Monthly Archives: September 2017

Shareholder Litigation of Externally Managed REIT Allowed to Proceed

Steven M. Haas and David C. Wright are partners at Hunton & Williams LLP. This post is based on a Hunton & Williams publication by Mr. Haas and Mr. Wright, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently denied a motion to dismiss a shareholder derivative suit brought against an externally managed REIT. The shareholder alleged that the board of directors breached its fiduciary duties by (1) renewing the REIT’s management agreement with its external manager each year and (2) approving a transaction in which the REIT internalized its manager. The court held that the plaintiff had created a reasonable doubt as to whether the board of directors was adequately informed in making these decisions. Thus, the derivative demand requirement was excused.

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The High Cost of Fewer Appraisal Claims in 2017: Premia Down, Agency Costs Up

Matthew Schoenfeld is a Portfolio Manager at Burford Capital. This post is based on a recent paper by Mr. Schoenfeld, and is part of the Delaware law series; links to other posts in the series are available here.

This post considers the preliminary results of an ongoing effort to discourage appraisal litigation. In the year since the August 2016 reforms to the Delaware appraisal statute, Chancery has issued a slew of at-or-below merger price appraisal opinions in cases such as Clearwire and PetSmart, while simultaneously pinioning fiduciary litigation by reiterating the principles of Corwin. The result—as one would expect when costs are raised and benefits are reduced—has been that fewer deals are being challenged via appraisal: In 1H 2017, the number of deals challenged fell by 33%. Those who successfully advocated for curbs on the practice had argued that appraisal claims lowered deal premia by incenting buyers to withhold top dollar, thereby hurting non-appraising shareholders. On their view, curtailment of appraisal should have sent premia upwards. But year to date the average U.S. target premium of 22.4% is the lowest of any year in recent history. The average target premium in 2Q 2017 of 19.3% was the single-lowest of the fifty prior quarterly observations; thus far, 3Q 2017, at 19.6%, is tracking as the second-lowest. Amid the pronounced decline in merger premia, change-in-control payouts have expanded as a percentage of transaction value.

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How M&A Agreements Handle the Risks and Challenges of PRC Acquirors

Ethan Klingsberg is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg, Ling Huang, Denise Shiu and Rob Gruszecki.

U.S. and European companies continue to receive bids to sell themselves and their significant assets to companies based in the People’s Republic of China. Evaluation of these proposals requires due diligence of the acquiror’s ownership structure, assets, cash position, and financing sources. Moreover, even if this due diligence exercise gives rise to satisfactory results, the continued unpredictability of the PRC government (including its recently enhanced foreign exchange control measures), coupled with the ties of some of these buyers and financing sources to governmental entities in the PRC, as well as the challenges that a non-PRC counterparty faces when seeking to enforce contractual obligations and non-PRC judgments in PRC courts, merit the implementation of an array of innovative provisions in M&A Agreements to protect the seller/target. Several months ago, we reviewed these provisions in a previous post. This new post updates that earlier post to reflect recent regulatory developments and the evolution of market practice.

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Weekly Roundup: September 1–7, 2017


More from:

This roundup contains a collection of the posts published on the Forum during the week of September 1–7, 2017.



NYDFS Cybersecurity Regulations Take Effect




The Evolution and Current State of Director Compensation Plans



Executive Compensation: A Survey of Theory and Evidence




Out of Sight Out of Mind: The Case for Improving Director Independence Disclosure

Yaron Nili is Assistant Professor at University of Wisconsin Law School. This post is based on his recent article, forthcoming in the Journal of Corporation Law.

In July 2016, a coalition of 13 CEOs and heads of major investment firms—which included names like JPMorgan Chase CEO Jamie Dimon, Berkshire Hathaway CEO Warren Buffett, General Motors CEO Mary Barra and BlackRock CEO Larry Fink—released the Commonsense Principles of Corporate Governance (discussed on the Forum here). These Principles emphasize the critical role of director independence in corporate America, stating that: “[t]ruly independent corporate boards are vital to effective governance, so no board should be beholden to the CEO or management” and that “[d]irectors should be strong and steadfast, independent of mind and willing to challenge [management] constructively.” Indeed, this recent statement echoes the importance and emphasis that academics, investors, regulators and companies alike, have placed on director independence.

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Divided Second Circuit Panel Overrules Prior Newman Insider Trading Decision

The following post is based on a publication from Paul, Weiss, Rifkind, Wharton & Garrison LLP, authored by Brad S. Karp, Geoffrey R. Chepiga, Daniel J. Kramer, Lorin L. Reisner, Audra J. Soloway, and Richard C. Tarlowe.

On [August 23, 2017], in United States v. Martoma, the United States Court of Appeals for the Second Circuit overruled its own 2014 decision in United States v. Newman and altered the standard for determining whether the personal benefit element of insider trading has been satisfied. The decision had been eagerly anticipated as a key test for how courts would interpret the U.S. Supreme Court’s 2016 decision in Salman v. United States.

