Monthly Archives: August 2018

New Amendments to Delaware General Corporation Law

Posted by Matthew M. Greenberg, Christopher B. Chuff, and Taylor B. Bartholomew, Pepper Hamilton LLP, on

Thursday, August 16, 2018

Appraisal rights, Charter & bylaws, Defective corporate act, Delaware law, DGCL, DGCL Section 204, DGCL Section 262, Mergers & acquisitions
More from: Christopher Chuff, Matthew Greenberg, Taylor Bartholomew, Pepper

Matthew M. Greenberg is partner and Christopher B. Chuff and Taylor B. Bartholomew are associates at Pepper Hamilton LLP. This post is based on their Pepper Hamilton memorandum and is part of the Delaware law series; links to other posts in the series are available here.

On August 1, several amendments to the Delaware General Corporation Law, 8 Del. C. § 1-101 et seq. (the DGCL), became effective. The most notable amendments alter (1) the availability of statutory appraisal rights and (2) the availability of, and procedures for, ratifying defective corporate acts.

Statutory Appraisal Rights

The 2018 amendments to section 262 extend the applicability of the “market out” exception to appraisal rights in a so-called “intermediate form” merger, in which there is an exchange offer followed by a back-end merger consummated without the vote of stockholders pursuant to section 251(h). Section 262(b)(1) of the DGCL provides a market-out exception to stockholders’ appraisal rights when stock of the target corporation is (1) listed on a national securities exchange or (2) held of record by more than 2,000 holders. Section 262(b)(2) of the DGCL provides an exception to the market-out exception, under which appraisal rights remain available to target stockholders (even if the target corporation’s stock was listed on a national exchange or held by more than 2,000 holders), when the target stockholders receive consideration of any form other than stock, depository receipts in respect thereof, cash in lieu of fractional shares, or any combination thereof.

The Misplaced Focus of the ISS Policy on NOL Poison Pills

Posted by Keith Gottfried and Sean Donahue, Morgan, Lewis & Bockius LLP, on

Thursday, August 16, 2018

Boards of Directors, Entrenchment, Institutional Investors, ISS, Mergers & acquisitions, Poison pills, Shareholder activism, Shareholder voting, Takeover defenses
More from: Keith Gottfried, Sean Donahue, Morgan Lewis

Keith Gottfried and Sean Donahue are partners at Morgan, Lewis & Bockius LLP. This post is based on a Morgan Lewis memorandum by Mr. Gottfried and Mr. Donahue. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

Since 2009, Institutional Shareholder Services, Inc. (“ISS”) has differentiated between traditional poison pills used to protect against unsolicited takeovers and other coercive transactions and NOL poison pills used to protect and preserve a company’s tax assets, primarily tax operating loss carryforwards. According to ISS’ most recent published proxy voting manual, ISS’ voting policy applicable to management proposals to approve or ratify the adoption of an NOL poison pill has as its purported rationale the evaluation of “the terms and purpose behind the NOL poison pill, as well as the company’s existing governance structure, to assess whether the structure actively promoted board entrenchment or adequately protects shareholder rights.” The proxy voting manual further indicates that “[w]hile ISS acknowledges the high estimated tax value of NOLs, which benefit shareholders, the ownership acquisition limitations contained in an NOL poison pill coupled with a company’s problematic governance structure could serve as an antitakeover device.”

Self-Dealing Without a Controller

Posted by Jason M. Halper, Ellen V. Holloman and James M. Fee, Cadwalader, Wickersham & Taft LLP, on

Wednesday, August 15, 2018

Boards of Directors, Conflicts of interest, Controlling shareholders, Corwin, Delaware cases, Delaware law, Derivative suits, Fairness review, Merger litigation, Mergers & acquisitions, Securities litigation, Shareholder suits
More from: Ellen Holloman, James Fee, Jason Halper, Cadwalader

Jason M. Halper and Ellen V. Holloman are partners and James M. Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Holloman, and Mr. Fee 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 July 26, 2018, Vice Chancellor Glasscock of the Delaware Court of Chancery denied in part and granted in part Defendants’ motion to dismiss in Sciabacucchi v. Charter Communications Corporation et al. We discussed the Court’s prior ruling in this action here. In brief, the action challenged certain transactions between Charter Communications, Inc. and its largest stockholder, Liberty Broadband Corporation, which owned approximately 26% of Charter’s outstanding common stock and had the right to designate four of ten directors on Charter’s Board. In particular, a Charter stockholder challenged a voting proxy agreement between Charter and Liberty and two stock issuances worth $5 billion made by Charter to Liberty, allegedly as a part of the “financing” of Charter’s $78.7 billion merger with Time Warner Cable and its purchase of Bright House Networks, LLC. Ultimately, 86% of Charter stock not affiliated with Liberty voted, in a single vote, to approve (i) the share issuances and the voting agreement, (ii) the merger with Time Warner Cable and (iii) the purchase of Bright House. Both third-party transactions were conditioned on Charter stockholders’ approval of the share issuances to and voting agreement with Charter.

