Yearly Archives: 2010

Canadian Decision Provides Road Map for a Dual-Class Collapse

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Friday, August 27, 2010
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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 firm memorandum by Mr. Lipton, and relates to the decision of the Ontario Superior Court in Magna International Inc., which is available here; we understand that certain of the objecting shareholders intend to appeal this decision.

Update: The ruling of the Superior Court was subsequently affirmed on appeal; that decision can be found here.

A Canadian case decided this month is destined to become a landmark decision on the difficult issue of comparative fairness in change-of-control transactions involving collapse of two classes of stock into a single class.

In Magna International, Ontario Superior Court No. CV-10-8738-00CL, major institutional shareholders attacked the restructure of Magna from a dual-class to a single-class stock capitalization. The investment bank retained by the special committee of directors did not give a fairness opinion. (Major investment banks generally do not give “comparative” fairness opinions.) The special committee did not make a recommendation to the shareholders. The high-vote shares received a date-of-announcement premium of 1,800% and the low-vote shares suffered an 11.7% dilution; each far larger than any Canadian or U.S. precedent transaction. Announcement of the proposal for the dual-class collapse was well received by the market with a material increase in the low-vote share price, despite the dilution. A proxy statement for the shareholder meeting called to consider the transaction was approved by the Ontario Securities Commission as satisfying requirements for full disclosure of the facts relevant to the shareholder decision. At the meeting, 75% of the low-vote stock voted to approve the transaction.

The Magna transaction and the Court’s decision provide a clear road map for a company’s directors, and the investment bankers and lawyers advising them, in a dual-class restructure to create a single class of stock. They also provide interesting facts and analysis that may be of use in other types of change-of-control dual-class transactions.

A Measured Approach to Facilitating Director Nominations by Shareholders

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Thursday, August 26, 2010
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s statement at a recent open meeting of the SEC, which 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. The post relates to the adoption of a final SEC rule on proxy access; the adopting release is available here. Additional posts relating to proxy access are available here.

Public companies in the United States can raise capital around the world. As a result, shareholders of public companies are dispersed throughout the 50 states, and across the globe. The idea that shareholder decisions are made in-person at a company’s annual meeting is anachronistic. Shareholders are no longer able to meet in person to discuss who should sit on the board of directors, make nominations, and vote. Instead, these deliberations and determinations are made primarily through the written process that makes up the corporate proxy solicitation.

Recognizing this reality, for the better part of a decade, the SEC and its staff have been considering how to restore to shareholders the traditional ability to nominate directors.

Today, the staff is recommending rules that will enable owners of a significant, long-term, stake in the company to include in the company’s proxy materials a limited number of nominations — no more than 25% of the board. The staff has described these rules in detail, and I will not repeat what has been said.

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Concerns About New Proxy Access Rule

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, August 26, 2010
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Editor’s Note: Troy A. Paredes is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Paredes’ statement at a recent open meeting of the SEC, which is available here. The views expressed in the post are those of Commissioner Paredes and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. The post relates to the adoption of a final SEC rule on proxy access; the adopting release is available here. Additional posts relating to proxy access are available here.

Today, the Commission is adopting rule changes to provide shareholders with “proxy access.” New Exchange Act Rule 14a-11 creates for shareholders a minimum federal right of access to a company’s proxy materials to nominate directors. As amended, Exchange Act Rule 14a-8 will allow shareholders to include in a company’s proxy materials a proposal to amend the company’s bylaws to provide for proxy access, subject to a major exception. That is, shareholders are unable to opt out of the Rule 14a-11 access regime, even if they want to. The proxy access right the Commission is establishing under Rule 14a-11 is mandatory.

The Rule 14a-8 amendment facilitates shareholders in crafting what the shareholders believe to be an appropriate access regime for a particular company. I welcome the Rule 14a-8 amendment as a sensible step that empowers shareholders, respects the traditional role of states in regulating internal corporate affairs, and allows for efficient private ordering.

