Monthly Archives: July 2018

Stock Option Grants and Fiduciary Duties in Ratification

Amy Simmerman and Julia Reigel are partners and Nate Emeritz is of counsel at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Ms. Simmerman, Ms. Reigel, Mr. Emeritz, John Aguirre and Ryan Greecher, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery issued a post-trial decision determining that a director who refused to cooperate in remediating flaws in the company’s capital structure breached his fiduciary duty of loyalty and owed damages to the corporation. The opinion is particularly important because of that holding. However, the opinion is equally important because of the court’s emphasis on the importance of complying with technical rules under Delaware law when issuing equity and the need to document the board’s decision to issue equity. Finally, the case highlights the ongoing use of provisions of the Delaware corporate statute that allow for the ratification and validation of defective corporate acts—and the reality that some of the most fraught uses of those provisions can occur in the context of disputes among founders and board members.

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Impact of SEC Guidance on Shareholder Proposals in the 2018 Proxy Season

Marc Gerber is partner, Hagen Ganem is counsel and Ryan Adams is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Gerber, Mr. Ganem, and Mr. Adams.

In the period leading up to the 2018 proxy season, the staff of the Division of Corporation Finance (Staff) of the Securities and Exchange Commission (SEC) published Staff Legal Bulletin No. 14I (SLB 14I), which provided new guidance concerning companies’ ability to exclude shareholder proposals from their proxy statements under the “ordinary business” or “relevance” grounds of Rule 14a-8. Although some viewed the guidance as a significant shift that would increase the likelihood of excluding shareholder proposals from proxy statements, to date that has not been the case.

This lack of early company success, coupled with the need to use limited board or board committee resources to utilize the guidance, may create the impression that SLB 14I represents a dead-end street to be avoided. Lessons learned from this first year, however, suggest the Staff’s guidance may yet represent a viable and worthwhile avenue to exclude certain shareholder proposals.
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Beware the Universal Proxy Card

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

One of the most high-profile proxy contests to use a universal proxy card ended on Tuesday, with some last-minute drama thrown in.

The board of SandRidge was engaged in a proxy contest with Icahn Capital. In May, it announced that it had expanded its board to seven members in order to include two Icahn nominees on its ballot. Icahn had refused to settle with the company after it offered to appoint those nominees to the board.

The company’s white proxy card contained five company nominees and two Icahn nominees. Icahn’s gold proxy card included only five of his nominees. The company stated that both ISS and Glass Lewis supported Icahn having minority, but not controlling, representation on the board, by recommending in favor of four of the company’s nominees and three Icahn nominees.

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Enterprise Liability and the Organization of Production Across Countries

Sharon Belenzon is Associate Professor at Duke University, Honggi Lee is from Duke University, and Andrea Patacconi is Professor at the University of East Anglia. This post is based on their recent paper, with research assistance by Elad Gill.

Parent corporations often externalize the risk of tort liability through legally separate subsidiaries. For instance, utility companies in the US often create separate limited liability subsidiaries for each nuclear plant they own, arguably to protect the parent company from liabilities in case of accidents. Manville, a global leader in the manufacture of asbestos-containing products, separately incorporated its non-asbestos operations in the aftermath of asbestos litigation. Philip Morris did the same in response to tobacco litigation. Recently, Google reorganized as the Alphabet group, where a parent company (Alphabet) controls firms such as Google (online search), Verily (biotech and medical instruments) and Waymo (self-driving cars). One possible reason for the reorganization was, again, to prevent risks from spreading from one unit to another. As former Google engineer Anthony Lewandowski recalls, from the very beginning “Google was very supportive of the idea [driverless cars], but they absolutely did not want their name associated with it […] They were worried about a Google engineer building a car that crashes and kills someone.” Now a legally independent subsidiary, Waymo, builds self-driving cars.

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Appointments Clause & SEC Administrative Judges

Joshua D. Roth is partner, Justin J. Santolli is special counsel, and J. Zachery Morris is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Roth, Mr. Santolli, and Mr. Morris.

On June 21, 2018, the Supreme Court resolved a circuit split concerning the constitutionality of the U.S. Securities and Exchange Commission’s (“SEC”) administrative law judges (“ALJs”). In Lucia v. Securities and Exchange Commission, — U.S. —, 2018 U.S. LEXIS 3836 (June 21, 2018), the Court held that SEC ALJs are “officers of the United States,” and thus subject to the Constitution’s Appointments Clause, which limits the power to appoint “officers” to the President, “Courts of Law” or “Heads of Departments.” Because the ALJ who presided over Lucia’s administrative proceeding was not appointed by the SEC itself (the functional equivalent of a “Head of Department”), the Court held that the ALJ’s appointment was unconstitutional and ordered the SEC to provide Lucia with a new hearing in front of a new (constitutionally appointed) ALJ. The Court threw out the SEC’s prior order finding Lucia and his firm liable for securities violations and imposing monetary and equitable sanctions. As discussed further below, the Court’s decision will likely have a significant effect on many pending and already-concluded SEC administrative proceedings but also leaves a number of questions unanswered.

