Yearly Archives: 2019

An Overview of Vote Requirements at U.S. Meetings

Posted by Kosmas Papadopoulos, ISS Analytics, on
Saturday, July 6, 2019
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Kosmas Papadopoulos is Managing Editor at ISS Analytics. This post is based on an ISS Analytics memorandum by Mr. Papadopoulos.

At the general meeting of Tesla Inc. on June 11, 2019, two management proposals seeking to introduce shareholder-friendly changes to the company’s governance structure failed to pass, despite both items receiving support by more than 99.5 percent of votes cast at the meeting. To get official shareholder approval, the proposals needed support by at least two-thirds of the company’s outstanding shares. However, only 52 percent of the company’s share capital was represented at the general meeting; based on turnout alone, there was no possible way for the proposal to pass.
As strange as the voting outcome at Tesla may seem, it is not a very unusual result. Every year, dozens of proposals are not considered to be “passed,” even though they receive support by an overwhelming majority of votes cast at the meeting. Supermajority vote requirements may be responsible for a large portion of these failed votes with high support levels (62 percent of instances since 2008). However, using a base of all outstanding shares for the vote requirement is an even more common corresponding factor (92 percent of instances). The increase in failed majority-supported proposals in recent years can be directly attributed to the change in the rules pertaining to the treatment of broker non-votes.
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Director Independence and Oversight Obligation in Marchand v. Barnhill

Posted by Peter Atkins and Paul Lockwood, Skadden, Arps, Slate, Meagher & Flom LLP, on
Saturday, July 6, 2019
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Peter Atkins and Paul Lockwood are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum and is part of the Delaware law series; links to other posts in the series are available here.

On June 18, 2019, in Marchand v. Barnhill, the Delaware Supreme Court, in an opinion written by Chief Justice Leo E. Strine, Jr. on behalf of a unanimous court, issued a decision reversing the Court of Chancery’s dismissal of a stockholder derivative suit alleging Caremark claims [1]—that the board failed to provide adequate oversight of a key risk area and thus breached its duty of loyalty. The case arose out of a listeria outbreak in ice cream made by Blue Bell Creameries USA Inc. that sickened many consumers, caused three deaths and resulted in a total product recall.

Key Determinations

The key Delaware Supreme Court determinations, both fact-driven, were:

  • Independence. The Supreme Court held that one director, viewed by the Court of Chancery as independent, was not independent based on the allegations in the complaint. As a result, the court found that a majority of the board was not independent and disinterested for purposes of the board’s consideration of a stockholder demand to file a lawsuit against directors and officers.
  • Oversight. For purposes of denying a motion to dismiss by the company, the facts alleged by the plaintiffs were sufficient to satisfy the high Caremark standard for establishing that a board breached its duty of loyalty by failing to make a good faith effort to oversee a material risk area, thus demonstrating bad faith.

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Uber vs. Lyft: Who’s at the Wheel?

Posted by Ric Marshall, MSCI Inc., on
Friday, July 5, 2019
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Ric Marshall is Executive Director of ESG Research at MSCI Inc. This post is based on his MSCI 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, and the keynote presentation on The Lifecycle Theory of Dual-Class Structures.

Two companies, one highly disruptive business model, multiple big challenges looming. Few IPOs in recent memory have attracted more attention—or disappointed more decisively, initially—than the IPOs of ride-sharing groups Uber and Lyft. At the end of June 7, 2019, two months following its IPO, Lyft’s share price traded at 17.7% below its IPO price, while Uber’s ended that same day 1.9% lower. Could ESG considerations have played into investors’ thinking?

Both companies demonstrate striking similarities. Not only do they compete directly with each other, both are investing in autonomous vehicles. Both have large off-the-books workforces as their drivers are classified as independent contractors rather than employees. And both must protect their passengers—both physically and digitally given the amount of personal data they possess. All of these are major issues that have the potential to threaten their business models in the face of regulatory change or consumer backlash.

But one area where their paths have differed markedly, which might have an outsize importance to investors: their listed ownership structure, more specifically around the key question of ownership control alignment, or ownership control skew. [1] Why does this matter? In Uber’s case, investors’ level of influence over the company is commensurate with how many shares they own, while in Lyft’s, investors have virtually no influence, regardless of how many shares they own.

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2019 Midyear M&A Trends

Posted by Stephen F. Arcano, Christopher M. Barlow, and Allison R. Schneirov, Skadden, Arps, Slate, Meagher & Flom LLP, on
Friday, July 5, 2019
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Stephen F. Arcano, Christopher M. Barlow, and Allison R. Schneirov are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Although the U.S. M&A market has remained relatively strong by historical standards so far in 2019, activity has softened compared to the higher levels in 2017 and 2018, continuing a trend that began in the second half of last year. The pace of overall deal count in the U.S. has decreased from the past two years, with the U.S. having its slowest first quarter by deal count in five years, according to figures from Mergermarket. However, overall deal value in the U.S. remained high in the first quarter of 2019 at $414 billion, falling just below 2018’s first-quarter record high of $415 billion and representing over half of global deal volume. Seven “megadeals” (i.e., deals valued at $10 billion or more) have been announced in the U.S. in the first quarter, one more than in the first quarter of 2018.

