Yearly Archives: 2015

Shareholders Defeat Mandatory Deferral Proposal

Posted by John R. Ellerman, Pay Governance LLC, on

Friday, May 29, 2015

Clawbacks, Equity-based compensation, Executive Compensation, Financial institutions, Misconduct, Shareholder voting
More from: John Ellerman, Lane Ringlee, Maggie Choi, Pay Governance

John R. Ellerman is a founding Partner of Pay Governance LCC. The following post is based on a Pay Governance memorandum by Mr. Ellerman, Lane T. Ringlee, and Maggie Choi.

Many large U.S. based multinational banking and financial services corporations have implemented executive compensation clawback policies that require the cancellation and forfeiture of unvested deferred cash awards or performance share unit awards. These policies typically condition the cancellation of deferred compensation if it is determined that an executive engaged in misconduct, including failure to supervise or monitor individuals engaging in inappropriate behaviors that caused harm to the organization’s operations. Policies also apply to unvested deferred awards that could be vested and paid based on inaccurate financial statements. Most of the clawback policies have been implemented in response to the Dodd-Frank financial legislation of 2010 that requires public companies to adopt clawback policies to protect shareholder interests. The Securities and Exchange Commission is expected to release final guidance with respect to clawbacks later this year.

Shareholder Involvement in the Director Nomination Process

Posted by Stephen Erlichman & Catherine McCall, Canadian Coalition for Good Governance, on

Thursday, May 28, 2015

Board composition, Boards of Directors, Canada, Director nominations, Engagement, International governance, Proxy access, Proxy materials, Proxy season, Proxy voting, Shareholder communications, Shareholder nominations
More from: Catherine McCall, Stephen Erlichman, Canadian Coalition for Good Governance

Stephen Erlichman and Catherine McCall are Executive Director and Director of Policy Development, respectively, at Canadian Coalition for Good Governance (CCGG). This post is based on a CCGG policy publication, titled Shareholder Involvement in the Director Nomination Process: Enhanced Engagement and Proxy Access; the complete publication is available here. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Proxy access is the corporate governance cause célèbre in the 2015 U.S. proxy season. There has been a concerted push on the part of institutional shareholders and others to convince companies to adopt proxy access, most commonly in the form of a trigger of 3% of outstanding voting shares held for 3 years. Shareholders have responded very favourably to the proxy access shareholder proposals put forward by institutions such as the New York City Pension Funds through its Board Accountability Project. A surprising (to many) number of companies [1] have adopted proxy access on the 3%/3 year basis, including some of the largest, best known and established of U.S. companies, some voluntarily and without a majority approved shareholder proposal on the matter. In Canada, the Canadian Coalition for Good Governance (CCGG), an organization which represents institutional shareholders that collectively own or manage approximately Cdn $3 trillion of assets and which has a mandate to promote good corporate governance at Canadian public companies, has just released its own proxy access policy. The policy, entitled Shareholder Involvement in the Director Nomination Process: Enhanced Engagement and Proxy Access (available here), has been developing for over a year following widespread input and consultation among CCGG’s members and other market participants.

Financing Payouts

Posted by Joan Farre-Mensa, Harvard Business School, on

Thursday, May 28, 2015

Capital structure, Cash flows, Corporate debt, Cost of capital, Dividends, External financing, Payouts, Repurchases
More from: Joan Farre-Mensa, Martin Schmalz, Roni Michaely

Joan Farre-Mensa is Assistant Professor of Business Management in the Entrepreneurial Unit at Harvard Business School. This post is based on the article, Financing Payouts, authored by Mr. Farre-Mensa, Roni Michaely, Professor of Finance at Cornell University, and Martin Schmalz, Assistant Professor of Finance at the University of Michigan.

The established conventional wisdom in the finance literature is that firms rely on free cash flow to fund their payouts, whether these payouts are motivated by agency, signaling, or other considerations. In a popular finance textbook, Ross, Westfield, and Jaffe (2013) conclude that “a firm should begin making distributions when it generates sufficient internal cash flow to fund its investment needs now and into the foreseeable future.” Accordingly, they recommend managers to set their level of payouts “low enough to avoid expensive future external financing.” While it is a theoretical possibility that firms could also raise external funds to finance their payouts, such behavior is costly and thus often considered an “extreme payout policy” (DeAngelo, DeAngelo, and Skinner, 2008) that is “uneconomic as well as pointless” (Miller and Rock, 1985)—which likely explains why this possibility has gone unexamined until now.

