Monthly Archives: January 2019

Shareholder Resolutions and IPOs

Jonas Kron is Senior Vice President and Director of Shareholder Advocacy at Trillium Asset Management, LLC. This post is based on a Trillium memorandum by Mr. Kron.

One of Jay Clayton’s primary objectives as Chairman of the U.S. Securities and Exchange Commission (SEC) is to ensure that every day retail investors—“Mr. and Mrs. 401K”—as he often refers to them, are able to invest in young, innovative companies through the public markets. He, along with his appointed Director of Corporation Finance, Bill Hinman, laments the sharp decline in initial public offerings (IPOs) over the last several decades, and point to that trend as evidence of a lack of opportunities for everyday investors to benefit from investments in growth-stage companies.

As a result, Mr. Hinman and Chair Clayton have been examining how the SEC can help to encourage IPOs while still maintaining the proper oversight necessary to protect investors—both elements of the SEC’s multiple responsibilities.


Fiduciary Blind Spot: The Failure of Institutional Investors to Prevent the Illegitimate Use of Working Americans’ Savings for Corporate Political Spending

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent paperRelated research from the Program on Corporate Governance includes Conservative Collision Course?: The Tension between Conservative Corporate Law Theory and Citizens United by Leo E. Strine and Nicholas Walter (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson, Jr., James D. Nelson, and Roberto Tallarita (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).

For decades, American workers have been subjected to increasing pressure to become forced capitalists, in the sense that to provide for retirement for themselves, and to pay for college for their children, they must turn part of their income every month over to mutual funds who participate in 401(k) and 529 programs. These “Worker Investors” save for the long term, often hold portfolios that are a proxy for the entire economy, and depend on the economy’s ability to generate good jobs and sustainable growth in order for them to be able to have economic security. In recent years, there has been a heartening improvement in the self-awareness of the major mutual fund families—BlackRock, Vanguard, State Street, and Fidelity (the “Big 4”)—that have Worker Investors’ capital. This Big 4 has grown enormously because of the legal pressures that generate capital inflows to them every month from Worker Investors. To their credit, the Big 4 recognize that they have a duty to think and act in a way aligned with the interests of Worker Investors by encouraging the public companies in which they invest to implement business plans that will generate sound long-term growth. In fact, the Big 4 have recently recognized that unless public companies act in a manner that is environmentally, ethically, and legally responsible, they are unlikely to be successful in the long run. Thus, the Big 4 are more willing than ever to second-guess company management to fulfill their fiduciary duties.


REIT M&A in 2019

Adam O. Emmerich and Robin Panovka are partners and leaders of the REIT M&A practice at Wachtell Lipton Rosen & Katz. This post is based on a Wachtell Lipton memorandum authored by Mr. Emmerich, Mr. Panovka and colleagues at Wachtell Lipton.

As we enter the new year, we offer some thoughts based on hits and misses in 2018:

1Realistic Price Expectations are Key. REITs interested in exploring strategic alternatives—and there are more of these than casual observers might suspect—should be careful to set (and ensure that their internal records are consistent with) realistic price expectations. Slavish belief in internal or third-party NAVs is often a recipe for confusion and disappointment—in the real world, many favorable transactions that are in the best interests of shareholders fall below artificial NAV metrics. As we have long pointed out, the NAVs bandied about with great authority are often nothing more than rough estimates based on limited data, are usually backward looking, fail to take frictional costs into account, and in many cases do not reflect fundamental value. As Green Street recently pointed out, “managers and boards with an NAV-or-bust mindset do a disservice to shareholders.”


Weekly Roundup: December 28–January 3, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of December 28–January 3, 2018.

Fighting the Rising Tide of Federal Disclosure Suits

2019 Global & Regional Trends in Corporate Governance

The CFTC and Market Manipulation

Politics and Antitrust: Lessons from the Gilded Age

California Courts and Forum Selection Bylaws

Activism: The State of Play at Year-End 2018

Matters to Consider for the 2019 Annual Meeting and Reporting Season

Confronting the Problem of Fraud on the Board

Joel Friedlander is a partner at Friedlander & Gorris, P.A and Lecturer on Law at Harvard Law School. This post is based on Professor Friedlander’s recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Recent precedents make it difficult to challenge transactions approved by a board of directors and a stockholder majority. When should such cases be filed, proceed beyond the pleading stage, and prevail? My answer is that litigation rules should remedy and deter tortious misconduct that corrupts board decision-making. Commission of fraud on the board is an omnipresent temptation for self-interested controllers, activist stockholders, officers, financial advisors, and their legal counsel. Fraud can be used to put a company in play, steer a sale process toward a favored bidder, suppress the sale price to a controller, or make a favored bid look more attractive. Successful stockholder actions in recent decades can be reinterpreted as occasions when courts made tentative or final determinations that a board decision was corrupted by fraud or related tortious misconduct. Going forward, problematic legal rules bearing on fraud on the board need to be confronted. Stockholder plaintiffs should be permitted to inspect contemporaneously created electronic books and records to test whether the publicly disclosed narrative of a sale process conceals undisclosed fraud on a board. A non-fiduciary’s corruption of a board’s decision-making processes should be considered a free-standing tort, without the need to establish that duped fiduciaries breached their fiduciary duties. Recognizing a tort of fraud on the board would be consistent with tort principles and a sound stockholder litigation regime.