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When Political Spending and Core Values Conflict

Bruce F. Freed is president of the Center for Political Accountability; Karl J. Sandstrom is a former Federal Election Commissioner and practices law at Perkins Coie LLP. This post is based on a CPA report by Mr. Freed and Mr. Sandstrom.

Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here), and Corporate Politics, Governance, and Value Before and after Citizens United by John C. Coates.

The Center for Political Accountability (CPA) released in mid-June a report entitled “Collision Course: The Risks Companies Face When Their Political Spending and Their Core Values Conflict, and How to Address Them.” It is the first report to analyze the heightened risk that political spending poses in today’s polarized political environment.

The report examines how ill-considered political spending creates reputational risk and raises unwanted questions for corporate governance. This perspective lends the report added importance for management, who are involved in the company’s political spending decisions, and directors, who oversee a company’s political spending and set relevant policies for it.

The report launches a new CPA educational initiative focused on the role of the corporation in our democracy. It is an invitation to the corporate. legal and academic communities, to continue the debate on the rules, internal and external, that should govern corporate political participation.

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Creditor Control Rights and Board Independence

Daniel Ferreira is Professor of Finance at the London School of Economics; Miguel Ferreira is Banco BPI Chair in Finance at Nova School of Business and Economics; and Beatriz Mariano is Lecturer in Banking at Cass Business School. This post is based on their recent article, forthcoming in the Journal of Finance.

After a loan covenant violation, creditors can use the threat of accelerating loan payments and/or terminating credit agreements to extract concessions from borrowers in exchange for contract renegotiation. In practice, creditors rarely need to carry out such threats; most covenant violations lead to contract renegotiation. However, covenant violations enhance creditors’ bargaining position in renegotiations and such an improvement in creditors’ bargaining power is described as an increase in “creditor control rights.”

In our article, Creditor Control Rights and Board Independence, we show that covenant violations trigger profound changes on a firm’s governance. By changing governance, covenant violations can thus affect firm policies many years after the event, implying that current and past credit agreements have a long-lasting impact on a firm’s governance.

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Legal and Practical Limits on Indemnification and Advancement in Delaware Corporate Entities

Paul J. Lockwood is a partner and Arthur Bookout is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is a version of Legal and Practical Limits on Indemnification and Advancement in Delaware Corporate Entities, a whitepaper Mr. Lockwood and Mr. Bookout published in partnership with AIG Financial Lines. Skadden, Arps, Slate, Meagher & Flom LLP is a member of AIG Financial Lines’ Management Liability Panel Counsel Program. This post is part of the Delaware law series; links to other posts in the series are available here.

Directors and officers of Delaware corporations generally expect that the company will provide them with indemnification and advancement in corporate lawsuits.

Indemnification is where the company reimburses the director or officer for the attorneys’ fees and costs, and potentially judgments, incurred in connection with claims arising out of the director’s or officer’s service to the company. Advancement is where the company pays the director’s or officer’s attorneys’ fees and costs prior to the final disposition of the litigation, and is sometimes subject to an undertaking to repay the company if it is ultimately determined that indemnification is unwarranted.

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The Directors’ E&S Guidebook

Barbara Zvan is Chair of the E&S Committee at the Canadian Coalition for Good Governance (CCGG) and Chief Risk & Strategy Officer of the Ontario Teachers’ Pension Fund. Stephen Erlichman is Executive Director of the CCGG and partner at Fasken Martineau DuMoulin LLP. This post is based on a CCGG memorandum by Ms. Zvan and Mr. Erlichman.

Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell (discussed on the Forum here).

Since inception, CCGG has focused on good governance, and has, over the years, become an authority on best practice governance guidance for boards of directors. In recent years, CCGG has observed growing shareholder emphasis on environmental and social (E&S) factors. Companies have come under greater pressure to demonstrate that the right frameworks, practices, and capabilities are in place to identify and address material E&S factors as they emerge and to provide relevant and sufficient disclosures to shareholders along the way. Investors are facing increased responsibility to include E&S factors in their investment decision-making.

In 2016 CCGG initiated a process both to strengthen its existing best practice guidance for boards by including oversight of E&S factors and to provide guidance for issuers in the preparation of E&S disclosures to investors. Benefiting from its unique access to the boards of public companies in Canada and abroad, CCGG interviewed directors who sat on the boards of companies considered to be leaders in the management of E&S factors.

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