Monthly Archives: May 2015

Winning a Proxy Fight—Lessons from the DuPont-Trian Vote

Posted by Andrew R. Brownstein, Steven A. Rosenblum, David A. Katz, and Sabastian V. Niles, Wachtell, Lipton, Rosen & Katz, on
Monday, May 18, 2015
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Andrew R. Brownstein, Steven A. Rosenblum, and David A. Katz are partners, and Sabastian V. Niles is counsel, in the Corporate Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell, Lipton, Rosen & Katz client memorandum by Messrs. Brownstein, Rosenblum, Katz, and Niles. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

DuPont’s defeat of Trian Partners’ proxy fight to replace four DuPont directors is an important reminder that well-managed corporations executing clearly articulated strategies can still prevail against an activist, even when the major proxy advisory services (ISS and Glass-Lewis) support the activist. As with AOL’s success against Starboard Value, Agrium’s against JANA Partners, Forest Laboratories’ against Carl Icahn and other examples, DuPont’s victory is a notable exception to the growing trend of activist victories.

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Delaware Supreme Court Affirms Protections of Exculpatory Provisions

Posted by Theodore N. Mirvis, Wachtell, Lipton, Rosen and Katz, on
Monday, May 18, 2015
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Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, Paul K. Rowe, William Savitt, and Ryan A. McLeod. 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.

The Delaware Supreme Court yesterday [May 14, 2015] unanimously held that a claim for damages against independent, disinterested directors of corporations with exculpatory charter provisions must be dismissed absent allegations of disloyalty or bad faith—even in controlling stockholder cases and no matter what standard of review governs the challenged transaction. In re Cornerstone Therapeutics Inc. Stockholder Litig., No. 564, 2014 (Del. May 14, 2015).

Clarifying a long-uncertain area of Delaware law, yesterday’s opinion establishes that a plaintiff “must plead non-exculpated claims against a director who is protected by an exculpatory charter provision to survive a motion to dismiss, regardless of the underlying standard of review for the board’s conduct—be it Revlon, Unocal, the entire fairness standard, or the business judgment rule.” Specifically, to survive dismissal, a plaintiff must plead “facts supporting a rational inference that the director harbored self-interest adverse to the stockholders’ interests, acted to advance the self-interest of an interested party from whom they could not be presumed to act independently, or acted in bad faith.” Chief Justice Strine’s opinion for the Court highlighted that “each director has a right to be considered individually when the directors face claims for damages in a suit challenging board action” and that “the mere fact that a director serves on the board of a corporation with a controlling stockholder does not automatically make that director not independent.”

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Commissioner Gallagher’s and Professor Grundfest’s Wrongful Attack on the Shareholder Rights Project

Posted by Jonathan R. Macey, Yale Law School, on
Monday, May 18, 2015
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Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post relates to a paper by Commissioner Daniel M. Gallagher and Professor Joseph A. Grundfest, Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors, described on the Forum in a post by Professor Grundfest here. Earlier posts by Professor Macey on the Gallagher/Grundfest paper appear on the Forum here, here, and here, with responses by Professor Grundfest here and here. A joint statement by thirty-four senior corporate and securities law professors from seventeen leading law schools, opining that the allegations in the Gallagher/Grundfest paper are meritless and urging the paper’s co-authors to withdraw these allegations, is available on the Forum here.

Earlier this month, at a University of Pennsylvania Law School’s Institute for Law & Economics Corporate Roundtable, Professor Joseph Grundfest presented to a audience of practitioners and academics the same accusations against Harvard and the Shareholder Rights Project (SRP) that he advanced in his paper (co-authored with soon-to-be departing SEC Commissioner Daniel Gallagher), “Did Harvard Violate the Federal Securities laws? The Campaign Against Classified Boards of Directors” (available here and described on the Forum here). Given Grundfest’s persistence in making these accusations, which have been widely viewed as meritless by corporate and securities law academics (see the statement by 34 senior law professors here ), readers might find of interest a new paper I just posted on SSRN, Commissioner Gallagher’s and Professor Grundfest’s Wrongful Attack on the Shareholder Rights Project, available here.

