Monthly Archives: December 2016

Nasdaq and NYSE Guidance on Equity Plan Amendments Increasing Share Withholding

David M. Kaplan is partner and co-chair of the Employee Benefits Practice Group and Andrew J. Rudolph is a senior partner at Pepper Hamilton LLP. This post is based on a Pepper publication by Mr. Kaplan and Mr. Rudolph.

Earlier this year, the Financial Accounting Standards Board (FASB) issued new guidance (ASU 2016-09) regarding equity-based compensation. Among other things, this guidance will enable employers to increase share withholding on equity awards. Now Nasdaq and the NYSE have clarified that equity plan amendments implementing this increased share withholding will not require stockholder approval.

Under current accounting standards, an equity award is subject to liability-based (i.e., “variable”) accounting if it permits the withholding of shares to satisfy taxes associated with that award in excess of the minimum withholding legally required. Most employers want to avoid variable accounting, and, accordingly, most equity plans expressly limit share withholding to the minimum amount required by law.

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Weekly Roundup: December 9–December 15, 2016


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This roundup contains a collection of the posts published on the Forum during the week of December 9–December 15, 2016.



Third Circuit Ruling on Make-Whole Provisions Enforceable in Bankruptcy














Forum-Selection Bylaws—Another Attack Rebuffed

Eric M. Roth and Eric S. Robinson are of counsel at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Roth, Mr. Robinson, and Aneil Kovvali. The memorandum discusses the continued judicial acceptance of exclusive forum bylaws, which were put forward by Wachtell Lipton partner Theodore N. Mirvis and discussed by him on the Forum herehere, and here. This post is part of the Delaware law series; links to other posts in the series are available here.

In previous posts (available here and here), we have tracked the increasing judicial acceptance of forum selection bylaws adopted by Delaware corporations in the wake of the 2013 Court of Chancery decision in Chevron and the 2015 enactment of Section 115 of the Delaware General Corporation Law. Some plaintiff’s law firms nevertheless continue to file breach of fiduciary duty claims in other states against Delaware companies that have adopted forum selection bylaws, in apparent response to the Court of Chancery’s recent crackdown on disclosure-only settlements. [On December 12, 2016], a Missouri state court rejected the most recent attempt to circumvent a Delaware forum bylaw, amplifying the trend toward enforcement of such bylaws adopted in anticipation of, or in connection with, a potential corporate transaction.

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The Law and Brexit IX: The Cliff Edge and New Proposals for EU Intermediate Holding Companies

Thomas J. Reid is Managing Partner of Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Additional posts on the legal and financial impact of Brexit are available here.

“What’s the model? Have your cake and eat it.”

These were the handwritten notes of a Conservative Party aide captured by a sharp-eyed photographer as the aide left a meeting at the UK Department for Exiting the EU. The note also suggested that the UK will try for a “Canada plus” type arrangement and that getting special treatment for UK financial service providers would be “difficult”. As a statement of government policy, this note tells us only a little more than the UK Prime Minister’s famous line of “Brexit means Brexit”. Conversely, European Union (“EU”) leaders have begun to warn this week that any special deal to allow the continuation of passporting is unlikely and some may even resist granting a transitional period. In short, then, a relatively rapid move towards a “hard” Brexit seems a reasonably likely outcome of the Brexit negotiations.

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The Venture Capital Board Member’s Survival Guide

Steven E. Bochner and Amy L. Simmerman are partners at Wilson Sonsini Goodrich & Rosati. This post is based on their recent article and is part of the Delaware law series; links to other posts in the series are available here. The views expressed in this article are those of the authors and are not necessarily those of Wilson Sonsini Goodrich & Rosati or its clients. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here).

The venture capital industry and the companies it supports are a crown jewel of the United States economy. The sector fuels innovation and economic activity and has spawned companies such as Apple, Amazon, Netflix, Cisco, Google, Facebook, Genentech, Tesla, and Twitter.

While there is an alignment of interests among stakeholders in venture-backed companies much of the time, certain recurring features of venture capital investments lead to potential structural conflicts under Delaware corporate law. Venture capital investment terms typically include the right to elect a partner of the fund to the private company’s board of directors. The venture fund directors in this context are “dual fiduciaries,” having fiduciary duties to the fund itself and its partners, as well as to the stockholders of the company on whose board they serve. In addition, venture capital investors obtain, in the form of preferred stock, preferential rights over holders of common stock in areas such as allocation of proceeds in an acquisition of the company, protection from future dilution, and special voting rights. Transactions in which the interests of the preferred and common holders diverge, such as down-round financings and acquisitions resulting in disparate treatment of stockholders, can create difficult conflicts of interest. Over time, the Delaware case law has come to hold that where preferred stock terms address an issue, the rights of preferred stockholders are generally contractual in nature, and directors should, where possible, prefer the interests of common stockholders. This may exacerbate the potentially conflicted position of the venture fund designee whose fund holds preferred stock.

