Monthly Archives: February 2017

U.S. Corporate Governance: Will Private Ordering Trump Political Change?

Marc S. Gerber is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Gerber. Additional posts addressing legal and financial implications of the Trump administration are available here. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In the weeks following the U.S. presidential election, companies and investors enjoyed a stock market rally fueled by expectations concerning tax cuts, increased government spending and significant deregulation. While the legal and regulatory changes envisioned under a new presidential administration may present real and substantial opportunities for companies, those changes may have little if any impact when it comes to corporate governance. The forces driving shareholder activism, governance activism, scrutiny of board composition, concerns regarding board oversight of risk management and director-shareholder engagement remain present and may gain strength in a period of deregulation. Investors, having successfully employed “private ordering” in recent years to achieve corporate governance changes, may find that private ordering will be able to trump the impact of political change.

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Contractual Freedom and the Evolution of Corporate Control in Britain, 1862 to 1929

Ron Harris is Professor of Legal History and Dean at Tel Aviv University Law School. This post is based on a paper authored by Professor Harris; Timothy W. Guinnane, Philip Golden Bartlett Professor of Economic History at the Department of Economics Yale University; and Naomi R. Lamoreaux, Stanley B. Resor Professor of Economics & History, Chair of the History Department at Yale University, and Research Associate at NBER.

British general incorporation law granted companies an extraordinary degree of contractual freedom to craft their own governance rules. It provided companies with a default set of articles of association, but incorporators were free to reject any part or the entire model and write their own rules instead. We study the uses to which incorporators put this flexibility by examining the articles of association filed by random samples of companies from the late nineteenth and early twentieth centuries, as well as by a sample of companies whose securities traded publicly. One might expect that companies that aimed to raise capital from external investors would adopt shareholder-friendly corporate governance rules. We find, however, that regardless of size or whether their securities traded on the market, most companies wrote articles that shifted power from shareholders to directors. We also find that there was little pressure—from the government, the financial press, shareholders, or the market—to adopt governance structures that afforded minority investors greater protection. Although there were certainly abuses, it seems that incorporators made an implicit bargain with investors that offered them the chance to earn high returns in exchange for their passivity.

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BlackRock CEO’s Annual Letter Asks Companies to Address Impact of Changes in Global Environment

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication.

This year, in his annual letter to corporate CEOs, Laurence D. Fink, CEO of asset manager BlackRock, challenges companies to address the impact of significant political, economic, societal and technological changes on their current strategies for long-term value creation: “As BlackRock engages with your company this year, we will be looking to see how your strategic framework reflects and recognizes the impact of the past year’s changes in the global environment. How have these changes impacted your strategy and how do you plan to pivot, if necessary, in light of the new world in which you are operating?”

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Business Judgment Rule Applies to Stockholder-Approved Transaction Involving Controlling Stockholder

J. D. Weinberg is a partner and Max S. Heuer is an associate at Covington & Burling LLP. This post is based on a Covington publication and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery ruled [on January 30, 2017] that the protection of the business judgment rule afforded to directors involved in a change of control transaction that is approved by a majority of fully informed, disinterested stockholders—as reinforced by the Delaware Supreme Court in 2015 in Corwin v. KKR Financial Holdings LLC [1] (discussed in a prior alert)—applied to a merger notwithstanding the presence of a target corporation controlling stockholder that was unaffiliated with the buyer. The In re Merge Healthcare Inc. Stockholders Litigation [2] decision by Vice Chancellor Glasscock punctuates a series [3] of recent Chancery decisions dismissing post-closing fiduciary claims under Corwin with useful judicial gloss on the scope of Corwin’s exception to business judgment review for transactions involving controlling stockholders. [4]

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Why Do Boards Exist? Governance Design in the Absence of Corporate Law

Mike Burkart is Professor of Finance at the London School of Economics; Salvatore Miglietta is Associate Professor of Finance at BI Norwegian Business School. This post is based on a recent paper authored by Mr. Burkart, Mr. Miglietta, and Ms. Charlotte Ostergaard, Professor of Finance at BI Norwegian Business School.

The board is commonly described as a monitor of management on behalf of dispersed shareholders, but fundamental aspects of exactly how and when it adds value, are still open questions (Adams, Hermalin and Weisbach (2010)). While boards help to solve managerial agency problems, they also entail costs by introducing an additional agency layer to the organizational structure. The trade-offs between costs and benefits are, however, obscured because the statutory law, in any jurisdiction, does not only mandate the board but also prescribes its powers and duties.

