Monthly Archives: May 2017

Court of Chancery’s Guidance on “Credible Basis” Standard for Obtaining Books

Joseph O. Larkin is counsel and Rupal Joshi is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Larkin and Ms. Joshi, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court has held that strict adherence to the procedural requirements of Section 220 of the Delaware General Corporation Law “protects the right of the corporation to receive and consider a demand in proper form before litigation is initiated.” For this reason, a stockholder making a books-and-records demand has the initial burden to show both that he or she has standing to make such a demand and that the production is necessary. To do so, a stockholder must provide documentary evidence of continuous beneficial or record ownership in the corporation from the time of the alleged wrong. The stockholder also must articulate a “proper purpose” for the request that is reasonably related to a legitimate interest as a shareholder and is not adverse to the corporation’s best interests. If the purpose is to investigate or prosecute alleged wrongdoing, the stockholder must demonstrate a credible basis (and not mere speculation) of alleged mismanagement and also explain why each category of documents is “necessary and essential” to fulfill the demand’s stated purpose.

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Private Investor Meetings in Public Firms: The Case for Increasing Transparency

Martin Bengtzen is a DPhil Candidate at the Faculty of Law and the Oxford-Man Institute of Quantitative Finance, both at the University of Oxford. This post is based on his recent article, published in the Fordham Journal of Corporate & Financial Law.

What are the consequences if a senior manager of a public firm selectively discloses valuable non-public information (NPI) about the firm (such as details of its next quarterly report) to curry favor with an investor who trades on the information and makes a substantial profit? In theory, they may both be in breach of the insider trading prohibition and the manager may have violated Regulation Fair Disclosure (Reg FD). In practice, however, my article argues, the development of insider trading law, the flawed design of Reg FD, the enforcement policy and practices of the SEC, and the preference and ability of both corporate managers and investors to keep such selective disclosures out of the view of the public and the regulator combine to allow such conduct to occur with impunity. As a result, selective disclosure provides an attractive method for extraction of private benefits from public firms to the detriment of investors without preferential access.

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Just How Preferred is Your Preferred?

Daniel E. Wolf and Jon A. Ballis are partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis publication by Mr. Wolf and Mr. Ballis. This post is part of the Delaware law series; links to other posts in the series are available here.

Many financial investors structure their investments in private companies in the form of preferred stock. This instrument provides the investor with a preference as to dividends and liquidation proceeds over other equityholders, typically management or legacy stockholders, who hold common stock. A recent Delaware case, ODN Holding, highlights some potential fiduciary duty complications when enforcing those preferences in the context of an investment that has gone sideways or negative (i.e., when the portfolio company has limited funds available to satisfy those preferences—whether the payment of preferential dividends, the redemption of the preferred or the distribution of substantially all sale proceeds to the preferred).

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Mutual Fund Companies Have Significant Power to Increase Corporate Transparency

Rachel Curley is Democracy Associate for Public Citizen’s Congress Watch Division. This post is based on a Public Citizen publication. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here), and Corporate Politics, Governance, and Value Before and after Citizens United by John C. Coates.

A new report released by Public Citizen in its capacity as one of the chairs of the Corporate Reform Coalition shows the significant power mutual fund companies have to increase corporate transparency. The report illustrates what would happen if major mutual fund companies like The Vanguard Group, BlackRock Inc., and Fidelity Investments used the significant number of shares they invest in America’s largest companies to push those companies to be more transparent about how they spend money to influence politics.

Examining major mutual fund companies that own more than 5 percent of common stock in public companies where shareholders filed political spending disclosure resolutions in 2016, this report projects what would have happened if these mutual fund companies used their shares to support these resolutions instead of abstaining from voting or voting against them, which is what these fund families typically do.

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It Pays to Write Well

Byoung-Hyoun Hwang is an Assistant Professor of Finance at the Cornell SC Johnson College of Business. Hugh Kim is Assistant Professor of Finance at the University of South Carolina Darla Moore School of Business. This post is based on an article published in the May 2017 edition of the Journal of Financial Economics authored by Professors Hwang and Kim.

In It Pays to Write Well, published in the May 2017 edition of the Journal of Financial Economics, we examine how the readability of corporate disclosure documents affects investors and stock prices.

