Monthly Archives: November 2018

Drafting Considerations from the MAC Decision

Gail Weinstein is senior counsel, and Steven Epstein and Matthew V. Soran are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Epstein, Mr. Soran, Robert C. SchwenkelDavid L. Shaw, and Andrew J. Colosimoand is part of the Delaware law series; links to other posts in the series are available hereRelated research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

In Akorn v. Fresenius (Oct. 1, 2018), the Delaware Court of Chancery found for the first time ever that a target company had suffered a “material adverse effect” (MAC) between the signing and closing of a merger agreement, which entitled the acquiror to terminate the agreement. The 246-page opinion by Vice Chancellor Laster also serves essentially as a primer on how the court may interpret certain standard provisions in merger agreements and in corporate contracts generally.

Below, we provide (i) a summary of Key Points relating to the decision; (ii) a summary of the factual background and the court’s holdings; and (iii) a review of the court’s discussion of various agreement provisions. We also offer practice points, including specific drafting considerations, that arise from the opinion. We note that the decision is being appealed, thus further explication of these issues may follow.


Reforming the Community Reinvestment Act Regulatory Framework

Gregory W. Meeks is U.S. Representative (D-NY). This post is based on a recent comment letter addressed to Comptroller Joseph M. Otting (Office of the Comptroller of the Currency) authored by Congressman Meeks and joined by his New Democrat Coalition colleagues who serve on the House Committee on Financial Services.

The undersigned Members of Congress serve on the House Committee on Financial Services and are part of the New Democrat Coalition, an organization of forward-thinking Democrats who are committed to pro-economic growth and pro-innovation policies supporting Main Street workers and entrepreneurs.

We recognize the Community Reinvestment Act’s (“CRA”) regulatory framework is due for modernization and we conceptually support the federal banking regulators undertaking a reform effort to update and improve consistency in CRA examination, crediting, and remedial standards. Nonetheless, we encourage the Office of the Comptroller of the Currency (“OCC”) to incorporate the principles below to strengthen banks’ affirmative obligation to meet the credit needs of their communities in a safe and sound way, including the needs of financial consumers and small business entrepreneurs located in low- and moderate-income (“LMI”) communities.


MFW’s “Ab Initio” Requirements for Business Judgement Rule Review

Joshua Apfelroth, Jason Halper, and William Mills are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Apfelroth, Mr. Halper, Mr. Mills, and Chelsea Donafeld. 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); Adverse Selection and Gains to Controllers in Corporate Freezeouts by Lucian Bebchuk and Marcel Kahan; and The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In Flood v. Synutra Int’l Inc., the Delaware Supreme Court clarified its holding in Kahn v. M&F Worldwide Corp. (“MFW”). In MFW, the Court held that the business judgment rule—rather than the entire fairness standard—applies to a controlling stockholder transaction if such transaction is conditioned “ab initio,” or at the beginning, upon approval of both an independent special committee of directors and the informed vote of a majority of the minority stockholders (the “MFW Conditions”). At issue in Flood was whether the Court of Chancery properly applied the business judgment rule to a controlling stockholder acquisition of Synutra International even though the controlling stockholder did not include the MFW Conditions in its initial proposal to acquire Synutra, but instead included such conditions in a follow-up letter sent two weeks later. Chief Justice Strine, writing for the majority, affirmed the Delaware Court of Chancery’s decision, which held that the MFW Conditions need not be included in the controlling stockholder’s initial expression of interest for the transaction to be afforded business judgment protection; instead, business judgment protection will be afforded so long as the MFW Conditions are in place before any substantive economic negotiations occur between the special committee, the board of directors and the controlling stockholder.


The Perils of Dell’s Low-Voting Stock

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School. Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and Senior Fellow at Harvard Law School Program on Corporate Governance. This post is based on their recent paper, The Perils of Dell’s Low-Voting Stock. The paper is part of the work of the Research Project on Controlling Shareholders of the Harvard Law School Program on Corporate Governance. The Project’s related work includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

Dell Technologies Inc. (“Dell”) is planning a “backdoor-IPO” transaction that would bring it back to the public market with a multiclass structure. In a short paper we recently placed on SSRN, The Perils of Dell’s Low-Voting Stock, we identify and analyze three governance risks and costs that Dell’s IPO structure would create for public investors holding Dell’s low-voting stock:

  • Lifetime entrenchment of Michael Dell (“MD”): He would be able to retain control indefinitely even after he ceases to be a fitting leader and even if he becomes disabled or incompetent.
  • Small-minority controller: Although MD would initially hold a majority of the equity capital, Dell’s structure would enable him to unload most of his shares and still retain control even with a small equity stake, and his status as small-minority controller would be expected to produce substantial governance risks and costs.
  • Midstream changes: Dell’s governance structure would enable MD to adopt subsequent changes in governance arrangements, without any support from public investors, which would increase Dell’s governance risks beyond the risks associated with a small-minority controller.

Each of these governance risks can be expected to both (i) decrease the expected future value of Dell by increasing agency costs and distortions, and (ii) increase the discount to a per-share value of Dell at which low-voting shares of Dell can be expected to trade. Both types of effects would operate to reduce the value at which the low-voting shares of public investors would trade and therefore should be taken into account in assessing the risks to such investors posed by Dell’s planned structure.

Below is a more detailed account of our analysis:


The Proxy Process Roundtable

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent remarks at the Proxy Process Roundtable, available here. The views expressed in the post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning and thank you to the Divisions of Corporation Finance and Investment Management for organizing this roundtable. I hope that everyone here will take this opportunity to engage in a thoughtful, meaningful discussion on the proxy process. If the process were perfect, we would not be here today [Nov. 15, 2018]. The topics on the agenda have the tendency to get emotional. Trust me, we know where most, if not all, of you stand on the issues. You have a platform today and I hope you use it to provide us with specific examples, data, and facts rather than generalities or anecdotes. With the knowledge you gather today, you can then submit data to the comment file based on these discussions. We look forward to these submissions and your suggestions on how the SEC can make changes to improve the process.


