Monthly Archives: January 2017

Preparing for the 2017 Proxy Season

Thomas W. Christopher and Tony Richmond are partners at Latham & Watkins LLP. This post is based on a Latham publication by Mr. Christopher, Mr. Richmond, Brian MillerTiffany Fobes CampionJessica Lennon, and Danit Tal.

Many public companies have received shareholder proxy access proposals in connection with their upcoming 2017 annual meetings and additional companies are likely to receive proposals in the coming months. Proxy access is a mechanism that gives shareholders the right to nominate directors for inclusion in the company’s annual meeting proxy statement. Proxy access gained significant momentum in 2015 and 2016, with more than 200 proposals submitted to shareholders and approximately 58% of those proposals receiving shareholder approval. [1]

Accordingly, public companies may wish to consider proxy access and develop a plan for responding to a shareholder proxy access proposal. Based on lessons learned in recent years, this post summarizes:

  1. Actions a public company can take to prepare for receiving a proxy access proposal
  2. Whether a company should wait and react to a specific shareholder proxy access proposal or preemptively adopt its own proxy access regime
  3. Alternatives available to a company following receipt of a proxy access proposal

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2016 Year in Review: Corporate Governance Litigation and Regulation

Jason M. Halper is partner and Co-Chair of the Global Litigation Group at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper, Nathan Bull, Jared Stanisci, Adam Magid, and Jaclyn Hall. This post is part of the Delaware law series; links to other posts in the series are available here.

2016 saw many notable developments in corporate governance litigation and related regulatory developments. In this article, we discuss significant judicial and regulatory developments in the following areas:

  • Mergers and Acquisitions (“M&A”): 2016 was a particularly significant year in M&A litigation. In Delaware, courts issued important decisions that impose enhanced scrutiny on disclosure-only M&A settlements; confirm the application of the business judgment rule to mergers approved by a fully informed, disinterested, non-coerced shareholder vote; inform the proper composition of special litigation committees; define financial advisors’ liability for breaches of fiduciary duty by their clients; and offer additional guidance for calculating fair value in appraisal proceedings.
  • Controlling Shareholders: Delaware courts issued important decisions clarifying when a person with less than majority stock ownership qualifies as a controller, when a shareholder may bring a quasi-appraisal action in a controlling shareholder going-private merger, and when the business judgment rule applies to controlling shareholder transactions. In New York, the Court of Appeals followed Delaware’s guidance as to when the business judgment rule applies to a controlling shareholder squeeze-out merger.
  • Indemnification and Jurisdiction: Delaware courts issued decisions clarifying which employees qualify as officers for the purpose of indemnification and articulating an updated standard for exercising jurisdiction in Delaware over actions based on conduct undertaken by foreign corporations outside of the state.
  • Shareholder Activism and Proxy Access: Shareholder activists remained busy in 2016, including mounting successful campaigns to replace CEOs and board members at Chipotle and Hertz. Additionally, the SEC’s new interpretation of Rule 14a-8 has limited the ability of management to exclude a shareholder proposal from a proxy statement on the grounds that it conflicts with a management proposal. Also, some companies have adopted “proxy rights” bylaws, which codify a shareholder’s right to directly nominate board members.

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The Common Law Corporation: The Power of the Trust in Anglo-American Business History

John D. Morley is Professor of Law at Yale Law School. This post is based on his recent article.

Just about every big business we can think of is organized as a corporation or something similar. But, what, exactly does the corporate form accomplish? What does it do that other forms of organization cannot, and what did its development in early modern England contribute to the making of the modern world?

In a new article just published in the Columbia Law Review, I offer new answers by suggesting that if the corporate form mattered at all in Anglo-American legal history, it was not for the reasons we have long supposed. Based on a new examination of historical legal sources from the late Middle Ages to the middle of the twentieth century, I show that the basic powers of the corporate form were also available throughout most of modern history through an underappreciated but enormously important legal device known as the common law trust. The trust’s success at mimicking the corporate form meant that the corporate form was almost never the exclusive source of the legal features that have long been considered its key contribution to modern life.

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Former SEC Chair White Speaks at Securities Regulation Institute

Mary Jo White is former Chair of the U.S. Securities and Exchange Commission. This post is based on her recent keynote address at Northwestern University Pritzker School of Law’s 44th Annual Securities Regulation Institute. The complete publication, including footnotes, is featured on Practical Law.

It is an honor to speak with you again in honor of Alan B. Levenson, not only a legendary Director of the SEC’s Division of Corporation Finance and distinguished private practitioner, but also a founder of both this Institute and the annual “SEC Speaks” conference. It is a special honor today that Alan’s daughter Julie Levenson is with us to share her wonderful memories of her father. In these days of politics and partisanship, Alan Levenson stands out as the model public servant, reminding us all of what government service is about. Each day I was at the Commission, I witnessed the dedication and sacrifice that true commitment to public service requires. I am pleased to report that the SEC today remains a strong, independent agency doing a critical job in the finest tradition of Alan Levenson.

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Corporate Governance Update: Prioritizing Board Diversity

David A. Katz is a partner and Laura A. McIntosh is a consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh.

In what has been called a “breakout year” for gender diversity on U.S. public company boards, corporate America showed increasing enthusiasm for diversity-promoting measures during 2016. Recent studies have demonstrated the greater profitability of companies whose boards are meaningfully diverse. In many cases, companies have collaborated with investors to increase the number of women on their boards, and a number of prominent corporate leaders have publicly encouraged companies to prioritize diversity. The Business Roundtable, a highly influential group of corporate executives, recently released a statement that explicitly links board diversity with board performance in the two key areas of oversight and value creation. Likewise, a group of corporate leaders—including Warren Buffett, Jamie Dimon, Jeff Immelt, and Larry Fink, among others—published their own “Commonsense Principles of Corporate Governance,” (discussed on the Forum here) an open letter highlighting diversity as a key element of board composition.

