Monthly Archives: March 2018

Corporations and the Culture Wars

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh which originally appeared in the New York Law Journal. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Increasingly, corporations are finding themselves called upon to become—willingly or unwillingly—participants in a range of social and political controversies. While retail businesses long have been accustomed to consumer-driven activism such as boycotts and publicity campaigns, the current movement is significantly different. Today, institutional investors and other stakeholders are asking companies to take public stances on a wide array of topics, some of which may be wholly unrelated to the targeted company’s corporate purpose. Investment funds themselves are feeling this pressure, as they are being asked by their own investors to become activists on social issues, and the rapid pace of recent external events—combined with the impact of social media—can demand hasty statements or actions.


Traceable Shares and Corporate Law

George S. Geis is the William S. Potter Professor of Law and the Thomas F. Bergin Teaching Professor of Law at the University of Virginia School of Law. This post is based on his recent article, forthcoming in the Northwestern University Law Review.

A healthy system of shareholder voting is crucial for any regime of corporate law. The proper allocation of governance power is subject to debate, of course, but everyone should be concerned with the fitness of the underlying mechanism used to stuff the ballot boxes. Proponents of shareholder power, for instance, cannot argue for greater control if the legitimacy of the resulting tallies is suspect. And those who advocate for board deference do so on the bedrock of authority that reliable shareholder elections supposedly confer.

Unfortunately, our trust in the corporate franchise was forged during an era that predates modern complexities in the way that stock ownership is now tracked and traded. We do not trace shares, and any clear-eyed look at the conferral of voting rights via back-end stock clearing practices is unsettling. Evidence of the various entanglements crops up from time to time—in the form of questionable voting outcomes or disputes about standing for shareholder lawsuits—but the underlying problems are systemic, not episodic. Our stock clearing system is a kludge.


Weekly Roundup: March 16–22, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 16–22, 2018,

Do CEO Paycuts Really Work?

The Appraisal of AOL, Inc.

A Comparative Perspective on Regulation Versus Litigation in Corporate Law

Are Buybacks Really Shortchanging Investment?

Risk Management and the Board of Directors

A Regulatory Framework for Exchange-Traded Funds

Director Abstention as Material Information

Collateral Damage

Bringing the #MeToo Movement into the Boardroom

Updated Guidance (and Ground Rules) for Controlling Stockholder Deals

Updated Guidance (and Ground Rules) for Controlling Stockholder Deals

Paul S. Scrivano and Jane D. Goldstein are partners and Sarah H. Young is an associate at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Scrivano, Ms. Goldstein, and Ms. Young, 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 Delaware Supreme Court’s 2014 decision in Kahn v. M&F Worldwide Corp. (“MFW”) [1] provided business judgment rule protection for controlling stockholder transactions that are conditioned from the outset on certain procedural protections being utilized, including approval by (1) a fully-empowered independent special committee that meets its duty of care and (2) a fully-informed, uncoerced vote of a majority of the target minority stockholders unaffiliated with the controller. While MFW provided helpful guideposts for avoiding entire fairness review in controlling stockholder transactions, as with any new doctrine, questions remained as to the application of MFW to different types of deals and negotiations, and the consequences of small deviations from strict adherence to MFW. Recent guidance from the Delaware Court of Chancery has given way to updated ground rules for controlling stockholder transactions: (i) MFW also applies to deals where the controller is only on the sell-side; (ii) other conflicted controller transactions besides mergers, such as recapitalizations, are eligible for MFW protection; and (iii) small, alleged foot faults will not cause the business judgment rule protection afforded by MFW to be lost.