Like much of the rest of the world, the U.S. continues to confront economic and political uncertainty, and dealmakers have taken different approaches in response. For instance, although some dealmakers have been restrained, others—including in the biopharmaceutical and financial services industries—have remained active. While the three largest U.S. deals of 2019 thus far have been between strategics, financial sponsors also have been active in the first half of this year.

Selected 2019 Midyear Trends

Regulatory Developments

The Foreign Investment Risk Review Modernization Act (FIRRMA), which in August 2018 expanded the jurisdiction of the Committee on Foreign Investment in the United States (CFIUS), is already impacting U.S. M&A activity. Notably, interim regulations released by CFIUS in October 2018 have added to the chilling effect on Chinese investments in the U.S., particularly in the technology sector. At the same time, escalating trade tensions with China have led to concerns that Chinese authorities may take stricter stances on approving transactions involving U.S. firms, although this situation remains fluid.

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Weekly Roundup: June 28-July 3, 2019

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, July 5, 2019

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This roundup contains a collection of the posts published on the Forum during the week of June 28-July 3, 2019.

Overview of Recent Stock Exchange Proposals

Posted by Cydney S. Posner, Cooley LLP, on Friday, June 28, 2019
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Dual-Class Shares: Governance Risks and Company Performance

Posted by Kosmas Papadopoulos, Institutional Shareholder Services, Inc., on Friday, June 28, 2019
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Spotlight on Boards

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on Friday, June 28, 2019
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Baby on Board: Remarks before the Society for Corporate Governance National Conference

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on Friday, June 28, 2019
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Post-Cyan Ruling on Discovery Stay

Posted by Vincent Sama and Brendan Gibbons, Arnold & Porter Kaye Scholer LLP, on Saturday, June 29, 2019
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Irrelevance of Governance Structures

Posted by Zohar Goshen (Columbia Law School) and Doron Levit (University of Pennsylvania), on Sunday, June 30, 2019
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SEC Rules and Guidance for Broker-Dealers and Investment Advisers

Posted by Jessica Forbes, Stacey Song, and Joanna D. Rosenberg, Fried, Frank, Harris, Shriver & Jacobson LLP, on Monday, July 1, 2019
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Deal Insurance: Representation & Warranty Insurance in M&A Contracting

Posted by Sean J. Griffith (Fordham University), on Monday, July 1, 2019
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How Boards Govern Disruptive Technology—Key Findings from a Director Survey

Posted by Steve Klemash and Jennifer Lee, EY Center for Board Matters, and Kris Pederson, EY, on Monday, July 1, 2019
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SEC Staff Guidance on Shareholder Proposals: A Murky Path Forward

Posted by Marc S. Gerber, Hagen J. Ganem, and Ryan J. Adams, Skadden, Arps, Slate, Meagher & Flom LLP, on Tuesday, July 2, 2019
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Shareholder Protection and the Cost of Capital

Posted by Joel F. Houston (University of Florida), Chen Lin (The University of Hong Kong), and Wensi Xie (The Chinese University of Hong Kong), on Tuesday, July 2, 2019
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Task Force on Climate-Related Financial Disclosure 2019 Status Report

Posted by Stacy Coleman (Promontory Financial Group) and Mara Childress (Bloomberg LP), on Tuesday, July 2, 2019
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Glass Lewis, ISS, and ESG

Posted by David Bixby and Paul Hudson, Pearl Meyer & Partners, LLC, on Wednesday, July 3, 2019
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Solving Banking’s “Too Big to Manage” Problem

Posted by Jeremy C. Kress (University of Michigan), on Wednesday, July 3, 2019
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SEC Proposal on Pro Forma Synergy Disclosures

Posted by David A. Katz, Trevor Norwitz, and Victor Goldfield, Wachtell, Lipton, Rosen & Katz, on Wednesday, July 3, 2019
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Statement Regarding Offers of Settlement

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Wednesday, July 3, 2019
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Statement Regarding Offers of Settlement

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Wednesday, July 3, 2019
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Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement, 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.

When the Securities and Exchange Commission is considering filing (or has filed) an action alleging violations of the federal securities laws, it often is in the public interest to pursue a timely, reasonable and consensual resolution of the matter. The Commission has long recognized that an appropriately-crafted settlement can be preferable to pursuing a litigated resolution, particularly when the settlement is agreed early in the process and the Commission obtains relief that is commensurate with what it would reasonably expect to achieve in litigation. In plain language, the sooner harmed investors are compensated, the offending conduct is remediated, and appropriate penalties are imposed, the better.

