Yearly Archives: 2020

A Flowchart of the Delaware Standards of Review

Posted by Taylor B. Bartholomew, Matthew M. Greenberg and Christopher B. Chuff, Troutman Pepper, on
Monday, July 27, 2020
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Matthew M. Greenberg is a partner and Taylor B. Bartholomew, and Christopher B. Chuff are associates at Troutman Pepper. This post is based on their Troutman Pepper memorandum and is part of the Delaware law series; links to other posts in the series are available here. 

In the context of an M&A transaction, practitioners are routinely left to navigate the various standards of review that are applied by the Delaware courts to evaluate whether a Delaware corporation’s directors have complied with their fiduciary duties. Determining which standard of review will apply to a given transaction is particularly critical—depending on the applicable standard, a Delaware court may heavily scrutinize a transaction or determine that the directors may face personal liability for their decisions in connection with the transaction. The flowchart below has been prepared to serve as a quick-reference tool for M&A practitioners when determining which standard of review might apply. While this chart has been prepared in accordance with applicable case law decided to date, it is important to bear in mind that each step set forth below necessarily involves a fact-intensive analysis and that this flowchart should not be exclusively relied upon.

The flowchart is available here.

CEO Succession Plans in a Crisis Era

Posted by Rusty O'Kelley, Margot McShane, and Justus O’Brien, Russell Reynolds Associates, on
Sunday, July 26, 2020
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Rusty O’Kelley III, Margot McShane, and Justus O’Brien are co-leaders of the firm’s Board & CEO Advisory Partners at Russell Reynolds Associates. This post is based on their Russell Reynolds memorandum.

CEO succession planning is one of the most important responsibilities of a corporate board, and one of the most challenging. In the best of circumstances, directors are working thoughtfully to anticipate the future, develop potential successor candidates over several years, and to ultimately have one of them step into the top spot. In emergencies or other unexpected circumstances, there is a great sense of uncertainty as to whether the board is selecting the best leader, or just the best leader available right now. It is an expensive question to answer. By one estimate, replacing an ill-chosen or short-tenured CEO leads to a loss of $1.7 billion in shareholder value in addition to a loss of organizational confidence and momentum.

According to forthcoming research from Russell Reynolds Associates and The Conference Board, more than 60 percent of directors surveyed stated that their board had not reviewed or updated the succession plan for the CEO and other key executives in light of the health risks posed by the COVID-19 crisis. The sector with the highest share of corporate boards that did review the CEO succession plan is Consumer Staples (25 percent of all respondents in this sector), while the sector with the lowest share is Materials (11.1 percent). Interestingly, the largest companies were by far those with the highest shares of cases where the board of directors did not review the CEO succession plan (70.3 percent of those with annual revenue of $10 billion and over and 80 percent of those in the Financials and Real Estates sectors with asset value exceeding $100 billion).

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The Board’s Role in Guiding the Return to Work

Posted by Erica Volini, Steve Hatfield, and Jeff Schwartz, Deloitte Consulting LLP, on
Sunday, July 26, 2020
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Erica Volini, Steve Hatfield, and Jeff Schwartz are principals at Deloitte Consulting LLP. This post is based on their Deloitte memorandum.

Introduction

We began discussing this publication in January 2020, before global pandemic and social unrest became central topics of everyday conversation. The impact of COVID-19 is devastating at the individual, local, national, and global level. It has created huge immediate changes to how and where people interact, and how business is done. For many organizations, it has also thrust the future of work (FOW) to the forefront, as management and workers grapple with changes today and prepare for a different and uncertain tomorrow. In many ways, the current environment has illuminated possibilities and opportunities that many organizations previously shied away from, but that are now accelerating the pace of change as management meets the challenges of now in preparation for now and the future.

While organizations continue to work through the near- and long-term effects of the pandemic, one of our initial observations is that companies leaning in on their future of work agenda appear to be better positioned to weather the impacts of this global disruption. These companies have strategized and planned for the what, who, where, and how of a shifting work landscape, proactively expanding their future of work portfolio over time, providing options for ongoing “forever” virtual work options, addressing and bolstering immediate needs for technology and connectivity, and implementing new ways of looking at jobs and interactions with the organizational ecosystem. [1] The pandemic appears to be accelerating these companies into the “new normal”—navigating the disruptions while improving their market positioning and brand. We refer to this strategy as “returning to work in the future of work”.

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Comment Letter on DOL Proposed Rule on ESG Investments

Posted by Robert A.G. Monks and Nell Minow, ValueEdge Advisors, on
Saturday, July 25, 2020
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Robert A.G. Monks is Chairman and Nell Minow is Vice Chair of ValueEdge Advisors. This post is based on their recent comment letter to the Department of Labor. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here); and Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff and Max M. Schanzenbach (discussed on the Forum here).