For more than 30 years, since the Supreme Court’s seminal decision in Dirks v. SEC, the dividing line between lawful trading on material, nonpublic information and unlawful insider trading has been whether the tipper breached a duty in exchange for a “personal benefit.” In most cases, courts have had little difficulty defining the boundaries of that requirement because either the tipper received a financial benefit, or the tippee was a close friend or relative with whom the insider had no legitimate, business reason to be sharing confidential corporate information. In those circumstances, courts have generally permitted an inference of a personal benefit.

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Delaware Supreme Court Reverses Chancellor’s Chicago Bridge Ruling

Elizabeth Kitslaar is a partner at Jones Day. This post is based on a Jones Day publication by Ms. Kitslaar, Michael P. ConwayBryan E. Davis, and James A. White. This post is part of the Delaware law series; links to other posts in the series are available here.

In a much-anticipated decision, on June 27, 2017, the Supreme Court of Delaware reversed the Chancery Court’s ruling in Chicago Bridge v. Westinghouse The Delaware Supreme Court determined that an independent auditor appointed to resolve purchase price adjustment disputes did not have a “wide-­ranging brief to adjudicate all disputes” under the Purchase Agreement but, rather, “one confined to a discrete set of narrow disputes.” Specifically, the Court held that the Independent Auditor could not hear the seller’s arguments that the purchase price should be reduced because historical financial statements and accounting practices were not compliant with generally accepted accounting principles. The decision represents an important statement on the limits of authority of Independent Auditors acting “as an expert, not an arbitrator.”

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Executive Compensation: A Survey of Theory and Evidence

Alex Edmans is Professor of Finance at London Business School; Xavier Gabaix is Pershing Square Professor of Economics and Finance at Harvard University; and Dirk Jenter is Associate Professor of Finance at London School of Economics.This post is based on their recent paper. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

Executive compensation is a rich, complex, and controversial topic. In addition to there being an intense debate among academics on its drivers, the efficiency of current practices, and the case for reform, few topics have sparked as much interest among the general public. Politicians, regulators, investors, and executives themselves have all taken strong positions on whether and how to reform pay.

This paper sheds light on this debate by surveying the theoretical and empirical literature on executive compensation. We start in Section 2 by presenting the stylized facts, starting with U.S. data on public firms going back to 1936. We show that, while the level of pay has generally increased over time, this trend has been neither constant nor uniform, contrary to popular belief. We next decompose total pay into its components, illustrating in particular the rise and fall of option compensation, and discuss the increasing use or disclosure of other forms of pay, such as performance-based equity, (multi-year) bonus plans, pensions, perquisites (“perks”), and severance pay. We then present evidence on the level and composition of pay in non-U.S. countries, and survey recent findings on pay in U.S. private firms.

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Companies Should Maximize Shareholder Welfare Not Market Value

Oliver D. Hart is Andrew E. Furer Professor of Economics at Harvard University. This post is based on a recent paper authored by Professor Hart and Luigi Zingales, Robert C. Mccormack Distinguished Service Professor of Entrepreneurship and Finance at University of Chicago Booth School of Business.

There is a big debate in Washington about the attempt in many states to restrict people’s ability to vote in political elections. Yet, there is almost complete silence about a more imminent and no less important form of vote suppression: the attempt to limit shareholder votes introduced in the Financial Choice Act, approved by the House in June. As in all forms of vote suppression, it takes a very technical and even benign form: the Financial Choice Act increases from the current level of $2,000 to 1% the ownership threshold for submitting shareholder proposals to be included in corporate ballots. While $2,000 might be too low to filter out purely frivolous proposals, 1% becomes prohibitive for all but a handful of institutional investors: for example, to make a proposal in Apple you would need over $7 billion in holdings.

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The Evolution and Current State of Director Compensation Plans

John Ellerman is a partner, Peter England is a consultant, and Blaine Martin is a consultant at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Ellerman, Mr. England, and Mr. Martin.

Over the past 20 years, there has been a major shift in how large public companies have compensated their outside Directors. [1] These changes have included the elimination of Board meeting fees, granting of equity compensation in the form of full-value shares, the elimination of Director retirement plans and other perquisites, adoption of stock ownership guidelines for Directors, and giving of supplemental cash retainers to Committee Chairs in recognition of their substantial time commitments to committee work.

A recent Pay Governance review of Director compensation among S&P 500 companies reveals that these trends have become embedded in the policies and compensation in large U.S. companies. [2] The survey, which reports 2016 Board compensation, shows that the median total direct compensation awarded to an S&P 500 corporate Director was $265,487. This represents a <1% (i.e., 0.5%) annual compensation increase for 2016 compared to 2015.

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