Weekly Roundup: November 9-15, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 9–15, 2018.

Decoding Quant ESG

The Limits of Mutual Fund Obligation to Shareholders

Investment Bank Liability for M&A Services

The SEC’s New Shareholder Proposal Guidance

Lessons from the CBS-NAI Dispute, Part V: “Independent” Directors at Controlled Corporations

Private Equity Indices Based on Secondary Market Transactions

The 2018 U.S. Spencer Stuart Board Index

What the Tesla Settlement Means for Other Companies

CFO Pay Stagnancy

The Untenable Case for Keeping Investors in the Dark

The Economic Relevance and Ordinary Business Exclusion for Shareholder Proposals

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

Corp Fin has just released a new staff legal bulletin on shareholder proposals—we’re up to 14J—that once again examines the exclusions under Rules 14a-8(i)(5), the “economic relevance” exception, and 14a-8(i)(7), the “ordinary business” exception. Notably, these rules were also the subject of SLB 14I. More specifically, the new SLB provides guidance with regard to the following:

  • the nature of the board analysis the staff would find most “helpful” in evaluating a no-action request to exclude a shareholder proposal,
  • “micromanagement” as a basis for exclusion under Rule 14a-8(i)(7) and
  • the application of Rule 14a-8(i)(7) to exclude proposals related to senior executive and/or director compensation matters.


Audit Process, Private Information, and Insider Trading

Daniel Taylor is Associate Professor at the Wharton School of the University of Pennsylvania. This post is based on a recent paper authored by Professor Taylor; Salman Arif, Assistant Professor at the Indiana University Kelley School of Business; John Kepler is a Ph.D. Candidate in Accounting at the Wharton School of the University of Pennsylvania; and Joe Schroeder, Assistant Professor at the Indiana University Kelley School of Business. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Our paper examines insider trading in conjunction with the audit process. Audit reports—and the requirement that public companies file audited financial statements—are a cornerstone of modern financial reporting. While it is generally accepted that financial statement audits mitigate agency conflicts, managers and directors (hereafter “corporate insiders”) are typically aware of the contents of the audit report well in advance of the general public. Thus, although a key purpose of financial statement audits is to protect shareholders, an unintended consequence of the audit process is that it endows corporate insiders with a temporary information advantage. In this study, we examine whether corporate insiders exploit this advantage for personal gain and trade based on private information about audit findings.


Lessons Learned from the CBS-NAI Dispute, Part VI: Board Access to Privileged Communications with Company Counsel

Victor L. Hou is partner, Rahul Mukhi is counsel, and Jessica Thompson is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

As described in a prior post, on May 14, 2018, certain members of the CBS board filed suit in Delaware seeking authorization to issue a special dividend intended to dilute the voting control of NAI, CBS’s controlling stockholder. [1] The majority of the CBS board (other than three directors with ties to NAI) subsequently considered and purported to approve a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting NAI’s voting interest in CBS, with the payment of such dividend conditioned on Delaware court approval.


The Untenable Case for Keeping Investors in the Dark

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance, Harvard Law School; Robert J. Jackson Jr. is Commissioner of the U.S. Securities and Exchange Commission, and Professor of Law (on leave for public service) at New York University School of Law; James Nelson is Assistant Professor, the University of Houston Law Center; and Roberto Tallarita is Associate Director and Research Fellow at the Harvard Law School Program on Corporate Governance. This post is based on their recent paper.
Commissioner Jackson completed his work on this paper prior to joining the Commission in January 2018. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any publication or statement by any of its members or employees, and the views expressed herein thus do not necessarily reflect the views of the Commissioners, the Commission or its staff.
Related research from the Program on Corporate Governance and its Research Project on Corporate Political Spending includes Corporate Political Speech: Who Decides? by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here); Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson (discussed on the Forum here); Citizens United as Bad Corporate Law by Jonathan R. Macey and Leo E. Strine, Jr. (discussed on the Forum here); and Corporate Politics, Governance, and Value Before and after Citizens United by John C. Coates.

The 2018 midterm elections with their record spending are over, but political spending by public companies remains under investors’ radar. In a paper recently placed on SSRN, The Untenable Case for Keeping Investors in the Dark, we seek to contribute to the heated debate on the disclosure of political spending by public companies.

We show that the case for keeping political spending under the radar of investors is untenable. The case for SEC adoption of disclosure rules, we demonstrate, is compelling.

A rulemaking petition urging SEC rules requiring such disclosure has attracted over 1.2 million comments since its submission seven years ago, but the SEC has not yet made a decision on the petition. (Full disclosure: The committee of ten corporate and securities law professors that submitted the rulemaking petition was co-chaired by two of us.) The petition has sparked a debate among academics, members of the investor and issuer communities, current and former SEC commissioners, and members of Congress. In the course of this debate, opponents of mandatory disclosure have put forward a wide range of objections to such SEC mandates. Our paper provides a comprehensive and detailed analysis of these objections, and it shows that they fail to support an opposition to transparency in this area.

Among other things, we examine claims that disclosure of political spending would be counterproductive or at least unnecessary; that any beneficial provision of information would best be provided through voluntary disclosures of companies; and that the adoption of a disclosure rule by the SEC would violate the First Amendment or at least be institutionally inappropriate. We demonstrate that all of these objections do not provide, either individually or collectively, a good basis for opposing a disclosure rule.

Below is a more detailed account of the analysis in our paper:


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