Monthly Archives: October 2018

Materiality and Efforts Qualifiers—Some Distinctions, Some Without Differences

Daniel E. Wolf and Eric L. Schiele are partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis publication by Mr. Wolf and Mr. Schiele, 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 M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV.

Much deserved attention has been paid to the first finding of a “material adverse change” (MAC) by a Delaware court in the recent Akorn decision. Of perhaps equal practical importance to dealmakers is the court’s guidance on a question that has long occupied draftspersons—whether or not there is, and the extent of, any legal difference between the many shades of qualifiers used in deal agreements on two key terms: materiality modifiers and efforts covenants. Building on earlier Delaware decisions, the court reached a clear split decision on this question.


Cracking the Corwin Conundrum and Other Mysteries Regarding Shareholder Approval of Mergers and Acquisitions

Franklin Gevurtz is Distinguished Professor of Law at the University of the Pacific McGeorge School of Law. This post is based on a recent paper authored by Professor Gevurtz, and is part of the Delaware law series; links to other posts in the series are available here.

Corporate mergers and acquisitions are big business and so is the constant stream of litigation challenging board decisions to enter such transactions. Plaintiffs cast these actions as a contest between victimized shareholders and faithless directors. Yet, merging or selling a corporation normally requires approval by the shareholders, who rarely vote down the deal. This apparent incongruity between what plaintiff shareholders assert and how most shareholders vote, in turn, raises the question of what impact shareholder approval should have on judicial scrutiny when dissenting shareholders sue.

Simple policy might suggest that shareholders okaying a corporate merger or sale should radically reduce, if not eliminate, the willingness of a court to say that directors breached their duty to the shareholders in saying yes to the deal. After all, if most of the shareholders vote in favor of a merger or sale, who is a judge to say the deal is not good enough? In Corwin v KKR Financial Holdings, the Delaware Supreme Court took a seemingly major step toward this conclusion. The Court stated that an informed and un-coerced vote by the shareholders to approve a merger or sale of a company invokes the deferential business judgment rule in litigation challenging the deal, at least when the deal does not involve a controlling shareholder on the other side.


The ISS Equity Plan Scorecard

Edward A. Hauder is Lead Consultant and Senior Advisor at Exequity, LLP. This post is based on an Exequity memorandum by Mr. Hauder. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

If you are considering taking a request to shareholders for the approval of shares for an equity compensation plan and a significant number of your shareholders are influenced by the Institutional Shareholder Services (ISS) vote recommendations, you should understand how ISS evaluates equity plan proposals. This post provides an overview of ISS’ EPSC model which ISS uses to evaluate equity compensation plan proposals.

Overview of the EPSC Model

The EPSC looks at three categories (or “pillars,” as ISS refers to them) when evaluating an equity compensation plan proposal:

  • Plan Features
  • Grant Practices
  • Plan Cost


New Ruling on the Fujifilm-Xerox Transaction

Andrew Stern and Kai Haakon E. Liekefett are partners at Sidley Austin LLP. This post is based on their Sidley memorandum.

On October 16, 2018, the New York Appellate Division reversed an injunction that had stalled Fujifilm’s $6.1 billion transaction with Xerox for nearly five months and a completely dismissed all related claims against Fujifilm. The court’s decision in In re Xerox Corporation Consolidated Shareholder Litigation and Deason v. Fujifilm Holdings Corp. reaffirms the longstanding rule that a plaintiff must establish that a majority of the directors on a corporate board is interested or lacks independence with respect to a decision in order to rebut the business judgment rule.


Public Sentiment and the Price of Corporate Sustainability

George Serafeim is Professor of Business Administration at Harvard Business School. This post is based on a recent paper authored by Professor Serafeim. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

News about firms’ impact on society is an everyday phenomenon. In this paper, I analyze how public sentiment influences the market pricing of firms’ sustainability activities and thereby the future stock returns of portfolios that integrate ESG data. This is the first paper that combines analyst driven ESG ratings from MSCI with big ESG data from machine learning and artificial intelligence from TruValue Labs.

Thousands of companies are investing resources to reduce energy consumption, waste and carbon emissions and to provide products that improve environmental and social outcomes. For example, developments in healthy nutrition, access to wellbeing services, low carbon transportation, and green buildings have provided billions in revenues for companies that developed products for these markets (Generation Investment Management 2017). Similarly, companies spend significant resources to improve employee safety and well-being and to conduct business with integrity avoiding corruption. These activities, typically referred by companies as corporate sustainability activities, are under the supervision of a Chief Sustainability Officer and are disclosed in sustainability reports (Miller and Serafeim 2015). The data from sustainability reports and other sources that might also reflect controversies around human rights, pollution, discrimination and corruption, are collected by data providers and form the basis of measures of company’s performance on environmental, social and governance (ESG) issues.


Commonsense Principles 2.0: A Blueprint for U.S. Corporate Governance?

