Monthly Archives: August 2017

MeadWestvaco Highlights the Extremely High Bar To Personal Liability of Disinterested Directors

Gail Weinstein is senior counsel and Philip Richter is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Richter, Steven Epstein, and Scott B. Luftglass. This post is part of the Delaware law series; links to other posts in the series are available here.

In In re MeadWestvaco Stockholders Litigation (Aug. 17, 2017), the Delaware Court of Chancery dismissed claims against target company directors for breach of the duty of loyalty based on allegations that they had acted in bad faith in approving a merger.

  • The decision—in which the court suggests that the standards of “waste” and “bad faith” are equivalent—highlights the extremely high bar to potential liability of disinterested target company directors. We note that if, under Corwin, business judgment review applies in a post-closing action for damages, the only basis on which a transaction can be successfully challenged is that it constituted “waste”; and that if Corwin does not apply, then, given the effect of the exculpation statute, the only route to a successful post-closing action for damages is that the directors’ conduct in approving the transaction was so egregious that it constituted “bad faith.” In MeadWestvaco, the court indicated that the two standards are essentially equivalent—and virtually impossible to meet.
  • Non-controller, non-Revlon transactions (like the stock-for-stock merger in MeadWestvaco) continue to be subject to business judgment review both pre-closing and post-closing. We note that Corwin—which when applicable transforms the standard of review post-closing to business judgment (regardless of what the standard was pre-closing)—should have no practical impact on non-Revlon transactions.
  • Although the court did not address the issue, MeadWestvaco may signal that there remains some uncertainty whether Corwin “cleanses” bad faith by directors. As discussed below, although one early post-Corwin decision stated that Corwin does cleanse bad faith, and a number of decisions since then have stated that Corwin cleanses breaches of the duty of loyalty (of which, we note, the duty of good faith is a part), MeadWestvaco may signal that some uncertainty remains as to whether Corwin would cleanse director action that is “so ‘egregious,’ so ‘irrational,’ or ‘so far beyond the bounds of reasonable judgment’ as to be ‘inexplicable on any ground other than bad faith.’”


Make-Whole Premiums and the Agency Costs of Debt

Richard Squire is Professor of Law at Fordham University School of Law. This post is based on his recent book chapter, forthcoming in the Elgar Research Handbook on Bankruptcy Law.

A make-whole premium is a contractual penalty a borrower must pay for prepaying a loan. In several recent bankruptcy cases, the court ruled that the debtor triggered its make-whole obligations by voluntarily filing for bankruptcy and thereby accelerating all of its debts. In such cases, the questions then arise whether, and at what level of priority, the make-whole premium is recoverable as a statutory matter from the bankruptcy estate.

In a forthcoming book chapter, I argue that a make-whole premium automatically triggered by a bankruptcy filing shifts risk onto the debtor’s general creditors and thus increases the agency costs of debt. Risk-shifting occurs because a make-whole that is automatically triggered by a bankruptcy filing is an instance of correlation-seeking: the incurring of a contingent liability whose risk of being triggered correlates positively with the debtor’s insolvency risk. Correlation-seeking generates social costs that reduce the joint surplus from lending arrangements. The anticipation of it induces creditors to incur monitoring costs and debtors to incur bonding costs. When correlation-seeking is undeterred, it encourages overinvestment: the committing of capital to projects that are expected to benefit the firm’s shareholders only because they are subsidized by a transfer of value away from general creditors.


SEC Announces Results of Cybersecurity Examination Initiative

Amy Ward Pershkow is a partner at Mayer Brown LLP. This post is based on a Mayer Brown publication by Ms. Pershkow, Matthew Rossi, Jeffrey Taft, Jerome Roche, Adam Kanter and Matthew Bisanz.

