Yearly Archives: 2019

Automatic Stay of Discovery—Securities Act Class Actions in State Courts

Posted by Andrew J. Ehrlich, Jane B. O’Brien, and Richard A. Rosen, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Tuesday, September 3, 2019
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Andrew J. Ehrlich, Jane B. O’Brien, and Richard A. Rosen are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Ehrlich, Ms. O’Brien, Mr. Rosen, William E. Freeland, and Naomi Jeehee Yang.

In 2018, the United States Supreme Court in Cyan, Inc. v. Beaver County Employees Retirement Fund held that class actions asserting claims under the Securities Act of 1933 (“Securities Act”) that are filed in state court are not removable under the Securities Litigation Uniform Standards Act (“SLUSA”). In addition to precipitating the increased filing of Securities Act class actions in state courts, Cyan left open several questions, including which procedural protections imposed by the Private Securities Litigation Reform Act of 1995 (“PSLRA”) are applicable in state court. In particular, lower courts are divided over whether discovery in Securities Act cases—automatically stayed in federal court while a motion to dismiss is pending—is likewise automatically stayed when brought in state court. State courts in California and Michigan have refused to stay discovery, while a Connecticut state court reached the opposite conclusion in City of Livonia Retiree Health and Disability Benefits Plan v. Pitney Bowes Inc., and now courts within the New York Supreme Court’s Commercial Division—a common forum for Securities Act class actions filed in state courts—are at odds over the answer to this question.

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Information Litigation in Corporate Law

Posted by George S. Geis (University of Virginia), on
Tuesday, September 3, 2019
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George S. Geis is the William S. Potter Professor of Law and the Thomas F. Bergin Teaching Professor of Law at the University of Virginia School of Law. This post is based on his recent article, forthcoming in the Alabama Law Review.

Corporate information is valuable and often worth guarding. Firms must protect business strategies, and there is legitimate justification for opacity in the boardroom. At the same time, however, some information access is necessary to support sound corporate governance. If shareholders are expected to elect and monitor corporate leaders—as well as make personal investment decisions—then they must be able to muster facts about what is happening at the firm.

One can imagine a regime where corporate lawmakers leave decisions about information exchange solely to the private parties. Equity investors might negotiate initial disclosures and ongoing promises of information transmission at the outset of a relationship, akin to the various obligations that are standard in debt contracts. Absent a contractual right, information would remain private unless a firm’s managers found it in the corporation’s self-interest to voluntarily share additional details.

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Federal Forum Provisions and the Internal Affairs Doctrine

Posted by Dhruv Aggarwal (Yale University), Albert H. Choi (University of Michigan), and Ofer Eldar (Duke University), on
Monday, September 2, 2019
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Dhruv Aggarwal is a J.D. Candidate at Yale Law School; Albert H. Choi is Professor of Law at the University of Michigan Law School; and Ofer Eldar is an Associate Professor of Law and Finance at the Duke University School of Law. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Michal Barzuza, Lucian A. Bebchuk, and Oren Bar-Gill and Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani.

Should a company be allowed to dictate the forum in which its shareholders can bring suit? This has been one of the most vexing and controversial issues in corporate and securities laws in recent years. At least with respect to lawsuits based on corporate law and for corporations incorporated in Delaware, the issue seems fairly well settled by now. Since the seminal case of Boilermakers Local 154 Retirement Fund v. Chevron Corp., numerous corporations began including forum selection provisions in their charters or bylaws. A key element of the decision is that forum selection for claims under state corporate law is governed by the internal affairs doctrine. The doctrine states that only the state of incorporation has authority to regulate a corporation’s internal affairs, and these internal affairs include the forum for litigating claims under the state’s corporate laws.

Forum selection with respect to federal securities lawsuits, on the other hand, is more controversial, and an important debate has taken place over whether corporations can dictate the forum for lawsuits based on federal securities laws in their charters and bylaws. Since 2017, a growing number of firms have pushed the envelope by adopting exclusive federal forum provisions (“FFPs”) that seek to limit shareholders to bringing federal law claims under the Securities Act of 1933 in federal courts only. The 33 Act, which governs claims for material misstatements or omissions in initial public offerings, specifically commits jurisdiction over these claims to both state and federal courts. FFPs were adopted in high profile initial public offerings, such as that of Snap, Inc., with the specific goal of restricting lawsuits for material misstatements or omissions in the IPO documents to federal courts. Furthermore, as the paper shows, the rate of adoptions of the FFPs significantly accelerated following the 2018 Supreme Court decision in Cyan v. Beaver County Employees Retirement Fund, which expressly validated the plaintiffs’ right to bring 33 Act lawsuits in state courts.

