Monthly Archives: February 2017

2017: Where Things Stand—Appraisal, Business Judgment Rule and Disclosure

Gail Weinstein is senior counsel and Philip Richter is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Richter, Steven EpsteinWarren S. de WiedChristopher Ewan, and Brian T. Mangino. This post is part of the Delaware law series; links to other posts in the series are available here.

As has been widely discussed over the past two years, the Delaware courts have moved toward substantially greater deference to board and stockholder decisions in M&A transactions. Other than in the case of transactions with controllers, there is significantly less risk today than in the past that a challenge (particularly post-closing) to a board decision to engage in a transaction will be successful; there is a far greater likelihood that litigation challenging a transaction will be dismissed at an early stage of litigation; and when there has been a pre-signing market check, there is considerably less risk that an appraisal award issued to dissenting shareholders will exceed the merger price.

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2017 Investor Corporate Governance Report

Viraj Patel is Head of Operations at CMi2i Proxy. This post is based on a CMi2i publication by Mr. Patel, Tony Quinn, and Mark Simms.

In our 2017 Annual Corporate Governance Survey, we asked Institutional Investors who collectively represent over $5 Trillion of Assets under Management a series of questions relating to one theme: what do they believe will be the key Corporate Governance areas of focus for 2017 and beyond?

In keeping with Surveys from previous years, investors expect to see increased levels of engagement with issuers (“Listed Companies”)—with a clear majority of respondents (69%) now stating that they intend to step up the amount of engagement they undertake in 2017. Institutions are being encouraged to monitor the issuers in which they invest more closely. Pressure for this originates from three areas: their own clients, evolving best practice and increasing regulatory obligations in the form of stewardship codes.

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Are Bank Fiduciaries Special?

Robert C. Hockett is Edward Cornell Professor of Law at Cornell Law School. This post is based on Professor Hockett’s recent article.

A distinct current of the post-crisis financial reform literature seizes on banking institutions’ status as corporate entities, and suggests that improving the governance regimes of these institutions can help prevent a recurrence of the abuses that led us to 2008. Some contributors to this literature highlight apparent abuses of the norms already governing bank fiduciaries prior to the crisis, and propose means of strengthening the enforcement regimes that vindicate those values. Others suggest that the content of traditional fiduciary duties be altered. And still others propose analogues to optional B-Corp charters for banks, pursuant to which some might then signal their greater public-spiritedness to would-be shareholders and depositors and, by attracting the same, model a “better way” for the industry.

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In Search of Lost Time: What if Delaware Had Not Adopted Shareholder Primacy?

David J. Berger is Partner at Wilson Sonsini Goodrich & Rosati. This post is based on his recent paper, forthcoming as a chapter in The Corporate Contract in Changing Times. This post is part of the Delaware law series; links to other posts in the series are available here.

Delaware law today is based upon the core concept that corporate directors cannot subordinate the best interests of stockholders to that of other corporate constituencies unless stockholders themselves expressly support that subordination. In my recent paper In Search of Lost Time: What if Delaware Had Not Adopted Shareholder Primacy, which is publicly available on SSRN (and is forthcoming in The Corporate Contract in Changing Times, Steven Davidoff Solomon and Randall Thomas ed, University of Chicago Press), I make no attempt to challenge this black-letter law. Instead, my paper asks the question “what if”? That is, how might directors and other corporate constituencies manage the corporation if we did not live in a world of stockholder control?

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Hot-Button Issues for the 2017 Proxy Season

This post is based on an Equilar publication by Troy A. Paredes, founder of Paredes Strategies LLC and former SEC Commissioner; Jonathan Salzberger, Director at Innisfree M&A, Inc.; Jennifer Cooney, Advisory Director at Argyle; Paula Loop, Leader of the Governance Insights Center at PricewaterhouseCoopers LLP; and John H. Stout, Partner at Fredrikson & Byron, P.A. This publication is based on the Winter 2017 issue of C-Suite magazine, available here.

Engaging Regulatory Change

Troy A. Paredes, Founder, Paredes Strategies LLC

People matter. Or as it is put in Washington circles, “personnel is policy.” With the transition of the White House from President Obama to President Trump, there will be new people throughout the federal government. This includes a Republican majority at the Securities and Exchange Commission (SEC)—a new chairman along with two Republican commissioners. (The SEC is bipartisan with no more than three of the five commissioners allowed to be from the same political party.)

Although it is too early to say for sure how this will change securities regulation, consider the many rules that were adopted 3­2 recently with the SEC Republican commissioners, including myself, dissenting. When it comes to proxy season, two rules that Republicans objected to stand out: proxy access and CEO pay ratio disclosures.

