Monthly Archives: May 2017

Lessons Beyond Corwin: Columbia Pipeline and Saba Software

Jason M. Halper is a partner at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper, Alejandra Contreras, and Hyungjoo Han. This post is part of the Delaware law series; links to other posts in the series are available here.

Two recent decisions from the Delaware Court of Chancery faithfully apply the Delaware Supreme Court’s holding in Corwin v. KKR Financial Holdings LLC. No surprise there. Corwin held that when “a transaction not subject to the entire fairness standard is approved by a fully informed, uncoerced vote of the disinterested stockholders, the business judgment rule applies.” That is so even if, pre-Corwin, an all-cash merger otherwise would have been subject to enhanced scrutiny under Revlon.

The significance of the two recent lower court decisions—In re Columbia Pipeline Group, Inc. Stockholder Litigation and In re Saba Software, Inc. Stockholder Litigation—lies not in the fact that they applied Corwin, but how each did so on the facts alleged in the complaints. In reaching opposite results (dismissal of the complaint in Columbia and denial of a motion to dismiss in Saba), the decisions provide important guidance regarding, among other things, the types of disclosures that are material; the appropriate oversight and handling of a sales process by a board and its financial advisor; circumstances that suggest a coerced stockholder vote; and the scope of aiding and abetting liability for the buyer.


Financial Markets and the Political Center of Gravity

Mark Roe is a professor at Harvard Law School. This post is based on a recent paper authored by Professor Roe and Travis Coan, lecturer in politics at the University of Exeter.

In Financial Markets and the Political Center of Gravity, Travis Coan and I investigate the link between left-right market-friendliness across the developed world and financial markets. Academics across multiple disciplines and policymakers in multiple institutions have in recent decades searched for the economic, political, and institutional foundations for financial market strength. Promising theories and empirics have developed, including major explanations from differences in nations’ political economy.

A common view among multiple academic observers is that, particularly because many pro-market corporate reforms occurred during the 1990s in Europe, when social democratic parties governed and financial markets deepened, basic left-right explanations fail to explain financial market strength. Hence, more complex political explanations are needed, and the correlation of left governments, market-oriented reforms, and financial deepening present an unexpected paradox. This finding might be interpreted to indicate that left-right orientation is unimportant in affecting financial development and that either nonpolitical institutional issues or different political considerations are more central.


Guarding Against Challenges to Director Equity Compensation

P. Rupert Russell is a partner and Jiang Bian is an associate at Shartsis Friese LLP. This post is based on a Shartsis Friese publication by Mr. Russell and Mr. Bian.

There has been an emerging litigation trend in Delaware, where most U.S. public companies are incorporated, alleging that directors breached their fiduciary duties and committed waste of corporate assets in granting themselves excessive awards under the company’s equity compensation plan. [1] Because directors have a direct interest in their own pay, Delaware courts have held that board decisions on director compensation do not receive the protection of the business judgment rule without proper stockholder ratification.

When dealing with stockholder lawsuits, the often crucial issue faced by many public companies is whether they can avoid discovery. If a stockholder lawsuit can survive a motion to dismiss, the nuisance nature of discovery may significantly increase the case’s settlement value, regardless of whether the plaintiff can eventually prevail. Absent the protection of the business judgment rule, it could be difficult to dismiss stockholder complaints at the pleadings stage, and the corporate defendants may face an unpleasant choice between continued litigation with all of its risks and distractions or a costly settlement.


Saving Investors from Themselves: How Stockholder Primacy Harms Everyone

Frederick Alexander is Head of Legal Policy at B Lab. This post is based on Mr. Alexander’s recent article, published in the Seattle University Law Review.

Communities around the world face many difficult issues, including poverty, climate change, social and economic inequality, the cost and quality of education and healthcare, stagnant wages, financial market instability, disease, and food security. Despite the existential threat that these concerns may raise, there is no consensus on whether or how to address them through regulation, taxation, or other government policy tools. Private enterprise, however, has tremendous potential to address these issues through technology, wages, supply chain maintenance, green operations, efficient delivery of goods and services, and a myriad of other outputs and outcomes. In the U.S., the potential of the private sector to address these issues dwarfs that of the government. The 2015 federal budget was approximately $2.5 trillion (excluding transfer payments like Social Security), while the 2015 gross domestic product (GDP) was about $18 trillion. While numbers go up and down, total government spending (including state and local) typically accounts for about 20% of GDP when transfer spending is netted out. Consumer and business spending account for the other 80%.


SEC’s Investor Advisory Committee Airs Concerns Over Multi-Tiered Offerings Following Snap’s IPO

Brian Shea is an associate at Mintz, Levin, Cohn, Ferris, Glovsky and Popeo, P.C. This post is based on a Mintz Levin publication by Mr. Shea. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

Snap Inc., which debuted on the New York Stock Exchange (NYSE) on March 2nd, was the largest tech IPO since Alibaba went public in 2014. Initially priced at $17 per share, the share price jumped to more than $24 by the end of the first trading day, raising $3.4 billion and beating market expectations.

Beyond the magnitude of the offering and its implications for the broader deal pipeline, Snap’s IPO has raised interesting governance issues around its non-voting shares, which the SEC’s Investor Advisory Committee (IAC) [1] tackled on March 9th at its quarterly meeting. The IAC’s discussion centered on Snap’s three-tiered capital structure: Class C shares with 10 votes per share for founders Evan Spiegel and Bobby Murphy, Class B shares with one vote per share for pre-IPO VC investors and other insiders, and Class A shares with no voting rights for public investors. Companies like Facebook and Google have employed similar structures in the past; in fact, a recent study by Institutional Shareholder Services (ISS) noted that dual- and multi-class capital configurations are common, especially in the technology sector. [2] However, the notion of affording no voting rights whatsoever to public investors is unprecedented.