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Six Reasons We Don’t Trust the New “Stakeholder” Promise from the Business Roundtable

Posted by Nell Minow, ValueEdge Advisors, on
Monday, September 2, 2019
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Nell Minow is Vice Chair of ValueEdge Advisors.

A new statement from the Business Roundtable commits to stakeholder interests instead of making the primary purpose of the company shareholder value. Long-term shareholders are increasingly committed to explicitly ESG investing, which values stakeholder interests as a way to minimize investment risk. But I am skeptical about what the CEO signatories to this statement have in mind for six reasons.

1. We’ve seen this before. The last time the BRT deployed stakeholder rhetoric it was during the 1980’s era of hostile takeovers, when a feint to the interests of anyone other than shareholders was the best way to entrench management. The CEOs who signed this statement know that accountability to everyone is accountability to no one. It’s like a shell game where the pea of any kind of obligation is always under the shell you didn’t pick. It’s shoot an arrow at the wall and then draw a bull’s-eye around it goal-setting.

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Cyber Risk Board Oversight

Posted by Steve W. Klemash, Pete Cordero, and Chuck Seets, EY Center for Board Matters, on
Monday, September 2, 2019
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Steve W. Klemash is Americas Leader at the EY Center for Board Matters, Pete Cordero is Managing Director-Cybersecurity and Chuck Seets is Americas Assurance Cybersecurity Leader, both at EY. This post is based on their EY memorandum.

In this Transformative Age, technology can make the impossible possible, but it also opens the door to exponentially increased cybersecurity risk.

A company’s board plays an important oversight role and is well-positioned to guide management in the development of an effective cybersecurity risk program.

In spring 2019, the EY Center for Board Matters hosted a series of private dinners as well as its second annual day- long Cybersecurity Board Summit. These gatherings brought together board members for discussions on the latest challenges and leading practices in overseeing cybersecurity risk. Their conversations centered on cyber threats, the processes and controls that can detect and mitigate such threats, the importance of planning and preparing for cyber incidents, and the board’s oversight role.

Read on to learn what we heard in person from over 100 directors who collectively represent in excess of 200 public companies.

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SEC Guidance for Investment Advisers and Proxy Advisory Firms: An Analysis

Posted by Cydney Posner, Cooley LLP, on
Sunday, September 1, 2019
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

At an open meeting [on August 21, 2019], the SEC voted (three to two) to publish guidance aimed at addressing some of the long-simmering controversy surrounding the reliance by investment advisers on proxy advisory firms. Do investment advisers rely excessively on proxy advisory firms for voting recommendations? How can they rely on proxy advisory firms and still fulfill their own fiduciary obligations? Are issuers allowed a fair chance to raise concerns about proxy advisory firm recommendations, particularly errors and incomplete or outdated information that forms the basis of a recommendation? Are conflicts of interest sufficiently transparent or addressed? What about the argument expressed by some that proxy advisory firms are essentially faux regulators with too much power and little accountability? (Ok, sorry, that last one didn’t come up.)

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Confidentiality and Inspections of Corporate Books and Records

Posted by Justin T. Kelton, Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP, on
Sunday, September 1, 2019
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Justin T. Kelton is a Partner at Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP. This post is based on an Abrams Fensterman memorandum by Mr. Kelton and is part of the Delaware law series; links to other posts in the series are available here.

In Tiger v. Boast Apparel, Inc., — A.3d —, 2019 WL 3683525 (Del. Aug. 7, 2019), the Delaware Supreme Court recently ruled on an issue of first impression: whether Section 220 inspections of corporate books and records are presumptively subject to confidentiality orders. The Court’s decision, which reverses a recent line of cases that found a presumption of confidentiality, may significantly impact Section 220 demands and subsequent litigation arising from these proceedings.

Background and the Chancery Court’s Decision

In Tiger, the plaintiff delivered a Section 220 demand to the defendant, the stated purposes of which were to “value his shares, investigate potential mismanagement, and investigate director independence.” Id. at *2. The defendant responded by proposing a confidentiality agreement that would have barred the plaintiff from using the documents in subsequent litigation. The parties negotiated over the proposed confidentiality terms, but were unable to reach an agreement. Id. The plaintiff then filed a Section 220 action, and the Court of Chancery was called upon to decide the scope of the parties’ confidentiality obligations. Id. The Chancery court ordered “an indefinite confidentiality period lasting up to and until [the plaintiff] filed suit based on facts learned through his inspection, after which confidentiality would be controlled by the applicable court rules.” Id. The plaintiff appealed to the Delaware Supreme Court.

