Monthly Archives: November 2018

PLX, Burden of Proof for Damages, and the Internal Logic of Delaware Law

Holger Spamann is Professor of Law at Harvard Law School. This post is part of the Delaware law series; links to other posts in the series are available here.

In his recent PLX decision, Delaware’s Vice-Chancellor (VC) Travis Laster refused to award monetary recovery on the grounds that plaintiffs did not carry their burden of proof on damages. [1] In this short comment, I argue that the burden of proof should not have been on the plaintiffs: once VC Laster found a breach of fiduciary duty, the internal logic of Delaware law demands that burden of proof shift to the defendants.

In PLX, VC Laster held activist hedge fund Potomac Capital Partners II, L.P. liable for aiding and abetting the breach by its principal, Eric Singer, of his fiduciary duty to Potomac’s portfolio company, PLX Technology Inc. Singer had joined PLX’s board on Potomac’s slate and oversaw its sale to Avago as chair of its “Strategic Alternatives Special Committee.” VC Laster took issue with various aspects of Singer’s behavior, above all that Singer withheld from his fellow PLX board members information about Avago’s intentions that he received from PLX’s investment banker after joining the PLX board, but long before start of the sale process with Avago. [2] Reasonable people may disagree as to whether this sale process was truly “flawed from a fiduciary standpoint,” as VC Laster found the plaintiffs to have proven. [3] I take no position on this question. The point I want to make concerns what follows a finding of a fiduciary breach: who should bear the burden of proof on damages? My argument is that in the rare case where a plaintiff can prove a violation of fiduciary duty, the internal logic of Delaware law demands that the burden on damages shift to the defendant.


Proxy Voting and the Future of Corporations

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz and Ms. McIntosh, originally published in the New York Law Journal.

A significant debate has developed in recent months regarding the purpose and future of corporations, the primacy of shareholder interests, and the role of the regulatory environment. The outcome could have a lasting impact on public companies. A recently released framework for public discussion in the British Academy, “The Future of the Corporation: Towards Humane Business,” centers around the view that the purpose of corporations is not simply to maximize shareholder value. The framework suggests further that corporations should specify their purposes, that some corporations with public and social functions should be required to align their purposes with social purposes, and that regulations should promote and even ensure the alignment of corporate with social purposes. This view is far removed from the general American view of the purpose of a corporation—i.e., to maximize shareholder value—and the perceived purpose of the regulatory environment—i.e., to facilitate corporations’ efforts to maximize shareholder value and to protect shareholders from misconduct.


Weekly Roundup: November 23-29, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 23–29, 2018.

Retail, Remedies, Resources and Results: Observations From the SEC Enforcement Division 2018 Annual Report

The Role of the Lead Independent Director

A Series of Avoidable Missteps: Fiduciary Breaches in Connection with the Sale of a Company

Do Private Equity Funds Manipulate Reported Returns?

Comment Letter: Fiduciary Duty Guidance for Proxy Voting Reform

The Double-Edged Sword of CEO Activism

Senate Bill on Proxy Advisors

2019 Americas Proxy Voting Guidelines Update

Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy

The Realities of Robo-Voting

Delaware Law Status of Bylaws Regulating Litigation of Federal Securities Law Claims

Lawrence A. Hamermesh is Professor Emeritus at Widener University Delaware Law School and Executive Director of the Institute for Law & Economics at the University of Pennsylvania law School. This post is based on a white paper issued by Professor Hamermesh and Professors Lucian Bebchuk, John Coates IV, John Coffee Jr., Wendy Gerwick Couture, James Cox, Michael Kaufman, Donald Langevoort, Ann Lipton, Joshua Mitts, Frank Partnoy, Brian JM Quinn, Joel Seligman, Dean Gordon Smith, James Spindler, Marc Steinberg, Randall Thomas, Robert Thompson, Urska Velikonja, David Webber, and Verity Winship.

As one commentator recently observed, “There has been renewed interest in whether the SEC should allow a U.S. company to conduct a registered initial public offering if its bylaws require shareholders to arbitrate federal securities claims.” [1] Responding to that interest, SEC Chairman Jay Clayton correctly observed that the validity of such bylaws “involves our securities laws, matters of other federal and state law, an array of market participants and activities, as well as matters of U.S. jurisdiction.” [2]

This submission focuses on only one of the elements identified by Chairman Clayton, namely the validity of such a bylaw under state law—and more specifically, Delaware corporate law. [3] The signatories to this submission hold a wide range of differing views regarding the utility of federal securities class actions. What they hold in common, however, is the view that Delaware corporate law does not permit a corporate bylaw (or charter provision, for that matter) to require that claims arising under the federal securities laws be resolved in arbitration or indeed in any specified venue. The reasoning supporting that view is set forth below. [4]


The Shift from Active to Passive Investing: Potential Risks to Financial Stability?

Patrick McCabe is an Assistant Director at the Board of Governors of the Federal Reserve System. This post is based on a recent paper authored by Mr. McCabe; Kenechukwu Anadu, Senior Risk Manager at the Federal Reserve Bank of Boston; and Mathias Kruttli, Emilio Osambela, and Chae Hee Shin, Senior Economists at the Board of Governors of the Federal Reserve System. The views expressed in this post are those of the authors and do not necessarily represent the views of the Federal Reserve Bank of Boston or the Board of Governors of the Federal Reserve System. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here), and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy, by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

A massive shift is underway in the $80 trillion global asset-management industry. Investors have moved trillions of dollars in the past couple of decades from active investment strategies, which involve selecting assets to try to outperform a benchmark, to “passive” or “indexing” strategies that aim to replicate a benchmark. In the U.S., assets in passive mutual funds (MFs) and exchange-traded funds (ETFs) have increased from $220 billion twenty years ago to $7 trillion today (figure 1). Similar shifts appear to be occurring in other asset-management sectors and around the world, and passively managed funds hold a rising share of total financial assets. The shift to passive investing has sparked research and debate on a wide range of possible repercussions, including effects on asset prices and volatility, market liquidity, price discovery, industry concentration, competition, and corporate governance. Our contribution is a comprehensive examination of the potential repercussions of the active-to-passive shift for financial stability.


