Monthly Archives: October 2019

Climate in the Boardroom

Eli Kasargod-Staub is Executive Director of Majority Action and the Climate Majority Project. This post is based on his Majority Action report. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Key Climate-Related Shareholder Resolutions Would Have Passed with BlackRock and Vanguard Support

The world’s largest asset managers BlackRock and Vanguard control the largest blocks of shares in nearly every publicly traded firm in the U.S. The pattern of ownership is seen in the energy and utility industries, and across the companies at which there were critical climate votes in 2019 (see Figure 13). The two asset managers were both in the top five common stock shareholders at all 28 companies with critical climate resolutions.

BlackRock and Vanguard were the two largest shareholders at 18 of these 28 companies.

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The Reverse Agency Problem in the Age of Compliance

Asaf Eckstein is Associate Professor of Law at Ono Academic College and Gideon Parchomovsky is Robert G. Fuller, Jr. Professor of Law at University of Pennsylvania Law School and Professor of Law at Hebrew University School of Law. This post is based on their recent paper.

The agency problem, the idea that corporate directors and officers are motivated to prioritize their self-interest over the interest of their corporation, has had long-lasting impact on corporate law theory and practice. In recent years, however, as federal agencies have stepped up enforcement efforts against corporations, a new problem that is the mirror image of the agency problem has surfaced—the reverse agency problem.

The surge in criminal investigations against corporations, combined with the rising popularity of settlement mechanisms including Pretrial Diversion Agreements (PDAs), and corporate plea agreements, has led corporations to sacrifice directors and officers in order to reach settlements with law enforcement authorities, at all cost. While such settlements are in the best interest of companies and shareholders, they have devastating effects for individual directors and officers.

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Implied Private Right of Action Under the Investment Company Act

Rich Lincer, Robin Bergen, and Adam Brenneman are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lincer, Ms. Bergen, Mr. Brenneman, Marc Rotter, and Steven Xie.

In a recent decision, Oxford University Bank v. Lansuppe Feeder, LLC, the United States Court of Appeals for the Second Circuit held that parties that enter into contracts that violate the Investment Company Act of 1940 (the “Act”) have a private right of action under § 47(b) of the Act to sue for rescission of those contracts. The Second Circuit’s holding departs from prior decisions by two other Circuit courts and several district court decisions, amplifying potential contractual and litigation risks for funds and “inadvertent investment companies,” as well as such entities’ investors, lenders and contractual counterparties.

In Oxford University Bank, [1] a private fund issuer, which otherwise would have been required to register as an investment company, relied on the § 3(c)(7) exemption from the definition of “investment company” in the Act. The § 3(c)(7) exemption requires, among other things, that owners of the issuer’s outstanding securities be, at the time of acquisition of such securities, “qualified purchasers” (“QPs”) or “knowledgeable employees.” Holders of a class of junior notes of the issuer alleged a violation of the exemption and sued for rescission of the indenture under which the notes were issued.

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Taking a Play out of the Financial Acquirer’s Playbook

Jamie Leigh and Eric Schwartzman are partners and Ian Nussbaum is an associate at Cooley LLP. This post is based on their Cooley 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 M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV; and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

As the NFL season gets underway, it is interesting to see how certain plays go from fringe status to near-universal. A recent example is the “run-pass option” that, before finding a home in every NFL team’s playbook, was used only in high school and college football games. [1] Coaches survey plays to assess what works, and, over time, some version of a useful play finds its way into a coach’s playbook and then every coach’s playbook. That is an enduring aspect of the sport: if you see a game-changer, use it.