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Predictions on Dodd-Frank’s Executive Compensation Provisions

Joseph A. Hall is a partner and head of the corporate governance practice at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); How to Fix Bankers’ Pay by Lucian Bebchuk (discussed on the Forum here); and Rationalizing the DoddFrank Clawback by Jesse Fried (discussed on the Forum here). Additional posts addressing legal and financial implications of the incoming Trump administration are available here.

With President-elect Donald Trump’s transition underway, speculation has been rife as to the impact of his Administration and a Republican-controlled Congress on a variety of issues, including executive compensation. While one might assume that all of the recent executive compensation rules mandated by the Dodd-Frank Act are headed out the window, the fate of those rules will depend on two key variables:

  • The first is the timing of the rules’ effective and compliance dates as compared to the timing feasibility of the potential rollback vehicles, such as the Financial CHOICE Act, introduced by the chairman of the House Financial Services Committee earlier this year.
  • The second variable consists of the views of the Trump Administration, its new SEC Commissioners and others about the policy goals and content of the rules, including the level of emphasis that they choose to give to executive compensation as a strategic matter. [1]

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Issues and Best Practices in Drafting Drag-Along Provisions

Robert B. Little is a partner and Joseph A. Orien is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication.

Drag-along rights, or drag rights, which give the majority owner of a company the right to force minority owners to participate in a sale of the company, can be a fiercely negotiated provision in a company’s governing documents. These provisions implicate the rights a majority owner and minority owner will have in a future sale transaction, which could be years down the road and to an unknown buyer. From the perspective of a majority owner, these provisions are intended to ensure that the majority owner will be able to sell the entire company on terms and conditions, and at the time, desired by the majority owner. In negotiating these provisions, the minority owner seeks to ensure that such a sale will not disadvantage the minority. In light of what is at stake and the inherent uncertainty drag rights engender, parties are understandably cautious when approaching the negotiating table.

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Corporate Control Activism

Doron Levit is Assistant Professor of Finance and Adrian Aycan Corum is a doctoral candidate at the Wharton School of the University of Pennsylvania. 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 Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Corporate boards can resist takeovers, for example, by issuing poison pills. In some cases, they use it to negotiate a higher takeover premium and sell the firm, and in others, they protect their private benefits of control and block takeovers that would otherwise create shareholder value. In those cases, the resistance to takeovers can be overcome only if the incumbent directors are voted out in a contested election, i.e., a proxy fight. Empirically, however, bidders rarely launch a proxy fight. Most proxy fights are launched by activist hedge funds, which often demand from companies they invest in to sell all or part of their assets. In fact, the probability of a takeover is several times higher if an activist hedge fund is a shareholder of the target. This evidence suggests that activist investors play an important role in the market for corporate control. However, since bidders and activists can use similar techniques to challenge corporate boards (i.e., proxy fights), what is the relative advantage of activists in pressuring companies to sell? More generally, what are the implications of activist interventions on the M&A market? Do activists complement the effort of bidders to acquire companies, or do they compete away bidders’ rents? We study these questions in our paper Corporate Control Activism, which is available in SSRN.

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2016 U.S. Shareholder Activism Review and Analysis

Glen T. Schleyer is a partner Stephen M. Guynn is an associate at Sullivan & Cromwell LLP. This post is based on the Executive Summary of a Sullivan & Cromwell publication by Mr. Schleyer, Mr. Guynn, Korey R. Inglin, Tengteng Peng, and Chenjing Shen. 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 Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Shareholder activism remains a major force in corporate decision-making in 2016 but is increasingly operating in an environment of robust, multi-faceted shareholder engagement, particularly at large companies. The time and effort that companies and institutional investors have spent developing a mutual understanding of each other’s concerns have narrowed the opportunities for activists at high-profile companies, and the returns of activist funds overall are down in 2016. The total number of activist campaigns has nevertheless remained high, due in large part to newer and often smaller activists targeting small and mid-size companies.

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NFA’s Swap Dealer Examinations

Gail C. Bernstein is Special Counsel and Daniel J. Martin is an Associate at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication by Ms. Bernstein and Mr. Martin.

Both the Commodity Futures Trading Commission (CFTC) and the National Futures Association (NFA), the self-regulatory organization for the US derivatives industry, have signaled their expectation—now nearly four years after swap dealers first became provisionally registered—that firms have had sufficient time to implement fully the CFTC’s swap regulations. This post updates recent changes in NFA’s approval process, provides a status report on NFA’s current examination schedule and previews what changes swap dealers may expect in future NFA examinations.

Most notably, NFA is likely to begin conducting examinations of non-US swap dealers for the first time. In addition, during the course of its future examinations, NFA is likely to evaluate whether firms have taken appropriate corrective action based on prior feedback.

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