Corporate disclosure comes in the form of accounting numbers framed or accompanied by a substantial amount of text. While earlier research has emphasized the informativeness of the accounting numbers, our study is part of a relatively new literature stream that looks at the informativeness of the text and the ease with which the text in corporate disclosure documents can be processed.

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Sections 204 and 205 of Delaware Corporation Law: Effective Tools to Remedy Defective Corporate Acts

Jenness E. Parker is Counsel and Kaitlin E. Maloney is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication. This post is part of the Delaware law series; links to other posts in the series are available here.

Since they became effective in 2014, Sections 204 and 205 of the Delaware General Corporation Law (DGCL) have provided mechanisms for a corporation to unilaterally ratify defective corporate acts or seek relief from the Court of Chancery to validate any corporate act under certain circumstances. These provisions filled a perceived gap in the DGCL. Prior to their enactment, a corporation had no tool to fix defective acts or obtain validation of issues causing uncertainty in corporate documents, actions or otherwise. So far, the Court of Chancery has had relatively few opportunities to opine on the use of these statutory provisions.

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Do Exogenous Changes in Passive Institutional Ownership Affect Corporate Governance and Firm Value?

Rüdiger Fahlenbrach is Associate Professor at Ecole Polytechnique Federale and Swiss Finance Institute. Cornelius Schmidt is Adjunct Associate Professor at the Department of Finance, Norwegian School of Economics (NHH Bergen) and is an Economist with the European Commission (DG Competition—Chief Economist Team). This post is based on a recent article by Professor Fahlenbrach and Professor Schmidt, forthcoming in the Journal of Financial Economics. The views expressed in this article are personal, and do not necessarily represent those of DG Competition or of the European Commission.

In our article, Do Exogenous Changes in Passive Institutional Ownership Affect Corporate Governance and Firm Value?, which was recently accepted for publication in the Journal of Financial Economics, we examine whether the increase in passively managed institutional ownership changes the governance of corporations to the detriment of shareholders, or whether index-tracking institutions participate in governance as much as more active institutions. We concentrate on two corporate governance areas which executives may rapidly influence after a change in the balance of power in corporations—the board of directors and their relative power in the organization measured by an accumulation of titles. We also examine whether passive institutional investors use their main governance device, shareholder proposals, more actively. We study announcement returns to mergers and acquisitions to test whether agency costs are higher and whether managers can reap personal gains from empire building after increases in passive ownership.

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Delaware’s Fall: The Arbitration Bylaws Scenario

Lynn M. LoPucki is Security Pacific Bank Distinguished Professor of Law at the UCLA Law School. This post is based on a recent article by Professor LoPucki, forthcoming in Delaware’s Dominance in Corporate Law (Stephen Bainbridge, ed., Cambridge University Press 2018). This post is part of the Delaware law series; links to other posts in the series are available here.

Until recently, Delaware’s dominance in the competition to sell corporation charters was considered so great as to be irreversible. Scholars assumed that if another state were to discover a method to compete effectively, Delaware could simply copy it. But the current threat to Delaware’s dominance comes not from another state, but from arbitration bylaws. Delaware cannot solve the problem by copying because the U.S. Constitution prohibits states from offering secret arbitration.

For Delaware, loss of its cases to arbitration would a crippling blow. Delaware dominates the charter competition by leveraging its unique Chancery Court. Unlike the courts of other states, the Chancery Court is significantly specialized in corporate law, publishes its opinions, has a large body of precedent, tries cases without juries, and has the resources and motivation to provide quick hearings. Other states cannot copy Delaware because they do not incorporate sufficient numbers of companies to generate sufficient litigation to support a court specialized in corporate law, because their governments are not dependent upon, and so not fully supportive of, their efforts to compete for charter sales, and because their constitutions guarantee the right to trial by jury.
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Private M&A Deal Terms: UK vs. US Markets

Charlie Geffen is a partner in the London office of Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Geffen, Matthew H. Hurlock, and Anne MacPherson.

The growth of transatlantic private M&A (including private equity) has led to increasing examples of “two nations divided by a common language.” Although many of the core principles of deal making are the same, there are market and cultural differences in the UK and US that participants should understand. We have seen many hours spent working through these differences and, whilst some are meaningful, others are in reality more “form over substance.”

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Weekly Roundup: May 12–May 18, 2017


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This roundup contains a collection of the posts published on the Forum during the week of May 12–May 18, 2017.

















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