Unfortunately, the Commission has chosen to do more than amend Rule 14a-8. The Commission also is adopting Rule 14a-11, the mandates of which displace private ordering and state law and negate the import and effect of shareholder choice when it comes to determining the contours of proxy access. Neither theory nor data adequately substantiate the Commission’s imposition of the mandatory Rule 14a-11 proxy access right. Accordingly, I am not able to support the final rule before us and respectfully dissent. [1]

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FASB Proposes Expanded Disclosures Regarding Loss Contingencies

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Thursday, August 26, 2010
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Charles Nathan is Of Counsel at Latham & Watkins LLP and is co-chair of the firm’s Corporate Governance Task Force. This post is based on a Latham & Watkins Client Alert by Robert J. Malionek, Kim Marie K. Boylan and Adam J. Goldberg.

The Financial Accounting Standards Board (FASB) proposes to “retain” existing disclosures and “enhance them with additional information” by updating the requirements in what is now known as FASB Accounting Standards Codification Topic 450 (formerly Statement of Financial Accounting Standards No. 5) (ASC 450) for disclosure of certain loss contingencies. [1] The FASB’s proposal is the culmination of an extended study following its 2008 proposal to amend the standards regarding loss contingencies.

The prior proposal would have expanded vastly the disclosures required by US issuers, particularly with respect to litigation loss contingencies, and generated significant comments and debate as to whether, among other concerns, the expanded disclosures would have infringed upon the attorney-client privilege and work product protections. [2]

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Facilitating Shareholder Director Nominations

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, August 25, 2010
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Editor’s Note: Mary Schapiro is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Schapiro’s opening statement at today’s open meeting of the SEC, which is available here. The views expressed in the post are those of Chairman Schapiro and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. The post relates to the adoption of a final SEC rule on proxy access; the adopting release is available here. Additional posts relating to proxy access are available here.

Today, we consider adopting rules that would allow shareholders access to a company’s proxy materials to include their nominees to the corporate board of directors.

As we discussed when the Commission proposed these rules last year, the concept that shareholders can directly participate in the director nomination process — without having to mount a proxy contest — has been debated for over 30 years. In fact, this is the fourth time in recent memory that the Commission has considered the question of amending our proxy rules to address so-called “proxy access.”

Some of the debate during the past has concerned whether the Commission has the authority to adopt these rules. That question was resolved last month, when Congress adopted and the President signed the Dodd-Frank Wall Street Reform and Consumer Protection Act. That law confirms the Commission’s authority to act in this regard. Now it is time to resolve the issue of under what circumstances the Commission should adopt proxy access.

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Proxy Access Is In

Posted by Lucian Bebchuk and Scott Hirst, Harvard Law School, on
Wednesday, August 25, 2010
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Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School and author of The Case for Shareholder Access to the Ballot and The Myth of the Shareholder Franchise. Scott Hirst is Executive Director of the Corporate Governance Program and co-author with Professor Bebchuk of Private Ordering and the Proxy Access Debate.  Comments in support of the SEC’s proxy access rule submitted by one or both of them are available here, here and here.

The Securities and Exchange Commission today voted to approve a rule that provides shareholder with the right to place director candidates on the corporate ballot in certain circumstances.

The adoption of proxy access is a welcome and long overdue development. In our view, the case for providing shareholders with access to the corporate ballot is compelling. Last fall, one of us submitted on behalf of a bi-partisan group of eighty professors of law, business, economics, or finance a comment letter in support of adopting a proxy access proposal. The breadth of this group reflected the widespread support among academics for removing impediments to shareholders’ ability to nominate and elect directors. The case for the proposed rule is supported by the significant body of empirical work (described in another comment letter submitted by one of us) indicating that reducing incumbent directors’ insulation from removal is associated with improved value for shareholders.

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Delaware Issues Important Poison Pill Opinion

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Tuesday, August 24, 2010
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Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn &  Crutcher LLP. This post is based on a Gibson Dunn Client Alert regarding the Delaware Court of Chancery’s decision in Yucaipa American Alliance Fund II, L.P. v. Riggio et al., which is available here. 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.