I have been considering the factors that affect settlement negotiations and settlement agreements with an eye toward enhancing outcomes for investors and most effectively utilizing our resources. [1] This statement discusses my views on some of those factors and specifically addresses the Commission’s approach to settlement offers that are accompanied by contemporaneous requests for Commission waivers from automatic statutory disqualifications and other collateral consequences.

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SEC Proposal on Pro Forma Synergy Disclosures

Posted by David A. Katz, Trevor Norwitz, and Victor Goldfeld, Wachtell, Lipton, Rosen & Katz, on
Wednesday, July 3, 2019
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David A. Katz, Trevor Norwitz and Victor Goldfeld, are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

The SEC recently proposed amendments to its financial disclosure requirements relating to business acquisitions and dispositions. In general, the proposals reflect a welcome comprehensive review and update, balancing the need for providing relevant information to investors with the costs and burdens of disclosure requirements. Among other things, the proposed amendments would:

  • revise the “significance” tests used to determine whether and which financial statements of a target business need to be filed by the registrant, including by (1) using market capitalization rather than total assets for the denominator in the “investment” test (notably, this may increase the number of transactions that meet the test because it is based on equity rather than enterprise value) and (2) adding a new revenue component to the “income” test;
  • eliminate the need to include financial statements for certain periods required under the current rules; and
  • raise the significance threshold for dispositions from 10% to 20%, matching the current significance threshold for acquisitions.

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Solving Banking’s “Too Big to Manage” Problem

Posted by Jeremy C. Kress (University of Michigan), on
Wednesday, July 3, 2019
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Jeremy Kress is Assistant Professor of Business Law at the Stephen M. Ross School of Business at the University of Michigan. This post is based on his recent article, forthcoming in the Minnesota Law Review.

One of the enduring ironies of the 2008 financial crisis is that nearly everyone now dislikes big banks, but no one can agree what to do about them. Policymakers as diverse as Bernie Sanders, Elizabeth Warren, John McCain, Newt Gingrich, and even President Donald Trump, have called for shrinking the largest financial firms.  In fact, both the Democratic and Republican parties endorsed breaking up the banks in their policy platforms for the 2016 election.

This apparent consensus in favor of breaking up the banks stems, in large part, from a perception that some U.S. financial institutions are “too big to manage” (TBTM). A financial institution is TBTM if its size prevents executives, board members, and shareholders from effectively overseeing the firm, leading to excessive risk taking and misconduct. Officials from both the Obama and Trump Administrations have cited the TBTM problem as a catalyst for the 2008 financial crisis. On this view, many of the largest U.S. financial companies collapsed because management was unable to monitor the firms’ risk profiles.

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Glass Lewis, ISS, and ESG

Posted by David Bixby and Paul Hudson, Pearl Meyer & Partners, LLC, on
Wednesday, July 3, 2019
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David Bixby is managing director and Paul Hudson is principal at Pearl Meyer & Partners, LLC. This post is based on a Pearl Meyer memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

With some help from leading investor groups like Black Rock and T. Rowe Price, environmental, social, and governance (“ESG”) issues, once the sole purview of specialist investors and activist groups, are increasingly working their way into the mainstream for corporate America. For some boards, conversations about ESG are nothing new. For many directors, however, the increased emphasis on the subject creates some consternation, in part because it’s not always clear what issues properly fall under the ESG umbrella. E, S, and G can mean different things to different people—not to mention the fact that some subjects span multiple categories. How do boards know what it is that they need to know? Where should boards be directing their attention?

A natural starting place for directors is to examine the guidelines published by the leading proxy advisory firms ISS and Glass Lewis. While not to be held up as a definitive prescription for good governance practices, the stances adopted by both advisors can provide a window into how investors who look to these organizations for guidance are thinking about the subject.

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Task Force on Climate-Related Financial Disclosure 2019 Status Report

Posted by Stacy Coleman (Promontory Financial Group) and Mara Childress (Bloomberg LP), on
Tuesday, July 2, 2019
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Stacy Coleman is Managing Director at Promontory Financial Group and Mara Childress is Director of Public Policy at Bloomberg LP. This post is based on their Task Force on Climate-related Financial Disclosures (TCFD) report. 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) and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Executive Summary

In June 2017, The Task Force on Climate-related Financial Disclosures (Task Force or TCFD) released its final recommendations (2017 report), which provide a framework for companies and other organizations to develop more effective climate-related financial disclosures through their existing reporting processes. [1] In its 2017 report, the Task Force emphasized the importance of transparency in pricing risk—including risk related to climate change—to support informed, efficient capital-allocation decisions. [2] The large-scale and complex nature of climate change makes it uniquely challenging, especially in the context of economic decision making.

Furthermore, many companies incorrectly view the implications of climate change to be relevant only in the long term and, therefore, not necessarily relevant to decisions made today. Those views, however, have begun to change. [3]

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