Monthly Archives: August 2017

Federal Reserve Board Proposes Guidance Addressing Supervisory Expectations on Boards of Directors

Richard M. Alexander is partner and chairman, and Kevin M. Toomey is an associate, at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter Kay Scholer publication by Mr. Alexander, Mr. Toomey, Brian McCormally, Robert Azarow, Dave Freeman, and Michael Mancusi.

On August 9, 2017, the Board of Governors of the Federal Reserve System (FRB) published proposed guidance (Proposal) that would address supervisory expectations on boards of directors of banks and holding companies, as applicable.

The Proposal results from a multi-year review of practices of boards of directors, particularly at the largest banking organizations, which assessed, among other things, factors that make boards effective, the many challenges boards face, and how boards influence the safety and soundness of their enterprises and promote compliance with laws and regulations. Findings from the review, as noted in the preamble to the Proposal, suggest what many bank and bank holding company board members have noted for some time: that supervisory expectations for boards and senior management have become increasingly difficult to distinguish, boards often devote significant time to non-core tasks, and boards are disadvantaged by information flow challenges.

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Far Beyond the Quarterly Call

Tim Youmans is Research Director and Brian Tomlinson is Senior Research Advisor for the Strategic Investor Initiative at CECP. This post is based on their paper Far Beyond the Quarterly Call, originally published in the Spring 2017 issue of The Journal of Applied Corporate Finance.

The structure and content of corporate communications with shareholders contribute to pressures towards short-termism. For example, the practice of issuing quarterly earnings guidance seems to reinforce short-term investment horizons. CEOs have also described short-term pressures as having intensified over the last five years, citing, in addition, the competitive environment, performance expectations from the board, economic uncertainty, and vocal activist investors as factors.

Intensifying short-term pressures are at odds with trends and evidence on the sources of corporate value:

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ISS and the Removal of CEOs: A Call for an Enhanced Standard

Richard Grossman is Partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Grossman, Gabrielle Wolf, and Kashira Patterson.

Recently, shareholder activists have been pursuing proxy contests seeking to prevent re-election of the CEO as a director, by proposing an alternative director nominee. When voting in proxy contests, many shareholders give significance to (or automatically follow) the recommendations of Institutional Shareholder Services Inc. (ISS). The analytical framework that ISS uses to determine whether it will recommend that shareholders support a dissident in a proxy contest depends on whether the dissident is seeking a minority or a majority position on the board, with the standard for a dissident seeking minority representation being significantly easier to meet than if control is sought. However, this framework does not expressly account for whether a CEO is being targeted in a dissident’s minority slate.

Replacing the CEO as a company director can harm the company and shareholders. Typically, the CEO is the prime mover in developing and overseeing execution of the company’s strategic plan as well as a myriad of other important corporate strategies, actions and relationships. This central leadership function is reinforced by the CEO’s status as a director. Moreover, board membership enhances quality, two-way communication between the CEO and other directors. In short, the CEO-director is not “just another director”—and targeting the CEO for replacement on the board, which may well disrupt these key functions, implicates important additional considerations, ultimately bearing on shareholder value. For this reason, ISS should adopt an enhanced intermediate analytical framework in its review process that takes into account whether a dissident is targeting a CEO for replacement on the board.

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SEC Staff Examines Impact of Regulation on Capital Formation and Market Liquidity

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

In response to a statutory requirement, the SEC Staff of the Division of Economic and Risk Analysis (DERA) has issued a lengthy report to Congress on the combined impacts of the Dodd-Frank Act and other financial regulations on access to capital for consumers, investors and businesses and market liquidity. DERA studied (a) capital raising in the primary markets by analyzing evidence on the evolution of the issuance of debt, equity and asset-backed securities across registered and exempt offerings and (b) secondary market liquidity by analyzing market activity and liquidity in corporate bonds and US treasuries, along with funds and investment companies that invest in those securities.

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Weekly Roundup: August 18–24, 2017


More from:

This roundup contains a collection of the posts published on the Forum during the week of August 18–24, 2017.

Losing Stockholder Standing to Assert and Enforce Corporate Inspection Rights













Board Oversight of Long-Term Value Creation and Preservation

Tim J. Leech is managing director at Risk Oversight Solutions Inc. This post is based on a publication from The Conference Board, authored by Mr. Leech.

