Monthly Archives: April 2018

Cybersecurity Risk Management Oversight

Cindy Fornelli is Executive Director, Catherine Ide is Managing Director of Professional Practice and Member Services, and Chris Alabi is a Professional Practice Fellow at the Center for Audit Quality. This post is based on a CAQ publication by Ms. Fornelli, Ms. Ide, and Mr. Alabi.

Companies are facing not only increasing cyber threats but also new laws and regulations for managing and reporting on data security and cybersecurity risks. Boards of directors face an enormous challenge: to oversee how their companies manage cybersecurity risk. As boards tackle this oversight challenge, they have a valuable resource in Certified Public Accountants (CPAs) and in the public company auditing profession.

CPAs bring to bear core values—including independence, objectivity, and skepticism—as well as deep expertise in providing independent assurance services in both the financial statement audit and a variety of other subject matters. CPA firms have played a role in assisting companies with information security for decades. In fact, four of the leading 13 information security and cybersecurity consultants are public accounting firms. [1]

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Removing Directors in Private Companies by Written Consent?

Lisa R. Stark and Rick Giovannelli are partners at K&L Gates LLP. This post is based on a K&L Gates publication by Ms. Stark and Mr. Giovannelli, 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 Agency Costs of Venture Capitalist Control in Startups by Jesse M. Fried and Mira Ganor.

A recent order by the Delaware Court of Chancery that interprets standard venture capital financing documents invalidated action taken by the holders of a majority of the common stock of a Delaware corporation to remove and replace the corporation’s CEO and board chairman and an independent director. This serves as a cautionary reminder that governance provisions in these documents must be reviewed against the backdrop of Delaware law to ensure the effectiveness of the parties’ bargained-for rights. Dictum in the Court’s decision also indicates that a provision granting stockholders a right to remove directors might be valid if contained in a corporation’s certificate of incorporation or bylaws but not in a stockholders’ agreement, departing from an earlier decision.

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Indications of Corporate Control

Jason M. Halper, Joshua Apfelroth, and William P. Mills are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper, Mr. Apfelroth, Mr. Mills, James Fee, and Winnie Chen, 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).

On March 28, 2018, in In re Tesla Motors, Inc. Stockholder Litigation, the Delaware Court of Chancery denied a motion to dismiss a lawsuit brought by stockholders of Tesla Motors, Inc. (“Tesla” or the “Company”). The plaintiffs alleged that Tesla’s Board of Directors, along with its Chairman and CEO, Elon Musk, breached their fiduciary duties by approving the $2.6 billion acquisition of SolarCity, which allegedly benefitted SolarCity stockholders to the detriment of Tesla stockholders. At the time of the transaction, Mr. Musk was the Chairman of the Board, Chief Executive Officer and Chief Product Architect of Tesla, and owned approximately 22.1% of Tesla’s outstanding common stock. He was also Chairman of the Board of SolarCity and SolarCity’s largest stockholder, owning approximately 21.9% of SolarCity’s outstanding common stock. In their motion to dismiss, the defendants argued that Mr. Musk was not a controlling stockholder of Tesla and that, because the transaction was approved by an uncoerced, fully informed majority vote of disinterested stockholders, the transaction should be reviewed under the deferential business judgment rule in accordance with Corwin v. KKR Financial Holdings LLC. The Court denied the motion to dismiss and found that “it is reasonably conceivable that Musk, as a controlling stockholder, controlled the Tesla Board in connection with the Acquisition.” If so proven, the transaction will be reviewed under the more stringent entire fairness standard. The decision is the latest in a line of cases (as discussed in our prior post) in which Delaware courts have found that minority stockholders can, in certain circumstances, exercise corporate control.

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Which Antitakover Provisions Matter?

Jonathan M. Karpoff is Washington Mutual Endowed Chair in Innovation and Professor of Finance at the University of Washington Foster School of Business; Robert J. Schonlau is Assistant Professor of Finance at Brigham Young University Marriott School of Business; and Eric W. Wehrly is Assistant Professor of Finance at Western Washington University. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

Researchers disagree sharply over which antitakeover provisions affect a firm’s takeover likelihood. Some argue, for example, that poison pills are the only important takeover deterrents, while others claim that classified boards or coverage by business combination laws are. Other researchers argue that golden parachutes deter takeovers, while some contend that they facilitate takeovers. Similarly, there is significant disagreement about whether such provisions as supermajority vote requirements and blank check preferred stock offer any incremental takeover deterrence, or whether the widespread availability of shadow poison pills (pills that can be quickly adopted without shareholder approval) renders most other provisions irrelevant. In short, there is little consensus among researchers about which, or whether, antitakeover provisions affect a firm’s takeover likelihood in meaningful ways.

