Monthly Archives: October 2019

Time To Demand Accountability Regarding Mutual Fund “Risks”

Aaron T. Morris is a partner at Barr Law Group. This post is based on his Barr Law memorandum.

The case law on who bears the risks inherent in a mutual fund’s operations is becoming paradoxical, and may now require intervention by mutual fund boards. Investment advisors have, incredibly, convinced some federal courts that they bear enormous risks in operating their mutual funds—so much so that they’re justified in charging hundreds of millions of dollars in extra advisory fees—but, at the same time, should not be held liable if and when those risks materialize, even if the result is a catastrophic meltdown of the fund.

Two cases exemplify this state of affairs. Last year, JPMorgan was trapped in a litigation requiring it to justify charging $132 million more, annually, to certain JPMorgan-branded funds than it charged third-party funds for the same investment advice. To justify the difference, the advisor hired an economist from Ohio State University to opine about the “substantially greater risks” JPMorgan assumed as to its own funds, which JPMorgan argued “require it to charge higher fees.” [1] This was the argument, despite the fact that, like virtually every other investment advisory contract in the country, JPMorgan’s contract included provisions that immunized it for everything short of bad faith and intentional misconduct. Nonetheless, the court apparently found the argument persuasive because it copied and pasted a section of the economist’s opinion into its order, and ruled in favor of JPMorgan. [2]

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SEC Guidance on Excludability of Rule 14a-8 Shareholder Proposals, Eschewing One-Size-Fits-All Approach

David A. Katz, Victor Goldfield, and Elina Tetelbaum are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz, Mr. Goldfield, Ms. Tetelbaum, and Carmen X. W. Lu.

Yesterday, the Staff of the SEC’s Division of Corporation Finance provided additional guidance in Staff Legal Bulletin (SLB) No. 14K on two key considerations for excluding Rule 14a-8 shareholder proposals under the “ordinary business” exception of Rule 14a-8(i)(7): the significance of the proposal’s subject matter and whether it seeks to “micromanage” the company. SLB 14K also addresses claims of technical deficiencies relating to a shareholder proponent’s proof of ownership letters, noting that companies should not seek to exclude proposals if documentary support sufficiently evidences the requisite minimum ownership requirements. The key takeaway from SLB 14K is that the SEC looks more favorably upon arguments tailored to the circumstances of a particular company, eschewing one-size-fits-all or overly technical approaches in determining if no-action relief is appropriate.

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Conducting a Token Offering Under Regulation A

Robert Rosenblum is partner and Amy Caiazza and Taylor Evenson are associates at Wilson Sonsini Goodrich & Rosati. This post is based on their Wilson Sonsini memorandum.

For many (if not all) companies developing blockchain-based technologies that involve digital assets (“tokens”), success is dependent on two critical issues: (1) the ability of a project sponsor (the “token issuer”) to distribute tokens broadly to its targeted users, often as rewards for contributing to a project’s development, and (2) free transferability of the tokens, without which the tokens are of limited use or value. These two elements together can encourage use and development of a new platform, which in turn can allow it to then achieve visibility and market saturation. In contrast, without these two features, it is unlikely that a token-based platform will be able to fully develop, much less achieve success.

The Problem

Throughout much of 2017 and 2018, many companies developing blockchain-based technologies (and their counsel) steadfastly took the position that tokens were not securities and that, as a result, the federal securities laws did not apply to limit a developer’s ability to distribute freely transferrable tokens broadly.

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2019 Mid-Year Shareholder Activism Report

Barbara Becker and Richard Birns are partners and Daniel Alterbaum is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Ms. Becker, Mr. Birns, Mr. Alterbaum, Eduardo Gallardo, Saee Muzumdar, and Zoe Carpou. 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).

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 first half of 2019. As is typically the case during proxy season, shareholder activism rose during the first half of 2019 relative to the second half of 2018 as reflected in the number of public actions (51 vs. 40), in the number of activist investors that launched campaigns (33 vs. 29) and in the number of companies involved (46 vs. 34). As compared to the same period of 2018, however, shareholder activism activity declined, as reflected by the number of public actions in the first half of 2018 (51 vs. 62), the number of activist investors that launched campaigns (33 vs. 41) and the number of companies involved (46 vs. 54).