In public M&A, some provisions in merger agreements become near-universal as practitioners study precedents and react to case law. In the early 1990s, it was typical for financial acquirers to bargain for a financing condition with a walk-away right if it could not obtain the financing for the deal. This play proved to be a losing proposition—in competition for assets with strategic parties whose bids were backed by their balance sheets, the financing condition would usually render the financial buyer’s bid a non-starter as it was deemed too risky from a deal certainty perspective in the eyes of the seller. Financial buyers, wanting to compete against strategic parties, gradually developed a new play that has now become the market norm for public company deals. They have foregone the financing condition (although a few remain bold enough to ask for it from time to time) in favor of agreeing to pay a reverse termination fee to the seller in the event that there is a financing failure. Critically, as part of this framework, the reverse termination fee generally operates as a maximum liability cap for the financial buyer, such that, following full payment of the reverse termination fee (plus any expense reimbursement or interest that may be owed to the sellers), a financial buyer eliminates any further liability to the seller on any basis. [2]

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Women Board Seats in Russell 3000 Pass the 20% Mark

Betty Moy Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and  Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Women now occupy more than 20% of Russell 3000 board seats, according to a recently released Equilar report. Equilar states that this is the first time Russell 3000 boards have achieved this milestone. In addition, Equilar found that women constituted over 40% of new directors during the first half of 2019, compared to 17.8% of new directors in 2014.

As discussed in a September 11 WSJ article, companies may be responding to a number of factors including existing or anticipated state legislative pressure. California made headlines in 2018 by being the first state to require exchange-listed companies with principal offices within its borders to have at least one female board member or potentially face a monetary fine. While New Jersey is looking to follow California, other states are also considering a variety of initiatives.

Another driving factor is pressure from some of the largest institutional investors, who warned over a year ago that they would start holding boards more accountable. The big-three index fund managers, BlackRock, Vanguard and State Street Global Advisors (State Street), recently released their annual stewardship reports, and some report their voting record against directors on boards that fail to meet certain standards.

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Delaware Court of Chancery Again Sustains Oversight Claims

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Savitt, Mr. McLeod, and Ms. Reddy and is part of the Delaware law series; links to other posts in the series are available here.

Further extending the practical reach of the Caremark doctrine, the Delaware Court of Chancery this week upheld claims against directors of a life sciences firm for failing to ensure accurate reporting of drug trial results. In re Clovis Oncology, Inc. Derivative Litig., C.A. No. 2017-0222-JRS (Del. Ch. Oct. 1, 2019).

Clovis’s stock dropped sharply in 2015 when it disclosed poor clinical trial results for its most promising experimental cancer drug. Federal securities actions challenging the company’s previous disclosures about the drug and a related SEC investigation followed, and were settled. Stockholders then brought a derivative action alleging that the board breached its fiduciary duties by disregarding “red flags” that reports of the drug’s performance in clinical trials were inflated.

The Court of Chancery recognized that the board had implemented robust reporting procedures regarding drug development and regularly received reports of the new drug’s progress in clinical testing. Crediting allegations that the directors ignored “warning signs that management was inaccurately reporting [the drug’s] efficacy,” however, the court nevertheless sustained the claims. The Clovis directors argued, and the court accepted, that duty-to-monitor claims require a showing of scienter—that is, evidence that the directors knew they were violating their duties. But the court did not require the plaintiff to allege particular facts showing such knowledge. Instead, reasoning that Clovis had a board “comprised of experts” and “operates in a highly regulated industry,” the court concluded that the directors “should have understood” the problem and intervened to fix it. Also notably, the “corporate trauma” alleged here was a stock drop upon the announcement of bad news for the company’s financial expectations—the typical stuff of federal securities claims—rather than corporate liability for public-facing corporate crimes or torts that are more often the basis of duty-to-monitor claims.

Clovis thus highlights the widening risk to boards of directors of fiduciary litigation when bad news can be tied to an alleged compliance failure. As we recently noted, a compliance program is no longer enough. Courts now look for engaged board oversight, and directors should consider implementing procedures to ensure that the board itself monitors “mission critical” corporate risks.

Response to CII Proposal to Amend DGCL

David Berger and Amy Simmerman are partners at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel, the keynote presentation on The Lifecycle Theory of Dual-Class Structures, and the posts on The Perils of Dell’s Low-Voting StockThe Perils of Lyft’s Dual-Class Structure and the Perils of Pinterest’s Dual-Class Structure (discussed on the Forum herehere, and here).

