Monthly Archives: November 2018

Glass Lewis’ Shareholder Initiative Guidelines

Courteney Keatinge is Director of Environmental, Social & Governance Research at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Ms. Keatinge.

Shareholders are playing an increasingly important role at many companies by engaging in meetings and discussions with the board and management. When this engagement is unsuccessful, shareholders may submit their own proposals at the companies’ annual meetings. While shareholder resolutions are relatively common in some countries like the United States, Japan and Canada, in other markets shareholder proposals are rare. Additionally, securities regulations in nearly all countries define and limit the nature and type of allowable shareholder proposals including submission ownership thresholds. For example, in the United States, shareholders need only own 1% or $2,000 of a company’s shares to submit a proposal for inclusion on a company’s ballot. However, American issuers are able to exclude shareholder proposals for many defined reasons, such as when the proposal relates to a company’s ordinary business operations. In other countries such as Japan, however, shareholder proposals are not bound by such content restrictions. Additionally, whereas in the U.S. and Canada the vast majority of shareholder proposals are precatory (i.e. requesting an action), such proposals are binding in most other countries. Binding votes in the U.S. are most often presented in the form of a bylaw amendment, thereby incorporating the proponent’s “ask” in the company’s governing documents.


Emerging Practice in Long-Term Plans

Brian Tomlinson is Research Director of the Strategic Investor Initiative at CECP. This post is based on a CECP memorandum by Mr. Tomlinson. 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).

Executive Summary

The information asymmetry between corporations and investors is particularly severe regarding long-term strategic plans: existing market infrastructure for disclosure is very short-term focused and underserves sources of long-term value creation. The CEO-delivered long-term plan gives corporations an opportunity to reorient disclosures to the long-term. The Strategic Investor Initiative provides comprehensive guidance to CEOs and their Investor Relations teams on the key components of a long-term plan—set out in our Investor Letter to CEOs.

Through feedback from institutional investors we have identified content elements essential to an effective investor-facing CEO-delivered long-term plan:


Weekly Roundup: November 2-8, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 1–8, 2018.

Clarifying MFW’s ab initio Condition

The DOJ’s New Corporate Monitor Policy

Do Insiders Time Management Buyouts and Freezeouts to Buy Undervalued Targets?

Cyber-Fraud Controls and the SEC

The Duty of Activist Investors in Negotiating Mergers

Are Proxy Advisors Really a Problem?

The Future of the Corporation

Mandating Women on Boards: Evidence from the United States

Mandating Women on Boards: Evidence from the United States

Sunwoo Hwang is a PhD candidate at the University of North Carolina Kenan-Flagler Business School; Anil Shivdasani is the Wells Fargo Distinguished Professor of Finance at the University of North Carolina Kenan-Flagler Business School; and Elena Simintzi is Assistant Professor of Finance at the University of North Carolina Kenan-Flagler Business School. This post is based on their recent paper.

On September 30, 2018, California enacted Senate Bill 826 mandating that all publicly-traded companies headquartered in the state to have at least one female director by the end of 2019. The law further requires that by year-end 2021, all firms have at least one female director if the board has four members or fewer, two female directors if the board has five members, and three female directors if the board has six members or more. With the passage of this law, California has become the first state in the United States to mandate female directors on boards of publicly held firms. Not surprisingly, the law has generated substantial debate with proponents praising efforts towards balanced gender representation. Opponents have raised concerns over appointments of less qualified female board members and discrimination against male candidates.


Synutra—A Practical Application of MFW or a Free Look for Controlling Stockholders?

William Lawlor is partner and Michael Darby is an associate at Dechert LLP. This post is based on their Dechert memorandum 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); 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 the recent decision of Flood v. Synutra International, Inc., [1] a divided Delaware Supreme Court affirmed the Court of Chancery’s dismissal of a challenge to a controlling stockholder’s take-private transaction. The Court in an opinion by Chief Justice Strine held, among other things, [2] that the deferential business judgment review applied to the merger because the controlling stockholder had timely satisfied the dual requirements of Kahn v. M&F Worldwide Corp. [3] (“MFW”) in proposing those requirements in the initial stages of the process but after submitting its initial proposal letter.

The plaintiff challenged the application of MFW on the grounds that the controlling stockholder had failed to satisfy MFW’s “ab initio” requirement that the merger be conditioned on MFW’s dual requirements upfront. The controlling stockholder had submitted an initial written proposal to the target board and attached the proposal as an exhibit to its Schedule 13D filing. That initial proposal did not condition the merger on MFW’s dual requirements, but a follow-up proposal two weeks later did. Nevertheless, in rejecting the plaintiff’s argument for the “brightest of lines”—the initial offer—the Court held that the follow-up proposal was sufficient because the MFW conditions were in place before any “economic horse trading” had begun.


