Yearly Archives: 2015

Practice Points Arising From the El Paso Decision

Posted by John E. Sorkin, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Thursday, June 4, 2015
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John E. Sorkin is a partner in the corporate practice at Fried, Frank, Harris, Shriver & Jacobson LLP. The following post is based on a Fried Frank publication authored by Mr. Sorkin, Philip Richter, Abigail Pickering Bomba, and Gail Weinstein. 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 Chancery Court recently ruled, in In re El Paso Pipeline Partners, L.P. Derivative Litigation (Apr. 20, 2015), that the general partner of a master limited partnership (MLP) was liable to the MLP for the $171 million by which the court determined that the MLP had overpaid for liquefied natural gas (LNG) assets purchased from its parent company for $1.4 billion in a typical “dropdown” transaction. In a separate memorandum (available here and discussed on the Forum here), we have discussed the decision and our view that it will have limited applicability given the unusual factual context. We note that the court’s extremely negative view of the conduct of the conflict committee and its investment banker offers a blueprint for how not to conduct a conflict committee process. We offer the following practice points arising out of the decision.

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Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal)

Posted by Luca Enriques, University of Oxford, on
Thursday, June 4, 2015
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Luca Enriques is Allen & Overy Professor of Corporate Law at University of Oxford, Faculty of Law.

Transactions between a corporation and a “related party” (a director, the dominant shareholder, or an affiliate of theirs) are a common instrument for those in control to divert value from a corporation, especially in countries with concentrated ownership. While direct evidence of value diversion via related party transactions (RPTs) is obviously hard to obtain, widespread use of RPTs has been observed for example in China (in the form of inter-company loans) and South Korea (also as a tool to transfer wealth from one generation of controllers to the next in avoidance of inheritance taxes), has been vividly reported for post-privatization Russia and Italy (where corporate scandals, such as Parmalat and, more recently, Fondiaria-Sai, often go together with significant RPT activity). Anecdotal evidence of value extraction via RPTs also exists with regard to the US (think of the Hollinger case and those reported in Atanasov et al.’s paper on law and tunneling, available here). Their (ab)use at Russian and East-Asian companies listed in the UK has recently prompted the UK Listing Authority to stiffen its already strict provisions on RPTs (see here; for a news report on RPTs at one of these East-Asian companies—Bumi, now renamed Asia Mineral Resources—see here).

In my article Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal), published in 16 European Business Organization Law Review 1 (2015), and available here (and here as a working paper), I provide a comparative and functional overview of how laws deal with RPTs and criticize a recent European Commission proposal for a harmonized EU regime on RPTs (see Article 9c of the Proposal for a Directive of the European Parliament and of the Council amending Directives 2007/36/EC and 2013/34/EU, available here).

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Capital Unbound: Remarks at the Cato Summit on Financial Regulation

Posted by Michael S. Piwowar, U.S. Securities & Exchange Commission, on
Wednesday, June 3, 2015
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Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at the Cato Summit on Financial Regulation. The complete publication, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am happy to be with you in New York City. When I have the opportunity to travel for meetings or to conferences such as this, I have fundamentally different conversations than when I am in Washington, D.C. In Washington, conversations frequently are scripted. Participants, who may be accompanied by trade association representatives and lawyers, use their talking points and have been coached to “stay on message.” Those discussions are undoubtedly meaningful as we at the Securities and Exchange Commission (“Commission” or “SEC”) engage in rulemaking and otherwise set policy.

But outside of Washington D.C., people generally want to talk about something else. They want to share their dreams and concerns about running their businesses. They want to show how their products, services, and innovations contribute to the economy, create jobs, and improve standards of living. And more importantly, they want to demonstrate how inside-the-beltway regulations are often focused on concerns that do not represent the biggest risks of harm to investors, customers, and businesses outside the beltway. I hear how regulations distract attention from the real risks and challenges of operating a business in globally competitive markets.

Compliance with securities laws and regulations is only one component of running a company. A business must also comply with laws on consumer protection, taxes, safety, employment, zoning, and the environment, to name only a few. If you have multiple locations—such as in New York, New Jersey, and Connecticut—you must deal with regulators in each jurisdiction. Soon, it may seem like you exist not to provide a good or service, but just to stay in compliance with the law.

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Anticipating Proxy Put Litigation

Posted by William Savitt, Wachtell, Lipton, Rosen & Katz, on
Tuesday, June 2, 2015
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William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt.