Earlier this month the Council of Institutional Investors (“CII”) publicly called upon Delaware’s legislature and governor to amend the state’s corporate code to effectively prohibit publicly traded Delaware corporations from having multi-class stock unless the multi-class structure ends no later than seven years after the company’s IPO. CII’s lobbying effort in Delaware is only its latest attempt to obtain a mandatory prohibition against dual-class stock; earlier efforts by CII to have the SEC and the national exchanges prohibit dual-class stock proved unsuccessful (although CII has managed to have some indexes exclude certain dual-class companies).

In this newest iteration, CII’s proposal would apply to an array of capital structures that involve differential voting power among classes of common stock, including dual-class structures that have become relatively common in recent years, as well as the use of a “golden share” that carries special voting rights. While CII’s proposal would grandfather in preexisting capital structures, it generally provides that, going forward, public companies incorporated in Delaware can only have multi-class structures for a period of up to seven years following an initial public offering or approval of the structure by each class of stock. (CII’s letter to the chair of the Council of the Corporation Law Section of the Delaware State Bar Association, as well as its full proposal, can be found here. READ MORE »

SEC Expansion of “Testing-the-Waters” Communications to All Issuers

Michael Zeidel is partner,  Andrew Brady is of counsel, and Ryan Adams is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Zeidel, Mr. Brady, Mr. Adams, Brian Breheny, Laura Kaufmann, and Michelle Gasaway.

On September 26, 2019, the Securities and Exchange Commission (SEC) adopted new Rule 163B and related amendments under the Securities Act to expand the permitted use of “testing-the-waters” communications to all companies regardless of size or reporting status, including business development companies (BDCs) and other registered investment companies. The new rule enables any issuer, including those that are not an emerging growth company (EGC) or any person authorized to act on the issuer’s behalf, to make oral and written offers to qualified institutional buyers (QIBs) [1] and institutional accredited investors (IAIs) [2] before or after the filing of a registration statement to gauge investors’ interest in an offering.

This new rule is a much-anticipated development that will level the playing field for issuers seeking to evaluate market interest prior to a registered public offering and represents an additional example of the SEC taking concerted action to encourage public capital formation.

The rule will become effective 60 days following its publication in the Federal Register.

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Weekly Roundup: September 27–October 3, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of September 27–October 3, 2019.

The Long Term, The Short Term, and The Strategic Term



Analysis of IAC Recommendations to Improve U.S. Proxy System




Proxy Advisors and Pay Calculations



Toward an Interest Group Theory of Foreign Anti-Corruption Laws


Proxy Season Say-on-Pay Review



Managerial Response to Shareholder Empowerment: Evidence from Majority Voting Legislation Changes



Toward Fair and Sustainable Capitalism


Evolving Board Evaluations and Disclosures


Stakeholder Capitalism and Executive Compensation


Opt-Out Rate in Securities Class Action Settlements



Pay for Performance—A Mirage?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. 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 the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.

Yes, it can be, according to the Executive Director of the Council of Institutional Investors, in announcing CII’s new policy on executive comp. Among other ideas, the new policy calls for plans with less complexity (who can’t get behind that?), longer performance periods for incentive pay, hold-beyond-departure requirements for shares held by executives, more discretion to invoke clawbacks, rank-and-file pay as a valid reference marker for executive pay, heightened scrutiny of pay-for-performance plans and perhaps greater reliance on—of all things—fixed pay. It’s back to the future for compensation!

Simplified and tailored plans. CII recommends that comp plans and practices be tailored for each company’s circumstances and that they be comprehensible: compensation practices that comp committees “would find difficult to explain to investors in reasonable detail are prime candidates for simplification or elimination.” In addition, performance periods for long-term compensation should be long term—at least five years, not the typical three-year time horizon for restricted stock.

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