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Stakeholder Impartiality: A New Classic Approach for the Objectives of the Corporation

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya. This post is based on his recent article, forthcoming in Fiduciary Obligations in Business (Cambridge University Press).

The stockholder/stakeholder dilemma has occupied corporate leaders and corporate lawyers for over a century. Most recently, the Business Roundtable, in a complete turnaround of its prior position, stated that “the paramount duty of management and of boards of directors is to the corporation’s stockholders.” The signatories of this statement failed, however, to specify how they would carry out these newly stated ideals. Directors of large U.K. companies don’t enjoy this luxury anymore. Under section 172 of the Companies Act 2006, directors are required to have regard to the interests of the company’s employees, business partners, the community, and the environment, when they endeavor to promote the success of the company for the benefit of its members (shareholders). Government regulations promulgated in 2018 require large companies to include in their strategic reports a new statement on how the directors have considered stakeholders’ interest in discharging this duty.

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Weekly Roundup: October 11–17, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of October 11–17, 2019.

Naming and Shaming: Evidence from Event Studies


Recent Trends in Shareholder Activism


CEO Pay Growth and Total Shareholder Return


Delaware Choice-of-Law Provisions in Restrictive Covenant Agreements


Observations on Clovis Oncology, Inc. Derivative Litigation



Institutional Investors’ Views and Preferences on Climate Risk Disclosure


ESG and Executive Remuneration—Disconnect or Growing Convergence?


One Size Does Not Fit All



The Passing of Retired Chancellor William T. Allen


Disclosure on Cybersecurity Risk and Oversight



Dual-Class Shares: A Recipe for Disaster

Dual-Class Shares: A Recipe for Disaster

Rick A. Fleming is an Investor Advocate with the U.S. Securities and Exchange Commission. This post is based on Mr. Fleming’s recent remarks at the ICGN Miami Conference. The views expressed in this post are those of Mr. Fleming and do not necessarily reflect those of the Securities and Exchange Commission or its staff. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here); The Perils of Small-Minority Controllers (discussed on the Forum here); The Perils of Dell’s Low-Voting Stock (discussed on the Forum here); the keynote presentation on The Lifecycle Theory of Dual-Class Structures; and the posts The Perils of Lyft’s Dual-Class Structure and The Perils of Pinterest’s Dual-Class Structure, all by Lucian Bebchuk and Kobi Kastiel.

Thank you, Kerrie Waring, for your kind introduction. I appreciate the opportunity to speak at a conference where you will spend the next two days discussing the stewardship responsibilities of shareholders. [1] I know you take those responsibilities seriously, and I do my best to encourage a regulatory environment that makes companies accountable to their shareholders.

Of course, before I begin, I must give the standard disclaimer given by all SEC speakers, that the views I express are my own and do not necessarily represent the views of the Securities and Exchange Commission, the Commissioners, or my colleagues on the Commission staff.

Let me start by thanking this group for your engagement with the SEC over the years. Feedback from groups like ICGN is especially valuable because you provide real-world insight into the types of information that investors utilize to make investment and voting decisions. The Commission and its staff need to know the value you place on things like quarterly reporting, auditor attestation of internal controls over financial reporting, ESG disclosure, the proxy voting process, and numerous other matters.

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Public Enforcement after Kokesh: Evidence from SEC Actions

Urska Velikonja is a Professor of Law at Georgetown University Law Center. This post is based on her recent article, forthcoming in the Georgetown Law Journal.

On September 20, 2019, the U.S. House Financial Services Committee approved by 49-5 votes a now-bipartisan Investor Protection and Capital Markets Fairness Act (H.R. 4344), also known as the Kokesh-fix. The Bill authorizes the SEC to bring claims for disgorgement in actions filed in court (the SEC has had express statutory authority to bring disgorgement claims in administrative proceedings since 1990) and extends the statute of limitations for disgorgement, injunctions, and officer & director bars to 14 years (from 5 years today).

