Monthly Archives: March 2018

Delaware’s Retreat: Exploring Developing Fissures and Tectonic Shifts in Delaware Corporate Law

James D. Cox is the Brainerd Currie Professor of Law of Duke Law School and Randall S. Thomas is John S. Beasley II Chair in Law and Business at Vanderbilt Law School. 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.

The 1980s is appropriately considered the Golden Age of Delaware corporate law. Within that era, the Delaware courts won international attention by not just erecting the legal pillars that frame today’s corporate governance discourse but by interjecting a fresh perspective on the rights of owners and the prerogatives of managers. Four decisions stand out within a melodious chorus of great decisions of that era—Revlon , Inc. v. MacAndrews & Forbes Holding, Inc., Weinberger v. UOP, Inc., Unocal Corp. v. Mesa Petroleum Co., and Blasius Industries, Inc. v. Atlas Corporation. We refer collectively to the decisions as the Golden Quartet and show they each had the same life cycle: first, fundamentally changing Delaware’s judicial review of important recurring questions that both delineate the obligations of managers and defining the owner-manager relationship, only to be later eviscerated with the alacrity with which they first appeared.

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Weekly Roundup: March 2–8, 2018


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This roundup contains a collection of the posts published on the Forum during the week of March 2–8, 2018.


The Misuse of Tobin’s Q


The Retention Effects of Unvested Equity: Evidence from Accelerated Option Vesting



UN Investor Summit Highlights




SEC’s OCIE 2018 Areas of Focus


Freedom of Contract in LLCs


Firm Level Decisions in Response to the Crisis: Shareholders vs. Other Stakeholders


Sexual Harassment in Today’s Workplace



Tax Cuts and Shareholder Activism



So Long, Stockholder


Investor Letter to CEOs: The Strategic Investor Initiative

Brian Tomlinson is Research Director and Mark Tulay is Director for the Strategic Investor Initiative (SII) at CECP. This post is based on the Strategic Investor Initiative’s “Investor Letter to Presenting Companies” signed by SII Co-Chair and Chairman of Vanguard Bill McNabb and nine other leading institutional investors.

The Strategic Investor Initiative convenes CEO-Investor Forums to provide a venue for corporations and investors to hold a meaningful conversation on long-term value creation. To guide companies in preparing long-term plans, the investor members of the Strategic Investor Initiative’s Advisory Board have developed a “Letter to Presenting Companies”. Signed by SII Co-Chair and Vanguard Chairman Bill McNabb and nine other leading institutional investors, the letter is part of operationalizing the call to re-orient our capital markets to the long-term and help meet the informational needs of long-term investors.

Investor Letter to Presenting Companies

Companies that are listed on public stock exchanges face a constant, daily demand from investors for information. In recent years, however, many large institutional investors have expressed a desire to gain a different perspective: the long-term view.

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So Long, Stockholder

Stephen Davis is a senior fellow in corporate governance at Harvard Law School and co-author of What They Do With Your Money: How the Financial System Fails Us and How to Fix It (Yale University Press, 2016).

As US companies put finishing touches on proxy statements for spring annual meetings, activist investors are set to challenge CEOs and corporate boards to generate more value, and quickly, or face the threat of ouster. Not even the biggest companies are immune to insurgency. So now might be a good time to reveal a simple, one-word “tell” anyone can use to test which US company might have a better chance of gliding unscathed through the season, and which might be a more likely target for attack. Scan the language a firm uses to refer to its investors in those forthcoming proxy statements. If it favors the term “stockholder” over “shareholder”, watch out.

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Engaging with Vanguard

Chris Wightman is a partner and founder at CamberView Partners. This post is based on a CamberView publication that features an interview with Rob Main, Head of Investment Stewardship Engagement and Voting at Vanguard.

CamberView Partners is pleased to present a new series of conversations with the people and organizations shaping the evolving investor landscape. This interview has been edited and condensed for clarity.

Chris Wightman: Tell us a bit about Vanguard’s approach to Investment Stewardship.

