Monthly Archives: June 2017

Criticism of Governance Provisions in Proxy Contest Leads to Reincorporation

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu.

Among the settlement terms in the proxy contest between Arconic Inc. and Elliot Management is an agreement to reincorporate to Delaware due to the corporate governance provisions in the company’s charter.

As the surviving company of Alcoa Inc., which spun off parts of its business into a new entity called Alcoa Corp., the renamed Arconic was governed under a charter that staggered board elections and required 80% of outstanding shares to amend the terms for fair price protection, change the classified board or remove its directors. About eight years ago, shareholder proposals favored by a majority of the votes cast asked the board to amend those provisions. Though the company made several efforts by sponsoring management proposals that the board supported, the company never obtained the requisite 80% of outstanding shares necessary to effect the changes. In fact, it appears that the number of shares voted on any proposal may have never reached that level.

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Five Key Points from the DOL’s Fiduciary Rule Announcement

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Roberto Rodriguez.

On May 22, Department of Labor (DOL) Secretary Alexander Acosta capped months of uncertainty about the DOL’s fiduciary duty rule by announcing that the June 9 compliance date would not be delayed further. [1] While this means that the rule’s “best interest” standard for retirement advice will go into effect on June 9, full implementation of the rule is not scheduled until January 1, 2018. Following Secretary Acosta’s announcement, the DOL clarified its policy on enforcement through the end of this year and released a new set of responses to frequently asked questions (FAQs), one of which made clear that it will continue an in-depth analysis of whether the fiduciary rule harms retirement investors or the industry, as directed by a February White House Memorandum (Memo). [2]

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Supreme Court Applies Five-Year Statute of Limitations to SEC Disgorgement Claims

Lewis J. Liman and Matthew C. Solomon are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Liman, Mr. Solomon, and Alexander Janghorbani.

On June 5, 2017, the Supreme Court unanimously held that the five-year statute of limitations in 28 U.S.C. § 2462 applies to claims for disgorgement by the Securities and Exchange Commission (“SEC”). The Court’s opinion in Kokesh v. SEC expands upon its 2013 decision in Gabelli v. SEC to prohibit the SEC from seeking to recover monetary relief for conduct that occurred outside the five-year statute. This opinion may have the greatest impact on enforcement areas that tend to be resource-intensive or difficult to investigate, such as claims under the Foreign Corrupt Practices Act, but may also incentivize the SEC to speed the pace of its investigations and its use of tolling agreements.

Cleary Gottlieb argued and won the Gabelli case and submitted an amicus brief on the prevailing side in the Kokesh case.

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Déjà Vu All Over Again: New Efforts to Reinstate the Glass-Steagall Act

V. Gerard Comizio is a partner and Nathan S. Brownback is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Comizio and Mr. Brownback.

The Trump administration has sent signals that the White House would support legislation that would function to reinstate the provisions of the Depression-era Glass-Steagall Act separating commercial and investment banking, which were repealed by the Gramm-Leach-Bliley Act of 1999 (the “GLBA”).

Notably, a bill with bipartisan sponsorship, the 21st Century Glass-Steagall Act, has been introduced in the Senate that would reinstate the Glass-Steagall Act’s separation of commercial and investment banking and also restrict long-standing bank and bank holding company powers and activities.

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The Failure of Federal Incorporation Law: A Public Choice Perspective

Sung Hui Kim is Professor of Law at the University of California. This post is based on a recent paper by Professor Kim, forthcoming as a chapter in In Can Delaware be Dethroned? Evaluating Delaware’s Dominance of Corporate Law. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Delaware Law as Lingua Franca: Evidence from VC-Backed Startups by Jesse Fried, Brian J. Broughman, and Darian M. Ibrahim (discussed on the Forum here); Federal Corporate Law: Lessons From History, by Lucian Bebchuk and Assaf Hamdani; and The Market for Corporate Law by Lucian Bebchuk, Oren Bar-Gill and Michal Barzuza.