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Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital

Sean J. Griffith is T.J. Maloney Chair and Professor of Law, Fordham Law School; and Natalia Reisel is Professor of Finance and Business Economics, Gabelli School of Business, Fordham University. This post is based on a paper by Professor Griffith and Professor Reisel. 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); and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

Dead Hand Proxy Puts are a contractual innovation in corporate debt agreements that change the nature of proxy fights. The term triggers default and immediate repayment of corporate indebtedness in the event that a dissident slate wins a majority of the seats on the target company’s board. Unlike the “Change-of-Control” provisions that have become standard in corporate debt agreements, the Dead Hand Proxy Put strips incumbent management of the power to “approve” the dissident slate, thereby threatening a debt default that management is powerless to prevent. As a result, the feature has attracted attention as a defense against hedge fund activists, whose central weapon, the proxy fight, is blunted by the provision. Dead Hand Proxy Puts give shareholders powerful incentives to vote against activist slates in order to avoid triggering default.

In our paper, Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital, we empirically investigate the effect of the Dead Hand Proxy Put on corporate debt. We first demonstrate that the incidence of Dead Hand Proxy Puts has increased sharply in the era of hedge fund activism, especially for companies that are likely targets of hedge fund activists. We then show that Dead Hand Proxy Puts reduce the cost of debt. In addition, we find evidence that bondholders react positively to the presence of Dead Hand Proxy Puts in loan contracts, suggesting that bondholders free-ride on the protection that the provision offers to bank lenders. These findings suggest that the provision provides a significant firm-level benefit by reducing the cost of capital.

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The Spotlight on Boards 2017

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz, focusing on rapid response shareholder activism and preparedness, takeover defense and corporate governance. This post is based on a Wachtell Lipton publication by Mr. Lipton and Mr. Niles.

This past year witnessed a number of new corporate governance initiatives. Among the most significant:

  • BlackRock, State Street and Vanguard each issued strong statements supporting long-term investment, criticizing the short-termism afflicting corporate behavior and the national economy and rejecting financial engineering to create short-term profits at the expense of sustainable value.
  • The January 23, 2017, “must read,” corporate governance letter from Laurence Fink, Chairman and CEO of BlackRock, to the CEO’s of the S&P 500 companies contains the following advice, “As we seek to build long-term value for our clients through engagement, our aim is not to micromanage a company’s operations. Instead, our primary focus is to ensure board accountability for creating long-term value. However, a long-term approach should not be confused with an infinitely patient one. When BlackRock does not see progress despite ongoing engagement, or companies are insufficiently responsive to our efforts to protect our clients’ long-term economic interests, we do not hesitate to exercise our right to vote against incumbent directors or misaligned executive compensation.”

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Second Circuit Reverses Marblegate Decision Regarding Trust Indenture Act

John D. Lobrano is a partner at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher publication by Mr. Lobrano, Andrew R. KellerSandeep Qusba, and Marisa D. Stavenas.

On January 17, 2017, the Second Circuit Court of Appeals (the “Court”) held that Section 316(b) of the Trust Indenture Act of 1939, as amended (“TIA”), prohibits only non-consensual amendments to an indenture’s core payment terms (the amount of principal and interest owed and the date of maturity) [1]. This holding reversed the decision of the District Court for the Southern District of New York (the “SDNY”) [2], which had held that an out-of-court restructuring that involved the elimination of a parent guarantee and a significant asset transfer was impermissible under Section 316(b) of the TIA because such actions impaired the nonconsenting noteholders’ right to receive payment. [3]

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Succeeding in the New Paradigm for Corporate Governance

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, Steven A. RosenblumKaressa L. CainSabastian V. Niles, and Sara J. Lewis. Additional posts by Martin Lipton on short-termism and corporate governance are available here. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

Recognizing that the incentive for long-term investment is broken, leading institutional investors are developing a new paradigm (discussed on the Forum here) that prioritizes sustainable value over short-termism, integrates long-term corporate strategy with substantive corporate governance and requires transparency as to director involvement. We believe that the new paradigm can reduce or even eliminate the outsourcing of corporate governance and portfolio oversight to ISS and activist hedge funds.

Based on a series of statements by these investors over the past few years, we offer practical options for companies to consider as they adjust to the new paradigm and decide what and how to communicate. For example, the January 23, 2017 corporate governance letter from Laurence Fink, Chairman and CEO of BlackRock, to the CEO’s of the S&P 500 companies contains the following advice with respect to engagement:

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Supreme Court to Review the Application of Statute of Limitations to SEC Disgorgement Claims

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Karp, Charles E, Davidow, Andrew Ehrlich, Dan Kramer, Richard Rosen, and Audra Soloway.

On January 13, 2017, the Supreme Court granted certiorari in Kokesh v. Securities and Exchange Commission (U.S. Jan. 13, 2017) (No. 16-529) to determine whether disgorgement claims are subject to the five-year statute of limitations applicable to enforcement proceedings seeking civil penalties. The decision would resolve a split between the Tenth Circuit, which held in Kokesh that the five-year limitations period does not apply, and the Eleventh Circuit, which has held that it does. Notably, courts, including the Eleventh Circuit, have held that there is no statute of limitations for injunctive and other equitable relief. The law has, until now, been mixed as to whether disgorgement is a form of equitable relief immune from the five-year statute of limitations.

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