Matters to Consider for the 2019 Annual Meeting and Reporting Season

Brian Breheny and Joseph Yaffe are partners and Caroline Kim is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum Mr. Breheny, Mr. Yaffe, Ms. Kim, Hagen GanemAndrew Brady and Josh LaGrange.

Companies have important decisions to make as they prepare for the 2019 annual meeting and reporting season.

We have compiled the following overview of key corporate governance, executive compensation and disclosure matters on which we believe companies should focus as they plan for the upcoming season. As always, we welcome any questions you have on any of these topics or other areas related to annual meeting and reporting matters.

Comply With Updated SEC Filing Requirements

The U.S. Securities and Exchange Commission (SEC) has adopted new rules that companies should consider as they prepare year-end reports and other filings.


Activism: The State of Play at Year-End 2018

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

As we noted [in 2018], the threat of activism continues to be high, and has become a global phenomenon. The conclusion of a volatile and dynamic 2018 prompts a brief update of the state of play.

  • Activist assets under management remain at elevated levels, encouraging continued attacks on large successful companies in the U.S. and abroad. In many cases, activists have been taking advantage of recent stock market declines to achieve attractive entry points for new positions. These trends have been highlighted in several recent media reports, including in The Wall Street Journal and Bloomberg.
  • While the robust M&A environment of much of 2018 has recently subsided, deal-related activism remains prevalent, with activists instigating deal activity, challenging announced transactions (e.g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.


California Courts and Forum Selection Bylaws

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Savitt, Mr. McLeod, and Ms. Reddy. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill.

[On December 21, 2018], the California Court of Appeal became the second appellate court outside of Delaware to recognize the enforceability of forum-selection bylaws adopted by Delaware corporations designating the Delaware Court of Chancery as the exclusive forum for the litigation of intracorporate and fiduciary disputes. Drulias v. 1st Century Bancshares, Inc., No. H045049 (Cal. Ct. App. 6th Dist. Dec. 21, 2018).

The appeal arose from Midland Financial’s acquisition of 1st Century Bancshares, a Delaware-chartered bank holding company. When 1st Century’s board approved the merger, it also adopted a bylaw establishing Delaware as “the sole and exclusive forum” for intracorporate disputes, including any action asserting a claim for breach of fiduciary duty. A 1st Century stockholder sued, alleging that the board had breached its duties in approving the merger and that the company’s financial advisor had aided and abetted the breach.


Politics and Antitrust: Lessons from the Gilded Age

Richard B. Baker is Assistant Professor of Economics at The College of New Jersey; Carola Frydman is Professor of Finance at the Kellogg School of Management at Northwestern University; and Eric Hilt is Professor of Economics at Wellesley College. This post is based on their recent paper.

Recent years have witnessed a resurgence of interest in antitrust. In response to the perception that antitrust enforcement has become ineffectual, some commentators have argued that existing statutes may no longer offer regulators adequate tools for policing anticompetitive behavior. Yet the Department of Justice and Federal Trade Commission hold considerable discretion over how they choose to enforce the law. If modern antitrust is too weak, its weakness may originate in the content of our laws, or alternatively in the approach taken to enforcing those laws. It is not clear whether different leadership at America’s antitrust authorities would have produced different outcomes.


SEC Cyber Briefing: Regulatory Expectations for 2019

Craig A. Newman is a partner at Patterson Belknap Webb & Tyler LLP. This post is based on a Patterson Belknap memorandum by Mr. Newman.

Cybersecurity has played an important role in the U.S. Securities and Exchange Commission’s regulatory agenda during the past year.

And it’s likely to become even more important in 2019.

During 2018, the SEC has made significant moves on three fronts: issuing long-awaited guidance concerning cybersecurity disclosure issues for public companies; commencing enforcement actions against several companies for cyber-related ball drops; and finally, issuing an investigatory report about internal control failures relating to cyber or “business compromise” email fraud, which resulted in $100 million in losses.

We’ll look at each of these developments and the way they will likely influence the SEC’s regulatory and enforcement agenda in the coming year.


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