Yearly Archives: 2014

The Untouchables of Self-Regulation

Posted by Andrew Tuch, Washington University School of Law, on
Thursday, May 29, 2014
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Andrew Tuch is Associate Professor of Law at Washington University School of Law.

The conduct of investment bankers often arouses suspicion and criticism. In Toys “R” Us, the Delaware Court of Chancery referred to “already heightened suspicions about the ethics of investment banking firms” [1] ; in Del Monte, it criticized investment bankers for “secretly and selfishly manipulat[ing] the sale process to engineer a transaction that would permit [their firm] to obtain lucrative … fees”; [2] and, more recently, in Del Monte, it criticized a prominent investment banker for failing to disclose a material conflict of interest with his client, a failure the Court described as “very troubling” and “tend[ing] to undercut the credibility of … the strategic advice he gave.” [3] While the investment bankers involved in the cases inevitably escaped court-imposed sanctions, because they were not defendants, they also escaped sanctions from the Financial Industry Regulatory Authority (FINRA), the regulator primarily responsible for overseeing their conduct.

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How Much Protection Do Indemnification and D&O Insurance Provide?

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 28, 2014
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The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg; 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.

We consider below how advancement of legal fees, indemnification, and insurance operate when officers and directors become involved in regulatory investigations and proceedings. Part I addresses the enhanced risk officers and directors face today in an Age of Accountability. Part II addresses advancement of legal fees, which may be discretionary or mandatory depending on a company’s by-laws. Part III covers indemnification, which generally requires at least a conclusion that the officers and directors acted in good faith and reasonably believed that their conduct was in, or at least not contrary to, the best interests of the corporation. Part IV examines insurance coverage, which varies from carrier to carrier and may or may not provide meaningful protection. Finally, Part V summarizes the principal lessons from the analysis. Although there is significant overlap with similar principles that apply to private litigation, we limit our discussion here to advancement, indemnification, and insurance for regulatory investigations and proceedings.

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To Whom are Directors’ Duties Really Owed?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 28, 2014
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The following post comes to us from Martin Gelter, Associate Professor of Law at Fordham University, and Geneviève Helleringer of ESSEC Business School Paris-Singapore and Oxford University.

In the paper, Lift not the Painted Veil! To Whom are Directors’ Duties Really Owed?, which we recently posted on SSRN, we identify a fundamental contradiction in the law of fiduciary duty of corporate directors across jurisdictions, namely the tension between the uniformity of directors’ duties and the heterogeneity of directors themselves. The traditional characterization of the board as a homogeneous, often largely self-perpetuating body is far from universally true internationally, and it tends to be increasingly less true even in the United States. Directors are often formally or informally selected by specific shareholders (such as a venture capitalist or an important shareholder) or other stakeholders of the corporation (such as creditors or employees), or they are elected to represent specific types of shareholders (e.g. minority investors). The law thus sometimes facilitates the nomination of what has been called “constituency” directors, or even requires their appointment (e.g. employee directors in some European systems). However, even in systems that require the appointment of such directors, legal rules tend nevertheless to treat directors as a homogeneous group that is expected to pursue a uniform goal. We explore this tension and ask why a director representing a specific shareholder cannot advance this shareholder’s interests on the board?

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ISS Recommends Shareholders Withhold Votes for 6 Ashford Trust Directors

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 27, 2014
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The following post comes to us from JJ Fueser, Research Coordinator at UNITE HERE.

UNITE HERE proposals to opt out of Maryland Unsolicited Takeover Act have received resounding support from shareholders of Ashford Hospitality Prime.

Over the past two years, activist shareholder UNITE HERE, the hospitality workers’ union, has been winning corporate governance reforms at lodging REITs, which are nearly all incorporated in Maryland.

Several proposals ask boards to opt out of Maryland statutes which provide a range of anti-takeover tools. The Maryland Unsolicited Takeover Act (MUTA), for example, allows boards to classify at any time without shareholder approval.

UNITE HERE has argued that without opting out of MUTA—and requiring shareholder approval to opt in—a Maryland REIT has not truly declassified its board. The proposals to opt out of Maryland’s anti-takeover statutes have gained traction, with six proposals withdrawn after full or substantial implementation.

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Labor Representation in Governance as an Insurance Mechanism

Posted by E. Han Kim, University of Michigan, Ross School of Business, on
Tuesday, May 27, 2014
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E. Han Kim is Professor of Finance at the University of Michigan.

Worker participation in corporate governance varies across countries. While employees are rarely represented on corporate boards in most countries, Botero et al. (2004) state “workers, or unions, or both have a right to appoint members to the Board of Directors” in Austria, China, Czech Republic, Denmark, Egypt, Germany, Norway, Slovenia, and Sweden. Such board representation gives labor a means to influence corporate policies, which may affect productivity, risk sharing, and how the economic pie is shared between providers of capital and labor.

