Monthly Archives: February 2019

Text Messages and Personal Emails in Corporate Litigation

Daniel Wolf and Matthew Solum are partners at Kirkland & Ellis LLP. The following post is based on their Kirkland memorandum and is part of the Delaware law series; links to other posts in the series are available here.

A number of recent Delaware decisions highlight the potential risk to directors, officers and bankers of using text messaging or personal email accounts to communicate about corporate matters on the assumption that those communications will remain private in the event of subsequent M&A or other corporate litigation. In some recent high-profile cases (including litigation relating to Facebook, Uber, Xerox, Aruba Networks and Viacom) precisely these types of messages among directors, officers and bankers have featured prominently, resulting in negative attention and potential adverse impact on the outcome of the litigation.


Corporate Bankruptcy and Restructuring 2018-2019

Joshua A. Feltman and Emil A. Kleinhaus are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

The last year saw two competing narratives in the world of corporate bankruptcy and restructuring. On the one hand, overall default rates in the U.S. remained relatively low, against the backdrop of a strong U.S. economy and (for most of the year) robust credit markets. But at the same time, the U.S. retail sector faced significant distress, as a series of major retailers were forced into chapter 11 and/or liquidation. And as 2018 progressed, broader signs of stress also began to emerge. As discussed in our recent memo, Acquisition Financing Year in Review: From Break-Neck to Brakes-On, debt issuance declined sharply in the fourth quarter, and the prices of high-yield bonds came under heavy pressure.


The Method of Production of Long-Term Plans

Brian Tomlinson is Research Director at CECP and Mike Krzus is a Senior Advisor at BrownFlynn. This post is based on their CECP memorandum. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Method of Production of Long-Term Plans: Key Learning Points

CEO Motivation for Delivering a Long-Term Plan: Context for Preparing a Long-Term Plan: Organizational Process Themes from Long-Term Plan Development:
Frustration with short-term-focused market infrastructure: corporations interested in rebalancing communications towards the long term and setting out their sustainable value story. Investor voice, guidance, and pressure: mutual fund manager letters to CEOs, bilateral engagements, and the shareholder resolution process had elevated focus on sustainability and corporate governance themes.
  • Cross-team collaboration
  • Developing a shared
    understanding of materiality
  • Un-siloing environmental, social,
    and governance (ESG)
  • Identifying key metrics
  • Building beyond the Investor Day or Conference Presentation Investor Relations deck
  • Use of consultants
Extension of existing initiatives: amplification of efforts to expand the range and quality of disclosures and respond to investor demand. Strategic Investor Initiative (SII) briefings to CEO teams: the pre-event consulting and post-event feedback SII provides had facilitated long-term plan development.
CEO leadership: CEOs want to demonstrate leadership on an issue of importance to investors and corporate stakeholders. Board involvement: reflecting expanded governance plan process and governance expectations, boards had often been involved in the long-term arrangements were adjusting to account for long-term and sustainability priorities. Long-Term Plan—Potential Frequency:

  • Annual
  • Biennial or every 18 months
  • Strategic plan
  • Event triggered

Project Rationale: Understanding How Corporations Think about the Long-Term

Our work on this project seeks to understand and compare the different methods by which corporations have developed the long-term plans delivered at CEO Investor Forums.

Through this project we have developed insights into how organizational process, cross-team collaborations, available data, disclosure practice, and investor guidance influence the content of a long-term plan. This work forms the basis of decision-making guidance for corporations seeking to deliver a long-term strategic plan to investors.


Practical Lessons in Boardroom Leadership

Joseph Mandato is a Managing Director at DeNovo Ventures and William Devine leads the Corporation in Society practice at William Devine Esquire. This post was authored by Mr. Mandato and Mr. Devine.

The board at Tesla, Inc. appointed a new chairperson last month, naming the chief financial officer of Australia’s largest telecommunications company to replace a Tesla co-founder. The board also added two independent directors: an executive vice-president from Walgreens Boots Alliance, Inc., the nation’s 19th-largest company, and Oracle Corporation’s chair and chief technology officer, who doubles as the world’s 10th-richest man.

Will these high-profile additions enable the board to lead Tesla to a new level of zero-emission success? Probably not all by themselves. Especially now, when the growing conflict between demands from investors, regulators, and society adds multiple degrees of difficulty to the work of leading a company, while consuming significant management capacity. The effectiveness of Tesla’s board, like that of your board, will more likely turn not on director star power, witness Theranos, but rather on strength of board culture.


Board Diversity by U.S. Region

Brianna Ang is a Research Analyst at Equilar, Inc. This post is based on her Equilar memorandum.

Under SB-826, California became the first state to pass legislation to require that publicly traded companies have at least one woman on their board. Specifically, companies in California will need to achieve this by 2019. Starting in 2021, the required number of women on boards will increase based on the overall size of the board. For example, if a board has five directors, two of them must be women, and if it has six or more directors, three of them must be women. Companies that fail to recruit the requisite number of women will face a $100,000 fine for the first violation, and $300,000 for each subsequent violation. Women only make up 17.2% of directors on California boards. California only has an average of 1.49 female directors per Russell 3000 board, meaning that the average company in California will have to add at least one more female director by 2021.