Aabha Sharma is an associate and Howard Dicker is a partner at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum.

On October 18, 2018, over twenty prominent executives, representing some of America’s largest corporations, pension funds and investment firms, came together to sign Commonsense Principles 2.0. The signatories include, among other noteworthy individuals, Warren Buffett, Jamie Dimon and Larry Fink. [1] In an open letter, the signatories make “a commitment to apply the Commonsense Principles 2.0 in our businesses” and “hope others will do so as well.” Moreover, while recognizing that there is significant variation among public companies, and that not every principle will be applied in the same manner, the signatories expressed their intent to use the principles to guide their thinking, and encouraged others to do the same. [2]

The Commonsense Principles 2.0 are an updated version of the Commonsense Corporate Governance Principles launched in July 2016. A text comparison of the two versions is available here. While many of the recommendations have remained the same, there are significant changes as well, including in the areas of director elections, shareholder engagement, shareholder rights and the role and responsibilities of investors, including in the proxy voting process. Moreover, the updated principles are not only intended for public companies and their boards of directors, but also for their institutional shareholders—both asset managers and asset owners. Key recommendations from the Commonsense Principles 2.0 (many of which are the same as in the 2016 principles) are as follows:


Lessons from the CBS-NAI Dispute, Part IV: A Temporary Restraining Order Against the Controlling Stockholder?

Meredith E. Kotler is a partner and Mark E. McDonald is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Kotler and Mr. McDonald 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).

This is the fourth in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder. [1] Relevant background can be found here and additional posts in this series can be found here and here.

In the first week of the CBS-NAI litigation, the Court of Chancery denied CBS’s request for a temporary restraining order (“TRO”), which would have prevented NAI from exercising its rights as a controlling stockholder to protect its voting control before the CBS board could meet and vote on a proposed stock dividend to dilute such voting control. [2]  In so ruling, the Court of Chancery resolved an “apparent tension” in the law between, on the one hand, past decisions suggesting the possibility that a board might be justified in diluting a controlling stockholder in extraordinary circumstances (arguably implying that, in such circumstances, the board should be permitted to act without interference by the controlling stockholder) and, on the other hand, cases recognizing the right of a controlling stockholder to have the opportunity to take action to avoid being disenfranchised.  The court found the well-established right of a controlling stockholder to take measures to protect its voting control “weigh[ed] heavily” against granting a TRO that would restrain it from doing so, and that “truly extraordinary circumstances” would therefore be required to support such a TRO. At the same time, the court noted that it had the power to review and, if necessary, “set aside” any such action taken by the controlling stockholder after the fact (itself another reason why a TRO in these circumstances was not warranted).


Public or Private Venture Capital?

Darian M. Ibrahim is Professor of Law at the William & Mary Law School. This post is based on a recent paper authored by Professor Ibrahim.

In the United States, high-growth startups raise funds privately from angel investors and venture capital funds (VCs). Other countries, without the robust supply of angel and VC funding found in the U.S., have resorted to public markets to supply startups with venture capital. These junior stock exchanges, or public venture capital, have not been successful at replicating the U.S. private venture capital success, however.

Three of the most notable attempts at public venture capital have been London’s Alternative Investment Market (AIM), Germany’s Neuer Markt (NM), and Hong Kong’s Growth Enterprise Market (GEM). While other countries have also attempted to establish public venture capital, the AIM, NM, and GEM are the most notable efforts. They also offer differing approaches to regulation and outcomes, making for fruitful academic study. Further, the AIM, NM, and GEMs’ small size and express intention to supply growth capital to startups makes these junior stock exchanges the apt comparison to Silicon Valley, not the Nasdaq, though they were initially touted as a rival to the latter.


Amended NASDAQ Rules for Shareholder Approval

Nasdaq recently amended the price tests under Nasdaq Rule 5635(d)—the shareholder approval rule often applied in PIPE (private investments in public equity) transactions and certain other private offerings (including private offerings of securities convertible into or exercisable for common stock). The amended Rule, according to Nasdaq, will provide greater flexibility and certainty for Nasdaq-listed companies entering into such transactions without the need to obtain shareholder approval.


2018 Canadian Proxy Season Review

Wes Hall is Executive Chairman and Founder, Amy Freedman is Chief Executive Officer, and Ian Robertson is Executive Vice President of Communication Strategy at Kingsdale Advisors. This post is based on a their Kingsdale memorandum. 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).

Throughout the years, we’ve seen a large increase in the number of public proxy contests in Canada, from six in 2003 to a peak of 55 in 2015. While we likely won’t reach 2015 numbers, 2018 is on pace to be another eventful year.

Year-to-date activity has exceeded last year’s figures: this time last year, there were 21 public proxy contests, increasing to 32 by year-end. Comparatively, there have already been 29 proxy fights in 2018, and new battles continue to surface daily.


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