Monthly Archives: January 2017

The Importance of the Business Judgment Rule

Bernard S. Sharfman is an associate fellow of the R Street Institute and a member of the Journal of Corporation Law’s editorial advisory board. This post is based on Prof. Sharfman’s recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

The business judgment rule (Rule), the most prominent and important standard of judicial review under corporate law, protects a decision of a corporate board of directors (Board) from a fairness review (“entire fairness” under Delaware law) unless a well pleaded complaint provides sufficient evidence that the Board has breached its fiduciary duties or that the decision making process is tainted, such as with a lack of independence or interestedness. [1] Yet, anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the Rule is so important.

To provide a better understanding of the Rule’s importance, my paper, The Importance of the Business Judgment Rule, takes the approach that the Aronson formulation of the Rule [2] is not the proper starting place for its explanation. The Aronson formulation is a common starting point because it includes an aspect of the duty of care, the need for a Board to make a decision “on an informed basis,” that was not found in prior formulations used by the Delaware Supreme Court. Yet, starting with the Aronson formulation is like staring in the middle of a story, with much to be lost in its understanding.


Insider Trading Law After Salman

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

In Salman v. United States, decided on December 6, 2016, the Supreme Court upheld a conviction for criminal violations of insider trading laws. The Court, however, declined to adopt the expansive theories of insider trading advanced by the government and expressed skepticism about those theories at oral argument. Salman provides an appropriate occasion to describe what Judge Rakoff referred to as the “topsy-turvy” way in which insider trading law has developed. We trace the evolution of the law up to and including Salman and discuss five potential defenses that exist even after the Supreme Court’s decision.


Say on Pay Laws, Executive Compensation, CEO Pay Slice, and Firm Value around the World

Ricardo Correa is Chief of the International Financial Stability Section, Division of International Finance, U.S. Federal Reserve Board; Ugur Lel is Nalley Distinguished Chair in Finance and Associate Professor of Finance at University of Georgia Terry College of Business. This post is based on their recent article. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

In our study Say on Pay Laws, Executive Compensation, Pay Slice, and Firm Valuation around the World, which was recently published in the Journal of Financial Economics, we examine changes in CEO compensation and in firm valuation around the adoption of say on pay (SoP) laws in a large cross-country sample of firms. SoP laws aim to more closely align the interests of executives with those of shareholders—a key tenet of corporate governance—by providing shareholders with the ability to vote on their firms’ compensation policies on a periodic basis. The main purposes of these laws are to limit the seemingly excessive levels of CEO pay, tighten the link between firm performance and CEO pay, and improve disclosure on executive compensation. Between 2003 and 2012, 11 developed countries passed SoP laws, and several countries are either contemplating or have recently adopted such laws, notably Switzerland and France.


Acquisition Financing: the Year Behind and the Year Ahead

Eric M. Rosof is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Rosof, Joshua A. Feltman, Gregory E. Pessin, Michael S. Benn, and John R. Sobolewski.

If 2008 through 2010 were years of tumult and recession in U.S. financing markets, and 2011 through 2015 years of recovery and growth, marked by ever-lower yields and record-setting financing activity even in the face of new compliance regimes, 2016 felt like a tipping point. After hitting record lows in the first half of the year, interest rates at last experienced a sustained rise, and the U.S. election results opened the door to major regulatory and legislative changes, including the potential roll-back of portions of Dodd-Frank and the potential roll-out of consensus-fueled fiscal stimulus.


Private Ordering Post-Trulia

Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on a recent paper by Professor Griffith, and is part of the Delaware law series; links to other posts in the series are available here.

One year ago, in its January 2016 Trulia opinion, the Delaware Court of Chancery announced that nuisance settlements would no longer be welcome in Delaware. A lingering question, however, was whether they would be welcome elsewhere. A year later, the data now suggests that they are. Indeed, merger litigation remains extremely common, and claims are frequently brought in an alternative jurisdiction. The implication, unfortunately, is that Trulia alone is not sufficient to solve the “deal tax” problem.

In Private Ordering Post-Trulia: Why “No Pay” Provisions Can Fix the Deal Tax and Forum Selection Provisions Can’t, I map the evolution of merger litigation post-Trulia. I find that Trulia succeeds inside but fails outside of Delaware. The question thus becomes what more can be done to contain nuisance litigation in the wake of M&A transactions. I focus on private ordering solutions. After exploring the failure of the Exclusive Forum provision to cope with the assessment of the deal tax in alternative fora, I demonstrate how the No Pay provision promises a more effective cure for what ails merger litigation.


Proxy Access Reaches the Tipping Point

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on a Sidley update by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland. 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).

In late December 2016, proxy access reached the tipping point in terms of adoption by large companies—just over 50% of S&P 500 companies have now adopted proxy access. Through the collective efforts of large institutional investors, including public and private pension funds, and other shareholder proponents, shareholders are increasingly gaining the power to nominate a portion of the board without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials), shareholders will have yet another tool to influence board decisions.

