Yearly Archives: 2018

What Directors Need to Include in Effective Appraisal Notices

Posted by Christopher B. Chuff, M. Duncan Grant, and Joanna J. Cline, Pepper Hamilton LLP, on
Wednesday, August 8, 2018
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Christopher B. Chuff is an associate and M. Duncan Grant, and Joanna J. Cline are partners at Pepper Hamilton LLP. This post is based on a Law360 article published by Mr. Chuff, Mr. Grant, and Ms. Cline 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here); and Appraisal After Dell, both by Guhan Subramanian.

A recent Delaware Court of Chancery opinion serves as a stark reminder of the information that must be included in appraisal notices delivered pursuant to Section 262 of the Delaware General Corporation Law. As explained in the opinion, merely providing notice of a merger and the existence of appraisal rights is not sufficient. Rather, appraisal notices must provide stockholders with the information they need to determine whether to accept the merger consideration or to seek appraisal. More specifically, appraisal notices should include information regarding (1) the background and terms of the merger, (2) the value of the constituent corporations, (3) the board’s decision-making process, and (4) potential conflicts of interest.

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The Insignificance of NRG Yield

Posted by Itai Fiegenbaum (Harvard Law School), on
Wednesday, August 8, 2018
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Itai Fiegenbaum is a Fellow at the Harvard Law School Program on Corporate Governance. This post is based on his recent paper, 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).

The pathologies of influential corporate insiders with a significant equity stake were on full display during Oracle’s 2016 acquisition of industry rival NetSuite. Larry Ellison, Oracle’s long-time Chief Executive Officer and dominant figure, played a major role in choosing the acquisition target. Normally, Ellison’s involvement should lay to rest any doubts entertained by Oracle shareholders regarding the deal’s wisdom.

Unfortunately for Oracle’s shareholders, one noteworthy detail portrays the acquisition in a different light. At the time the deal was proposed, Ellison owned 45% of NetSuite’s stock. The conflicting ownership stakes questions Ellison’s singular devotion to maximizing Oracle’s value. Although Ellison’s Oracle stock would depreciate if the transaction was skewered in NetSuite’s favor, the concurrent rise of value in his NetSuite stock would more than make up for it. Oracle’s minority shareholders do not enjoy a similar opportunity to offset their losses.

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2018 Proxy Season Review

Posted by Kellie C. Huennekens and Jamie Smith, EY Center for Board Matters, on
Wednesday, August 8, 2018
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Kellie C. Huennekens and Jamie Smith are Associate Directors at the EY Center for Board Matters. This post is based on their EY publication.

This proxy season we are seeing enhanced disclosure around board composition, gains in board gender diversity and more companies disclosing investor engagement.

These changes reflect shared goals between companies and institutional investors around the benefits of having a diverse board aligned to corporate strategy and key risks.

At the same time, more investors are using proxy votes to amplify the call for more women on boards and to support increased transparency and accountability on environmental and social issues. Overall, investor support remains high—more than 90% average support—for director elections and executive compensation programs across various sectors and market capitalization, despite growing scrutiny of executive compensation and board composition across many dimensions.

This post provides five key takeaways for boards as they reflect on this proxy season and evolving governance developments. [1]

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Ratings that Don’t Rate: The Subjective World of ESG Ratings Agencies

Posted by Timothy M. Doyle, American Council for Capital Formation, on
Tuesday, August 7, 2018
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Timothy M. Doyle is Vice President of Policy and General Counsel at the American Council for Capital Formation. This post is based on an ACCF memorandum by Mr. Doyle.

As the trend of Environmental, Social, and Governance (“ESG”) investing has risen, so too has the influence and relative importance of ESG rating agencies. With an increasing focus on social corporate responsibility, the ability to project a positive image around ESG-related topics is critical. As such, more companies have begun making select and unaudited disclosures in an effort to attract ESG-investing capital. The arbiters for obtaining this capital are the major ESG rating agencies.

However, individual agencies’ ESG ratings can vary dramatically. An individual company can carry vastly divergent ratings from different agencies simultaneously, due to differences in methodology, subjective interpretation, or an individual agency’s agenda. There are also inherent biases: from market cap size, to location, to industry or sector—all rooted in a lack of uniform disclosure.

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The Rise of the Net-Short Debt Activist

Posted by Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski, Wachtell, Lipton, Rosen & Katz, on
Tuesday, August 7, 2018
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Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Feltman, Mr. Kleinhaus, and Mr. Sobolewski.

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); 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).

The market for corporate debt does not immediately lend itself to the same kind of “activism” found in equity markets. Bondholders, unlike shareholders, do not elect a company’s board or vote on major transactions. Rather, their relationship with their borrower is governed primarily by contract. Investors typically buy corporate debt in the hope that, without any action on their part, the company will meet its obligations, including payment in full at maturity.

In recent years, however, we have seen the rise of a new type of debt investor that defies this traditional model. As we previewed here, this investor buys “long” positions in corporate debt not to make money on those positions, but instead to assert defaults that will enable the investor to profit on a larger “short” position. We call this investor a “net-short debt activist.”

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JOBS Act 3.0

Posted by Glenn Pollner, Elizabeth Ising, and Thurston Hamlette, Gibson, Dunn & Crutcher LLP, on
Monday, August 6, 2018
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Glenn Pollner and Elizabeth Ising are partners and Thurston Hamlette is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Mr. Pollner, Ms. Ising, and Mr. Hamlette.