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Trump Administration and Congress Signal New Priorities for Financial Regulation

David F. Freeman is a partner and Anthony Raglani is an associate at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter Kaye Scholer publication by Mr. Freeman, Mr. Raglani, Robert C. Azarow, Henry G. Morriello, Charles Landgraf, and Kevin O’Neill. Additional posts addressing legal and financial implications of the Trump administration are available here.

The new Administration and Congress are pursuing a multi-pronged approach to regulatory relief for financial services firms, with stated goals of reducing administrative burdens and complexity as a means to spur economic growth. This includes a series of Executive Orders and Presidential Memoranda aimed at establishing new principles for financial regulation, temporarily staying and reconsidering recently-adopted regulations that have not yet gone into full effect and are deemed to be overly costly or inconsistent with the emerging regulatory priorities of the Trump Administration, and a directive to the new Treasury Secretary to review the existing financial regulatory framework and propose legislation to realign that framework with new priorities. The priorities and policies set out by the President are intended to inform future legislative action for reform of the financial regulatory system. For its part, Congress has commenced a review under the Congressional Review Act of recently-adopted rules and is considering new legislation to roll back portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the Dodd-Frank Act). The House Financial Services Committee under the leadership of its Chair Jeb Hensarling (R-TX) has an early start with the Financial CHOICE Act, which the Committee reported out in September 2016 and is actively revising for consideration in the new session.

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Avoiding an ISS Negative Recommendation: Considerations for Approval of Equity Incentive Plan Proposals

Erica Schohn and Neil M. Leff are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Ms. Schohn, Mr. Leff, and Michael R. Bergmann.

As the 2017 proxy season approaches, companies may be preparing to solicit shareholder approval for a new, or an amendment to an existing, equity incentive plan. In doing so, in addition to considering business needs, companies must keep in mind the positions of proxy advisory firms—particularly Institutional Shareholder Services (ISS) and Glass Lewis—if those firms’ recommendations have a significant influence on the company’s shareholder base. In addition, as ISS positions tend to drive market practice, even companies with a shareholder base not heavily influenced by ISS should be aware of its policies.

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Vindicating the Duty of Loyalty: Using Data Points of Successful Stockholder Litigation as a Tool for Reform

Joel Friedlander is a partner at Friedlander & Gorris, P.A. This post is based on Mr. Friedlander’s recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

The stockholder litigation reform agenda is currently shaped by the felt necessity of the time to reduce or eliminate those types of stockholder actions that typically had been settled for nominal relief soon after filing. For example, Judge Richard Posner writes that “deal litigation” is a term used “disapprovingly” and class action settlements in which immaterial supplemental disclosures are the settlement consideration are “no better than a racket” and “must end.” [1] Stephen Bainbridge argues in favor of fee-shifting bylaws, because stockholder class action litigation is a “problem [that] has reached crisis proportions” and empirical data “suggest that the pervasive problem in this area is not breaches of duty by directors and officers but rather strike suits filed by the plaintiffs’ bar.” [2]

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Dieckman: Applying Good Faith Obligation to MLP General Partner—The Impact on GPs

Philip Richter and Aviva F. Diamant are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Richter, Ms. Diamant, Warren S. de Wied, Steven EpsteinScott B. Luftglass, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

In Dieckman v. Regency (Jan. 20, 2017), the Delaware Supreme Court, reversing the Court of Chancery, refused to dismiss, at the pleading stage, the plaintiff MLP unitholder’s claims against a general partner that had relied on “safe harbor” provisions in the master limited partnership agreement to effect a merger between the MLP and one of the general partner’s affiliates. The MLP agreement provided that the general partner could effect a transaction between the MLP and the general partner or any of the general partner’s affiliates if the general partner obtained approval of the transaction either by an independent conflicts committee of the general partner’s board or by the unaffiliated unitholders of the MLP. The Supreme Court, hearing the case en banc, found that, although the MLP agreement (as is typical) disclaimed all fiduciary duties of the general partner, the implied covenant of good faith and fair dealing applied to the general partner’s actions in obtaining safe harbor approvals of the conflicted transaction.

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Antitrust Agencies Continue Aggressive Enforcement of the HSR Act

Bernard A. Nigro, Jr. is a partner and Nathaniel L. Asker is special antitrust counsel at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Nigro, Mr. Asker, and Aleksandr B. Livshits.

In an effort to facilitate a smooth transition for the new administration, the Federal Trade Commission and the Antitrust Division of the Department of Justice this week announced three separate actions charging parties with violations of the Hart-Scott-Rodino Act. The actions are a reminder that HSR compliance is important and not always straightforward. The following precautions will help ensure compliance:

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