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Shareholder Proposals Regarding Lead Director Tenure: A Harbinger of Things to Come?

Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on a Cooley publication. Related research from the Program on Corporate Governance includes The “New Insiders”: Rethinking Independent Directors’ Tenure by Yaron Nili (discussed on the Forum here).

The topic of director tenure has increasingly become the focus of both academics and investors. Some argue that long-term directors contribute deep knowledge of the company and provide experience, historical memory and continuity to the board—along with the gravitas sometimes necessary to challenge management. Others contend that directors with long tenure are “stale” and rarely contribute fresh perspectives. Moreover, they suggest, the independence of directors with long tenure may even be compromised—not in the technical sense of the NYSE or Nasdaq definitions of course, but rather more in the sense of “social independence,” meaning that the development over time of shared social connections might bias them or taint their objectivity. According to the WSJ, the head of a corporate governance center at the Conference Board has observed that “’[t]he tenure issue is one that is bubbling below the surface.’“ (See this PubCo post and this PubCo post.)

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Should Mutual Funds Invest in Startups?

Jeff Schwartz is William H. Leary Professor of Law, University of Utah S.J. Quinney College of Law. This post is based on a recent article by Professor Schwartz, forthcoming in the North Carolina Law Review.

Contrary to longstanding practice and to their reputation for investing in public companies, mutual funds, including some of the most prominent, are allocating portions of their portfolios to private venture-stage firms, including famous unicorns like Airbnb and Uber. In my forthcoming article, Should Mutual Funds Invest in Startups? A Case Study of Fidelity Magellan Fund’s Investments in Unicorns (and other Startups) and the Regulatory Implications, I analyze whether the securities laws adequately protect mutual-fund investors from the risks that arise when their funds add this unique asset class to fund holdings.

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Private Funds Year in Review and 2017 Outlook

Ari M. Berman is a partner at Vinson & Elkins LLP. This post is based on a Vinson & Elkins publication by Mr. Berman, Mark ProctorAmy Lamoureux Riella, and Chris Rowley.

In 2016, the U.S. Securities and Exchange Commission (SEC) continued its regulatory focus on private funds. The SEC investigated and brought cases related to staple issues such as disclosure failures and Foreign Corrupt Practices Act violations, and extended into areas such as cybersecurity and valuation. As 2017 gets off the ground, complete with the uncertainty inherent with a new administration, private funds naturally wonder about the future of the recently-robust enforcement environment. It is ever more important for private fund advisers to continue to update and improve their compliance infrastructure and to evaluate their internal policies and procedures.
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2015 Short- and Long-Term Incentive Design Criteria Among Top 200 S&P 500 Companies

James F. Reda is a Managing Director at Arthur J. Gallagher & Co. This post is based on an Arthur J. Gallagher publication by Mr. Reda, David M. Schmidt, and Kimberly A. Glass. 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).

Over six years ago, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) was signed into law. Implementation of this Act by the Securities and Exchange Commission (“SEC”) continues to unfold slowly and with increasing uncertainty following this year’s election.

The initial proposal of the CEO pay ratio disclosure rule was released on Sept. 18, 2013 with comments due Dec. 2, 2013. The SEC had targeted fall of 2014 for action on this regulatory initiative, which was pushed back until the rules were finalized on Aug. 18, 2015. The final rules require that CEO total annual compensation, as stated in the summary compensation table, be compared to the median total annual compensation of all the other employees of the company, both foreign and domestic. The impact of these final rules on CEO pay remains a matter of speculation. Nonetheless, CEO pay ratio disclosures will become a part of the corporate executive compensation disclosure package for fiscal year reports beginning on or after Jan. 1, 2017, which for many would be at their 2018 annual shareholders’ meeting.

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Corporate Officers as Agents

Deborah DeMott is David F. Cavers Professor of Law at Duke Law School. This post is based on her recent article, forthcoming in the Washington and Lee Law Review.

Although officers are crucial to corporate operations, scholarly and theoretical accounts tend to slight officers. Officers are often amalgamated with directors into a single category, “managers,” which elides significant differences. In my article, I anchor officers within the common law of agency—as does black-letter law—which crisply differentiates officers from directors. Understanding that agency is central to the legal account of officers’ positions and responsibilities is crucial to seeing why, like directors, officers are fiduciaries, but distinctively so, not as instances of generic “corporate fiduciaries.” Officers, like directors, owe duties of loyalty to the corporation, but also particularized duties of care, competence, and diligence. Additionally, officers’ duties of performance encompass two distinct to agency law: a duty to comply with reasonable instructions and a duty to share material information with the board of directors or others within the corporation. These furnish the legal underpinning for a corporation’s ability to exercise control over its officers’ actions.

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