Monthly Archives: July 2017

The Law & Brexit XII

Thomas J. Reid is Managing Partner of Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Reid. Additional posts on the legal and financial impact of Brexit are available here.

On June 23, 2017, we passed the one year mark since the referendum on the UK’s membership of the EU. Although certainty on the eventual consequences of that decision is in short supply, the UK and the EU finally began the Brexit negotiation process in Brussels. The unexpected result of the June general election in the UK (where the ruling Conservative Party lost its majority in the House of Commons) means that the UK negotiating team begins the Brexit process without the clear mandate that had been sought by the UK Prime Minister. It is not yet apparent how the consequent lack of political stability in the UK will affect the UK’s position in the negotiations. In this post, however, we focus on the EU side of the negotiating table in relation to financial services.


Weekly Roundup: June 30–July 6, 2017

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This roundup contains a collection of the posts published on the Forum during the week of June 30–July 6, 2017.

Trap for the Unwary Shareholder Activist: The Latest Tactic by Companies to Tilt the Playing Field in Proxy Contests

Andrew M. Freedman is Partner and Co-Chair of the Activist & Equity Investment Group at Olshan Frome Wolosky LLP. This post is based on an Olshan publication by Mr. Freedman, Steve Wolosky, and Ron S. Berenblat.

Shareholder activists seeking to nominate director candidates for election to the boards of their portfolio companies are advised to be on the lookout for the latest trap for the unwary designed by company defense law firms to further entrench board members. The trap is embedded in questionnaires and representation agreements that are now commonly required to be submitted by a nominating shareholder’s director nominees under nomination procedures contained in company bylaws. Taking the bait can give the company a significant strategic advantage over the dissident in an election contest.


Congressional Lawmakers Push SEC Chairman to Focus on Board Diversity Disclosure

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

Two letters from members of the House of Representatives directed Chairman Clayton to continue his predecessor’s efforts toward requiring companies to provide more information on the diversity composition of their boards.

Citing research that found that only half of S&P 100 companies referenced gender when disclosing their board diversity, Representatives Carolyn Maloney (D-NY) and Donald Beyer (D-VA) asked Clayton to consider the SEC staff’s review of the existing rule previously ordered by former SEC Chair White. In March, Representative Maloney reintroduced a bill on board gender diversity that would require the SEC to establish a group to study and make recommendations on ways to increase gender diversity on boards. Companies must also disclose the gender composition of their boards.


Internal Investigations Special Committees Resource

Gregory A. Markel is a partner and Heather E. Murray is an associate at Seyfarth Shaw LLP. This post is based on a ThomsonReuters Practical Law publication by Mr. Markel and Ms. Murray.

In recent years, companies increasingly have been undertaking internal investigations in an effort to uncover and remediate corporate wrongdoing. Some internal investigations are handled by the company’s board of directors, if a majority of the board is comprised of independent directors, while others are carried out by the audit committee (see Box, Audit Committee Investigations, below) or other existing board committee. In many cases, however, the board creates a special committee of independent board members specifically to conduct the investigation.


Index Eligibility as Governance Battlefield: Why the System is Not Broken and We Can Live With Dual Class Issuers

Ethan A. Klingsberg is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg. 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).

As passive investing via funds that track market indices continues to grow, the terrain where investors are fighting battles over governance reform is now expanding beyond contested stockholder meetings and into debates over the criteria for eligibility of issuers for inclusion in these indices. Indeed, in this era of index fund investing, a company focused on the future trading price of its shares should be much more concerned about gaining entry into and maintaining eligibility for indices than whether there will be a withhold vote recommendation on the members of its governance committee. If this direction continues to gain traction, we could end up with a market dominated by passive strategy investing where the current importance of familiarity with the hot button governance concerns of proxy advisory firms and institutional investors becomes subsidiary to understanding how to navigate new, governance-related eligibility requirements of major equity indices.


The “Responsible Corporate Officer Doctrine” Survives to Perplex Corporate Boards

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; his views do not necessarily reflect the views of McDermott Will & Emery or its clients. Joshua T. Buchman, Rebecca Martin and Ryan Marcus assisted in the preparation of this post.

The U.S. Supreme Court’s decision to deny the petition for a writ of certiorari in U.S. v DeCoster [1] assures that Responsible Corporate Officer Doctrine (“RCOD”) enforcement exposure will remain a disconcerting compliance risk that boards in several key industries must monitor.

The RCOD is a controversial strict liability theory interpreted by the government as permitting (in certain circumstances) the prosecution of corporate officers and directors for misdemeanor criminal offenses—without the need to establish their intent or personal involvement in wrongful conduct. It is based upon two U.S. Supreme Court decisions, issued thirty-two years apart, with severe fact patterns that disturb the conscience. [2] In each case, the Supreme Court upheld the conviction of corporate officers for public welfare-based crimes without evidence that they participated in or had knowledge of the core criminal activity.


Board Reforms and Firm Value: Worldwide Evidence

Larry Fauver is Associate Professor, James. F. Smith, Jr. Professor of Financial Institutions, and a Research Fellow of the Corporate Governance Center at the University of Tennessee Knoxville Haslam College of Business. This post is based on a recent article, forthcoming in the Journal of Financial Economics, authored by Professor Fauver; Mingyi Hung, Chair Professor of Accounting at Hong Kong University of Science and Technology; Xi Li, Assistant Professor of Accounting at Hong Kong University of Science and Technology; and Alvaro G. Taboada, Assistant Professor of Finance at Mississippi State University College of Business.

The last two decades have witnessed an increase in corporate board reforms designed to create greater board independence, audit committee and auditor independence, and separation of the chairman and chief executive officer positions. Do these reforms affect firm value? Existing research on such reforms has typically focused on a single country and yielded mixed results. In our Journal of Financial Economics article, Board Reforms and Firm Value: Worldwide Evidence, we examine the impact of corporate board reforms on firm value in 41 countries and find that such reforms do indeed increase firm value, with the effects determined by the type and nature of the reforms.


Red Light for New Activist Strategy

Lizanne Thomas and Robert A. Profusek are partners at Jones Day. This post is based on a Jones Day publication by Ms. Thomas, Mr. Profusek, and Lyle G. Ganske. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

[Last month], General Motors (“GM”) won a decisive victory in a proxy contest waged by Greenlight Capital, the activist fund headed by David Einhorn. Greenlight claimed that GM’s shares, which were trading at a price barely above their 2010 IPO price, were significantly undervalued because the market was not properly assessing the sizeable cash dividends paid on the shares. Greenlight proposed that GM’s shares be split into two classes—a class of “dividend shares” that would have one-tenth of a vote per share and would be entitled to quarterly cash dividends at the current annual rate, and a class of “capital appreciation shares” that would have one vote per share and would be entitled to GM’s earnings in excess of the dividends paid on the dividend shares.


Investor Support Heating Up for Climate Change Proposals

Lyuba Goltser is a partner and Kaitlin Descovich is an associate at Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Goltser and Ms. Descovich. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

The biggest headline of the 2017 proxy season was a change in the policies, engagement efforts and voting of institutional investors and asset managers on environmental and climate change issues, which occurred against the backdrop of shifting U.S. policies on these issues. These changes, which resulted in majority-supported proposals at three S&P 500 companies, reflect intensified investor focus on sustainable business practices—a broad category in which environmental and social risks, costs and opportunities of doing business are analyzed alongside conventional economic considerations—as a key factor in long-term financial performance.


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