Monthly Archives: April 2019

2018 Year-End Activism Update

Richard Birns is partner and Daniel Alterbaum and William Koch are associates at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (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).

This post provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion during the second half of 2018. Shareholder activism underwent a modest decline in the second half of 2017, but accelerated again in the first half of 2018. A similar pattern emerged during the second half of 2018, with a modest decline relative to the second half of 2017 in the numbers of public activist actions (40 vs. 46), activist investors taking actions (29 vs. 36) and companies targeted by such actions (34 vs. 39). However, in light of the robustness of shareholder activism activity in the first half of 2018, full-year numbers for 2018 are virtually identical to those of 2017, including with respect to the numbers of public activist actions (98 vs. 98), activist investors taking actions (65 vs. 63) and companies targeted by such actions (82 vs. 82).


Lorenzo v. SEC: Expanded Scope of Securities Fraud Liability

Martin J. Crisp, David Hennes and R. Daniel O’Connor are partners at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum authored by Messrs. Crisp, Hennes, O’Connor, Gregg Weiner, Eva Carman, and Peter Welsh.

On March 27, 2019, the U.S. Supreme Court issued a 6-2 decision in Lorenzo v. SEC holding that an individual who is not a “maker” of a misstatement under Janus v. First Derivative Traders, 564 U.S. 135 (2011) can nonetheless be held primarily liable under Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder for knowingly “disseminating” a misstatement made by another person. As we previewed in our Alert following oral argument in Lorenzo, the Court’s decision potentially expands the ability of private plaintiffs to bring Section 10(b) claims against those who knowingly or recklessly transmit false and misleading statements that were made by someone else, and could meaningfully erode the limits on primary liability under Section 10(b) established by the Court in Janus and Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).


2019 Proposed Amendments to DGCL

John Mark Zeberkiewicz is a Director and Brigitte Fresco is Counsel at Richards, Layton & Finger, P.A. This post is based on their Richards, Layton & Finger memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Legislation proposing to amend the General Corporation Law of the State of Delaware (the “General Corporation Law”) has been released by the Corporate Council of the Corporation Law Section of the Delaware State Bar Association and, if approved by the Corporation Law Section, is expected to be introduced to the Delaware General Assembly. If enacted, the 2019 amendments to the General Corporation Law (the “2019 Amendments”) would, among other things, (i) add new provisions relating to the documentation of transactions and the execution and delivery of documents, including by electronic means, and make conforming changes to existing provisions; (ii) significantly revise the default provisions applicable to notices to stockholders under the General Corporation Law, the certificate of incorporation or the bylaws, including by providing that notices may be delivered by electronic mail, except to stockholders who expressly “opt out” of receiving notice by electronic mail; (iii) consistent with the foregoing, update the provisions governing notices of appraisal rights and demands for appraisal; (iv) update the procedures applicable to stockholder consents delivered by means of electronic transmission; (v) clarify the time at which a unanimous consent of directors in lieu of a meeting becomes effective; and (vi) make various other technical changes, including with respect to incorporator consents and the resignation of registered agents.


Regulators Join in Event-Driven Securities Litigation

Michael S. Flynn, James P. Rouhandeh, and Michael Kaplan are partners at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

In recent years, plaintiffs have increasingly filed securities litigation in response to reports of bad actions within companies. This phenomenon is known as “event-driven” securities litigation, with a claim generally based on the theory that the company must have known that it was committing bad acts and should have told its investors of the alleged misconduct. Commentators have pejoratively dubbed this the theory that “everything is securities fraud.”

On March 14, the Securities and Exchange Commission (“SEC”) joined this trend and filed suit against Volkswagen AG, alleging fraud in connection with offerings of the company’s corporate and collateralized debt.

