Yearly Archives: 2014

Preparing for the 2015 Proxy Season

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 26, 2014
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The following post comes to us from Lawrence R. Hamilton, partner in the Corporate & Securities practice at Mayer Brown LLP, and is based on a Mayer Brown Legal Update. The complete publication, including footnotes, is available here.

It is time for calendar year-end public companies to focus on the upcoming 2015 proxy and annual reporting season. This post discusses the following key issues for companies to consider in their preparations:

  • Pending Dodd-Frank Regulation
  • Say-on-Pay and Compensation Disclosure Considerations
  • Shareholder Proposals
  • Proxy Access
  • Compensation Committee Independence Determinations
  • Compensation Adviser Independence Assessment
  • Compensation Consultant Conflict of Interest Disclosure
  • NYSE Quorum Requirement Change
  • Director and Officer Questionnaires
  • Proxy Advisory Firm and Investment Adviser Matters
  • Conflict Minerals
  • Cybersecurity
  • Management’s Discussion and Analysis
  • XBRL
  • Proxy Bundling
  • Foreign Issuer Preliminary Proxy Statement Relief
  • Technology and the Proxy Season

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Audit Committee Reporting To Shareholders: 2014 Proxy Season Update

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, September 25, 2014
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The following post comes to us from Ernst & Young, and is based on an Ernst & Young study by Allie M. Rutherford and Ruby Sharma. The complete publication is available here.

The 2014 proxy season saw significant growth in audit committee transparency. Continuing the trend of the past several years, an increased number of Fortune 100 companies are going beyond the minimum disclosures required.

These disclosures are also more robust—providing valuable perspectives on the activities of audit committees, including their oversight of external auditors.

The recent movement toward increased audit committee transparency has been encouraged by a variety of factors and entities. In addition to the ongoing disclosure effectiveness review by the US Securities and Exchange Commission (SEC) involving a holistic review of the US corporate disclosure regime, audit committee disclosures are receiving significant attention from a variety of stakeholders. These stakeholders include US and non-US regulators, investors, and policy organizations.

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Influence of Public Opinion on Investor Voting and Proxy Advisors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, September 25, 2014
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The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University; Isil Erel of the Department of Finance at Ohio State University; and Laura Starks, Professor of Finance at the University of Texas at Austin.

In our paper, Influence of Public Opinion on Investor Voting and Proxy Advisors, which was recently made publicly available on SSRN, we address the question of how public opinion influences the proxy voting process. We find strong influence of public opinion on the evolution in both investor voting behavior and proxy advisor recommendations. Therefore, our results suggest that an additional channel through which the public can communicate with corporate management (and potentially influence corporate behavior) is the proxy voting process. We provide new evidence that media coverage can also influence firm behavior through the voting channel. This channel is important because media coverage captures the attention of proxy advisors, institutional investors and individual investors, and is thus reflected in recommendations and votes.

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Update on Directors’ and Officers’ Insurance in Bankruptcy

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 24, 2014
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The following post comes to us from Douglas K. Mayer, Of Counsel in the Restructuring and Finance Department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Mayer, Martin J.E. Arms, and Emil A. Kleinhaus.

Directors’ and officers’ (“D&O”) insurance coverage continues to represent a key element of corporate risk management. See memo of July 28 2009. A decision in the bankruptcy of commodities brokerage MF Global, In re MF Global Holdings Ltd., No. 11-15059 (S.D.N.Y. Sept. 4, 2014), provides a recent illustration of how D&O insurance may be treated upon the bankruptcy of the insured company, depending on the specific structure and terms of the insurance at issue.

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Radical Shareholder Primacy

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 24, 2014
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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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Why Delaware Appraisal Awards Exceed the Merger Price

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, September 23, 2014
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The following post comes to us from Philip Richter, partner and co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank publication by Mr. Richter, Steven Epstein, David Shine, and Gail Weinstein. The complete publication, including footnotes, 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.