The Realities of Robo-Voting

Timothy M. Doyle is Vice President of Policy & General Counsel at the American Council for Capital Formation (ACCF). This post is based on an ACCF memorandum by Mr. Doyle.

New research from the American Council for Capital Formation identifies a troubling number of assets mangers that are automatically voting in alignment with proxy advisor recommendations, in a practice known as “robo-voting.” This trend has helped facilitate a situation in which proxy firms are able to operate as quasi-regulators of America’s public companies, despite lacking any statutory authority.

While some of the largest institutional investors expend significant resources to evaluate both management and shareholder proposals, many others fail to conduct proper oversight of their proxy voting decisions, instead outsourcing decisions to proxy advisors. We reviewed those asset managers that historically vote in line with the largest proxy firm, Institutional Shareholder Services (ISS), finding 175 entities, representing more than $5 trillion in assets under management, that follow the advisory firm over 95% of the time.


Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Scott Hirst is Associate Professor at Boston University School of Law and Director of Institutional Investor Research at the Harvard Law School Program on Corporate Governance. This post is based on their recent study. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

Index funds own an increasingly large proportion of American public companies, currently more than one fifth and steadily growing. Understanding the stewardship decisions of index fund managers—how they monitor, vote, and engage with their portfolio companies—is critical for corporate law scholarship. In a study that we recently placed on SSRN—Index Funds and the Future of Corporate Governance: Theory, Evidence and Policy—we seek to contribute to such understanding by providing a comprehensive theoretical, empirical, and policy analysis of index fund stewardship.

We begin by putting forward an agency-costs theory of index fund incentives. Stewardship decisions by index funds depend not just on the interests of index fund investors but also the incentives of index fund managers. Our agency-costs analysis shows that index funds have strong incentives to (i) under-invest in stewardship, and (ii) defer excessively to the preferences and positions of corporate managers.

We then provide the first comprehensive and detailed evidence of the full range of stewardship activities that index funds do and do not undertake. This body of evidence, we show, is inconsistent with a no-agency-costs view but can be explained by our agency-cost analysis.

We next put forward a set of policy reforms that should be considered in order to encourage index funds to invest in stewardship, to reduce their incentives to be deferential to corporate managers, and to address the concentration of power in the hands of the largest index fund managers. Finally, we discuss how our analysis should reorient important ongoing debates regarding common ownership and hedge fund activism.

The policy measures we put forward, and the beneficial role of hedge fund activism, can partly but not fully address the incentive problems that we analyze and document. These problems are expected to remain a significant aspect of the corporate governance landscape, and should be the subject of close attention by policymakers, market participants, and scholars.

Below is a more detailed account of our study:


2019 Americas Proxy Voting Guidelines Update

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an Institutional Shareholder Services publication by Georgina Marshall, Global Head of Research & Policy at Institutional Shareholder Services.


Board of Directors—Voting on Director Nominees in Uncontested Elections

Board Composition—Diversity

Rationale for Change:

1) Investors favor gender diverse boards.

During the 2017 and 2018 proxy seasons, investors increasingly targeted companies with little or no female representation on their boards, citing reasons of equality, good corporate governance, and enhanced long-term company performance. [1] Increased investor engagement on the topic appears to have prompted many boards to add one or more women directors to their ranks over the past two years. When boards fail to respond to such engagement, a number of large investors have cast votes against directors.


Submission for SEC Proxy Process Roundtable

Nick Dawson is Managing Director & Co-Founder of Proxy Insight. This post is based on a Proxy Insight letter sent in advance of the SEC’s Proxy Process Roundtable.

Proxy Insight appreciates the opportunity to provide comments on issues related to the Securities and Exchange Commission’s staff Roundtable on “Proxy Process” to be held on November 15, 2018. Proxy Insight’s views are those of an independent data provider tracking the voting records and policies of over 1,700 global investors.

Based on our extensive engagement with market participants and thorough analysis of the data, we believe that much of the criticism of Proxy Voting Advisors (PVAs) is unwarranted. Most importantly, our data demonstrates that investors are clearly making voting decisions themselves rather than simply delegating to PVA house positions.

It should be stressed that Proxy Insight is not, has never been and does not intend to become a PVA, so can provide a completely objective viewpoint. Indeed, a number of our clients have suggested that we are uniquely placed to contribute to this debate without any real or perceived bias.


Senate Bill on Proxy Advisors

Nichol Garzon is Senior Vice President and General Counsel at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Garzon.

Just as the SEC convenes a Staff Roundtable to look at the proxy process as a whole, including the possible regulation of the proxy advisory industry, on November 14 six U.S. Senators introduced a bill that would amend the Investment Advisers Act of 1940 to require proxy advisory firms to register as investment advisers. The bill is a continuation of the legislative process that began with U.S. Senate Banking Committee inquiries and hearings held over the summer.

It’s the first time that Senators have introduced a bill addressing proxy advisory firms. Compared to existing legislation in the House, the Senate bill takes a narrower approach, and excludes some of the more controversial aspects of HR 5311 and HR 4015. Rather than creating a new regulatory framework tailored specifically to the proxy advisory industry, the bill seeks to fold proxy advisors, broadly defined to include firms providing ratings along with actual voting recommendations, into existing regulations and disclosure requirements aimed at investment advisers.


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