The SEC’s civil suit against Volkswagen, two of its financing subsidiaries and its former CEO, Martin Winterkorn, was filed more than two years after Volkswagen admitted to criminal wrongdoing related to the use of software “defeat devices” to evade emissions tests of the company’s diesel vehicles. The SEC alleges that Volkswagen made false statements related to its compliance with environmental regulations and omitted information regarding its use of “defeat devices” in connection with corporate debt offerings in 2014 and 2015. The SEC also alleges fraud in relation to a Volkswagen subsidiary’s sponsorship during the same period of asset-backed securities (“ABS”) that included the company’s diesel vehicles as collateral. The SEC seeks injunctive relief, disgorgement, civil penalties and, in the case of Winterkorn, a bar from serving as an officer or director of a U.S. public company.


Noteworthy Developments in 2018 Affecting Executive Pay

Joseph Bachelder is special counsel at McCarter & English LLP. This post is based on a memorandum by Mr. Bachelder. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this post. Related research from the Program on Corporate Governance includes Stealth Compensation Via Retirement Benefits; the book Pay without Performance: The Unfulfilled Promise of Executive Compensation; and Executive Compensation as an Agency Problem, all by Lucian Bebchuk and Jesse Fried.

This post reports on tax and securities law developments in 2018 affecting executive compensation.

1. Tax Developments

Change in the Corporate Tax Rate.

Effective for taxable years beginning after Dec. 31, 2017, the ordinary income tax rate for corporations is 21 percent. This replaces the prior ordinary income tax rate structure for corporations that ranged from 15 percent to 35 percent. This change is contained in §13001 of the Tax Cuts and Jobs Act of 2017 (Public Law No. 115-97, 131 Stat. 2054 (Dec. 22, 2017)) (the 2017 Tax Act).

In consequence of this change, annual incentive plans based on an increase in a corporation’s 2018 earnings over 2017 earnings, if not already modified, may need to be modified. The same is true for long-term incentive plans that are based on a corporation’s change in earnings over a multi-year period that includes a year after 2017 over a base that includes a year, or a period of years, prior to 2018.

On Aug. 21, 2018, the IRS issued Notice 2018-68 providing initial guidance on amendments to Internal Revenue Code §162(m) by §13601 of the 2017 Tax Act (the IRS Guidance).


The Rise of Books and Records Demands Under Section 220 of the DGCL

Roger A. Cooper is partner and Vanessa C. Richardson, and Kimberly Black are associates 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.

In recent years, in part in response to decisions like Corwin that have raised the pleading standard for stockholder plaintiffs, the Delaware courts have encouraged stockholders to seek books and records under Section 220 of the Delaware General Corporation Law (DGCL) before filing stockholder derivative or post-merger damages suits, and—in response—each year more stockholders have done so. As a result of this trend, we have already seen several important decisions addressing books and records demands in 2019. These decisions have (i) clarified the types of documents that may be obtained, including (in some limited circumstances) personal emails or text messages; (ii) explained when a stockholder’s demand will be denied as impermissibly lawyer-driven (and when it will not be); and (iii) described the threshold showing of suspected wrongdoing that stockholders must make. As the plaintiffs’ bar makes more use of Section 220, these are important issues for boards of directors to consider.


Weekly Roundup: April 5–11, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 5–11, 2019.

Review and Analysis of 2018 U.S. Shareholder Activism

Merger Agreement Termination based on Plain Contract Language

Going for Gold: Global Board Culture and Director Behaviors Survey

Framework for “Investment Contract” Analysis of Digital Assets

Hedging Climate News

Profiles of Selected Shareholder Activists

Enhanced Scrutiny on the Buy-Side

The SEC “Through the Eyes of Management”

Encouraging Smaller Entrants to Our Capital Markets

Private Equity and Activism

The Perils of Pinterest’s Dual-Class Structure

SECret Garden: Remarks at SEC Speaks

The SEC v. Mark Cuban

The SEC v. Mark Cuban

Marc I. Steinberg is the Radford Professor of Law at Southern Methodist University Dedman School of Law. This post is based on his recently published book, The Securities and Exchange Commission v. Cuban—A Trial of Insider Trading.