As has been widely noted, the number of post-merger appraisal petitions in Delaware has increased significantly in recent years, due primarily to the rise of appraisal arbitrage as a weapon of shareholder activists seeking alternative methods of influence and value creation in the M&A sphere. The phenomenon of appraisal arbitrage is to a great extent a product of the frequency with which the Delaware Chancery Court has appraised dissenting shares at “fair values” that are higher (often, far higher) than the merger consideration in the transactions from which the shareholders are dissenting. Our analysis of the post-trial appraisal decisions issued in Delaware since 2010 indicates that the court’s appraisal determinations have exceeded the merger price in all but two cases—with the appraisal determinations representing premiums over the merger price ranging from 8.5% to 149% (with an average of 61%).

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The Effect of Deferred and Non-Prosecution Agreements on Corporate Governance

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, September 23, 2014
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The following post comes to us from Wulf A. Kaal and Timothy Lacine of University of St. Thomas School of Law.

The increasing use of Non- and Deferred Prosecution Agreements (N/DPAs) has enabled federal prosecutors to incrementally expand their traditional role, exemplifying a shift in prosecutorial culture from an ex-post focus on punishment to an ex-ante emphasis on compliance. N/DPAs are contractual arrangements between the government and corporate entities that allow the government to impose sanctions against the respective entity and set up institutional changes in exchange for the government’s agreement to forego further investigation and corporate criminal indictment. N/DPAs enable corporations to resolve allegations of corporate criminal conduct, strengthen corporate compliance mechanisms to prevent corporate wrongdoing in the future, and mitigate the risks that collateral consequences of a conviction can bring for companies, their shareholders, employees, and the economy.

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The Need for Improved Transparency

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, September 22, 2014
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The following post comes to us from Darrell M. West, vice president and director of Governance Studies at The Brookings Institution, and based on a book authored by Mr. West, titled “Billionaires: Reflections on the Upper Crust;” a sample chapter may be downloaded for free here. Work from the Program on Corporate Governance about corporate political spending includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, discussed on the Forum here. A committee of law professors co-chaired by Bebchuk and Jackson submitted a rulemaking petition to the SEC concerning corporate political spending; that petition is discussed here.

Anyone paying the slightest amount of attention recognizes that the U.S. political system is performing poorly. Washington is gripped by extreme partisanship, which prevents Congress from conducting even routine business, and cooperation between the executive and legislative branches is near historic lows. But as I argue in my new book, Billionaires: Reflections on the Upper Crust, the problem with the nation’s politics is even deeper than the daily headlines suggest. There is limited transparency surrounding money and politics, and many institutions that in the past could counterbalance the power of the wealthy and other special interests have grown weak. It is difficult for financially strapped news organizations to provide quality coverage of government, and political parties have become heavily dependent on a relatively small number of wealthy and well-connected people for campaign contributions.

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The State of State Competition for Incorporations

Posted by Marcel Kahan, NYU School of Law, on
Monday, September 22, 2014
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Marcel Kahan is the George T. Lowy Professor of Law at the New York University School of Law.

The competition by states for incorporations has long been the subject of extensive scholarship. Views of this competition differ radically. While some commentators regard it as “The Genius of American Corporate Law,” others believe it leads to a “Race to the Bottom” and yet others have taken the position that it barely exists. Despite this lack of consensus among corporate law scholars, scholars in other fields have treated state competition for incorporations as a paradigm case of regulatory competition.

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SEC Enforcement Actions Over Stock Transaction Reporting Obligations

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, September 21, 2014
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The following post comes to us from Ronald O. Mueller, partner in the securities regulation and corporate governance practice area of Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn alert.

On September 10, 2014, the Securities and Exchange Commission announced an unprecedented enforcement sweep against 34 companies and individuals for alleged failures to timely file with the SEC various Section 16(a) filings (Forms 3, 4 and 5) and Schedules 13D and 13G (the “September 10 actions”). [1] The September 10 actions named 13 corporate officers or directors, five individuals and 10 investment firms with beneficial ownership of publicly traded companies, and six public companies; all but one settled the claims without admitting or denying the allegations. The SEC emphasized that the filing requirements may be violated even inadvertently, without any showing of scienter. Notably, among the executives targeted by the SEC were some who had provided their employers with trading information and relied on the company to make the requisite SEC filings on their behalf.

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