Monthly Archives: July 2019

The Development of Statutes for Ratification and Validation of Defective Corporate Acts

Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post was prepared with the assistance and insights of Amy Simmerman, Ryan Greecher, James Griffin-Stanco, and Brian Currie. This post is part of the Delaware law series; links to other posts in the series are available here.

Over the past five years, a growing number of states have adopted statutes authorizing ratification and validation of void or voidable corporate acts. These statutes have become important tools for the corporate technician and corporations pursuing financing, significant transactions, and greater certainty in the capital structure. Delaware provided the first model for ratification and validation statutes, and two other statutory models have since been promulgated by Nevada and the American Bar Association, with other states largely conforming to one of those models. The differences in legislative choices for these statutes are noteworthy for practitioners and states considering adoption of their own version of a ratification and validation statutory scheme. This post is not a comprehensive overview of any statute but rather a comparison of key elements of analogous statutes adopted in several jurisdictions, including the background, provisions, and application of these statutes.

Background of Ratification and Validation Statutes

In 2013, the Delaware General Assembly amended the Delaware General Corporation Law (the “DGCL”) to include new Sections 204 and 205 (together, the “Delaware Statutes”) which permit a Delaware corporation to restore certainty to the corporate foundation and capital structure as they were understood to have already existed. Section 204 provides for self-help in the form of corporate ratification, while Section 205 provides for judicial recourse, particularly when the corporation cannot take advantage of Section 204 or Section 204 is alleged to have been improperly used. Under the Delaware Statutes, corporate acts and shares of stock may be ratified, while certificates filed (or that should have been filed) with the Office of the Secretary of State (the “Delaware State Office”) may be validated.


Building a Sustainable and Competitive Economy: An Examination of Proposals to Improve Environmental, Social, and Governance Disclosures

Timothy J. Mohin is Chief Executive of the Global Reporting Initiative. This post is based on his testimony before the United States House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship and Capital Markets.

I thank the Subcommittee for inviting me to appear at today’s hearing. This Subcommittee has an integral role in ensuring that financial markets, international trade, and banking remain stable and strong for all Americans, and the policy being considered today is a crucial part of that mission.

I have had the pleasure of serving as Chief Executive for the Global Reporting Initiative (GRI) since 2017. Prior to this role, I served in senior roles for major U.S. companies, including Intel, Apple and AMD. I also have experience working in the Executive and Legislative branches of the Federal government. So, I speak on this issue not only as head of the world’s most widely used standards for non-financial reporting, but also as an individual who understands the complexities and pressures faced by reporting companies as well as the importance of Federal policy.


2019 Proxy Season Takeaways

Erica Lukoski is a Managing Director and Chief Operating Officer, Allie Rutherford is a Managing Director, and Eric Sumberg is a Director at PJT Camberview. This post is based on a PJT Camberview memorandum by Ms. Lukoski, Ms. Rutherford, Mr. Sumberg, Christopher Wightman, and Rob Zivnuska. Related research from the Program on Corporate Governance includes  Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Proxy season has come to a close and companies are beginning to prepare for a new cycle of engagement in the off-season. Here are the topics that drove vote outcomes this spring that will infuse investor conversations this fall.

New Overboarding Policies and Lower Support Levels for Directors

In a sign of growing investor assertiveness, significant opposition to directors of Russell 3000 companies this year increased to its highest level since 2011 despite a year-over-year decrease in negative proxy advisor recommendations, according to a June ISS Analytics report. A contributor to this decline was new or stricter overboarding policies put in place by leading institutional investors such as Vanguard, BlackRock and Boston Partners. Active public company executives sitting on more than two boards were particularly hard hit, and a number of directors saw their support drop 25 or more percentage points on a year-over-year basis.


Remarks to the SEC Investor Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the SEC Investor Advisory Committee, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Anne [Sheehan]. Good morning everyone, and I want to extend a special welcome to our new commissioner, Allison Lee.