In my recently published book, The Securities and Exchange Commission v. Cuban—A Trial of Insider Trading (Twelve Tables Press 2019) (ISBN 978-1-94607-4249), I focus on the Securities and Exchange Commission’s (SEC) enforcement action against Mark Cuban for allegedly engaging in illegal insider trading. This litigation was far from standard fare. Unlike the vast majority of SEC enforcement actions that are settled pursuant to the consent negotiation process whereby the respondent neither admits nor denies the Commission’s allegations of misconduct, Cuban declined to settle and proceeded to trial. After several years of contentious litigation where he spent $12 million in legal fees, Cuban was vindicated with a favorable jury verdict. The SEC’s case against Cuban raises questions focusing on the scope of this nation’s insider trading laws, the strategic litigation decisions made, the significant costs of defending one’s good reputation, and the proper limits of governmental prosecutorial discretion.

This book addresses many of the complexities of this litigation saga. As an experiential source, the book includes excerpts of pertinent documents from the SEC investigative stage through the entry of judgment. These documents—comprised of pleadings, motions, witness testimony, oral arguments, and jury instructions—are instructive. To add flair, the documents have greater interest due to the contentious nature of this litigation and the identity of the defendant: Mark Cuban, a well-known entrepreneur and investor whose ownership interests include the National Basketball Association’s (NBA) Dallas Mavericks. Mr. Cuban’s media persona includes being a principal investor on the reality television program Shark Tank and performing on Dancing with the Stars.


Executive Long-Term Incentive Plans

Joseph Kieffer is a Senior Research Analyst at Equilar Inc. This post is based on an Equilar memorandum by Mr. Kieffer, Alex Knowlton, Amit Batish, Brianna Ang, Leah Wright and Charlie Pontrelli. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here) and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

The optimization of pay structures for executives and upper-level management has played a prevalent role in the duties of compensation committees in recent years. From the restructuring of the compensation portion of the proxy statement to the introduction of Say on Pay and everything in- between, checks and balances regarding compensation have come in waves,

and shareholders have increasingly held boards more accountable because of it. As a result, board members—and specifically compensation committee members—have had to walk a thin line between attracting talent and overpaying executives, and the most effective strategy to achieve that has been basing rewards on company performance and the creation of shareholder value.

Designing an effective long-term incentive plan (LTIP) can be very difficult, as boards must be aware of the potentially high costs that come with an over- zealous LTI design. Similarly, boards must be privy to the gains associated with an effective plan, both for shareholders and the executives themselves. Consequently, compensation committees must work diligently to determine multiple factors in an LTI plan. Committees must select the correct metric(s) on which to base performance, the weighting of that metric compared to total performance, set the targets, thresholds and maximums for each award and lastly measure these goals to appropriate payouts.


SECret Garden: Remarks at SEC Speaks

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at SEC Speaks 2019, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I would like to begin with the standard disclaimer plus an additional one that ties with the theme of this speech. The views I represent are my own and not necessarily those of the Commission or my fellow Commissioners. The supplemental disclaimer is that the views of the staff are not necessarily those of the Commission either.

My cousin recently reminded me of a well-known children’s book, The Secret Garden by Frances Hodgson Burnett. The book tells the story of a troubled, young girl who finds herself living with her widowed uncle and troubled cousin on an estate in the wind-swept British moors. The estate has a number of gardens, but one of them has been sealed shut for ten years. The garden is walled and any sign of the erstwhile door is obscured. Even speaking of the garden seems to be frowned upon. Without giving too much of the story away, the girl manages to find the garden door and its buried key. She shares the secret with her cousin and a friend with a green-thumb, and the garden flourishes under its new caretakers, who in turn flourish. By reminding me of this story, my cousin got me thinking about the secret gardens at the SEC, gardens that have been sealed up longer and that are not as rosy or good for the health as the one in the classic story. These gardens are the topic about which I would like to speak today.


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