Related Party Transactions—Lessons from the El Paso MLP Decision

Posted by Christopher E. Austin, Cleary Gottlieb Steen & Hamilton LLP, on

Wednesday, May 27, 2015

Boards of Directors, Delaware cases, Delaware law, Derivative suits, Fiduciary duties, Partnerships, Related parties, Related party transactions, Special committees
More from: Christopher Austin, Cleary Gottlieb

Christopher E. Austin is a partner focusing on public and private merger and acquisition transactions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Austin. 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 his recent decision in In Re: El Paso Pipeline Partners, L.P. Derivative Litigation [1], Vice Chancellor Laster awarded $171 million in damages to the limited partners of a master limited partnership (“MLP”) that had challenged the MLP’s acquisition of assets from a related party. The transaction at issue—a so-called “dropdown” of assets—involved the sale to the MLP by its controller and general partner (El Paso Corporation) of certain LNG-related assets in exchange for approximately $1.41 billion in cash.

One of the important stated benefits of using MLP structures is the ability to “contract away” from normal Delaware fiduciary duty principles and instead provide that related-party transactions will be evaluated under standards specified in the partnership agreement for the MLP. The relevant standard for the El Paso MLP was on its face quite challenging for the plaintiffs. In particular, the partnership agreement simply

CEO Visibility: Are Media Stars Born or Made?

Posted by Ed deHaan, Stanford University, on

Wednesday, May 27, 2015

Disclosure, Entrenchment, Management, Public perception, Reputation, Signaling
More from: Ed deHaan, Elizabeth Blankespoor

Ed deHaan is Assistant Professor of Accounting at Stanford University. This post is based on an article authored by Mr. deHaan and Elizabeth Blankespoor, Assistant Professor of Accounting at Stanford University.

In our paper, CEO Visibility: Are Media Stars Born or Made?, which was recently made publicly available on SSRN, we investigate whether CEOs and/or their firms can use strategic disclosure to affect media coverage of the CEO. We predict that CEOs and/or firms can reduce journalists’ direct production costs via strategic “CEO promotion” in firm disclosures, where “promotion” refers to the extent to which the CEO is individually represented in the firm’s press release. Specifically, we predict that CEO promotion reduces journalists’ expected costs by providing low-cost CEO-specific content, signaling to journalists that the CEO is available for further inquiries, and better catching journalists’ attention. If the CEO and/or firm can effectively reduce journalists’ production costs, then the probability of the journalist writing about the CEO should increase, potentially increasing CEO visibility and its related benefits (Falato, Li, and Milbourn 2014).

Lazard v. Qinetiq: Important Lessons for Structuring Earn-Outs

Posted by David W. Healy and Douglas N. Cogen, Fenwick & West LLP, on

Tuesday, May 26, 2015

Acquisition agreements, Corporate disputes, Covenants, Delaware cases, Delaware law, Duty of good faith, Earnouts, Merger litigation, Mergers & acquisitions
More from: David Healy, Douglas Cogen, Fenwick

David W. Healy and Douglas N. Cogen are partners and co-chairs of the Mergers & Acquisitions Group at Fenwick & West LLP. The following post is based on a Fenwick publication by Mr. Healy and Mr. Cogen. 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 Delaware Supreme Court case authored by Chief Justice Strine upholds the literal meaning of an earn-out provision that limited the buyer from taking action “intended to reduce or limit an earn-out payment.” The court rejected the argument that buyer’s actions, which it likely knew would reduce the likelihood of an earn-out payment, met the intent-based standard the parties had agreed on in lieu of various affirmative post-closing covenants that had been rejected by the buyer. The court also rejected the seller’s argument that it could rely on the implied covenant of good faith and fair dealing to impose an objective standard and thereby avoid the burden to prove that the buyer intentionally violated such provision. The case has implications for buyers’ and seller’s negotiating strategies around post-closing operations covenants related to earn-outs and as to the impact of such covenants on the interpretation of the implied covenant of good faith and fair dealing. The case is Lazard Technology Partners, LLC, v. Qinetiq North America Operations LLC, April 23, 2015, Strine, L., 2015 WL 1880153, and it can be found at http://business.cch.com/srd/LazardTechnology-v-Qinetiq.pdf.

Are Companies Impermissibly Bundling Proposals for Shareholder Votes?