Urban Vibrancy and Firm Value Creation

Posted by Christopher A. Parsons (University of Washington), on

Wednesday, August 15, 2018

Accounting, Firm valuation, Human capital, Labor markets, Shareholder value, Social capital, Tech companies
More from: Casey Dougal, Christopher Parsons, Sheridan Titman

Christopher A. Parsons is Professor at the University of Washington Foster School of Business. This post is based on a recent paper authored by Professor Parsons; Casey Dougal, Assistant Professor of Finance at Drexel University LeBow College of Business; and Sheridan Titman, Professor of Finance at University of Texas at Austin McCombs School of Business.

Financial economists have long been interested in the reasons some organizations create more value than others. One common measure takes the difference between a firm’s market value and the replacement cost of its assets, under the notion that when management adds little value, the firm should be worth approximately the value of its plants, equipment, and other physical assets. On the other hand, when managers can squeeze more value out of these assets, the “market-to-book” ratio can substantially exceed one, the wedge representing value created for its shareholders. In this paper, we ask whether the location of a firm’s headquarters represents a source of comparative advantage, and accordingly, whether market-to-book ratios differ meaningfully between headquarter cities.

FCPA Successor Liability

Posted by James Gatta and Derek Cohen, Goodwin Procter LLP, on

Tuesday, August 14, 2018

Anti-corruption, Corporate crime, Corporate liability, Disclosure, DOJ, Due diligence, FCPA, International governance, Liability standards, Mergers & acquisitions, Misconduct
More from: Derek Cohen, James Gatta, Goodwin Procter

James Gatta and Derek Cohen are partners at Goodwin Procter LLP. This post is based on a Goodwin Procter memorandum by Mr. Gatta and Mr. Cohen.

In its continuing efforts to encourage companies to self-report Foreign Corrupt Practices Act (FCPA) violations, the Department of Justice (DOJ) announced [July 25, 2018] that it intends to apply the principles of its FCPA Corporate Enforcement Policy to successor companies that uncover wrongdoing in connection with mergers and acquisitions. Accordingly, successor companies that voluntarily disclose such wrongdoing to the DOJ, cooperate with a government investigation of the conduct, and enact effective remedial measures will be positioned to benefit from the principles of the policy, including being presumed eligible for a declination of prosecution. The announcement made clear that the FCPA Corporate Enforcement Policy will apply to companies that uncover corrupt conduct through due diligence in advance of an acquisition as well as to companies that learn of such conduct subsequent to an acquisition. This extension of the policy to mergers and acquisitions was announced on July 25, 2018, by Deputy Assistant Attorney General (DAAG) Matthew S. Miner of the Criminal Division of the Department of Justice, at the American Conference Institute’s Eighth Global Forum on Anti-Corruption Compliance in High-Risk Markets, held in Washington, D.C.

Director Skill Sets

Posted by Renée B. Adams (University of Oxford), Ali C. Akyol (University of Melbourne), and Patrick Verwijmeren (Erasmus University & University of Melbourne), on

Tuesday, August 14, 2018

Board composition, Board dynamics, Board monitoring, Board performance, Boards of Directors, Director qualifications, Diversity, Firm performance, Nominating committees, Regulation S-K
More from: Ali Akyol, Patrick Verwijmeren, Renee Adams

Renée B. Adams is Professor of Finance at the University of Oxford’s Saïd Business School; Ali C. Akyol is Senior Lecturer at the University of Melbourne; and Patrick Verwijmeren is Professor of Corporate Finance at the Erasmus School of Economics and the University of Melbourne. This post is based on a recent paper by Professor Adams, Dr. Akyol, and Professor Verwijmeren.

Boards of directors are multi-dimensional and the optimal board combines monitoring and advisory roles to varying degrees. We examine how individual director skills map into these roles. Do directors specialize as “advisors” or “monitors,” or, like boards, do they combine roles? And how do directors’ skills aggregate to the board level—are individual skills independent of each other or do they complement/substitute each other? The answers to these questions are important for understanding what boards do, why they are structured the way they are, and how they can be improved.

In our paper, we answer these questions by exploiting an amendment to Regulation S-K in 2009, which requires public U.S. firms to describe their reasons for nominating directors. According to this rule, firms have to disclose the skills they believe each director brings to the table. A particular strength of these data is that the descriptions represent the firm’s perspective rather than a perspective chosen by researchers. The data allow us to document the skills that directors have and allow us to test how these skills cluster at the board level. We then examine whether some boards have skill sets that lead them to systematically outperform other boards.

Women in the C-Suite: The Next Frontier in Gender Diversity

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on

Monday, August 13, 2018

Diversity, Executive Compensation, Executive performance, International governance, Management, Manager characteristics
More from: Subodh Mishra, Institutional Shareholder Services Inc.

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Kosmas Papadopoulos, Managing Editor at ISS Analytics.