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The Middle-Market IPO Tax

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 Greater Cleveland Middle Market Forum, 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, Tom, for that kind introduction. It’s a real honor to be here with you today at the Greater Cleveland Middle Market Forum. In addition to leading some of the Nation’s most promising young companies, you all have done exceptional work making sure that the middle market gets the attention it deserves in Washington. And as a lifelong baseball fan, I couldn’t miss the chance to see the Indians show the Cubs who’s boss tonight in Cleveland. [1]

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 fully expect to convince my colleagues of the absolute and obvious correctness of my views.

As Tom mentioned, although it feels like a lifetime ago I was just recently sworn in as a Commissioner in January. It’s been an incredible honor to serve with my fellow Commissioners—and the real privilege is working with the incredibly talented and hardworking SEC Staff who have dedicated their lives and exceptional talents to protecting investors.

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Weekly Roundup: April 20-26, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of April 20-26.

Corporate Culture Risk and the Board



Is There a Gender Gap in CEO Compensation?


Corporate Governance Deviance


Threat of Falling High Status and Corporate Bribery: South Korean Evidence



How to Be a Good Board Chair





A Look Under the Hood of Spotify’s Direct Listing


Controlling Shareholder Transactions


Testimony before the Financial Services and General Government Subcommittee of the House Committee on Appropriations

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent testimony before the Financial Services and General Government Subcommittee of the House Committee on Appropriations, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Chairman Graves, Ranking Member Quigley and members of the Subcommittee, thank you for the opportunity to testify today on the President’s fiscal year (FY) 2019 budget request for the U.S. Securities and Exchange Commission (SEC). [1]

It is an honor to appear before this Committee for the first time, and I would like to thank the members of this Committee for your support of the SEC, its personnel and its mission to protect investors, maintain fair, orderly and efficient markets and facilitate capital formation.

Congress’s recent funding for the agency, with additional funds for information technology, will provide the SEC with the ability to make significant investments in FY 2018 in furtherance of our efforts to modernize our information technology infrastructure and improve our cybersecurity risk profile. This funding also will allow us to make advances in each part of our tripartite mission. I recognize the vote of confidence that you have shown in the SEC as does our staff. We all appreciate it. I am committed to ensuring that the agency is a prudent steward of this appropriation.

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Controlling Shareholder Transactions

Gail Weinstein is senior counsel, and Robert C. Schwenkel and Steven J. Steinman are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Schwenkel, Christopher EwanMatthew V. Soran, and Brian T. Mangino, 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).

We have discussed in recent Fried Frank M&A/PE Briefings the dramatic transformation in Delaware law since about 2014—with a trend toward clearer paths to more certain judicial outcomes. This has been accompanied by a continued contraction of the grounds on which directors may have legal liability in connection with their decisions relating to M&A matters. Thus, under the seminal Corwin decision, cases not involving a conflicted controller are routinely dismissed at the pleading stage of litigation if the stockholders have approved the transaction in a fully informed and uncoerced vote. Where a conflicted controller is involved, however, Corwin does not apply—and the courts continue to conduct a highly contextual analysis, and (unless the prerequisites for application of MFW are satisfied, as discussed below) to apply the “entire fairness” standard of review, the most rigorous standard applicable to target board responsibilities (requiring that both the price and the process be fair).

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A Look Under the Hood of Spotify’s Direct Listing

Nicolas Grabar and David Lopez are partners and Andrea Basham is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Grabar, Mr. Lopez, and Ms. Basham.

Spotify finally went public on April 3, following an unusual path known as “direct listing”—the shares started trading on the New York Stock Exchange, without any of the contractual or marketing arrangements that attend a typical IPO. No traditional road show or bookbuilding, no allocations. No one promising to sell, no underwriters promising to buy. The company even declined to ring the opening bell.

It sounds simple, but like streaming music, it turns out to be tricky to implement. Will other issuers and their shareholders consider this model for developing a public trading market? That will depend on how well it serves the interests of the company and its investors, by providing a liquid market, satisfactory price discovery, and potentially acquisition currency. For those that do consider it, this post takes a closer look at the details from a securities lawyer’s point of view.

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A Second Bite at the Apple for Shareholder Activists to Nominate Directors?

Steve Wolosky, Andrew Freedman, and Ron Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan publication by Mr. Wolosky, Mr. Freedman, and Mr. Berenblat.

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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (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).

Now that we are midway into the 2018 proxy season, most deadlines for shareholder submissions of director nominations for upcoming annual meetings have come and gone. Nevertheless, shareholder activists who have missed a nomination deadline for whatever reason should be aware that in certain circumstances they may have a second bite at the apple. Where a company experiences a material change in circumstances set in motion by its board of directors after the passing of the nomination deadline, the shareholder may have grounds to compel the company to reopen the nomination window if the shareholder can demonstrate that the change in circumstances would have been material to its decision whether or not to nominate directors had it been known at such time. There is already case law in Delaware holding that it is inequitable for directors to refuse to grant a waiver of an advance notice deadline under such circumstances.

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