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A More Strategic Board

Posted by Maureen Bujno, Benjamin Finzi and Vincent Firth, Deloitte LLP, on
Saturday, August 31, 2019
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Maureen Bujno is a managing director in Deloitte LLP’s Center for Board Effectiveness, and Benjamin Finzi and Vincent Firth are managing directors at Deloitte Consulting LLP. This post is based on a Deloitte memorandum by Ms. Bujno, Mr. Finzi, Mr. Firth, Kathy Lu, and Mark Lipton.

Introduction

To be a CEO today is to have one of the most complex and demanding—not to mention visible—jobs in the world. Beyond the scope of their business, CEOs and the organizations they lead have increasingly significant and more transparent influence at multiple levels—societal, cultural, environmental, political—affecting vast numbers of stakeholders, including shareholders, employees, customers, and citizens. Meanwhile, the world around them is in constant motion.

Given the weight of responsibility that rests on their shoulders, it’s no wonder that CEOs, when observed from a distance, are often depicted in near-heroic terms. It’s also not surprising that CEOs, when engaged in more intimate conversations about their role, are often keenly interested in finding help to validate their models of the business environment and to develop their vision of the future.

But where can CEOs find the sounding board they need without falling short of the extraordinary abilities that people find reassuring to attribute to them? One possible answer lies in the recognition that CEOs also have bosses: the boards who hire them, evaluate them, set their pay, and sometimes fire them. In fact, as one CEO told us, “The board relationship is really the most critical factor in [a CEO’s] success.”

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Compensation Committees and ESG

Posted by Robert Newbury, Don Delves, and Ryan Resch, Willis Towers Watson, on
Saturday, August 31, 2019
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Robert Newbury is Director, and Don Delves and Ryan Resch are managing directors at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Environmental, social and governance (ESG) issues are increasingly important to boards and their compensation committees, especially human capital management, as a critical part of the “S” in ESG.

Compensation committees realize it directly relates to their mission, long-term strategy and success, and they’re being more proactive.

Here are three recent examples. We chose to not identify two of the companies.

  • At Royal Dutch Shell plc., the company committed to use ESG as an executive compensation performance measure in an effort to reduce its net carbon footprint 20% by 2035 and 50% by 2050. Executives’ pay will be linked, in part, to this target, through an energy transition measure within their 2019 long-term incentive award.
  • Board members of a power generation company asked for more insights after a social responsibility report found a gender pay gap existed based on the ratio of average female pay to average male pay. The analysis examined demographics by level, pay gaps by level and job family, and promotion and pay increase trends by gender. Findings reinforced that the company was paying men and women in jobs of equal value at similar levels. However, the check also uncovered that more men worked at higher levels of the organization, and an inclusion and diversity strategy was needed to encourage a better gender balance at all levels of the organization.
  • An integrated oil and gas company wanted better insights on key human capital metrics in support of the organization’s people strategy so management proposed a series of measures in a dashboard that could be updated quarterly for review at each committee meeting (e.g., demo-graphics, promotion/turnover rates, talent pipeline, wellness, safety and productivity/ returns. The dashboard for the compensation committee provides greater context for each performance measure (i.e., historical trends and/or relative benchmarking against other organizations) and includes a mixture of leading and lagging indicators.

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Board Oversight of Corporate Political Activity and CEO Activism

Posted by Holly J. Gregory, Sidley Austin LLP, on
Friday, August 30, 2019
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Holly J. Gregory is partner at Sidley Austin LLP. This post is based on her Sidley publication. Related research from the Program on Corporate Governance includes The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here); Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson (discussed on the Forum here); and The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert Jackson, James David Nelson, and Roberto Tallarita, (discussed on the Forum here).

The US Supreme Court’s decision in Citizens United v. Federal Election Commission overturned restrictions on corporate political contributions in the form of disclosure requirements and spending limits, articulating a company’s right to engage in political activity as free speech (558 U.S. 310 (2010)). Companies and their executive leadership have long played a role in US politics through quiet lobbying activities and contributions. However, in the current political environment, CEOs are engaging publicly on sensitive social and political issues that they may have avoided in the past, including issues that are not directly related to the company’s business.

Issues that have given rise to “CEO activism” include:

  • Hate speech evidenced in the protests in Charlottesville, Virginia.
  • The “zero-tolerance” immigration policy and family separations at the southern border.
  • The current administration’s policy on climate change.
  • State and municipality adoption of anti-LGBTQ+ laws and policies.
  • Gun violence and its perceived link to National Rifle Association policies.

How a CEO responds to sensitive social and political issues on the company’s behalf will vary, and there is a risk that constituents may be offended when a corporate leader takes a stand, especially when the link between the issue and the company’s business interests is unclear. However, failure to take a position on certain issues may also expose a company to criticism.

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