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In re Kingate

Posted by David Parker, Kleinberg, Kaplan, Wolff & Cohen, P.C., on
Monday, May 18, 2015
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David Parker is a partner in the Litigation and Risk Management practice at Kaplan, Kleinberg, Kaplan, Wolff & Cohen, P.C. The following post is based on a Kleinberg Kaplan publication by Mr. Parker and David Schechter.

The U.S. Court of Appeals for the Second Circuit, in In re Kingate Management Limited Litigation, recently made it significantly easier for plaintiffs in the Second Circuit and New York, Connecticut and Vermont state courts to bring class actions alleging violations of state law in litigation involving certain types of securities. By allowing these claims to proceed under state law, the Second Circuit has signaled that plaintiffs may now be able to avoid the rigorous pleading standards of the Private Securities Litigation Reform Act of 1995 (“PSLRA”), which requires that pleadings contain robust fraud allegations pleaded with particularity. The PSLRA also requires that plaintiffs allege the defendant acted with scienter—in other words, that the defendant knew the alleged statement was false at the time it was made, or was reckless in not recognizing that the alleged statement was false.

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Wham, Bam, Thank You Spam! Don’t Click on the Link!

Posted by Paul A. Ferrillo, Weil, Gotshal & Manges LLP, on
Sunday, May 17, 2015
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Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on a Weil Alert authored by Mr. Ferrillo and Randi Singer; the complete publication, including footnotes, is available here.

It seems that just like in old times (in cyberspace that means last year) the existence of “snake-oil” salesmen on the Internet is getting worse, not better. Rather than selling something medicinal or at the very least useful, these snake-oil salesmen of today have one intent only: to steal your personal information or worse, to distribute malware to your computer. One recent report issued by Symantec in April 2015 literally details scores of scams all designed to steal information and potentially ruin your computer (and others’ as well) and steal your personal information. We detail them not out of morbid curiosity of the utter gall of the snake-oil salesmen, but to hopefully inform and prevent the inadvertent “click on the link” circumstances which you and your company would rather avoid. We also point to other recently issued reports noting that other scams like phishing and spear phishing continue to be a bothersome and dangerous component of company emails. At the end of the day, continuous employee training and awareness of these sorts of scams is truly a strong part of the Holy Grail of Cybersecurity, along with certain network hardware components that can help stop “bad” emails before they get to your employees’ desktops.

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DOL Re-Proposed Expanded “Investment Advice” Rule

Posted by Jeffrey D. Hochberg, Sullivan & Cromwell LLP, on
Saturday, May 16, 2015
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Jeffrey D. Hochberg is a partner in the Tax and Alternative Investment Management practices at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Hochberg, David J. Passey, and Dana E. Brodsky; the complete publication, including footnotes, is available here.

On April 14, 2015, the Department of Labor (“DOL”) proposed a regulation (the “Proposed Regulation”) defining the circumstances in which a person will be treated as a fiduciary under both the Employee Retirement Income Security Act of 1974 (“ERISA”) and Section 4975 of the Internal Revenue Code (the “Code”) by reason of providing investment advice to retirement plans and individual retirement accounts (“IRAs”). As part of the regulatory package, the DOL also released proposed prohibited transaction class exemptions intended to minimize the industry disruptions that might otherwise result from the Proposed Regulation, most notably, the so-called “Best Interest Contract Exemption.”

The Proposed Regulation is a re-proposal of a 2010 proposed regulation (the “2010 Proposed Regulation”) that was withdrawn by the DOL after extensive criticism from the financial services industry and politicians of both parties.