Delaware and Santa Fe

James J. Park is Professor of Law at UCLA School of Law. This post is based on his recent paper, forthcoming as a chapter in Delaware’s Dominance in Corporate Law, is part of the Delaware law series; links to other posts in the series are available here.

The U.S. Supreme Court’s 1977 decision in Santa Fe Industries v. Green drew a line between corporate and securities law that arguably enabled Delaware to become the leading creator of corporate law. Prior to Santa Fe, the federal courts had become receptive to suits brought under Rule 10b-5 alleging corporate misconduct rather than a clear misrepresentation to investors. These decisions emboldened the plaintiff in Santa Fe to argue that a breach of fiduciary duty standing alone could support a federal securities fraud claim.

By rejecting this argument and emphasizing that federal securities law regulates disclosure while state corporate law regulates the internal affairs of the corporation, the Supreme Court helped open the door to Delaware’s dominance of corporate law for the next two decades. Soon after it was decided, the Delaware Supreme Court observed that “Santa Fe is a current confirmation by the Supreme Court of the responsibility of a state to govern the internal affairs of corporate life.” As one Delaware judge noted years later, Santa Fe “abruptly reversed” a “creeping federalization of corporate law.” A prominent corporate law scholar has observed that Santa Fe is a symbol for a “world of weak federal corporate law.”


California District Court: Indirect Purchasers Can Bring Fraud Claims Against Private Company

Michael S. Dicke is a partner and Alexis I. Caloza is an associate at Fenwick & West LLP. This post is based on a Fenwick publication by Mr. Dicke and Mr. Caroza.

In a case with important implications for late-stage private companies, a federal magistrate judge ruled last week that investors in funds holding private company securities can bring fraud claims against the issuer of the securities and its officers, even though the plaintiffs had no dealings with the issuer or its officers and hold no actual shares.

The dispute involves the securities of Theranos, a private life sciences company headquartered in Silicon Valley. In Colman v. Theranos, a case of first impression, U.S. Magistrate Judge Nathanael Cousins of the Northern District of California held that California Corporations Code sections 25400(d) and 25500 permit suits by “indirect purchasers” of pre-IPO shares, i.e. purchasers who bought securities interests from intermediaries and not from the issuer. In its April 18 decision, the court reasoned that because the statutes are designed to combat fraud affecting the market and price for the issuer’s securities, there is no requirement that a purchaser have direct dealings with the issuer, or even that the purchaser have relied specifically on any alleged false statement made by the issuer. Instead, the court held, false public statements which are alleged to have affected the market for the issuer’s securities, and which the issuer made to induce purchase of the company’s shares generally, can form the basis for a claim under California law. The court further held that plaintiffs may sue corporate officers responsible for the allegedly false statements.


Past, Present and Future Compensation Research: Economist Perspectives

Michael Gibbs is Clinical Professor of Economics at the University of Chicago Booth School of Business, and Research Fellow at the Institute for the Study of Labor (IZA). This post is based on an piece authored by Professor Gibbs and published in Compensation & Benefits Review. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

At the 2016 Academy of Management conference, a group of leading human resource scholars held a panel discussion assessing the state of compensation research, which was subsequently published in Compensation and Benefits Review [CBR]. Afterwards, CBR editor Charles Fay asked me to organize a panel discussion of economists on the same topic. This seems a good time to assess where we now stand in this field. Over the last several decades economists have produced an enormous literature on compensation, especially incentives. The 2016 Nobel Prize in Economics was shared by Bengt Holmstrom (with Oliver Hart). Bengt’s work provided a rigorous theoretical foundation for understanding incentives, and inspired much of the empirical literature on the topic in economics, accounting, and governance. Meanwhile, “Workforce Analytics” has emerged as a new tool that firms use to manage their employees. It uses statistical analysis of data on employees, policies, and outcomes—precisely what personnel economists have done for two decades in studying compensation and related issues. Given recognition by the Nobel Committee, and adoption of similar methods by practitioners, where does compensation research go from here?

What You Are Likely to Hear in the Board Room

Steve Pakela and Lane Ringlee are managing partners at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Pakela, Mr. Ringlee, and John Ellerman.

In the first 3 months of 2017, our firm’s partners and consulting staff attended more than 200 corporate Boards of Directors compensation committee meetings in our role as executive compensation advisors. From attending these meetings, we have learned a great deal about certain issues emerging as dominant themes in Board discussions about executive pay and corporate governance. Recently, several Pay Governance partners convened an internal meeting at which we shared our collective observations concerning the trends we expect to dominate compensation committee discussions through the remainder of the year.

The goal of this post is to share our views with you regarding the emerging issues and developments in executive compensation. Below, we identify the trends we believe will be addressed by many Board compensation committees in the coming months and our firm’s insights regarding these issues.


CHOICE Act 2.0: House Financial Services Committee Revises Regulatory Reform Bill

John C. Dugan is a partner and Randy Benjenk is an associate at Covington & Burling LLP. This post is based on a Covington publication. Additional posts addressing legal and financial implications of the Trump administration are available here.

On April 19, 2017, the House Financial Services Committee (the “Committee”) released a new “discussion draft” of the Financial CHOICE Act, its comprehensive regulatory reform bill (“CHOICE Act 2.0”). The Committee released the first version of the bill (“CHOICE Act 1.0”) in June 2016.

Buoyed by the election of a Republican president, and following several months of public and industry outreach, Committee leadership has made a number of significant changes to the bill. Key changes from the CHOICE Act 1.0 include:


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