Monthly Archives: December 2017

Finding the Right Balance in Appraisal Litigation: Deal Price, Deal Process, and Synergies

Lawrence A. Hamermesh is Executive Director of the University of Pennsylvania Law School Institute for Law and Economics and Professor Emeritus at Widener University Delaware Law School. Michael L. Wachter is the William B. and Mary Barb Johnson Professor of Law and Economics at the University of Pennsylvania Law School, and is Co-Director of its Institute for Law and Economics. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.

This paper examines the evolution of Delaware appraisal litigation and concludes that recent precedents have created a satisfactory framework in which the remedy is most effective in the case of transactions where there is the greatest reason to question the efficacy of the market for corporate control, and vice versa. The article suggests that, in effect, the developing framework (including the December 14, 2017 Delaware Supreme Court opinion in the Dell appraisal case, which was issued after the current draft of the article was completed) invites the courts to accept the deal price as the proper measure of fair value, not because of any presumption that would operate in the absence of proof, but where the proponent of the transaction affirmatively demonstrates that the transaction would survive judicial review under the enhanced scrutiny standard applicable to fiduciary duty-based challenges to sales of corporate control. The article also suggests, however, that the courts and expert witnesses should and are likely to refine the manner in which elements of value (synergies) should, as a matter of well established law, be deducted from the deal price to arrive at an appropriate estimate of fair value.


The Limits of Shareholder Ratification for Discretionary Director Compensation

Gail Weinstein is senior counsel, and Philip Richter and Adam Kaminsky are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Richter, Mr. Kaminsky, Steven EpsteinWarren S. de Wied, and Robert C. Schwenkel.

In re Investor Bancorp, Inc. Stockholder Litigation, issued by the Delaware Supreme Court on Dec. 13, 2017, may result in challenges to compensation awarded to directors pursuant to existing discretionary equity plans and is likely to affect the structure of future equity plans.

The Supreme Court, at the motion to dismiss stage, rejected the Court of Chancery’s expansion of the application of the stockholder ratification defense to the granting of discretionary compensation to directors pursuant to equity plans that contain “meaningful limits” on awards. Reversing the decision below, the Supreme Court held that deferential business judgment review will not be available for (and the entire fairness standard of review will apply instead to) challenges to awards made under such equity plans if the plaintiff alleges facts that support an inference that the directors may have breached their fiduciary duties when determining the awards. The Supreme Court reasoned that when stockholders grant directors broad authority to use their discretion in making self-interested decisions, the stockholders do so knowing that the directors are subject to fiduciary standards in exercising that discretion; and that, therefore, there is a need for judicial oversight of the exercise of that discretion. The Supreme Court found in this case that the alleged facts sufficiently supported an inference of breach by the directors of their fiduciary duties for purposes of a motion to dismiss, as the awards granted appeared to have been “excessive” (based on their having been very significantly higher than the past compensation and the compensation at peer companies).


Passive Fund Providers and Investment Stewardship

This post is based on a Morningstar report by Hortense Bioy, Jose Garcia-Zarate, Alex Bryan, Jackie Choy, and Ben Johnson. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst.

As assets continue to flow from actively managed to index-tracking strategies, the largest index asset managers are becoming increasingly influential, often ranking among the largest investors of public companies. Despite this fact, little research has been done to understand how index managers carry out their investment stewardship responsibilities.

It is legitimate to assume that devoting resources to monitor investee companies is not as high a priority for an index manager as it is for an active manager. After all, index managers tend to compete on fees, and their overriding objective is to match the performance of indexes. But unlike active managers, index managers can’t sell poorly run companies. They must either put up with poor governance or encourage positive change through voting and engagement. The former is not an option. These managers have a fiduciary duty to their investors to push for changes that will increase shareholder value. As large, permanent owners of a wide swath of public firms, they have the clout to advance their agendas. Being an active owner is also a means of galvanizing managers’ reputations as investor advocates.


Meaningful Limits on Director Pay

Dan Marcec is Director of Content at Equilar, Inc. This post is based on an Equilar publication by Mr. Marcec; research analysts Kyle Benelli, Sean Barry, and Angelo Martinez contributed data analysis to the study.

A wave of lawsuits surrounding director compensation surfaced a couple of years ago, often alleging “excessive” pay for boards of directors on a variety of grounds. Because boards set their own pay levels, there are potential legal ramifications due to the “self-dealing” nature of director compensation. While lawsuits were settled and subsequent litigation has subsided, the topic is back in the spotlight in light of the updated Institutional Shareholder Services (ISS) proxy voting guidelines.

In a recent webinar hosted by Equilar and Meridian Compensation Partners, Michael Falk, a partner with law firm Kirkland & Ellis set the stage. “We are seeing a trend now that corporations will put a ‘meaningful limit’ into their director compensation plan if it’s not in there already,” he said. “These lawsuits showed that you want to have a separate limit that is specific to directors, proposing that the board will pay no more than a certain value transferred to directors in any one year in combined cash and equity.”