I am interested in today’s discussion. I understand the Committee first will be talking about the SEC approach to regulation in areas where competition may be limited. Competition is important to the functioning of our capital markets and, over the years, some of the Commission’s most effective actions have fostered competition.

Personally, I often think of the work of the Commission under Chairman Levitt, where the elimination of opacity in our trading markets fostered competition which, in turn, brought down transactions costs for both institutional and Main Street investors and enhanced price discovery and other market functions. [1]


Recent Ruling on Advance Notice Bylaws

Trevor S. Norwitz and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton 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 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).

A recent decision of the Delaware Court of Chancery provides a valuable reminder both of the validity and efficacy of advance notice bylaws, and of the importance of ensuring that they are carefully crafted and judiciously applied in a contested election.

In its ruling, which the companies have appealed, the Court held that two closed-end funds “went too far” in disqualifying board candidates proposed by an activist hedge fund based on its failure to respond to a lengthy supplemental questionnaire within the five-business day deadline stipulated in the funds’ bylaws. (The hedge fund submitted the completed questionnaires “shortly after” this deadline and receiving a notice of disqualification.) Based on a close reading of the bylaws and fact-specific circumstances, and reminding that the bylaws “constitute part of a binding broader contract among the directors, officers and stockholders” and that “[i]f charter or bylaw provisions are unclear, we resolve any doubt in favor of the stockholder’s electoral rights,” the Court overruled the disqualification and allowed the activist hedge fund to run its candidates.


2019 Proxy Season Review: Part 1—Rule 14a-8 Shareholder Proposals

Marc Treviño is a partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Treviño, Melissa Sawyer, H. Rodgin Cohen, and June Hu.

A. Overview of Shareholder Proposals

The following table and pie charts summarize, by general category, the Rule 14a-8 shareholder proposals submitted in 2018 full-year and 2019 year-to-date, the number voted on and the rate at which they passed. Overall, the total number of shareholder proposals significantly declined, continuing a downward trend from 2015. A total of 678 shareholder proposals have been submitted to-date in 2019, relative to 751 at this time last year, 788 for 2018 as a whole and 836 for 2017. The decline relative to this time last year is led by a 12.5% drop in environmental, social, and political (“ESP”) proposals, closely followed by compensation-related proposals (11.9% drop), with governance-related proposals declining by a smaller proportion (6.2% drop). The overall decline would have been steeper but for the increase in proposals against investing or managing on the basis of ESP factors (so-called anti-ESP proposals).


Weekly Roundup: July 19-25, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 19-25, 2019.

Defining Corwin’s Limits

Comment Letter Regarding Earnings Releases and Quarterly Reports

Statement on Short-Term/Long-Term Management & Periodic Reporting System

The Bad Actor Disqualification Act and Expected Impact on SEC Settlements

Rulemaking Petition on More Restrictive SEC Buyback Rules

Individual Director Assessments

Violation of DGCL Section 203 and Stockholder Enforcement Rights

A Banner Proxy Season for Political Disclosure and Accountability

First Successful Use of a Universal Proxy Card for a Control Slate in the United States

How Much Do Directors Influence Firm Value?

Under Pressure: Directors in an Era of Shareholder Primacy

The Importance of Climate Risks for Institutional Investors

A Look inside H.R. 2534: Insider Trading Prohibition Act

The Future of Shareholder Activism

Amendments to the Accelerated Filer and Large Filer Definitions

Daniel Taylor is Associate Professor of Accounting at The Wharton School at the University of Pennsylvania. This post is based on a comment letter to the SEC’s Amendments to the SOX 404(b) Accelerated Filer Definition from Professor Taylor; Mary Barth, the Joan E. Horngren Professor of Accounting, Emerita at the Stanford University Graduate School of Business; Wayne Landsman, the KPMG Distinguished Professor of Accounting at the Kenan-Flagler Intranet at the University of North Carolina; and Joe Schroeder, Associate Professor at the Indiana University Kelley School of Business.