In recent months, a number of companies have received stockholder demands or faced stockholder litigation attacking “proxy put” provisions in credit agreements—that is, provisions that allow a lender to put outstanding debt to the corporate borrower for immediate payment upon a change in board control, creating potential financial risk for the company. These “proxy put” provisions are typically triggered when a majority of the board is displaced in a contested election. Many forms of credit agreement include a proxy put that allows an incumbent board to approve prospective directors for change-in-control purposes, even candidates sponsored by a dissident stockholder. Credit agreements of this kind can give rise to complex fiduciary duty litigation in the event a board declines to approve the members of a dissident slate in the face of a live proxy contest, but they do not appear vulnerable to facial attack under prevailing law.

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Bipartisan Group of Former SEC Commissioners Support the Rulemaking Petition for Transparency in Corporate Political Spending

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Tuesday, June 2, 2015
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Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

We are pleased to report that a bipartisan group of three distinguished former SEC Commissioners—former Chairman William Donaldson, former Chairman Arthur Levitt, and former Commissioner Bevis Longstreth—last week submitted to the SEC a letter urging the Commission to move forward with the rulemaking we proposed in our petition on corporate political spending. We are delighted that this distinguished group of former Commissioners is adding its voice to the massive and unprecedented support that the petition has already received.

In July 2011, we co-chaired a committee of ten corporate and securities law experts that submitted a rulemaking petition urging the SEC to develop rules requiring public companies to disclose their political spending. The SEC has thus far received more than 1.2 million comments on the proposal—more than any rulemaking petition in the SEC’s history.

The three former SEC Commissioners who have now come out in support of our petition bring a rich and telling set of perspectives and experiences to this issue. William Donaldson, a Republican, was appointed by President George W. Bush after having previously served in the Nixon Administration and served as SEC Chairman from 2003 to 2005. Arthur Levitt, a Democrat, was appointed by President Bill Clinton and served as SEC Chairman from 1993 to 2001. And Bevis Longstreth, a Democrat, was twice appointed to the SEC by President Ronald Reagan, serving as a Commissioner from 1981 to 1984.

As we have discussed in previous posts on the Forum, the case for rules requiring disclosure of corporate political spending is compelling. Unfortunately, Chairman Mary Jo White has faced significant political pressure not to develop such rules, and the Commission has so far chosen to delay consideration of rules in this area. The delay is unfortunate and unwarranted in light of the strong arguments for disclosure put forward in the rulemaking petition and the remarkable and broad support that the petition has received. Moreover, as we showed in our article Shining Light on Corporate Political Spending an examination of the full range of objections that opponents of such rules have so far been able to raise indicates that these objections, both individually and in combination, fail to provide an adequate basis for opposing such rules.

In the letter submitted last week by the bipartisan group of three distinguished former SEC Commissioners, the authors opined that it is a “slam dunk” for the SEC to move forward with rules that would shine light on corporate spending on politics. We are delighted that these distinguished former Commissioners share our view that the case for mandating disclosure of corporate political spending is compelling. The SEC should proceed with rulemaking in this area without further delay.

Dealing with Activist Hedge Funds

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, June 2, 2015
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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 memorandum by Mr. Lipton and Sabastian V. 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) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

Today, regardless of industry, no company can consider itself immune from hedge fund activism. Indeed, no company is too large, too popular or too successful, and even companies that are respected industry leaders and have outperformed the market and peers have come under fire. Among the major companies that have been targeted are Amgen, Apple, Microsoft, Sony, General Motors, Qualcomm, Hess, P&G, eBay, Transocean, ITW, DuPont, and PepsiCo. There are more than 100 hedge funds that have engaged in activism. Activist hedge funds are estimated to have over $200 billion of assets under management, and have become an “asset class” that continues to attract investment from major traditional institutional investors. The additional capital and relationships between activists and institutional investors encourages increasingly aggressive activist attacks.

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The Trend Towards Board Term Limits is Based on Faulty Logic

Posted by Robert C. Pozen, Harvard Business School, on
Monday, June 1, 2015
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Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution. This post is based on an article by Mr. Pozen and Theresa Hamacher that originally appeared in the Financial Times.

In the business world, experience is generally considered to be positive. When it comes to corporate directors, however, tenure is increasingly viewed with suspicion. Yet the trend towards board term limits is based on faulty logic and threatens performance.

The movement towards director term limits is global. In France, directors are not considered independent if they have served on the company’s board for more than 12 years. In the UK, publicly traded companies must either comply or explain: terminate a director after nine years of service, or explain why long tenure has not compromised director independence.

In the US, the Council of Institutional Investors, which represents many public pension funds, urges its members to consider length of tenure when voting on directors at corporate elections. The council is concerned that directors become too friendly with management if they serve for extended periods.

Institutional Shareholder Services, the proxy voting advisory firm that is a powerful force in corporate governance, penalises companies with long-serving directors by reducing their “quick score” governance rating. Under the current methodology, a company loses points if a substantial proportion of its directors has served for more than nine years. Although ISS recognises that there are divergent views on this, it concluded that “directors who have sat on one board in conjunction with the same management team may reasonably be expected to support that management team’s decisions more willingly”.

