Monthly Archives: July 2018

IPO Governance Survey 2018

Michael Kaplan, Joseph A. Hall, and Sophia Hudson are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Kaplan, Mr. Hall, Mr. Hudson, Alan Denenberg, Richard Truesdell, and Byron Rooney.

Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) by Lucian Bebchuk and Kobi Kastiel and Why Firms Adopt Antitakeover Arrangements, by Lucian Bebchuk.

An initial public offering is a key inflection point for a company, not least because it often triggers the opportunity to review and replace the company’s corporate governance structure. In place of complex contractual shareholder arrangements that are subject only to the constraints of corporate law, upon an IPO, a company adopts a more simplified governance structure that is subject to SEC and stock exchange listing standards. As the burden of obtaining shareholder approval to amend governance arrangements in the future is much higher for a public company, companies planning for an IPO often seek to establish a corporate governance structure which is as flexible as possible.

In the last few years, we have witnessed a sea-change in corporate governance among the largest U.S. public companies, e.g., those in the S&P 500, due largely to pressure imposed through shareholder proposals and proxy voting guidelines. Through increased pressure by shareholder activists and proxy advisory firms, these companies have been forced to abandon governance structures that are perceived to entrench control among a small group of holders and/or management, or which create barriers to more direct shareholder engagement. In recent years some of these same players have also put pressure on IPO companies and enacted policies meant to bring the governance of IPO companies in line with that of more mature public companies.

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Weekly Roundup: July 20-26, 2018


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This roundup contains a collection of the posts published on the Forum during the week of July 20-26, 2018.

Awaiting Supreme Court Clarification on Fraudulent Scheme Claims





Successful CFIUS Monitorships


Brexit Update: Keeping Track of the Moving Pieces




Corporate Disobedience


The Investment Stewardship Ecosystem


Development in Insider Trading Liability


Bank Resolution and the Structure of Global Banks


Enhancing Director Performance and Impact


SEC Enforcement for Social Media Violation



Analysis and Recommendations on Shareholder Proposal Decision-Making under the SEC No-Action Process

Sanford Lewis is Director at the Shareholder Rights Group. This post is based on a Shareholder Rights Group memorandum by Mr. Lewis, with editorial assistance from Andrew Toritto.

The shareholder proposal process, administered by the Securities and Exchange Commission (SEC) under Rule 14a-8, is a pillar of modern corporate governance.

The Shareholder Rights Group is a coalition of investors protecting shareholders’ rights to engage with public companies through shareholder proposals. Our analysis submitted to the SEC on July 2, 2018 concludes that certain changes in SEC practices during the 2018 proxy season raised serious threats to this well-established right. We include recommendations for corrective SEC guidance.

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2018 Proxy Season Review

Marc Treviño is a partner and June Hu is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Treviño and Ms. Hu.

The complete publication (available here) summarizes significant developments relating to the 2018 U.S. annual meeting proxy season, including:

Rule 14a-8 Shareholder Proposals

  • Environmental/social/political proposals gain traction. Although shareholders submitted a consistent level of environmental/social/political (“ESP”) proposals as a percentage of all shareholder proposals submitted, there was a significant increase in the percentage withdrawn (for the first time surpassing the percentage going to a vote). This development appears primarily to reflect growing engagement by companies on a number of these issues, particularly anti-discrimination policies. Moreover, those going to a vote recorded a higher average percentage of votes cast in favor (more than 25% for the first time) and, notwithstanding the decline in the number of ESP proposals voted on, there was a marked increase in the number that passed (although still a low number). As in prior years, the vast majority of ESP proposals failed.

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SEC Enforcement for Social Media Violation

Jessica Forbes and Stacey Song are partners and Joanna Rosenberg is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum.

On July 10, 2018, the Securities and Exchange Commission (the “SEC”) announced five settlements (the “Advertising Rule Settlements”) in connection with violations of Section 206(4) of the Investment Advisers Act of 1940 (the “Advisers Act”) and Rule 206(4)-1(a)(1) thereunder. [1] Each of the Advertising Rule Settlements involves the improper use of testimonials on social media.

Section 206(4) generally prohibits investment advisers from engaging in fraudulent, deceptive or manipulative conduct, and Rule 206(4)-1 (the “Advertising Rule”) prohibits registered investment advisers from using false or misleading advertisements. Testimonials in advertisements are deemed per se misleading and the Advertising Rule prohibits registered investment advisers from including them in advertisements. [2] The term “testimonial” is not defined in the Advertising Rule, but the staff has consistently interpreted that term to include a “statement of a client’s experience with, or endorsement of, an investment adviser.” [3]

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Enhancing Director Performance and Impact

Rusty O’Kelley III is the Global Head of the Board Consulting and Effectiveness Practice and Susanne Suhonen is Global Knowledge Leader at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley and Ms. Suhonen.

Boards are increasingly seeking to diversify their membership and draw on expertise from a wider variety of sources. As a result, they find themselves with an exceptional number of new—and often first-time—directors. While the need to acclimate new directors may occur only sporadically, getting it right can be essential to the effectiveness of a board. In a past Russell Reynolds Associates research project, we interviewed new directors based in the UK and learned that it takes them about six board meetings to come up to speed. Given that UK boards typically meet relatively frequently, for US-based companies that translates into more than a year of lost time before new directors are contributing at the level they should.

