Monthly Archives: August 2017

Why Your D&O Policies Should Cover Delaware Appraisal Proceedings

Peter M. Gillon is a partner and Benjamin D. Tievsky is an associate at Pillsbury LLP. This post is based on a Pillsbury publication by Mr. Gillon and Mr. Tievsky, and is part of the Delaware law series; links to other posts in the series are available here.

It’s now accepted wisdom that virtually all public company mergers and acquisitions will be challenged with at least one lawsuit—over 95% of them are. A less well-publicized form of challenge—and one that is both fascinating and perplexing for those interested in securities litigation—is the unique creature of Delaware law known as the appraisal proceeding. Under Delaware General Corporation Law §262, shareholders dissenting from a merger on grounds that the share price they’ll receive is inadequate “shall be entitled to an appraisal by the Court of Chancery of the fair value of the stockholder’s shares of stock.” If the court finds that the deal price is lower than fair market value, the acquiring corporation must pay the difference to the dissenting shareholders, plus interest. The court may also award their attorneys’ and experts’ fees, which can be significant. This process has created a cottage industry of “appraisal arbitrage,” in which hedge funds purchase shares in hopes of securing a higher price for those shares through appraisal. Fortunately, D&O insurance might be available to cover the acquired company’s defense and other costs.

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2017 Proxy Season Review

Glen T. Schleyer is a partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Schleyer.

The complete publication (available here) summarizes significant developments relating to the 2017 U.S. annual meeting proxy season, including:

  • Decline in traditional governance proposals. Proposals on traditional governance reforms (destaggering the board, adopting majority voting in uncontested director elections, eliminating supermajority voting provisions, and adopting special meeting rights) continued to decline in frequency. There are simply fewer large companies that have not adopted these practices already, and more smaller companies are doing so as well, especially with respect to majority voting.
  • Continued acceptance of proxy access leads to fewer proposals. Fewer proposals to adopt new proxy access provisions came to a vote in 2017, largely because most companies that received such a proposal reacted by adopting a proxy access bylaw with terms consistent with market practice (i.e., 3% ownership for three years, director cap of 20% of the board but no less than two, and a group limit of 20 shareholders). The proposals that did come to a vote generally passed.

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OFAC Breaks New Ground By Penalizing Non-U.S. Companies for Making U.S. Dollar Payments Involving a Sanctioned Country

The following post is based on a publication from Paul, Weiss, Rifkind, Wharton & Garrison LLP, authored by: Brad S. Karp, chairman and partner at Paul, Weiss; Roberto J. GonzalezMichael E. GertzmanRichard S. Elliott; and Matthew J. Rosenbaum.

On July 27, 2017, the U.S. Treasury Department’s Office of Foreign Assets Control (“OFAC”) announced a $12 million settlement with CSE Global Limited (“CSE Global”) and its subsidiary, CSE TransTel Pte. Ltd. (“TransTel”), which are both based in Singapore. [1]

TransTel entered into contracts to install telecommunications equipment for several Iranian energy projects. According to the settlement, TransTel apparently violated U.S. sanctions by using its U.S. dollar account at a Singapore-based bank to make over $11 million in payments to various third-party vendors—including several Iranian companies—that were providing goods and services in connection with the Iranian contracts. These payments (which did not indicate their relation to Iran) were processed through the U.S. financial system and caused multiple financial institutions to violate U.S. sanctions by engaging in the prohibited exportation of financial services (i.e., processing U.S. dollar payments) from the United States to Iran or for the benefit of Iran.

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The Volcker Rule and Potential Conflicts of Interests in Banks

Sureyya Burcu Avci is a Postdoc Research Scholar at the University of Michigan Ross School of Business. Cindy A. Schipani is Merwin H. Waterman Collegiate Professor of Business Administration and Professor of Business law at the University of Michigan Ross School of Business. H. Nejat Seyhun is Jerome B. & Eilene M. York Professor of Business Administration and Professor of Finance at University of Michigan Ross School of Business. This post is based on a recent article, forthcoming in the Yale Journal on Regulation, by Professor Schipani, Professor Seyhun, and Ms. Avci.

Under intense pressure from the banking industry, the Trump Administration recently introduced legislation to repeal the Dodd-Frank Act and thereby eliminate the Volcker Rule. This development immediately raises the question of why the big banks would want to worry about a small, arcane, technical trading rule such as the Volcker Rule. The answer is that the Volcker Rule, if properly implemented, would eliminate huge amount of profits banks are currently making from proprietary stock trading that may be in conflict with their clients’ interests.

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Declassified Boards Are More Likely to Be Diverse

Grant Bremer is a research analyst at Equilar Inc. This post is based on an Equilar publication by Mr. Bremer. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang; and Staggered Boards and Shareholder Value: A Reply to Amihud and Stoyanov, also by Alma Cohen and Charles C. Y. Wang (discussed on the Forum here).

The Equilar Gender Diversity Index (GDI) has reported that, at the current pace of growth in female representation on public company boards of directors, gender parity would not be reached until Q4 2055 for the Russell 3000. However, annually elected boards may already have an edge against their classified counterparts.