Delaware’s domination of corporate law in the U.S. has long fascinated academics. While there is wide consensus that Delaware’s preeminence arose out of decades of state-to-state competitive pressures, there is sharp disagreement and debate about the nature of those competitive pressures, that is, whether the competition has been a salutary or nefarious one—a race to the top or to the bottom. Both sides of the debate believe that states compete to attract corporate franchise tax revenues, but they differ as to what the estimated $500 million annual prize incentivizes states to do. Race-to-the-top theorists argue that the prize motivates states to compete to make better, more efficient, corporate law in an effort to discourage shareholders from causing a reincorporation outside of Delaware. Race-to-the-bottom theorists argue that the prize motivates states to pander to managerial interests because managers are the constituents that control the initial incorporation decision.

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Assessing ISS’ Newly Selected GAAP Financial Metrics for CEO P4P Alignment: How Can Companies Respond?

Ira Kay is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Kay, Marizu Madu, and Linda Pappas.

Say on Pay (SOP) and shareholder advisor vote recommendations have caused a increase in the use of relative total shareholder return (TSR) as a long-term incentive (LTI) plan performance metric. Relative TSR prevalence in LTI plans has nearly doubled over the past 5 years, used by approximately 50% of companies of all sizes and industries. This is largely due to shareholder advisors, such as Institutional Shareholder Services (ISS), using TSR as the primary metric in their relative pay for performance (P4P) quantitative evaluations. ISS is appropriately attempting to enhance its company performance assessment model by adding 6 metrics. [1] This new approach is clearly a response to critics, but it presents a new set of challenges.

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The Corporate Demand for External Connectivity: Pricing Boardroom Social Capital

David Javakhadze is Assistant Professor of Finance at Florida Atlantic University. This post is based on a recent paper by Professor Javakhadze; Stephen P. Ferris, Professor and Director of the Financial Research Institute at the University of Missouri at Columbia; and Yun Liu, Assistant Professor of Finance at the Claremont Colleges’ Keck Graduate Institute.

While there has been considerable public focus and academic research on executive compensation, boardroom compensation has received relatively little attention. Boards perform increasingly crucial functions of advising and monitoring the executive team. Consequently, boardroom performance has important implications for corporate decisions. As a result of the 2008 financial crisis boardroom functioning, including director expertise, oversight practices, compensation, and board structure, has been under careful scrutiny by shareholders as well as by regulators, requiring directors to be more actively involved in strategic decision-making.

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The Long Game: Incentive Pay Aims at Generating Lasting Return

Matthew Goforth is Research Manager at Equilar, Inc. This post is based on an Equilar publication which originally appeared in the Spring 2017 issue of C-Suite magazine, available here. 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).

Since Say on Pay went into effect in 2011, the concept of “pay for performance” has been the foremost trend in executive compensation, both in principle and practice. In response to regulation and pressure from proxy advisors and investors, companies have moved away from discretionary annual bonuses and stock options and toward performance share grants over the last five years.

Public company compensation committees face a number of competing interests, and as a part of the board of directors, they are tasked with determining the amount and structure of the company’s executive compensation program. Recruiting and retaining the most talented executives is their initial focus, and executive pay typically reflects trends in the marketplace. Compensation planning becomes more complicated as boards attempt to adopt a pay philosophy they believe aligns the interests of management and shareholders.

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The Limits of Gatekeeper Liability

Andrew Tuch is Associate Professor of Law at Washington University School of Law. This post is based on an article authored by Professor Tuch, forthcoming in the Washington & Lee Law Review.

Gatekeeper liability—the framework under which actors such as law firms, investment banks, and accountants face liability for wrongs committed by their corporate clients—is one of the most widely used strategies for controlling corporate wrongdoing. It nevertheless faces several well recognized flaws: gatekeepers may seek more to escape liability than to prevent wrongdoing by their clients; gatekeepers depend financially on the clients whose conduct they must monitor; and multiple gatekeepers act on major transactions, interacting with one another in ways that may produce gaps and overlaps in the gatekeeping net, undermining its deterrent force.

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Why Your Board Should Refocus on Key Risks

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop.

How well management handles key risks often determines whether the company will achieve its strategic goals.

It’s easy for boards to get bogged down discussing financial and compliance risks. But that can mean that they’re not paying enough attention to risks that are truly critical. Directors need to make sure they’re focusing on the right key risks—the ones that could spell success or failure for the company.

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