As a follow-up to our previous reports on proxy access, this update reflects recent developments on the topic, including:


Delaware Supreme Court Rules on Director Independence

Edward B. Micheletti and Edward P. Welch are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Micheletti, Mr. Welch, and Keenan Lynch, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently issued an important decision on the subject of director independence. In Sandys v. Pincus, No. 157, 2016 (Del. Dec. 5, 2016), the Delaware Supreme Court held that certain directors of Zynga, Inc. (Zynga or the company) were not independent because of personal and professional connections to Mark, J. Pincus, the company’s founder and controlling stockholder, and Reid Hoffman, an outside director. The Sandys opinion and the Supreme Court’s reasoning underlying its specific decisions concerning director independence should be carefully considered by boards of directors of companies faced with stockholder derivative lawsuits, particularly for companies that have a controlling stockholder.


Corporate Donations and Shareholder Value

Hao Liang is Assistant Professor of Finance at Singapore Management University, and Luc Renneboog is Professor of Corporate Finance at Tilburg University. This post is based on their recent paper.

More and more companies strive for a reputation of “giving back to society” by the means of donation. A 2014 survey among 261 leading firms worldwide (CECP, 2014) concludes that the amount of corporate philanthropy totals $25 billion, with a median of $18 million per company which is equivalent to 1.01% of pre-tax profits, 0.13% of revenues, or $644 of per employee. At the industry level, industrial and energy companies are at the bottom with donations of only 0.76% of pre-tax income, which stands in marked contrast with the healthcare and consumer discretionary sectors as top contributors with 1.58% and 1.25% of pre-tax income, respectively. The main beneficiaries are educational organizations capturing 28% of the total donations, followed by health & social services with 27%. The amount of donations keeps growing; it has augmented by about 40% over the past decade.

Corporate philanthropy usually concerns voluntary donations of corporate resources to charitable causes. As corporate philanthropy consists of pro-social behavior, it is considered as part of corporate social responsibility (CSR) that involves explicit pro-social spending. We can partition donations on the basis of the type of beneficiary: charitable and political donations, but can also dissect total charitable donations on the basis of the type of payment: cash and in-kind donations. An important mechanism for distributing donations is through a corporate foundation/trust; a good third of corporate donations are made via a corporate foundation.


Effectively Administering a Relative TSR Program—Learning and Best Practices

Steve Pakela is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Pakela, Brian Lane, and Brian Scheiring. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Relative TSR is a performance metric most often used in LTI performance plans. Its use as a metric has nearly doubled over the past 5 years and is now used by approximately 50% of companies spanning all sizes and industries. While the appeal of this metric for shareholders and directors alike is its alignment with shareholder value creation and the absence of having to establish long-term performance goals, there are other nuances and considerations that can make the administration of these plans much more complex than other types of arrangements. Over the years, our experience in designing and assisting companies with administering relative TSR plans has led to a series of best practices that are the focus of this article. These practices are less about contemporary design issues, and more about ensuring the appropriate provisions and methodologies are in place to enhance the governance of relative TSR plans from the time of grant to the calculation of payouts. They include:

  • understanding the implications of award valuation on the number of shares granted;
  • understanding the nuances of the TSR definition;
  • selecting a method for calculating relative TSR performance;
  • recognizing peer group changes that occur during the performance period; and
  • enhancing plan governance.


SEC Guidance on “New GAAP” Transition Disclosures and Non-GAAP Measures

Ellen Odoner is a partner in the Public Company Advisory Group of Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Goltser, Catherine T. Dixon, and P.J. Himelfarb.

At three significant year-end conferences, members of the SEC’s senior accounting and legal staff reinforced previously delivered guidance on several key financial reporting issues relevant to preparation of upcoming earnings releases, the 2016 Form 10-K and subsequent filings. We expect that the announced departures of SEC Chair Mary Jo White, Division of Corporation Finance Director Keith Higgins and Division of Enforcement Director Andrew Ceresney will not diminish the career staff’s promised close scrutiny in the new year of how well companies are following this guidance. Whether or not the Enforcement Division’s vigorous pursuit of accounting, internal controls and auditor independence cases will continue under the next administration is somewhat more difficult to predict, however, and will bear watching.

The financial reporting guidance discussed in this post is drawn from staff remarks delivered at Practising Law Institute’s 48th Annual Institute on Securities Regulation held on November 2-4, the Fall Meeting of the ABA Committee on Federal Regulation of Securities held on November 18-19, and the AICPA National Conference on Current SEC & PCAOB Developments held on December 5-7, 2016. We also cover staff guidance for the next round of conflict minerals disclosure, which was delivered at the PLI conference. Throughout this post we provide practical tips in “What to do Now?” sections.


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