Yearly Archives: 2017

NAIC Adopts Model Cybersecurity Law

Posted by Alice Kane & Analisa Dillingham, Clifford Chance LLP, on
Wednesday, August 30, 2017
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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.

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Controlling-Shareholder Related-Party Transactions Under Delaware Law

Posted by Jonathan Rosenberg & Alexandra Lewis-Reisen, O’Melveny & Myers LLP, on
Wednesday, August 30, 2017
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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:

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2017 Mid-Year Activism Update

Posted by Gibson, Dunn & Crutcher LLP, on
Tuesday, August 29, 2017
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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.

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

Posted by Margaret C. Bae, Olshan Frome Wolosky LLP, on
Tuesday, August 29, 2017
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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.

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Mapping Types of Shareholder Lawsuits Across Jurisdictions

Posted by Martin Gelter, Fordham University, on
Tuesday, August 29, 2017
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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.

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Proxy Access: Best Practices 2017

Posted by Glenn Davis, Council of Institutional Investors, on
Monday, August 28, 2017
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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.

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Second Circuit Ruling Creates Challenge for Securities Class Action Plaintiffs

Posted by Kenneth Herzinger and Stephanie Albrecht, Orrick, Herrington & Sutcliffe LLP, on
Monday, August 28, 2017
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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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Federal Reserve Board Proposes Guidance Addressing Supervisory Expectations on Boards of Directors

Posted by Richard Alexander and Kevin Toomey, Arnold & Porter Kaye Scholer LLP , on
Sunday, August 27, 2017
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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

Posted by Tim Youmans and Brian Tomlinson, CECP's Strategic Investor Initiative, on
Saturday, August 26, 2017
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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

Posted by Richard Grossman, Skadden, Arps, Slate, Meagher & Flom LLP, on
Friday, August 25, 2017
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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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