The Future of the Corporation

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum authored by Mr. Lipton.

A project of the British Academy—“The Future of the Corporation” reached a major milestone on November 1, 2018 with the public discussion of a framework and supporting papers. The project is led by Oxford Prof. Colin Mayer.

In his framework, Prof. Mayer puts forth a radical reinterpretation of the nature of the corporation that focuses on the corporate purpose, its alignment with social purpose, the trustworthiness of companies and the role of corporate culture in promoting purpose and trust. This view of the corporation rejects shareholder primacy—that the sole social purpose of the business corporation is to maximize shareholder wealth.


Are Proxy Advisors Really a Problem?

Frank M. Placenti is partner at Squire Patton Boggs (US) LLC. This post is based on a recent paper by Mr. Placenti that was commissioned by the American Council for Capital Formation.

Proxy advisory firms have been a feature of the corporate landscape for over 30 years. Throughout that time, their influence has increased, as has the controversy surrounding their role.

In Blackrock’s July 2018 report on the Investment Stewardship Ecosystem, [1] the country’s largest asset manager noted that, while it expends significant resources [2] evaluating both management and shareholder proposals, many other investor managers instead rely “heavily” on the recommendations of proxy advisors to determine their votes, and that proxy advisors can have “significant influence over the outcome of both management and shareholder proposals.”


Board Evaluation: International Practice

Mark Fenwick is a Professor at Kyushu University Graduate School of Law and Erik P. M. Vermeulen is Professor of Business & Financial Law at Tilburg University. This post is based on a recent paper by Professor Fenwick and Professor Vermeulen.

Although there is a broad consensus that we need “better corporate governance,” there is often less agreement as to what this actually means or how we might achieve it. Such uncertainties are hardly surprising. Contemporary corporate governance frameworks were significantly re-worked in the 2000s in response to a series of high-profile scandals. But these reforms appear to have had little effect on the performance of listed companies during the 2008 Financial Crisis. Moreover, the number, scale, and damage of corporate scandals and economic failures do not appear to be diminishing.

One possible reason for the poor performance of corporate governance measures has been an over-emphasis on the regulatory design of “checks-and-balances” in listed companies, rather than on the equally important question of how governance structures can add value to a firm. Our new paper, Evaluating the Board of Directors: International Practice, explores this latter issue, with particular reference to the role of boards and board evaluation.


The Duty of Activist Investors in Negotiating Mergers

Meredith E. Kotler, Roger A. Cooper, and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Kotler, Mr. Cooper, Mr. McDonald, and Kal Blassberger, 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 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).

On October 16, the Delaware Court of Chancery found an activist investor aided and abetted a target board’s breaches of fiduciary duty, most significantly by concealing from the target board (and from the stockholders who were asked to tender into the transaction) material facts bearing on a potential conflict of interest between the activist investor and the target’s remaining stockholders. See In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018). This decision serves as a reminder of the importance of full disclosure of material facts in cases involving potential conflicts (and not just of the potential conflicts themselves, but also of the ways in which such potential conflicts manifest themselves)—both at the board level and at the stockholder level. As this decision also demonstrates, in addition to the more familiar allegations of financial advisor conflicts, the court may find potential conflicts exist where an activist investor in the target with short-term interests that could be perceived to diverge from the interests of other stockholders is involved in merger negotiations.

Changes to the 2019 Glass Lewis Proxy Advice Guidelines

Kern McPherson is Vice President of Research and Engagement at Glass, Lewis & Co. This post is based on a Glass Lewis memorandum by Mr. McPherson.

Summary of Changes for the 2019 United States Policy Guidelines

Glass Lewis evaluates these guidelines on an ongoing basis and formally updates them on an annual basis. This year we’ve made noteworthy revisions in the following areas, which are summarized below but discussed in greater detail in the relevant section of the complete publication (available here):

Board Gender Diversity

Our policy regarding board gender diversity, announced in November 2017, will take effect for meetings held after January 1, 2019. Under the updated policy, Glass Lewis will generally recommend voting against the nominating committee chair of a board that has no female members. Depending on other factors, including the size of the company, the industry in which the company operates and the governance profile of the company, we may extend this recommendation to vote against other nominating committee members. Also, when making these voting recommendations, we will carefully review a company’s disclosure of its diversity considerations and may refrain from recommending shareholders vote against directors of companies outside the Russell 3000 index, or when boards have provided a sufficient rationale for not having any female board members. Such rationale may include, but is not limited to, a disclosed timetable for addressing the lack of diversity on the board, and any notable restrictions in place regarding the board’s composition, such as director nomination agreements with significant investors.


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