Substantive Gender Diversity in Boardrooms

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

A year ago, State Street Advisors, one of the largest institutional investors in the country, commissioned the “Fearless Girl” statue as a symbol of the increased attention by investors and the public to the lack of gender diversity within corporate boardrooms in the U.S. In the year since the “Fearless Girl” appeared on Wall Street the push for gender diversity in boardroom has gained traction within the investor community. State Street voted against 400 corporate boards that failed to nominate female directors, the New York City Comptroller and the New York City Pension Funds launched their own initiative focusing on board diversity disclosure and ISS and Glass Lewis, the two largest and most influential proxy advisory firms have announced a new focus on gender diversity. Finally, in early February Blackrock updated its voting guidelines to state that it now expects to see at least two female directors on every public company’s board. Indeed, while in 2017 women still only comprised less than 17% of corporate boards, with over 600 boards still having no female directors at all, these actions by investors have made a difference. For the first time ever, women and minorities accounted for half of the 397 newest independent directors at S&P 500 companies.


Exclusion of Conflicting Shareholder Proposals

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

This proxy season, after the Corp Fin staff permitted AES Corporation to exclude a shareholder proposal on the basis of Rule 14a-8(i)(9)—the exclusion for a proposal that directly conflicts with a management proposal—the Council of Institutional Investors sent a letter to William Hinman, director of Corp Fin, raising objections to the staff’s treatment of the proposal. (See this PubCo post.) The proposal, submitted by John Chevedden, had sought to reduce the threshold required for shareholders to call a special meeting from 25% to 10%. In its letter, CII charged that AES, by including in its proxy statement a conflicting management proposal to ratify the existing 25% threshold, was “gaming the system” and urged the SEC to revisit, once again, its approach to Rule 14a-8(i)(9). But what would be the impact of the CII letter? Would the CII letter induce the staff to revisit its prior position on the exclusion? Now, Corp Fin has issued a new no-action letter, in this instance to Capital One, once again allowing a company, following the same approach as in AES, to exclude a proposal that sought to reduce the special meeting threshold from 25% to 10% on the basis of Rule 14a-8(i)(9)—but with a twist. The question is: Is that the end of the story?

Bringing the #MeToo Movement into the Boardroom

Maintaining a workplace environment free of discrimination, sexual harassment and other misconduct is critical to both the short-term productivity and long-term health of a business. Reports of sexual harassment allegations at public corporations can have material negative effects on stock price, with some corporations seeing double digit single day drops after accusations are made public. As we have written elsewhere, the primary obligation to manage these risks on a day-to-day basis falls to executive leadership. [1] But the #MeToo movement also has raised questions about the role of boards of directors to provide oversight of management and, to the extent that senior management may be a source of the problem, the board’s obligation to take more direct action.

This post discusses some key issues for General Counsel to consider as they advise corporate boards about how to navigate their responsibilities in this environment.


Collateral Damage

Gary B. Gorton is Frederick Frank Class of 1954 Professor of Finance and Toomas Laarits is a PhD Candidate at Yale School of Management. This post is based on their recent paper.

In a classic banking panic, holders of demand deposits want their cash back because they do not trust the value of the banks’ loan portfolios backing the deposits. Deposit insurance solves this problem. A banking panic in the current financial system is different. In the crisis of 2007-8 the holders of short-term debt, in the form of repo, came to distrust the bonds used as collateral and increased haircuts, generating a run on the banking system (see Gorton and Metrick (2012) and Gorton, Laarits, and Metrick (2017)). Have the many post-crisis legal and regulatory changes mitigated this problem? Or, have they instead exacerbated the shortage of good collateral, resulting in collateral damage?


Director Abstention as Material Information

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

The Delaware Supreme Court recently held that the reason a company’s founder and chairman had abstained on a vote to approve a merger was material information that should have been disclosed to the company’s stockholders. The court said that the abstaining director’s view that it was an inopportune time to sell the company and that mismanagement had negatively affected the sale process would be important to an investor who was considering the board of directors’ recommendation in favor of the transaction.


Corporate Governance: On the Front Line of America’s Cyber War

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Jackson’s recent remarks at the Tulane Corporate Law Institute, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you so much, David, for that kind introduction. [1] It’s great to be here at the Tulane Corporate Law Institute for what, I know, is one of the most highly-anticipated corporate-law conferences of the year. It also doesn’t hurt that it happens to be in New Orleans. [2]

Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s Staff. And let me add my own standard caveat: I hope someday to persuade my colleagues of the utter, absolute, and obvious correctness of my views.


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