Stakeholders increasingly expect boards of directors to do more to oversee the organizations they direct. Some of these expectations are spelled out in laws and regulations—the Sarbanes-Oxley, Dodd Frank, Foreign Corrupt Practices, Anti-money Laundering acts—and stock exchange listing standards, to name just a few. Regulatory-driven board risk oversight expectations, by design, have focused on protecting the public and entity value preservation. The newest board risk oversight expectations, perhaps the most important to date, are being elevated by institutional investors representing billions of current and future pensioners and controlling trillions of dollars of investments. These highly influential investors are calling on CEOs and boards to spend more time and effort directing and overseeing long term value creation. Boards, in turn, are asking CEOs to provide long­ term value creation strategies, together with their assessment of risks to those objectives. The next logical step is for boards to ask for assurances from internal audit departments and enterprise risk management (ERM) specialists that the risk information they get from management linked to top value creation and value preservation objectives is reliable.

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Delaware Court of Chancery Extends Business Judgment Rule Deference to Controller Transactions Involving Third-Parties

Jason M. Halper is a partner and James M. Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper and Mr. Fee, 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).

On August 18, 2017, the Delaware Court of Chancery granted defendants’ motion to dismiss a class action brought by former minority stockholders of Martha Stewart Living Omnimedia, Inc. (“MSLO”) against Martha Stewart and Sequential Brands Group, Inc. (“Sequential”). In his opinion in In re Martha Stewart Living Omnimedia, Inc. Stockholder Litigation, C.A. No. 11202-VCS (Del. Ch. Aug. 18, 2017), Vice Chancellor Slights held that the business judgment rule, rather than the entire fairness standard, applied at the pleadings stage to a challenge to a controlling stockholder’s sale to a third party, applying the Delaware Supreme Court’s seminal holding in Kahn v. M&F Worldwide Corp. (“MFW”) to such “single-side” controller transactions. Chancellor Slight’s ruling represents the first time the business judgment rule has been applied to single-side controller transactions at the pleadings stage pursuant to the MFW framework; prior decisions involved situations where the controller was on both sides of the transaction.

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The Era of Private Ordering for Corporate Governance

Gary L. Tygesson is a partner in the Capital Markets and Corporate Compliance Group at Dorsey & Whitney LLP. This post is based on a Dorsey & Whitney memo by Mr. Tygesson. Related research from the Program on Corporate Governance includes Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Following the 2016 election, corporate governance circles have focused intently on what will happen in the nation’s capital with regard to a potential roll back of the current regulatory regime. The Trump Administration immediately signaled a strong desire for wide-ranging regulatory reform through a series of executive orders directed at federal agencies. Subsequent Congressional and agency actions initiated the potential unwinding of a broad swath of existing regulations. In the governance and disclosure world, the Republican-controlled Congress adopted a joint resolution suspending the resource extraction disclosure rules. In June, the House passed the Financial CHOICE Act which would repeal many of the governance-related provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (disclosures of CEO pay ratio and hedging policies) and limit the scope of other provisions (clawbacks), prohibit the SEC from mandating the use of universal proxy cards and increase shareholder proposal thresholds. Recently, the Securities and Exchange Commission revised its rule-making docket under newly appointed Chairman Clayton’s leadership and pushed all of the unfinished Dodd-Frank related rules (pay-for-performance disclosure, clawbacks and disclosure of hedging policies) and some additional governance rule-making (universal proxy cards and board diversity) to the back burner.

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ISS Releases Surveys for 2018 Policy Updates

Elizabeth Ising is a partner and Maia Gez is Of Counsel at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Ms. Ising and Ms. Gez.

On August 3, 2017, the proxy advisory firm Institutional Shareholder Services (“ISS”) launched its annual policy survey. Each year, ISS solicits comments in connection with the review of its proxy voting policies. ISS then uses the data to inform its voting policy review. At the end of this process, ISS will announce its updated proxy voting policies applicable to 2018 shareholder meetings.

This year, ISS divided its survey into two parts: the Governance Principles Survey and the Policy Application Survey. The Governance Principles Survey consists of a brief, high-level set of questions addressing what ISS views as the “fundamental and high-profile” issues this year:

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Delaware Court of Chancery Extends Business Judgment Protection to Control Shareholders Selling to a Third Party

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a publication by Mr. Mirvis, Paul K. Rowe, and Andrew J. Nussbaum. This post is part of the Delaware law series; links to other posts in the series are available here.

In 2014, the Delaware Supreme Court ruled that a control stockholder buying out the public minority interest could achieve the safe haven of business judgment review, provided that the controller structured the transaction to provide certain protections, notably special committee approval, full disclosure and a majority-of-minority vote condition. Kahn v. M&F Worldwide, 88 A.3d 635 (Del. 2014) (“MFW”). (Our previous post on the case is here.)

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