Rob Main: At Vanguard, our long-term perspective informs every aspect of our Investment Stewardship program. The majority of our assets under management are in index funds, so we are practically permanent shareholders in almost every public company in which we are invested. That really affects the way we think about investment stewardship—from our advocacy efforts in the industry, to our engagement with companies, to our proxy voting. We believe that companies with strong, foundational governance practices are best positioned to achieve long-term success.
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Tax Cuts and Shareholder Activism

Spencer D. Klein is a partner and Joseph Sulzbach is an associate at Morrison & Foerster LLP. This post is based on a Morrison & Foerster publication by Mr. Klein and Mr. Sulzbach. 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 Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

The Tax Cuts and Jobs Act (the “Act”) was intended principally to simplify the tax code, reduce individual and corporate tax rates, and allow for the repatriation of cash held overseas at a discounted tax rate. But, as with any sweeping legislation, the Act will have numerous unintended consequences as well. Though all the effects of the Act will not be known for years, it is clear that the amount of cash on company balance sheets will substantially increase. Numerous companies have announced employee bonuses, 401(k) contributions, and other compensation increases. Others have announced significant growth initiatives. Even with these announcements, U.S. companies will face a high-class problem: What should they do with the extra cash?

Capital allocation—specifically the use of “surplus” cash—has always been a focus of activist investors, who typically encourage its return to shareholders. Indeed, capital allocation has been a campaign target of many activist campaigns. We therefore anticipate activist investor campaigns based on capital allocation to increase in the coming year.

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The Cost of Turning a Blind Eye

Matthew Schoenfeld is a Portfolio Manager at Burford Capital. 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.

This paper considers the ramifications of the Delaware Supreme Court’s December 2017 Dell appraisal decision within the context of Delaware’s more sweeping clampdown on shareholder litigation protections in recent years, beginning with Corwin in 2015.

In addition to lower deal premia and higher agency costs, the primary effects of Delaware’s post-2015 effort to dull shareholder defenses, culminating in Dell, will likely be: 1) faster CEO pay growth, and 2) more M&A and higher industry-specific measures of concentration, which research has shown to contribute to declining competition, lower levels of labor market mobility, wage stagnation, and increasing inequality in the United States.

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Sexual Harassment in Today’s Workplace

Arthur H. Kohn, Francesca L. Odell, and Jennifer Kennedy Park are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Kohn, Ms. Odell, Ms. Park, Pamela L. MarcoglieseKimberly R. Spoerri, and Louise M. Parent.

In recent months, sexual harassment allegations against well-known figures across a growing number of industries have become a common feature in news headlines. In the wake of these allegations, many companies have concluded that their current policies and procedures related to sexual harassment and discrimination are inadequate. Against the backdrop of this rapidly evolving landscape, companies are considering how to improve their policies and procedures not only to appropriately and effectively respond to allegations of sexual harassment, but also to deter inappropriate behavior going forward and foster an environment of openness, diversity and inclusion in their workplaces. To that end, below are 8 key questions that companies should be asking themselves in developing policies and procedures to confront sexual harassment and other forms of misconduct in today’s workplace.

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Firm Level Decisions in Response to the Crisis: Shareholders vs. Other Stakeholders

Franklin Allen is Professor of Finance and Economics at Imperial College London; Elena Carletti is Professor of Finance at Bocconi University; and Yaniv Grinstein is Professor of Finance at IDC Herzliya. This post is based on their recent paper.

One of the interesting features of the 2008 financial crisis is the wide range of relationships between changes in a country’s output and changes in unemployment. Spain and Ireland had very large increases in unemployment despite quite different falls in output. This is perhaps not very surprising because both had significant construction industries that were devastated by the bursting of the property bubbles in both countries. More surprising is the fact that countries like Germany and Japan had much larger drops in output than the US but the effect on their unemployment rates was small.

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Freedom of Contract in LLCs

Jason Halper is partner and James Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper and Mr. Fee, and is part of the Delaware law series; links to other posts in the series are available here.

On February 1, 2018, the Delaware Court of Chancery granted defendants’ motion to dismiss an action brought by minority unitholders of Trumpet Search, LLC (“Trumpet” or the “Company”). The defendants were other unitholders that collectively held a majority of the membership units in Trumpet and, under the governing operating agreement (“OA”), had the power to appoint four of the seven managers on the Trumpet board of directors. Vice Chancellor Glasscock’s decision, Christopher Miller et al. v. HCP & Co., et al., C.A. No. 2017-0291-SG (Del. Ch. Feb. 1, 2018), is a powerful reminder that the broad freedom of contract that Delaware law accords entities such as LLCs offers both the promise of great latitude to contracting parties and the threat of serious pitfalls for parties that fail to carefully protect their interests in the agreement. The decision also underscores the limits on an implied covenant breach claim under Delaware law.

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