The fix is necessary because of a 2017 Supreme Court decision in Kokesh v. SEC, which held that disgorgement was a penalty, like a civil fine or forfeiture, and as such subject to the 5-year statute of limitations set out in section 28 U.S.C. 2462. According to an earlier Supreme Court decision in Gabelli v. SEC, the 5-year clock begins to run the moment the violation is completed, not when the agency discovers it. That means that the SEC must detect the violation, investigate, and file a lawsuit within the 5-year window. Any violations outside that window cannot be prosecuted, even if part of a long-running fraudulent scheme such Allan Stanford’s or Bernard Madoff’s Ponzi schemes.

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Disclosure on Cybersecurity Risk and Oversight

Bridget Neill is EY Americas Vice Chair, Public Policy; Chuck Seets is EY Americas Assurance Cybersecurity Leader; and Steve W. Klemash is Americas Leader, EY Center for Board Matters. This post is based on their EY memorandum.

Cybersecurity attacks are among the gravest risks that businesses face today. The EY 2019 CEO Imperative Survey found that CEOs ranked national and corporate cybersecurity as the top global challenge to business growth and the global economy.

In this environment, stakeholders want to better understand how companies are preparing for and responding to cybersecurity incidents. They also want to understand how boards are overseeing these critical risk management efforts. Some of the answers can be found in public disclosures.

The U.S. Securities and Exchange Commission (SEC) issued guidance in 2018 promoting clearer and more robust disclosure about cybersecurity risks and incidents and how boards discharge their cybersecurity risk oversight responsibility. Our 2018 Cybersecurity disclosure benchmarking report explored how companies were responding to this guidance.

We undertook the same research this year to help inform stakeholders of emerging trends and developments. We analyzed three areas of cybersecurity-related disclosures in the proxy statements and Form 10-K filings of Fortune 100 companies from 2018-2019: board oversight (including risk oversight approach, board-level committee oversight, and director skills and expertise), statements on cybersecurity risk, and risk management (including cybersecurity risk management efforts, education and training, engagement with outside security experts and use of an external advisor). We found that many companies are enhancing their cybersecurity disclosures, with the most significant changes related to board oversight practices.

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The Passing of Retired Chancellor William T. Allen

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.

The Delaware Judiciary was saddened to learn of the passing on Sunday of retired Chancellor William T. Allen, a giant of the corporate bar, academia, and the Delaware Bench. The Judiciary expresses its deepest condolences to the friends and family of Chancellor Allen.

Allen, 75, was appointed as Chancellor of the Delaware Court of Chancery by Governor Mike Castle in 1985. He served until 1997 when he returned to his alma mater, New York University, to teach law and re-entered private practice at Wachtell, Lipton, Rosen & Katz.

“Our nation lost one of the finest jurists of the last fifty years yesterday,” said Delaware Supreme Court Chief Justice Leo E. Strine, Jr. “Chancellor Allen set a standard of excellence that made Delaware stand out in the eyes of all sophisticated observers. Bill Allen, the person, set a standard as a husband, father, friend, and caring professor to which we should all aspire. For me personally, he was a mentor, source of wisdom, and an inspiration. Everyone in Delaware owes him a debt of gratitude for what he did for our state, and our Judiciary’s hearts are with his wife and children, as they endure the loss of this special man.”

“I was saddened on Sunday to learn of the passing of former Chancellor Allen—one of Delaware’s finest legal minds,” said Delaware Governor John Carney. “Bill helped set and maintain a reputation of excellence on Delaware’s Court of Chancery. He was known and respected across our country, and by many citizens in our state, for his judgment and his fairness. My thoughts and prayers remain with Bill’s family and his many friends during this difficult time,” he said.

William T. Allen became Chancellor in 1985, at a time when the takeover boom of the 1980s was in full swing and the Delaware Court of Chancery was the subject of intense national scrutiny. During that time, Chancellor Allen’s decisions, often produced under extreme time pressure, were known for their lucid and lively writing style and incisive analysis. His rulings also showed a deep concern for the integrity of the law, the need for those with power to use it with fidelity to those they represented, and for their understanding of scholarship relevant to the matters before the Court. For that reason, Chancellor Allen was considered to be one of the finest corporate law judges of the era and, even more broadly, as one of the finest judges of his generation on any court. When Delaware most needed a Chancellor that could provide trusted corporate law rulings that all would respect, it was fortunate to have Bill Allen in that critical position.

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