Despite recent advances in female board participation globally, gender diversity among top executives remains disappointingly low across all markets, with some improvement discerned in the past few years. Moreover, there does not appear a correlation between board gender diversity and gender diversity in the C-Suite at the market level. Some of the markets that have implemented gender quotas on boards and have achieved the highest rates of female board participation, such as France, Sweden, and Germany, appear to have embarrassingly low rates of female top executives. In fact, many of the markets with progressive board diversity policies have lower gender diversity levels in executive positions compared to several emerging markets like South Africa, Singapore, and Thailand. Thus, achieving higher rates of gender diversity in the C-Suite will require deeper cultural shifts within organizations in order to overcome potential biases and hurdles to gender equality.

Proposed Amendments to SEC’s Whistleblower Program

Posted by Angela Burgess, Kyoko Takahashi Lin, and Linda Chatman Thomsen, Davis Polk & Wardwell LLP, on

Monday, August 13, 2018

Accountability, Dodd-Frank Act, Oversight, SEC, SEC enforcement, SEC rulemaking, Securities enforcement, Securities regulation, Settlements, Whistleblowers
More from: Angela Burgess, Katherine Swan, Kyoko Lin, Linda Thomsen, Michael Flynn, Sidney Bashago, Davis Polk

Angela Burgess, Kyoko Takahashi Lin, and Linda Chatman Thomsen are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Burgess, Ms. Takahashi Lin, Ms. Chatman Thomsen, Michael Flynn, Katherine Swan, and Sidney Bashago.

On June 28, 2018, the Securities and Exchange Commission (“SEC”) voted to propose amendments to the rules governing its whistleblower program. These changes include expanding the types of resolutions covered by the program, giving the SEC discretion in modifying awards, eliminating potential double recovery, adjusting the claims review process, and barring individuals who submit false information or make repeated frivolous claims. [1] The proposed amendments would also expressly adopt the reporting requirements set forth in Digital Realty Trust, Inc. v. Somers, a recent Supreme Court decision which held that Dodd-Frank whistleblower protections apply only when a securities-law violation is reported to the SEC. [2] If adopted, these rules may increase reporting of potential securities-law violations to the SEC, though more data is needed to better understand the potential ramifications.

Circuit Split on Morrison Application

Posted by Jared Gerber, Leslie Silverman, Roger Cooper, and Adam Fleisher, Cleary Gottlieb Steen & Hamilton LLP, on

Sunday, August 12, 2018

Banks, Class actions, Cross-border transactions, Financial institutions, Foreign issuers, International governance, Liability standards, Morrison v. National Australia Bank Ltd., Section 10(b), Securities fraud, Securities litigation, U.S. federal courts
More from: Adam Fleisher, Alexandra McCown, Jared Gerber, Leslie Silverman, Roger Cooper, Cleary Gottlieb

Jared Gerber, Roger Cooper, and Adam Fleisher are partners and Leslie Silverman is senior counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Gerber, Mr. Cooper, Mr. Fleisher, Mr. Silverman, and Alexandra McCown.

On July 17, 2018 the Ninth Circuit, in Stoyas v. Toshiba Corporation, held that the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd. did not preclude the assertion of claims under the U.S. federal securities laws against foreign issuers with respect to domestic transactions in unsponsored American Depository Receipts (“ADRs”). The court, however, further held that even though a domestic transaction in unsponsored ADRs is necessary for the federal securities law to apply under Morrison, it is not sufficient under the Exchange Act. In order to state a claim against a foreign issuer, a plaintiff must also allege sufficient facts to demonstrate that the defendant’s actions were committed “in connection with” the domestic transaction at issue. In short, the plaintiff must allege facts showing that the foreign issuer committed the fraud to induce the domestic transaction. In issuing this decision, the Ninth Circuit explicitly parted ways with the Second Circuit’s decision in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings, which held that a domestic transaction may not satisfy Morrison if the nature of the transaction and allegations of fraud were predominantly foreign. The Ninth Circuit’s decision has important consequences for determining the extraterritorial scope of the federal securities laws, particularly with respect to unsponsored ADRs and other transactions in which the named foreign entity may not have been involved.

Shedding the Status of Bank Holding Company

Posted by V. Gerard Comizio and Nathan S. Brownback, Fried, Frank, Harris, Shriver & Jacobson LLP, on

Saturday, August 11, 2018

Banks, Financial institutions, Financial regulation, FSOC, OCC, SIFIs
More from: Nathan Brownback, V. Gerard Comizio, Fried Frank

V. Gerard Comizio is partner and Nathan S. Brownback is associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Comizio and Mr. Brownback.

On July 17, 2018, the Financial Stability Oversight Council (“FSOC”) issued a proposed decision that would, if finalized, approve a transaction (the “Transaction”) through which Zions Bancorporation, a bank holding company (“BHC”), would be eliminated through a merger into its national bank subsidiary, Zions Bank, N.A. (“ZB,” and, collectively with Zions Bancorporation, “Zions”), such that ZB would be the surviving entity.

Currently, Zions is a $66 billion banking organization, headquartered in Utah. It operates 433 branches in the western United States under eight brand names, and 99.7% of Zions Bancorporation’s assets and revenues come from ZB.

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