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Board Refreshment and Director Succession in Investee Companies

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, May 25, 2014
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The following post comes to us from Rakhi Kumar, Head of Corporate Governance at State Street Global Advisors, and is based on an SSgA publication; the complete publication, including appendix, is available here.

State Street Global Advisors (“SSgA”) believes that board refreshment and planning for director succession are key functions of the board. Some markets such as the UK, have adopted best practices on a comply-or-explain basis that aim to limit a director’s tenure to nine years of board service, beyond which, investors may question a director’s independence from management. Such best practices have helped lower average board tenure, and have encouraged boards to focus on refreshment of director skills and plan for director succession in an orderly manner.

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Accounting Class Action Filings and Settlements—2013 Review

Posted by John Gould, Cornerstone Research, on
Saturday, May 24, 2014
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John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report, titled “Accounting Class Action Filings and Settlements—2013 Review and Analysis,” available here.

The number of accounting case settlements in 2013 increased for the second year in a row, but remained low compared with the previous 10 years, according to Cornerstone Research’s latest report, Accounting Class Action Filings and Settlements—2013 Review and Analysis. While the number of securities class action filings that included accounting allegations (47) remained relatively constant in 2013 compared with 2012, the market capitalization losses associated with these filings more than doubled.

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Increased Scrutiny of High-Frequency Trading

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 23, 2014
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The following post comes to us from Matthew Rossi, partner in the Securities Litigation & Enforcement practice at Mayer Brown LLP, and is based on a Mayer Brown Legal Update by Mr. Rossi, Joseph De Simone, and Jerome J. Roche. The complete publication, including footnotes, is available here.

Following the publication of Michael Lewis’ new book, Flash Boys: A Wall Street Revolt (“Flash Boys”), plaintiffs’ lawyers and US government regulators have increasingly focused their attention on financial institutions participating in high-frequency trading (“HFT”). Less than three weeks after the release of Flash Boys, private plaintiffs’ lawyers filed a class action lawsuit against 27 financial services firms and 14 national securities exchanges (with additional defendants likely to be named later) alleging that the defendants’ HFT practices in the US equities markets violated the anti-fraud provisions of the federal securities laws. Plaintiffs’ lawyers filed a separate action against The CME Group, Inc. (“CME”) and The Board of Trade of the City of Chicago (“CBOT”) containing similar allegations in US derivatives markets.

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Renewed Focus on Corporate Director Tenure

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Thursday, May 22, 2014
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David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here.

The issue of director tenure recently has garnered significant attention both in the United States and abroad. U.S. public companies generally do not have specific term limits on director service, though some indicate in their bylaws a “mandatory” retirement age for directors—typically between 72 and 75—which can generally be waived by the board of directors. Importantly, there are no regulations or laws in the United States under which a long tenure would, by itself, prevent a director from qualifying as independent.

Institutional Shareholder Services (ISS) and other shareholder activist groups are beginning to include director tenure in their checklists as an element of director independence and board composition. Yet even these groups acknowledge that there is no ideal term limit applicable to all directors, given the highly fact-specific context in which an individual director’s tenure must be evaluated. In our view, director tenure is an issue that is best left to boards to address individually, both as to board policy, if any, and as to specific directors, should the need arise. Boards should and do engage in annual director evaluations and self-assessment, and shareholders are best served when they do not attempt to artificially constrain the board’s ability to exercise its judgment and discretion in the best interests of the company. In addition, much the same way boards consider CEO succession issues, boards are beginning to address director succession issues as well.

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Board Oversight of Sustainability Issues in the S&P 500

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, May 22, 2014
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The following post comes to us from Jon Lukomnik of the IRRC Institute and is based on the summary of a report commissioned by the IRRC Institute and authored by Peter DeSimone of the Sustainable Investment Institute; the full report is available here.

Board oversight has long been viewed as an effective mechanism to direct and monitor corporate management. For example, in the wake of accounting scandals last decade, the Sarbanes-Oxley Act of 2002 requires all publicly traded companies in the United States to have an audit committee comprised of independent directors, charged with establishing procedures for handling complaints regarding accounting or auditing matters and for the confidential submission by employees of concerns surrounding alleged fraud.

While sustainability has been a concern of corporations and investors for years, there has been little research focused on how boards oversee a company’s sustainability efforts. Sustainable and responsible investors also have seen board oversight as an effective way to encourage corporations to accelerate such efforts; they began filing shareholder proposals requesting board oversight of various sustainability issues in the 1970s, and both the numbers of resolutions and the support those resolutions have received have grown exponentially since. It is worth noting that one such model proposal, formulated by The Center for Political Accountability (CPA) and requesting board oversight of political spending in addition to key disclosure features, accounts for the vast majority of sustainability shareholder resolutions on board oversight and resulted in political spending being a top subtopic of board oversight duties.

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