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Proposed Rules for US and Non-US Person’s Security-Based Swaps Dealing

Posted by Kara M. Stein, U.S. Securities and Exchange Commission, on
Thursday, May 14, 2015
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Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent public statement, available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

During the financial crisis, the world witnessed how financial contracts known as swaps played a key role in creating a global financial hurricane. These financial contracts tied together the destinies of seemingly unrelated financial firms. The threat of a daisy chain of failures drove bailouts to companies no one dreamed would ever be risky. What’s more, the crisis and bailouts flooded across international borders. Indeed, over half of the largest recipients of the AIG bailouts were foreign organizations. [1]

Following the crisis, policymakers around the world committed to stop this from happening again. The resulting reform legislation, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”), directed the Securities and Exchange Commission (“Commission”) and its fellow regulators to bring the swaps marketplace into the light and to make it resilient enough to weather the next storm.

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Optimizing Our Equity Market Structure

Posted by Mary Jo White, U.S. Securities and Exchange Commission, on
Wednesday, May 13, 2015
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent address at the Inaugural Meeting of the Equity Market Structure Advisory Committee; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am pleased to welcome everyone to the inaugural meeting of the Equity Market Structure Advisory Committee. Maintaining and enhancing the high quality of the U.S. equity markets is one of the SEC’s most important responsibilities. This Committee’s work is an important part of that and will be of great assistance to the Commission as we continue our efforts to ensure that the equity markets optimally meet the needs of investors and public companies.

The U.S. equity markets have, of course, experienced a sweeping transformation over the last 20 years. Primarily manual market structures have been replaced by high-speed electronic markets in which computer algorithms dominate trading. As I have detailed before, empirical evidence shows that investors are doing better in today’s marketplace than they did in the old manual markets.

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Making Our Equity Markets Work Better for Investors

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Wednesday, May 13, 2015
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent public statement; the full text, including footnotes, 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.

It is well known that the Commission needs to undertake a holistic review of our current equity market structure. In fact, the Commission has formed an advisory committee to assist that review. In furtherance of that process, the following is intended to focus on certain issues that any serious review should consider—such as the various issues that have arisen from our markets’ increasingly fragmented structure, including market quality, and various market participants’ responses to the intensified competition for order flow.

In areas where there appears to be a compelling need for action—and where the benefits of a particular course of action are clear—there is a call for action. In areas where there may be a need for action, but where the best course is not readily apparent, recommendations will be made as to areas that require further study, including empirical research. Finally, in areas where there is no convincing evidence that change is warranted, or where it may appear that suggested reforms might even worsen matters, caution will be urged

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Delaware Court of Chancery Revisits Creditor Derivative Standing

Posted by Paul K. Rowe and Emil A. Kleinhaus, Wachtell, Lipton, Rosen and Katz, on
Wednesday, May 13, 2015
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Paul K. Rowe and Emil A. Kleinhaus are partners at Wachtell, Lipton, Rosen and Katz. This post is based on a Wachtell Lipton memorandum by Mr. Rowe, Mr. Kleinhaus, William Savitt, and Alexander B. Lees. 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 a significant decision, the Delaware Court of Chancery has rejected several proposed limitations on the ability of creditors to maintain derivative suits following a corporation’s insolvency. In doing so, however, the Court reaffirmed the deference owed to a board’s decisions, regardless of the company’s financial condition, and the high hurdles faced by creditors in seeking to prove a breach of fiduciary duty. Quadrant Structured Prods. Co. v. Vertin, C.A. No. 6990-VCL (May 4, 2015).

Quadrant, a creditor of Athilon Capital, brought a derivative action claiming that when Athilon was insolvent, its directors violated their fiduciary duties, including by authorizing repayments of debt owed to Athilon’s equity owner. The defendants moved for summary judgment on the basis that Quadrant lacked standing to sue under the Delaware Supreme Court’s decision in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla (see memo of May 24, 2007), which permits creditors to sue directors for breach of fiduciary duty only on a derivative basis, and only once the corporation is insolvent.

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