On July 17, 2018, the U.S. House of Representatives overwhelmingly passed, by a vote of 406-4, bipartisan financial reform legislation titled the “JOBS and Investor Confidence Act of 2018,” frequently referred to as JOBS Act 3.0. The JOBS Act 3.0 builds upon the 2012 Jumpstart Our Business Startups (“JOBS”) Act, and on the Fixing America’s Surface Transportation Act (the “FAST Act”), which was enacted in 2015 and is commonly referred to as JOBS Act 2.0.

The proposed JOBS Act 3.0, which had the backing of House Financial Services Committee Chairman Jeb Hensarling (R-TX) and Ranking Member Maxine Waters (D-CA), still must be approved by the U.S. Senate. The legislation includes 32 individual bills that already passed the House Financial Services Committee or the House during this congressional term. Key provisions include:

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The Rise and Fall (?) of the Berle-Means Corporation

Posted by Brian Cheffins (University of Cambridge), on
Monday, August 6, 2018
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Brian Cheffins is S J Berwin Professor of Corporate Law at the University of Cambridge. This post is based on a recent paper by Professor Cheffins. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

A description of a separation of ownership and control in America’s largest companies was the best-known feature of Adolf Berle and Gardiner Means’ renowned 1932 book The Modern Corporation and Private Property. Diffuse share ownership and the managerial autonomy which tends to follow on from it would become hallmarks of American corporate governance. Explaining why ownership becomes divorced from control in large firms has been the topic of lively debate. There has also been speculation lately that it is no longer appropriate to think of the typical American public company in terms of a separation of ownership and control. The Rise and Fall (?) of the Berle-Means Corporation, which formed part of the proceedings in a symposium which focused on Adolf Berle and the world he influenced, explores these related topics.

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Structuring Discretion for Clawbacks

Posted by Seymour Burchman, Kathryn Neel, and Olivia Voorhis, Semler Brossy Consulting Group, LLC, on
Monday, August 6, 2018
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Kathryn Neel is managing director, Seymour Burchman is managing director, and Olivia Voorhis is an associate at Semler Brossy Consulting Group, LLC. This post is based on a NACD Board Talk article published by Ms. Neel, Mr. Burchman, and Ms. Voorhis.

Related research from the Program on Corporate Governance includes Excess-Pay Clawbacksby Jesse Fried and Nitzan Shilon (discussed on the Forum here), and Rationalizing the Dodd-Frank Clawback by Jesse Fried (discussed on the Forum here).

The continuing stream of corporate wrongdoing and risk failures—at Wells Fargo & Co., Volkswagen AG, Equifax, Uber Technologies, Mylan, and others—gives new urgency to two questions: Should boards have broader policies for triggering compensation adjustments, forfeitures, and repayment of past compensation—generally referred to as recoupments or clawbacks—when corporate harm is demonstrated? How should boards exercise discretion when they implement such policies?

Regulators today require relatively narrow clawback policies, triggered mainly in the event of a restatement of financials. But a strong business case can be made that corporate harms of many kinds should qualify as triggers for clawbacks.

Many harms have little relation to financial restatements. In the months after Wells Fargo was found to have set up over 1.5 million unauthorized deposit accounts and another 560,000 unauthorized credit card accounts, the stock plunged over 20 percent. Market cap fell $30 billion and the loss of business, legal fees, and exposures continue to mount. The company did not have to restate earnings, but its actions tarnished its brand and hurt shareholders financially. In the aftermath, shareholders and the public at large called for some action to be taken against executives who caused or benefitted from these wrongdoings.

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Recent Developments Relating to Corporate Governance

Posted by Joseph Hall, Marcel Fausten, and Sarah Solum, Davis Polk & Wardwell LLP, on
Sunday, August 5, 2018
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Joseph A. Hall, Marcel Fausten, and Sarah Solum are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Hall, Mr. Fausten, and Ms. Solum.

Despite a political agenda packed with important issues like tariffs, immigration and a Supreme Court nomination, there have been a number of recent federal and state legislative developments relating to public company corporate governance topics that are of interest. In particular, the Senate Banking Committee has recently considered bills relating to the role of proxy advisory firms and disclosure of cybersecurity experience at the board level; there have been calls by lawmakers for regulation of executive sales following announcement of stock buybacks; the Senate Committee on Appropriations is proposing to direct the SEC to report on the decline in public companies; a bill implementing gender quotas on boards progressed through the California State Senate; and Delaware adopted a voluntary sustainability certification and reporting regime. While a number of these topics have received the attention of lawmakers over the past few years, it remains to be seen whether they will gain traction in the current political environment.

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Private Equity Liability Under European Law

Posted by David Vann, Ellen Frye, and Étienne Renaudeau, Simpson Thacher & Bartlett LLP, on
Saturday, August 4, 2018
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David Vann is partner, Ellen Frye is counsel, and Étienne Renaudeau is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Vann, Ms. Frye, and Mr. Renaudeau.

On July 12, 2018, the General Court of the European Union dismissed Goldman Sachs’s appeal of a decision finding it jointly and severally liable for the cartel conduct of a portfolio company held by funds controlled by Goldman Sachs. The General Court confirmed that the presumption that a parent company “exercises decisive influence” over a subsidiary, and therefore can be held jointly and severally liable for a subsidiary’s conduct, may apply even when a parent holds less than 100% of the share capital of its subsidiary. The General Court also held that the presumption of parental liability can also extend to portfolio companies of private equity firms when a private equity firm exercises such decisive influence. The decision also outlined the type of de jure or de facto board governance rights that could lead to a finding of decisive influence regardless of the quantum of shares or voting rights held.

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