On August 11, 2010, the Delaware Court of Chancery issued an important opinion in the area of stockholder rights plans, or poison pills.  Vice Chancellor Strine’s opinion in Yucaipa American Alliance Fund II, L.P. v. Riggio et al., 2010 WL 3170806 (Del. Ch. Aug. 11, 2010), reaffirms Delaware’s traditional deference to a board’s well-informed and well-reasoned implementation of antitakeover measures, and gives meaningful guidance to boards and their advisors in the implementation of poison pills and other defensive measures in the face of a potential unsolicited change in control situation.

The case arose out of Barnes & Noble’s implementation of a poison pill as a response to the rapid stock accumulation on the part of funds associated with Ronald Burkle (“Yucaipa”), which had approximately doubled their stake in Barnes & Noble to nearly 18% over a four day period in November 2009.  Barnes & Noble’s pill would be triggered when a shareholder acquired over 20% of Barnes & Noble’s outstanding stock.  The pill would also be triggered when two or more stockholders, who combined own over 20%, enter into an “agreement, arrangement or understanding . . . for the purpose of acquiring, holding, voting . . . or disposing of any voting securities of the Company.”  The poison pill’s 20% threshold did not apply to Barnes & Noble’s chairman and founder Leonard Riggio, whose approximately 30% stake was grandfathered under the terms of the implemented pill.  However, the pill did limit Riggio from further increasing his stake in the company.  Yucaipa challenged the implementation of the poison pill by Barnes & Noble’s board of directors, claiming that such action, and the board’s subsequent refusal to amend the pill, was a breach of the board’s fiduciary duties.

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Tenure and CEO Pay

Posted by Martijn Cremers, Yale School of Management, on
Monday, August 23, 2010
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Martijn Cremers is an Associate Professor of Finance at Yale University.

In the paper, Tenure and CEO Pay, which was recently made publicly available on SSRN, my co-author, Darius Palia of Rutgers University, and I examine the relationship between a CEO’s pay levels and pay-performance sensitivity and her tenure in the firm. The previous empirical literature had examined such issues used historical data that did not include the large amounts of incentive pay (such as options and shares that were introduced in the 1990s). We examine the predictions of four theories (namely, entrenchment, learning, career concerns and dynamic contracting) from the extant literature in order to test the impact of tenure on pay levels and pay-performance sensitivities.

We find a positive relationship between tenure and CEO pay levels that is consistent with the entrenchment, learning, and the dynamic contracting hypotheses. We also find a positive correlation between the tenure and the CEO’s pay-performance sensitivity which is only consistent with the career concerns and dynamic contracting hypotheses.

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Corporate Governance of the 100 Largest US Public Companies

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, August 22, 2010
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This post comes to us from John J. Madden, a member of the Mergers & Acquisitions Group at Shearman & Sterling LLP, and is based on Shearman & Sterling’s annual survey of selected corporate governance practices of the largest US public companies. The Survey is available here.

Without question, the role of public company boards and their corporate governance policies and practices continue to face intense scrutiny. That much of this scrutiny comes from shareholder activists and institutional investors comes as no surprise. Demands from these shareholders for greater “shareholder democracy” and involvement in corporate governance have been growing in line with the remarkable increases in the size of institutional investors’ portfolios over recent decades. Pressures brought by investors on corporate governance practices and policies have become even more acute in the last three years.

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Delaware Provides Guidance on Majority Vote Resignations

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Saturday, August 21, 2010
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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 firm memorandum by Mr. Lipton regarding the recent decision of the Delaware Supreme Court in City of Westland Police & Fire Retirement v. Axcelis Technologies, Inc., which is available here. 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.

A recent decision by the Delaware Supreme Court, City of Westland v. Axcelis, provides important guidance for situations where a director who has failed to obtain the requisite majority for reelection resigns in accordance with the company’s resignation policy and the resignation is not accepted by the board of directors.

The board had adopted a standard majority-vote-resignation policy.  A shareholder attacking the rejection of the resignation argued—citing the famous Blasius case— that the board had the burden of showing a “compelling justification” for rejecting the resignation and continuing the director in office.  The court rejected the argument and applied the business judgment rule.

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