But the assumption that lengthy director service means cozy relationships with management simply is not supported by the facts.

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“No Pay” Provisions: The Forgotten Middle Ground In The Fee-Shifting Battle

Posted by A. Thompson Bayliss, Abrams & Bayliss LLP, on
Monday, June 1, 2015
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A. Thompson Bayliss is a partner at Abrams & Bayliss LLP. This post is based on a Abrams & Bayliss publication by Mr. Bayliss and Mark H. Mixon, Jr. 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.

If it becomes law, Delaware State Senate Bill 75 will prohibit Delaware stock corporations from adopting provisions in their bylaws or certificates of incorporation that would shift legal fees to the losing party in stockholder litigation. [1] The debate over these so-called “loser pays” provisions and the proposed legislation prohibiting them has generated controversy nationwide. Opponents of the legislation argue that abusive lawsuits impose a “merger tax” and that prohibiting “loser pays” provisions would “eliminate an important mechanism” that could “protect innocent shareholders against the costs of abusive litigation.” [2] Proponents of the legislation contend that “loser pays” provisions would “foreclose meritorious stockholder claims [and] render illusory the fiduciary obligations of corporate directors.” [3] Both sides of the public debate have overlooked the availability of “no pay” provisions, which could transform stockholder litigation without the effects that make “loser pays” provisions unpalatable to many. [4]

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Institutional Investing When Shareholders Are Not Supreme

Posted by Anne Tucker, Georgia State University College of Law, on
Monday, June 1, 2015
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Anne Tucker is Associate Professor of Law at Georgia State University College of Law. This post is based on an article that first appeared in the Harvard Business Law Review, authored by Professor Tucker, and Christopher Geczy, Jessica Jeffers and David Musto, all of the Department of Finance at the University of Pennsylvania.

Signs of the public’s appetite for alternative business forms, such as benefit corporations, [1] that blend profit with purpose include the success of get-one-give-one brands like Warby Parker, and Etsy’s recent $300 million IPO, which made it the second (and largest) B Corp to go public. The success of alternative business forms will also depend, in part, on acceptance by institutional investors, as companies would likely suffer without access to their trillions in assets under management.

The question of institutions’ attitudes toward investing in alternative business forms prompted our recent research, Institutional Investing When Shareholders Are Not Supreme. [2] We address the question by gauging institutional investors’ response to decreased pressure on public firms to maximize shareholder value caused by the passage of constituency statutes. Why constituency statutes? Constituency statutes, first passed as takeover defenses in the 1980’s, explicitly extended directors’ discretion to consider non-shareholder interests in takeover, and sometimes other, circumstances. [3] The changes imposed by constituency statutes were smaller in scope (permissive director discretion in limited circumstances) than the changes codified in benefit corporation legislation (mandatory director consideration of a broader range of circumstances), but constituency statutes were the first codification of directors’ ability to reject a potentially profit maximizing endeavor because of other, non-shareholder concerns. [4] We didn’t rely solely on the statutory language to demonstrate that constituency statutes constituted a legal change; we analyzed thirty years’ worth of case citations to conclude that the statutes, as enforced, expanded boards’ rights to serve nonshareholder interests as opposed to maintaining the status quo. [5] Constituency statutes, at the time of their initial passage, sparked a large body of corporate legal scholarship theorizing the impact (and legality) of reducing pressure to maximize shareholder value. [6] We reviewed this initial debate in our paper because it mirrors, in many respects, the rhetoric and theory evoked in today’s alternative business form debate.

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Perspective on El Paso—No Increased Risk for Directors

Posted by Philip Richter, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Sunday, May 31, 2015
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Philip Richter is partner and co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. The following post is based on a Fried Frank publication authored by Mr. Richter, Robert C. Schwenkel, Steven Epstein, and Gail Weinstein. 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.

For what we believe is the first time, the Delaware Chancery Court has held the general partner of a master limited partnership (MLP) liable to the MLP for the amount by which the court determined that the MLP had overpaid for assets purchased from its parent company in a typical “dropdown” transaction. Vice Chancellor Laster found, in In re El Paso Pipeline Partners, L.P. Derivative Litigation (Apr. 20, 2015), that the general partner of the El Paso MLP was liable to the MLP for the $171 million by which the court determined that the MLP had overpaid for liquefied natural gas (LNG) purchased from the El Paso parent company for $1.4 billion. The Vice Chancellor was extremely critical of the conduct of the conflict committee of the general partner’s board, as well as the conduct of the committee’s investment banker. Nonetheless—and notwithstanding commentary on the case suggesting otherwise—in our view, the decision does not indicate that the court will be more likely than in the past to find liability of MLP general partners or their bankers.

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