The Supreme Court’s Non-Transsubstantive Class Action

J. Maria Glover is Associate Professor of Law at Georgetown University Law Center. This post is based on her recent article, forthcoming in the University of Pennsylvania Law ReviewRelated research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

The year 2016 marked the fiftieth anniversary of the adoption of Federal Rule of Civil Procedure Rule 23, and with it, the advent of the modern class action. As the fiftieth anniversary approached, many scholars, including myself, said that class actions were dead, dying, or headed for a zombie state. Many of the Supreme Court’s recent class action cases all but confirmed that view. In just the last six years, the Supreme Court ratcheted up the requirements for class certification under Rule 23 in Wal-Mart Stores v. Dukes and Comcast v. Behrend, increasing the cost and difficulty of obtaining certification. And, in a series of cases, the Court permitted the use of class action prohibitions in arbitration contracts, thus eliminating a swath of class actions and, often, the underlying claims themselves. The Court’s language in these cases also tracked stock arguments against the class action, leaving the distinct impression that the Roberts Court was on a mission to diminish or destroy the class action procedure.


Proposed Revisions to the UK’s Corporate Governance Regime

Peter Reilly is Director of Corporate Governance at FTI Consulting Dublin. This post is based on a memorandum by Mr. Reilly and Jonathan Neilan, Managing Director at FTI Consulting Dublin.

On 5 December the Financial Reporting Council (FRC) published proposals for the latest revisions to the UK Corporate Governance Code (the Code), which are due to be published by “early summer” 2018 and will be effective for all accounting periods beginning on or after 1 January 2019.

The stated aim of the FRC in proposing the revisions was to make the Code “shorter and sharper” with supporting principles either removed and incorporated into new principles and provisions or supplementary guidance, such as the guidance on Board Effectiveness. The proposed revisions to the Code place particular emphasis on:


Analysis of Delaware Supreme Court’s Dell Appraisal Decision

Victor Lewkow and Meredith E. Kotler are partners and Mark E. McDonald is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Lewkow, Ms. Kotler, and Mr. McDonald, and is part of the Delaware law series; links to other posts in the series are available here.

Last week, the Delaware Supreme Court issued another highly anticipated appraisal decision, Dell, Inc. v. Magnetar Global Event Driven Master Fund Ltd. Dell builds on the Court’s DFC decision earlier this year, discussed here, in which the Court held that the merger price will generally be entitled to significant, if not dispositive, weight in an appraisal action involving the sale of a public company pursuant to an open, competitive, and arm’s-length bidding process, regardless of whether the buyer is a financial or strategic bidder. Dell extends and applies this principle to mergers involving a relatively limited pre-signing bidding process, at least where that process is competitive and does not exclude logical potential bidders. Significantly, Dell also expands DFC to cases involving management buyouts (MBOs), at least where management is not a controlling stockholder and is committed to working with rival bidders who are given full access to necessary information about the company. As Dell makes clear, while process is extremely important in determining whether to defer to (or give substantial weight to) deal price in an appraisal case, it will take more than merely theoretical doubts about an arm’s-length and competitive process to justify departing from the deal price. [1]


2017 Board Diversity Survey

Mike Fucci is Chairman of the board, Deloitte. This post is based on a Deloitte publication by Mr. Fucci.

The 2017 board diversity survey was conducted in spring 2017 among 300 board members and C-suite executives at U.S. companies with at least $50 million in annual revenue and at least 1,000 employees. Conducted by Wakefield Research via an email invitation and online questionnaire, the survey sought to ascertain respondents’ perspectives on board diversity and their organizations’ criteria and practices for recruiting and selecting board members. The margin of error for this study is +/- 5.7 percentage points at the 95 percent confidence level.

Part 1. Perceptions of board diversity

The findings in this section show that the survey found nearly universal agreement on the need for diverse skill sets and perspectives on the board, and on the potential benefits of diversity.


Settlement of Workplace Harassment Suit at 21st Century Fox

Mark Lebovitch is a partner at Bernstein Litowitz Berger & Grossmann LLP. This post is based on a Bernstein Litowitz publication by Mr. Lebovitch.

We write to inform you about a shareholder derivative suit and related settlement in a case involving 21st Century Fox (“21CF” or the “Company”) and Fox News (together with 21CF, “Fox”) that became public last week. At a time when the number of high-profile and powerful individuals accused of sexual harassment increases almost every day, the Fox settlement is most notable for creating a majority-independent body of experts that is empowered to tackle these important issues in a novel way. This historic achievement may serve as a model for many other affected public companies.


Matters to Consider for the 2018 Annual Meeting

Brian Breheny and Joseph Yaffe are partners at Skadden, Arps, Slate, Meagher & Flom LLP.  The following post is based on a Skadden publication by Mr. Breheny and Mr. Yaffe.

Companies have important decisions to make as they prepare for their 2018 annual meeting and reporting season. We have prepared the following overview of key corporate governance, executive compensation and disclosure matters that we believe companies should focus on as they plan for the upcoming season. As always, we welcome any questions you have on any of these topics or other areas related to annual meeting and reporting matters.


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