In response to numerous inquiries from corporate boards about how to effectively integrate new board directors, we launched a research project to learn more about director onboarding practices across Fortune 500 companies. With responses from more than 160 directors representing over 100 Fortune 500 companies, the research shows that many boards are not investing heavily enough in integrating their new members. [1] Few companies tailor their onboarding process, despite the wide range of experiences and tenures new directors bring. Just 24 percent of directors said they had experienced customized onboarding, compared to 58 percent who went through a standardized program.

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Bank Resolution and the Structure of Global Banks

Patrick Bolton is Barbara and David Zalaznick Professor of Business at Columbia Business School, and Martin Oehmke is Associate Professor of Finance at the London School of Economics and Political Science. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes The Resolution of Distressed Financial Conglomerates by Howell E. Jackson and Stephanie Massman; and Containing Systemic Risk by Taxing Banks Properly by Mark J. Roe and Michael Troege.

How should prudential regulators deal with global banks that are too big to fail? Many see bank resolution as the key element in dealing with this challenge. The main idea is that global systemically important banks (G-SIBs) are required to issue a sufficient amount of “total loss absorbing capital” (TLAC) in the form of subordinated long-term debt or equity. These securities are issued for the purpose of absorbing losses and recapitalizing the institution in resolution, with minimal disruption to the bank’s operations and without public support.

But what should these resolution frameworks look like and, most importantly, will they work? Much hinges on this question, given that there are currently around thirty G-SIBs, with total exposures equal to more than 75% of global GDP in 2014.

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Development in Insider Trading Liability

Martine Beamon, Denis McInerney, and Linda Chatman Thomsen are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Beamon, Mr. McInerney, and Ms. Chatman Thomsen.

Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

On June 25, 2018, a divided panel of the U.S. Court of Appeals for the Second Circuit issued an amended decision in United States v. Martoma. In its initial decision, the Second Circuit expressly overturned a key requirement for insider trading liability set out by its previous decision in United States v. Newman. [1] Under Newman, the government was required to prove a “meaningfully close personal relationship” between an individual with material non-public information (tipper) and an individual who is told and ultimately trades on that information (tippee) in order to establish the “personal benefit” element under the “gift theory” of insider trading liability. The initial Martoma decision held that the “meaningfully close personal relationship” requirement was no longer tenable in light of the recent Supreme Court decision in Salman v. United States. [2]

The Court’s amended decision relies on the Supreme Court’s decision in Dirks v. SEC [3] to find that a “personal benefit” to the tipper may be established either by examining the relationship between the tipper and tippee or by determining that the tipper intended to benefit the tippee. A “meaningfully close personal relationship” or a relationship “that suggests a quid pro quo” is sufficient to establish a personal benefit to the tipper. Evidence that the tipper intended to benefit the tippee is independently sufficient to establish a personal benefit. The amended decision remains a victory for prosecutors and leaves open the potential to expand insider trading liability; the continued split decision remains a potential avenue for the Second Circuit to reconsider the issue en banc.

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The Investment Stewardship Ecosystem

Barbara Novick is Vice Chairman, Michelle Edkins is Global Head of Investment Stewardship, and Tom Clark is Head of Global Public Policy, Americas, at BlackRock, Inc. This post is based on a BlackRock memorandum by Ms. Novick, Ms. Edkins, Mr. Clark, and Alexis Rosenblum.

Your company’s strategy must articulate a path to achieve financial performance. To sustain that performance, however, you must also understand the societal impact of your business as well as the ways that broad, structural trends –from slow wage growth to rising automation to climate change –affect your potential for growth.
—Larry Fink, BlackRock, Annual Letter to CEOs, January 2018

Investors are increasingly turning to convenient, low-cost investment solutions such as index funds to help save for retirement and other important financial goals. This trend has fueled the growth of the asset management industry and led to questions around what impact, if any, asset managers should have on the companies they invest in. How do asset managers approach investment stewardship and to what degree do they factor in environmental, social, and governance (ESG) considerations?

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Corporate Disobedience

Elizabeth Pollman is Professor of Law at Loyola Law School. This post is based on an article by Professor Pollman, forthcoming in the Duke Law Journal.

From Uber to “legalized” marijuana businesses, examples of companies pushing or even transgressing legal boundaries are ubiquitous. Corporate law takes a dim view of law breaking, enabling the chartering of corporations only for a lawful purpose and denying business judgment rule protection for knowing violations of the law. The legal literature has not been as uniformly opposed or clear in disaffirming unlawful activity, but it has focused primarily on two issues: whether corporations can use a cost-benefit approach to law breaking and how to fit intentional violations of law into the framework of fiduciary duties.

In a forthcoming article, I aim to enrich this account by examining varied instances in which corporations subvert, transgress, challenge, dissent from and refuse to comply with the law—all, broadly construed, as forms of disobedience.

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