Monthly Archives: August 2016

The SEC and Whistleblowers: A Spotlight on Severance Agreements

John F. Savarese and Wayne M. Carlin are partners in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Savarese, Mr. Carlin, Jeannemarie O’Brien, and David B. Anders.

In the space of one week, the SEC brought two enforcement actions that reiterate its focus on protecting the rights of whistleblowers. In each case, companies attempted to remove the financial incentives for departing employees to submit whistleblower reports to the SEC. The result instead was a pair of administrative orders (on a neither admit nor deny basis) finding that each company violated SEC Rule 21F-17, which prohibits any person from taking any action to impede a whistleblower from communicating with the SEC about possible securities law violations. In the Matter of BlueLinx Holdings Inc. (August 10, 2016); In the Matter of Health Net, Inc. (August 16, 2016). For earlier developments in this area, see our post, “The SEC Opens a New Front in Whistleblower Protection” (April 2, 2015).

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SEC Denial of H&R Block’s Request to Exclude Proxy Access Proposal

Cam C. Hoang is a Partner at Dorsey & Whitney LLP. This article is based on a Dorsey & Whitney memo by Ms. Hoang, Kimberley R. Anderson, and Violet Richardson.

On July 21, 2016, the Staff of the SEC’s Division of Corporation Finance denied H&R Block Inc.’s request to exclude a shareholder proposal to amend the company’s existing proxy access bylaw. Like many companies earlier this year who adopted proxy access bylaws, H&R Block had sought to exclude the proposal under Securities and Exchange Act Rule 14a-8(i)(10) on the grounds that the company had already “substantially implemented” the proposal, but the Staff denied H&R Block’s request, signaling a potential shift in the Staff’s position on substantial implementation of proxy access.

Companies that have already adopted proxy access bylaws are now much more likely to see shareholder proposals in the upcoming proxy season, requesting amendments similar to those described below, as well as challenges to eligibility requirements for proxy access nominees that are more rigorous than requirements for other board nominees. It remains to be seen whether the broader investor base will support these proposals at companies that have already adopted “mainstream” proxy access. Among other data points, we will watch for ISS’s recommendation on the shareholder proposal at H&R Block, as well as voting results at the company’s annual meeting on September 8, 2016.

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The Rise of the Independent Director: A Historical and Comparative Perspective

Harald Baum is Senior Research Fellow and Head of the Japanese Department at the Max Planck Institute for Comparative and International Private Law, Hamburg; Professor at the University of Hamburg; and a Research Associate at the European Corporate Governance Institute, Brussels. This post is based on a recent paper authored by Professor Baum.

My paper provides a historical analysis of the rise of the independent director and the related model of a “monitoring board of directors” in the US and the UK. These two jurisdictions are commonly credited with creating the concept of the independent director and exporting it around the world. As of 2016, most Member States of the European Union and virtually all major Asian jurisdictions have rules for appointing at least some independent directors to their companies’ boards. On the supra-national level, the OECD Principles of Corporate Governance of 2015 recommend to assign important tasks to independent board members. The regulatory basis for this obligation is found either in the pertinent company laws, the listings rules and/or the corporate governance codes. Independent directors have obviously become global players. This is somewhat surprising giving the fact that there is only shaky empirical support for staffing boards with independent directors.

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Independent Chair Proposals

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. The following post is based on a Simpson Thacher publication authored by Ms. Cohn, Karen Hsu Kelley, and Avrohom J. Kess.

During the 2016 proxy season, 47 shareholder proposals calling for independent board chairs reached a vote at Russell 3000 companies, all of which failed. This development reflects a decline from last year’s proxy season during which 62 independent chair proposals reached a shareholder vote and two passed. Interestingly, the increased support of Institutional Shareholder Services, Inc. (“ISS”) for these proposals had little to no impact on the shareholder vote results. In addition to the fact that none of the proposals passed, average shareholder support for these proposals remained steady at 29 percent.

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Opting Out of the Fiduciary Duty of Loyalty: Corporate Opportunity Waivers within Public Companies

Gabriel Rauterberg is Assistant Professor of Law at Michigan Law School, and Eric Talley is Isidor and Seville Sulzbacher Professor of Law at Columbia Law School. This post is based on a recent paper authored by Professor Rauterberg and Professor Talley. This post is part of the Delaware law series; links to other posts in the series are available here.