Classified boards, also colloquially known as staggered boards, create separate “classes” of directors who are elected for multiple-year terms, with one “class” coming up for re-election each year. Proponents of classified boards say they strengthen a company’s long-term strategy by increasing focus and dedication. Classification may also reduce stress on a board by creating job stability and preventing hostile corporate takeovers. On the other hand, advocates of declassified boards highlight how annual elections can increase accountability and responsiveness to shareholders. Over the past five years, corporations have seen a strong migration away from classified boards to annually elected boards with no director classes. Indeed, almost 90% of large-cap companies now have declassified boards, up from about two-thirds in 2011.
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The Remaking of Wall Street

Andrew F. Tuch is Professor of Law at the Washington University in St. Louis School of Law. This post is based on a recent article by Professor Tuch, forthcoming in the Harvard Business Law Review.

At the dawn of the Financial Crisis of 2007-09, major investment banks stood as the elite of Wall Street. They were large-scale, publicly listed corporations providing broad-ranging financial products and services across the globe. But as we know, their reliance on short-term funding and exposure to mortgage-related securities left them financially vulnerable and created system-wide financial risks. As their lending sources dried up, they received massive government assistance designed to avert catastrophic system-wide harms. Those investment banks that survived became bank holding companies (BHCs). These events wiped out major investment banks, prompting The Wall Street Journal to assert that “Wall Street as we’ve known it for decades has ceased to exist.” [1]

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Chancery Finds Fair Value To Be Less Than Half Merger Price

Meredith E. Kotler is a partner at Cleary, Gottlieb, Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Kotler, Mark E. McDonald, and Vanessa C. Richardson. This post is part of the Delaware law series; links to other posts in the series are available here.

In a decision issued on Friday [July 21, 2017] that will likely slow the recent spike in appraisal suits, the Delaware Court of Chancery held that the fair value of Clearwire Corp. was $2.13 per share—less than half the merger price of $5 per share. See ACP Master, Ltd. et al. v. Sprint Corp., et al., C.A. No. 8508-VCL (Del. Ch. July 21, 2017) (“Clearwire”). The decision by Vice Chancellor Laster also found that Sprint Nextel Corp. (“Sprint”), which owned slightly more than 50% of Clearwire’s voting stock at the time of the merger, did not breach its fiduciary duties in acquiring the Clearwire shares it did not already own because the merger was entirely fair to Clearwire’s minority stockholders.
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Swimming Against the Current

Nick Dawson is Co-Founder and Managing Director of Proxy Insight. This post is based on a Proxy Insight publication by Mr. Dawson.

Dual stock structures have been cropping up quite a lot in the news recently. The resurgence of this long-standing debate can be traced back to Snap Inc’s listing earlier this year. The tech company’s IPO took the unprecedented step of offering no voting rights for its common stock.

This led the Council of Institutional Investors (CII) and some asset managers to reiterate the call for indices to ban non-voting shares. Picking up the debate, this post will look at the arguments surrounding this controversial issue alongside Proxy Insight data.

Although most investors agree with CII that dual stock structures represent poor corporate governance, rivalry between exchanges means that the council is likely fighting a losing battle.

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Brexit: The Great Repeal Bill

Thomas Donegan is a partner at Shearman & Sterling LLP. This post is based on a Shearman publication by Mr. Donegan, Ben McMurdo, and Oliver LinchAdditional posts on the legal and financial impact of Brexit are available here.

On 13 July 2017, the UK government published the European Union (Withdrawal) Bill, known as the “Great Repeal Bill.” This major piece of constitutional legislation sets out the government’s proposals for transforming existing EU laws into UK laws and ending the supremacy of EU laws in the UK after Brexit.

A referendum was held on 23 June 2016, which resulted in a vote for the UK to leave the EU. The European Union Referendum Act, which authorized the holding of the referendum, was silent as to any further steps to be taken in the event of a “leave” vote. Earlier this year, the European Union (Notification of Withdrawal) Act 2017 empowered the Prime Minister to notify the EU of the UK’s intent to withdraw from the EU. This notification was made on 29 March 2017, starting an extensible two-year negotiation period, at the end of which the UK will cease to be a member of the EU. The proposed Great Repeal Bill is one of several pieces of legislation that the UK government has recently proposed in order to give effect to the result of the referendum.

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Volcker Rule: Under Review Until Further Notice

Dan Ryan is Banking and Capital Markets Leader and Roberto Rodriguez is Director of Regulatory Strategy at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mr. Rodriguez, Mike Alix, Adam Gilbert, and Julien Courbe.

The Trump Administration has been critical of the Dodd-Frank Act since day one, and one of the primary targets has been the Volcker Rule (“rule”). The rule was born in a highly politicized environment during the financial crisis, and while its proprietary trading restriction was intended to promote financial stability, the complexity of implementing the rule has been considered problematic by banks and regulators alike. Since its inception, leading regulators—including Federal Reserve (Fed) Chair Janet Yellen, Former Fed Governor Daniel Tarullo, and New York Fed President William Dudley—have acknowledged that there is room to reduce the rule’s compliance burden and to tailor its “one-size fits all” approach.

In the most concrete action thus far, the Treasury Department devoted a great deal of attention to the rule in its first report on financial regulation. Unlike the Financial CHOICE Act which recently passed the House of Representatives, the report does not seek to repeal the rule. Instead, it proposes significant changes aimed at reducing the cost and burden of compliance on banks while still remaining true to the policy-intent of the rule.

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