Posted by Randall S. Thomas, Vanderbilt Law School, on

Tuesday, May 26, 2015

Bundling, Proxy voting, SEC rulemaking, Securities regulation, Shareholder rights, Shareholder voting
More from: Colleen Honigsberg, Fabrizio Ferri, James Cox, Randall Thomas

Randall S. Thomas is a John S. Beasley II Professor of Law and Business at Vanderbilt Law School. This post is based on the article Are Companies Impermissibly Bundling Proposals for Shareholder Votes? by Professor Thomas, James D. Cox, Fabrizio Ferri, and Colleen Honigsberg. Related research from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

Recognizing that shareholders face a distorted set of choices when management “bundles” more than one separate item into the same proxy proposal, in 1992 the SEC enacted a pair of rules meant to protect shareholders from this practice. Bundling deprives shareholders of the right to convey their views on each separate matter being put to a vote, and instead forces them to cast a vote on the single proposal as a whole. This management practice may force shareholders to choose between rejecting the entire proposal or approving items they might not otherwise want implemented (as with the proverbial spoonful of sugar to help the medicine go down, shareholders may be required to accept the good with the bad). To better protect the shareholder franchise, the SEC’s bundling rules prohibit joining together multiple voting items into a single proposal with a single box on the ballot. While these basic principles are easily stated, in practice the rules have been difficult to implement.

Fed Supervision: DC in the Driver’s Seat

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on

Monday, May 25, 2015

Banks, Federal Reserve, Financial institutions, Financial regulation, SIFIs, Systemic risk
More from: Adam Gilbert, Armen Meyer, Dan Ryan, Kevin Clarke, Mike Alix, PricewaterhouseCoopers

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Kevin Clarke, Adam Gilbert, and Armen Meyer.

On April 17th, the Board of Governors of the Federal Reserve System (“Fed”) issued a better-late-than-never Supervisory Letter, SR 15-7, describing its governance structure for supervising systemically important financial institutions under its so-called Large Institution Supervision Coordinating Committee (“LISCC”). [1] Though much of the structure has been in place for years, the Fed had not publicly explained in detail its supervisory process, leading some in Congress and elsewhere to criticize its secrecy.

Guiding Principles of Good Governance

Posted by Stan Magidson, Institute of Corporate Directors, on

Sunday, May 24, 2015

Board independence, Board leadership, Boards of Directors, Corporate governance, Governance standards, International governance
More from: Stan Magidson, GNDI, ICD

Stan Magidson is President and CEO of the Institute of Corporate Directors and Chair of the Global Network of Directors Institutes (GNDI). This post is based on a recent GNDI perspectives paper, available here.

The Global Network of Director Institutes (GNDI), the international network of director institutes, has issued a new perspectives paper to guide boards in looking at governance beyond legislative mandates.

The Guiding Principles of Good Governance were developed by GNDI as part of its commitment to provide leadership on governance issues for directors of all organisations to achieve a positive impact.

Aimed at providing a framework of rules and recommendations, the 13 principles laid out in the guideline cover a broad range of governance-related topics including disclosure of practices, independent leadership and relationship with management, among others.

Dealing with Director Compensation

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on

Friday, May 22, 2015

Board leadership, Boards of Directors, Compensation committees, Compensation consultants, Conflicts of interest, Delaware cases, Delaware law, Director compensation, Equity-based compensation, Fairness review, Fiduciary duties, Peer groups, Shareholder suits, Special committees
More from: David Katz, Laura McIntosh, Wachtell Lipton

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 complete publication, including footnotes, is available here. The views expressed are the authors’ and do not necessarily represent the views of the partners of Wachtell, Lipton, Rosen & Katz or the firm as a whole. 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.

Due to a recent Delaware Chancery Court ruling, the topic of director compensation currently is facing an uncharacteristic turn in the spotlight. Though it receives relatively little attention compared to its higher-profile cousin—executive compensation—director compensation can be a difficult issue for boards if not handled thoughtfully. Determining the appropriate form and amount of compensation for non-employee directors is no simple task, and board decisions in this area are subject to careful scrutiny by shareholders and courts.

The core principle of good governance in director compensation remains unchanged: Corporate directors should be paid fair and reasonable compensation, in a mix of cash and equity (as appropriate), to a level that will attract high-quality candidates to the board, but not in such forms or amounts as to impair director independence or raise questions of self-dealing. Further, director compensation should be reviewed annually, and all significant decisions regarding director compensation should be considered and approved by the full board.

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