For nearly two centuries, a cornerstone of Anglo-American corporate law has been the fiduciary duty of loyalty, the most demanding and litigated fiduciary obligation imposed on corporate managers. The duty—which regulates financial conflicts of interest and requires managers to subordinate their own interests to the corporation’s—represents a key policy lever to address the most pernicious of intra-firm agency costs. Practitioners, academics, and jurists alike have characterized loyalty as the most important fiduciary obligation, crediting it with facilitating efficient corporate stewardship and catalyzing investment and entrepreneurship. Indeed, a well-known literature in law and finance has documented the beneficial role that credible conflict-of-interest management plays in promoting company value, vibrant capital markets, and firm longevity. The duty of loyalty has long been characterized as inveterate and unyielding: While much of corporate law consists of “default rules” that parties may freely alter, loyalty is widely perceived as “immutable”—impervious to private efforts to dilute, tailor, or eliminate it.

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The Real Effects of Uncertainty on Merger Activity

Robert A. Dam is Assistant Professor of Finance at University of Colorado at Boulder Leeds School of Business. This post is based on a forthcoming article by Professor Dam; Vineet Bhagwat, Assistant Professor of Finance at University of Oregon Lundquist College of Business; and Jarrad Harford, Professor of Finance at University of Washington Foster School of Business.

Imagine you are in the market for a new car. You find exactly the car you want, and agree to the price and financing conditions, but there is a twist. In this alternate universe, you can’t actually pick up your car for several months, and during this time the actual value of “your” car is likely to have changed by 20% or more. Even worse, when the car has increased in value, the dealer can back out of your agreement, while you are likely stuck with the original terms if the car’s value has dropped. Are you still ready to sign on the dotted line?

In our article, The Real Effects of Uncertainty on Merger Activity, forthcoming in the Review of Financial Studies, we suggest acquirers face a reality not unlike our hypothetical car buyer, and as a result defer acquisitions when uncertainty is high. While the bidder and target agree to the terms of the deal up front, in our sample it takes an average of 126 days until deals for publicly-traded firms are completed. During the delay, we estimate that the target’s standalone value changes by over 10% in two-thirds of the deals, and by more than 20% over half of the time. Completing our analogy, we reference earlier works in the legal literature that argue targets retain—via proxy votes and share tenders—an easy out when it suits their interests, while bidders are far more likely to be held to the deal. [1]

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The Impact of the New Restructuring Law on Puerto Rico Creditors

Lorraine S. McGowen is a partner in the restructuring group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication.

On June 30, 2016, the United States Senate passed the “Puerto Rico Oversight, Management and Economic Stability Act” (“PROMESA”) and it was quickly signed into law by President Obama. [1] PROMESA enables the Commonwealth of Puerto Rico and its public corporations and other instrumentalities in financial distress to restructure their debt. [2] The goal of PROMESA is to “bring solvency to Puerto Rico, build a foundation for future growth and ensure the island regains access to capital markets”. [3] PROMESA, though, is not limited to restructuring and enforcement of debt obligations or securities. If you lent money or extended other forms of credit, or provided goods or services, to Puerto Rico or any of its instrumentalities, PROMESA may affect you.

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The Recent Decline in Legal Challenges to M&A Deals

Ravi Sinha is a principal at Cornerstone Research. This post is based on a Cornerstone publication by Mr. Sinha. This post is part of the Delaware law series; links to other posts in the series are available here.

For the first time since 2009, the percentage of M&A deals valued over $100 million that were subject to shareholder litigation declined to below 90 percent in 2015 and so far in 2016. The lower rate in late 2015 and the first half of 2016 may be due to the impact of the January 2016 Trulia ruling that diminished the acceptability of disclosure-only settlements. In addition, a smaller number of competing lawsuits were filed for the same deal and in fewer competing jurisdictions. Lawsuits were less likely to be filed in the Delaware Court of Chancery than in previous years.

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Creating a Foundation for a Substantive Debate on Proxy Access Proposals

Bernard S. Sharfman is an associate fellow of the R Street Institute, a former Visiting Assistant Professor of Law at Case Western Reserve University School of Law, a former adjunct professor of business law at the George Mason University School of Business as well as other business and law schools, and a member of the Journal of Corporation Law’s editorial advisory board. This post relates to two recent papers authored by Professor Sharfman, available here and here. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk; and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

If shareholder proposals on proxy access—that is, the ability of certain large shareholders to have their own slates of nominees to corporate boards included in the proxy materials companies must distribute ahead of their annual meetings—were candidates running for election, they could be thought of as running unopposed. That is, ever since the Office of the Comptroller of New York City (comptroller) launched its proxy-access initiative in the fall of 2014, there has been little public response from the community of public companies and others who do not believe proxy access is good for corporate governance.

As a result, the advocates for proxy access are winning the public debate hands down. Not surprisingly, the comptroller and other shareholder activists have been quite successful in gaining significant shareholder support for these proposals and many corporate boards have felt compelled to implement proxy access without even requiring a shareholder vote.

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Weekly Roundup: August 12–August 18, 2016


More from:

This roundup contains a collection of the posts published on the Forum during the week of August 12–August 18, 2016.









Optimizing Board Evaluations






Executive Compensation: What Worked?


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