On August 7, 2017, the Office of Compliance Inspections and Examinations (“OCIE”) of the US Securities and Exchange Commission (“SEC”) announced the results of its second cybersecurity examination initiative. [1] This initiative built on the SEC’s 2014 cybersecurity examination initiative (“Cybersecurity 1 Initiative”) but “involved more validation and testing of procedures and controls surrounding cybersecurity preparedness.” [2]

Beginning in September 2015 and over roughly a one-year period, OCIE examined 75 regulated entities—broker-dealers (“BDs”), investment advisers (“IAs”) and investment companies (“funds”)—focusing on (1) governance and risk assessment, (2) access rights and controls, (3) data loss prevention, (4) vendor management, (5) training and (6) incident response.


NAIC Adopts Model Cybersecurity Law

Alice Kane is counsel and Analisa Dillingham is an associate at Clifford Chance LLP. This post is based on a Clifford Chance publication by Ms. Kane, Ms. Dillingham, and Ryan Buffkin.

The Cybersecurity (EX) Working Group and the Innovation and Technology (EX) Task Force of the National Association of Insurance Commissioners (“NAIC”), at the NAIC Summer 2017 National Meeting in Philadelphia, approved the Insurance Data Security Model Law (the “Model Law”). This is a significant step in cybersecurity regulation. The Model Law closely parallels the comprehensive and first-in-the-nation New York Department of Financial Services (“DFS”) Cybersecurity Requirements for Financial Services Companies regulation that took effect on March 1, 2017 (the “NYDFS Cybersecurity Regulation”). The Model Law will now be considered by the NAIC Executive Committee and, if approved, will be presented to the Joint Meeting of the Executive Committee and Plenary for final approval. Capitalized terms used and not defined herein have the meanings set forth in the Model Law.


Controlling-Shareholder Related-Party Transactions Under Delaware Law

Jonathan Rosenberg is Partner and Chair of the Securities Litigation Practice at O’Melveny & Myers LLP; Alexandra Lewis-Reisen is a senior staff attorney at the New York Legal Assistance Group and formerly counsel at O’Melveny. This post is based on a publication from O’Melveny & Myers, authored by Mr. Rosenberg and Ms. Lewis-Reisen, and 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Under Delaware law, controlling shareholders (much like directors and officers) owe fiduciary duties to the companies they control and their minority shareholders. Historically, therefore, controlling shareholders’ transactions with their own companies were subject to heightened “entire fairness” scrutiny, and not the deferential “business judgment” rule review. Nevertheless, the common-law Delaware rules governing controlling shareholders and their companies are sometimes complex and not always intuitive. The following five practical pointers can be gleaned from Delaware case law:


2017 Mid-Year Activism Update

This post is based on a publication from Gibson, Dunn & Crutcher LLP. 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); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

This post provides an update on shareholder activism activity involving NYSE- and NASDAQ-listed companies with equity market capitalizations above $1 billion during the first half of 2017. Activism has continued at a vigorous pace thus far in 2017. As compared to the same period in 2016, [the complete publication] captured more public activist actions (59 vs. 45), more activist investors taking actions (41 vs. 35), and more companies targeted by such actions (50 vs. 38).

During the period from January 1, 2017 to June 30, 2017, seven of the 50 companies targeted faced advances from multiple activists, including two companies that each had three activists make separate demands and two companies that each dealt with activists acting jointly. As for the activists, 10 of the 41 captured by our survey took action at multiple companies. Equity market capitalizations of the target companies ranged from just above the $1 billion minimum covered by this survey to approximately $235 billion, as of June 30, 2017.


Chancery Court Provides Guidance Regarding Limits on a Delaware Corporation’s Ability to Fix Unauthorized Corporate Acts

Margaret C. Bae is a partner at Olshan Frome Wolosky LLP. This post is based on an Olshan publication by Ms. Bae, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently established new guidelines regarding the ability of a corporation to ratify defective corporate acts due to a failure of authorization pursuant to Sections 204 or 205 of the Delaware General Corporation Law (“DGCL”) in Nguyen v. View, Inc., C.A. No. 11138-VCS (Del. Ch. Jun. 6,2017). After the enactment of Sections 204 and 205 in 2014, corporations have been able to fix corporate acts that were not validly approved or were inconsistent with the corporation’s certificate of incorporation, or seek relief from the Court of Chancery to validate a corporate act under certain circumstances. Nguyen is the latest in a line of cases that attempts to establish the boundaries of the remedial effects of Sections 204 and 205.