Books and Records Access for Terminated Directors

Gail Weinstein is senior counsel and Brian T. Mangino and Randi Lally are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Mangino, Ms. Lally, Maxwell YimDavid L. Shaw, and Andrea Gede-Lange, 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).

In Schnatter v. Papa John’s (Jan. 15, 2019), the Delaware Court of Chancery ruled that a director had the right, under DGCL Section 220, to inspect the corporate books and records that related to the board’s determination to seek to sever ties with him. The board of Papa John’s International, Inc. (the “Company”) had terminated contractual arrangements with the director (“JS”) and sought his resignation based on his allegedly offensive misconduct involving the use of racial slurs. JS was the founder, largest stockholder, and longtime “public face” of the Company. JS’s stated purpose for his Section 220 demand was to determine whether, in severing ties with him, the directors had breached their fiduciary duties to act in the best interests of the stockholders. According to JS, the board’s actions had a significant negative impact on the Company and were undertaken without the board having interviewed him or investigated his conduct. The court ruled that JS was entitled to the access he sought.


Weekly Roundup: February 8-14, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of February 8-14, 2019.

Remarks to SEC Investor Advisory Committee

Good Faith, Fair Dealing, and Exit Provisions

Industry as Peer Group Criterion


Saying So Long to State Court Securities Litigation

As Luck Would Have It: Executive Compensation at Energy Companies

Corporate Sustainability: A Strategy?

The Road Ahead for Shareholder Activism

Is There a First-Drafter Advantage in M&A?

Public Letter following SEC Proxy Process Roundtable

Guidance on Books-and-Records Inspection Rights

Firms’ Innovation Strategy under the Shadow of Analyst Coverage

Capitalism at an Inflection Point

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 by Mr. Lipton.

Dissatisfaction with corporations is near the top of the political agenda for both the left and for the right.

The Accountable Capitalism Act, a bill that would make all corporations with $1 billion or more of annual revenue subject to a federal corporate governance regime (by requiring them to be chartered as a United States corporation), was introduced this past August by Senator Elizabeth Warren. Among other things, this regime would mandate that not less than 40% of the directors of a United States corporation be elected by employees, and that directors must consider the interests of all corporate stakeholders—including employees, customers, suppliers, investors, and the communities in which the corporation operates.


A Touch of Class: Investors Can Take or Leave Classified Boards

Nick Dawson is Co-Founder and Managing Director of Proxy Insight. This post is based on a Proxy Insight memorandum by Mr. Dawson. Related research from the Program on Corporate Governance includes The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy by Lucian Bebchuk, Charles C. Coates, and Guhan Subramanian; The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen; and Reexamining Staggered Boards and Shareholder Value by Alma Cohen and Charles C. Y. Wang (discussed on the Forum here).

Classified or staggered boards may be the norm in some markets, but they are generally not seen as part of corporate governance best practice. In the US, in particular, the tide of opinion is turning against them. Their opponents argue that, by only putting a part of the board up for re-election each year, they serve to entrench management, make it harder to replace underperforming directors and insulate board members from the consequences of poor conduct.

Many asset managers state in their voting policies that they will support the declassification of boards and oppose proposals to classify them. In practice, however, it seems that the larger part of investors will be happy either way.


Firms’ Innovation Strategy under the Shadow of Analyst Coverage

Bing Guo is Associate Professor of Accounting at Universidad Carlos III de Madrid; David Pérez‐Castrillo is Professor of Economics at Autonomous University of Barcelona; and Anna Toldra‐Simats is Associate Professor of Finance at Universidad Carlos III de Madrid. This post is based on their recent article, forthcoming in the Journal of Financial Economics.

Long-term growth in profits depends significantly on firms’ investment in innovation activities. However, firms may not invest in innovation in an optimal way. Some distortions arise because the decisions as to whether and how to invest in innovation are not only affected by their long-term expected benefits but also by other considerations. Among the factors that can distort firms’ incentives to innovate, the recent literature has highlighted the recommendations or reports issued by financial analysts.

There are two distinct effects through which analyst coverage influences firms’ innovation activity. On the one hand, there is an information effect. Analysts collect firms’ information and provide it to the investors, for instance, by writing reports about company activities. As a result, they reduce the information asymmetries and decrease the possibility of market undervaluation of the investments in innovation, which increase a CEO’s incentives to innovate. On the other hand, there is a pressure effect. Analysts discipline managers’ behavior through issuing periodic earnings forecasts. Missing the earnings forecasts is usually punished by investors. However, since investments in innovation do not usually generate short-term income, managers have an incentive to cut expenditures in innovation when they have the pressure to meet analysts’ earnings targets.


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