP, on
Friday, July 31, 2009
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This post is by Mr. Spark’s colleague Louis G. Hering. 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 its latest session, the Delaware legislature enacted several amendments to three of Delaware’s four “alternative entity” statutes – the Delaware Limited Liability Company Act (“DLLCA”), the Delaware Revised Uniform Limited Partnership Act (“DRULPA”) and the Delaware Revised Uniform Partnership Act (“DRUPA”). [1] The amendments become effective on August 1, 2009. Among other things, the amendments (i) effectively codify the doctrine of independent legal significance, as developed in Delaware corporation law, to apply to LLCs, limited partnerships and general partnerships; and (ii) confirm the ability by merger or consolidation to amend an operating or partnership agreement or adopt a new operating or partnership agreement for an entity that is the surviving or resulting entity in a merger or consolidation.

The utility of the Delaware alternative entity statutes, as well as the other advantages of using Delaware entities (for example, the predictability of the Delaware courts and the customer friendly attitude of the Delaware Secretary of State’s office), has resulted in significant use of Delaware alternative entities. According to the Delaware Secretary of State, 2,581 statutory trusts, 7,552 limited partnerships and 81,923 LLCs were formed in 2008, bringing the total number of each of these entities existing at the end of 2008 to 22,526, 70,503 and 501,670 respectively. The continued formation and use of Delaware’s alternative entities have predictably led to additional litigation, and we have again updated our survey of Delaware case law relating to alternative entities. The 2009 Cumulative Survey is now available on our website here under Publications.

The changes referenced above, together with other changes of particular interest, are summarized below.

Highlights

I. Certain 2009 Amendments To The Delaware Limited Liability Company Act, 6 Del. C. §§ 18-101 Et Seq.

A. Construction and Application of Chapter and Limited Liability Company Agreement [Section 18-1101(h)]

Newly added Subsection 18-1101(h) effectively codifies the doctrine of independent legal significance, as developed in Delaware corporation law. The amendment is in the form of a statement of the doctrine: that an action validly taken under one provision of the DLLCA shall not be deemed invalid solely because it is similar to an action that could have been taken under another provision of the DLLCA, but fails to satisfy the conditions of that other provision.

B. Merger and Consolidation [Section 18-209(f)]

Related to the amendment codifying the doctrine of independent legal significance, Section 18-209(f) was amended to confirm the ability by merger or consolidation to amend a limited liability company agreement or adopt a new limited liability company agreement for a limited liability company that is the surviving or resulting entity in a merger or consolidation by obtaining the approval of the requisite number of members to approve such merger or consolidation, unless the limited liability company agreement by its terms limits such amendment or adoption.

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