Mapping Types of Shareholder Lawsuits Across Jurisdictions

Martin Gelter is Professor of Law at Fordham University School of Law. This post is based on a forthcoming book chapter by Professor Gelter.

I recently posted my book chapter, Mapping Types of Shareholder Lawsuits across Jurisdictions (forthcoming in the Research Handbook on Shareholder Litigation, edited by Jessica Erickson, Sean Griffith, David Webber and Verity Winship) on SSRN.

When corporate law scholars explore shareholder litigation abroad, they often start by looking for types of shareholder litigation familiar from the US. In particular, scholarship often explores derivative litigation in various jurisdictions. The objective of the paper is to go beyond this relatively limited comparative analysis and the typical dichotomy between derivative and direct suits. Other jurisdictions sometimes employ different types of shareholder lawsuits that fulfill similar functions. To that end, this chapter attempts to create a functional (but likely incomplete) international taxonomy of shareholder lawsuits. This objective also necessitates a review of corporate conflict of interest, which are to some extent contingent on the type and ownership structure of the corporation.


Proxy Access: Best Practices 2017

Glenn Davis is Director of Research at the Council of Institutional Investors. This post is based on a CII publication by Mr. Davis. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot, and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

This post updates the Council of Institutional Investors’ (CII) 2015 guide, “Proxy Access: Best Practices,” an overview of the Council’s views on common proxy access bylaw provisions. Proxy access, a mechanism that enables shareholders to place their nominees for director on a company’s proxy card, gives shareholders a meaningful voice in board elections.

In 2015, proxy access was just beginning to come into widespread adoption on a company-by-company basis. Today, investors have successfully encouraged 60% of the S&P 500 to adopt proxy access. In all, more than 400 U.S. companies have adopted proxy access bylaws as of June 2017, according to research by Covington and Burling. However, while proxy access has gained broad acceptance, some adopting companies have included, or are considering including, provisions that could significantly impair shareholders’ ability to use it.


Second Circuit Ruling Creates Challenge for Securities Class Action Plaintiffs

Kenneth Herzinger is a partner and Stephanie Albrecht is a managing associate at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Herzinger, Ms. Albrecht, and Robert Reznick.

The Second Circuit recently considered the extraterritorial application of the U.S. securities laws in the private securities class action context, bringing some clarity to an area of the law that is increasingly important given the globalization of financial markets.

In re Petrobras Securities, 862 F.3d 250 (2nd Cir. 2017) was an appeal of a class certification order in a securities class action related to an alleged multi-year money-laundering and kickback scheme involving Petróleo Brasileiro S.A. (“Petrobras”), the Brazilian state-owned oil and gas company. The district court had certified two classes of investors who purchased Petrobras American Depository Shares (ADS) and debt securities, and who brought misrepresentation claims under the Securities Act of 1933 and the Securities Exchange Act of 1934 against Petrobras, its subsidiaries, and its underwriters. Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010), held that the anti-fraud provisions of the securities laws have no extraterritorial effect, and as a consequence apply only to transactions in securities that occur on a U.S.-based exchange or that are otherwise “domestic.” Petrobras ADS shares satisfied the first requirement, but the company’s debt securities are traded over-the-counter, not on a U.S. exchange. Prior decisions had limited “domestic” transactions to ones where (1) the purchaser “incurred irrevocable liability within the United States to take and pay for a security … or to deliver a security” or (2) “legal title to the security … transferred in the United States” (see, e.g., Absolute Activist Value Master Fund Ltd. v. Ficeto, 677 F.3d 60, 68 (2d Cir. 2012)), but how this test implicated the standards for class certification was not clear.


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