We appreciate the opportunity to comment on the Securities and Exchange Commission’s (the “Commission”) proposed Amendments to the Accelerated Filer and Large Accelerated Filer Definitions. Herein we provide comments and analysis relating primarily to the Request for Comments in Sections II.E and III.D of the proposed Amendments (“Proposal”). Our comments relate to the provisions of the Proposal that would eliminate internal control audits required under Section 404(b) of the Sarbanes-Oxley Act for companies with annual revenue less than $100 million.

Part I of this letter provides comment on the central premise of the Proposal. The Commission’s total estimated benefit to companies—$210,000 in cost savings from foregoing internal control audits—is economically small and amounts to less than 0.1% of the average affected company’s equity market value. In contrast, we interpret the evidence in the Proposal as suggesting that the elimination of internal control audits is likely to result in significantly weaker internal controls over the financial reporting system and significantly greater levels of accounting restatements (i.e., poorer financial reporting quality). Thus, the $210,000 cost savings needs to be weighed against the potentially large social costs created by weaker internal controls and elevated levels of accounting restatements.


The Future of Shareholder Activism

Assaf Hamdani is Professor of Law and Sharon Hannes is Professor of Law and Dean of the Faculty at Tel Aviv University Buchmann Faculty of Law. This post is based on their recent article, forthcoming in the Boston University Law Review. 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 Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (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).

Two major developments are shaping modern capital markets. The first development is the dramatic increase in the size and influence of institutional investors, mostly mutual funds. Institutional investors today collectively own 70-80% of the entire U.S. capital market, and a small number of fund managers hold significant stakes at each public company. The second development is the rising influence of activist hedge funds, which use proxy fights and other tools to pressure public companies into making business and governance changes.

Our new article, The Future of Shareholder Activism, prepared for Boston University Law Review’s Symposium on Institutional Investor Activism in the 21st Century, focuses on the interaction of these two developments and its implications for the future of shareholder activism. We show that the rise of activist hedge funds and their dramatic impact question the claim that institutional investors have conflicts of interest that are sufficiently pervasive to have a substantial market-wide effect. We further argue that the rise of money managers’ power has already changed and will continue to change the nature of shareholder activism. Specifically, large money managers’ clout means that they can influence companies’ management without resorting to the aggressive tactics used by activist hedge funds. Finally, we argue that some activist interventions—those that require the appointment of activist directors to implement complex business changes—cannot be pursued by money managers without dramatic changes to their respective business models and regulatory landscapes.


A Look inside H.R. 2534: Insider Trading Prohibition Act

Rahul Mukhi is a partner, Shannon Daugherty is an associate, and Destiny D. Dike is a law clerk at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary Gottlieb memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Last month, Representative Jim Himes (D-Conn) and his co-sponsors, Representatives Carolyn B. Maloney (D-NY) and Denny Heck (D-WA), introduced H.R. 2534:  The Insider Trading Prohibition Act. Unlike its substantially similar predecessor, H.R. 1625, which was introduced by Representative Himes on March 25, 2015, H.R. 2534 has gained some momentum in the U.S. House of Representatives, having been unanimously approved by the Financial Services Committee in May 2019. Although the bill is only at the preliminary stage, if the proposal eventually proceeds further in the process of becoming law, it will represent a potentially significant shift in and clarification of U.S. insider trading laws.


Current insider trading prohibitions arise from judicial case law interpreting Section 10(b) of the Securities Exchange Act of 1934 codified in 15 U.S.C. § 78j and the U.S. Securities and Exchange Commission (“SEC”) Rule 10b-5. This current state of judge-made law has increasingly come under attack for lack of certainty and clarity. [1] Some also have argued that the courts’ rooting of insider trading law in “deception” and breach of a duty fails to capture insider trading in the digital age. And others have argued that the lack of a statute specifically addressing insider trading has led to inconsistent interpretation and application by regulators and courts, particularly in the context of remote tippees, thus making it difficult for market participants to understand how to conform their conduct to the law. [2]


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