We have the strongest possible objections to the proposed rule on the appropriate consideration of ESG or any other non-traditional factors for plan investments, which fails as a matter of process, substance, cost-benefit analysis, regulatory policy, economics, consistency with other Administration policy, and clarity. It addresses a “problem” that is never documented based on claims and assertions of costs and benefits that are recklessly unsubstantiated. Most dangerously, it departs from every previous precedent in the history of EBSA and its predecessor, PWBA, which one of this comment’s signatories headed in the Reagan administration. We have already submitted a comment with Jon Lukomnik and a distinguished group of co-signatories. This comment is a supplement to the earlier filing, and we may file further if other comments require a response or other relevant information becomes available.

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Corporate Governance Update: Raising the Stakes for Board Diversity

Posted by David A. Katz and Laura A. McIntosh, Wachtell, Lipton, Rosen & Katz, on
Saturday, July 25, 2020

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David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on an article first published in the New York Law Journal. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

While diversity on boards of directors has been a high-profile issue for many years, and public companies have made notable progress in diversifying their boards over the past two decades, public companies now face increased pressure to move beyond verbal commitments and incremental progress. Investors, proxy advisors, and activists are demanding data-driven, measurable changes. They are leveraging litigation, legislation, shareholder proposals, and direct engagement to push companies to increase their commitment to diversity, to disclose their diversity data, and to make significant financial investments in diversity initiatives. Both gender and racial diversity are in the spotlight now.

A recent lawsuit by a shareholder of Oracle Corporation has opened a new line of attack on companies that have been slow to diversify their board membership and executive leadership team. The complaint alleges that Oracle’s failure to appoint racially diverse directors and officers—while making public statements avowing a commitment to racial diversity—constitutes securities fraud. The premise of the lawsuit, and the relief sought, are likely to provoke significant debate and some degree of change, regardless of the outcome of the litigation.

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Statement by Commissioner Roisman at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on
Friday, July 24, 2020
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Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent statement at an open meeting of the SEC. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Chairman Clayton. I want to express my gratitude for your continuing commitment to improving the proxy system, as well as for your thoughtful leadership throughout the process of developing this rulemaking in particular. Thank you also to Director [Bill] Hinman, Val Afshar, Director [S.P.] Kothari, Director [Dalia] Blass, and Tara Varghese for your presentations and all of the incredible work you and your teams have put into these recommendations. You should be very proud.

Introduction

From the outset of my tenure as an SEC Commissioner, I have focused on reviewing the proxy voting infrastructure, seeking to learn more about how it is operating in practice, where our rules should be modernized, or where the system could be improved. [1] Early on, I realized that we needed to update and clarify our rules that are relied on by businesses that provide professional proxy voting advice and other services to investment advisers as well as other institutional investors.

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Statement by Commissioner Peirce at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Friday, July 24, 2020
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent statement at an open meeting of the SEC. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Proxy voting advice businesses play an important role in our marketplace, a role that carries with it tremendous power. One root of that power is a 2003 Commission rule that required funds to publish their votes. [1] That rule pushed voting to the front burner for fund advisers, regardless of whether voting was a task that the funds and their shareholders wanted advisers to spend a lot of time on. Advisers looking to check the voting compliance box with as little headache as possible turned to proxy voting advice businesses for help, [2] a move enabled by staff no-action positions. [3] What followed was an outsourcing of the vote; funds’ voting decisions were handed over to proxy advisors, whose consequent power over public companies grew.

Two years ago, the Division of Investment Management took the commendable step of pulling back the no-action letters upon which this multi-tiered voting delegation edifice was constructed. [4] This action helped to facilitate a discussion about proxy voting, a discussion that has continued for the intervening two years with a lot of input from roundtable participants and commenters. That conversation is not over, but today’s releases are an important step toward modernizing the proxy voting system.

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Statement by Commissioner Lee at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Posted by Alison Herren Lee, U.S. Securities and Exchange Commission, on
Friday, July 24, 2020
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Allison Herren Lee is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in the post are those of Commissioner Lee, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

At the proposing stage for these rules, I observed that they would harm the governance process and suppress the free and full exercise of shareholder voting rights. Unfortunately, that is still the case with today’s final rules.

They are still designed to, and will, increase issuer involvement in what is supposed to be independent advice from proxy advisory firms. The release still wholly fails to explain how amplifying the views of issuers will improve the substance of proxy voting recommendations. The final rules will still add significant complexity and cost into a system that just isn’t broken, as we still have not produced any objective evidence of a problem with proxy advisory firms’ voting recommendations. No lawsuits, no enforcement cases, no exam findings, and no objective evidence of material error—in nature or number. Nothing.

It’s true that the final rules have been adjusted from the proposal in response to public outcry. While I appreciate the thought and effort by my colleagues that went into some of the changes, making the final rules less objectionable than the proposal does not relieve the Commission of its fundamental obligation to identify the need for this rulemaking and to explain how the rules we are adopting will meet this need. Unfortunately, we have done neither.

The final rules are unwarranted, unwanted, and unworkable.

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Statement by Chairman Clayton at Open Meeting to Adopt Amendments to the Proxy Solicitation Rules

Posted by Jay Clayton, U.S. Securities and Exchange Commission, on
Thursday, July 23, 2020
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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 statement at an open meeting of the SEC. 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.

Good morning. This is an open meeting of the U.S. Securities and Exchange Commission, under the Government in the Sunshine Act. Today we have two items on the agenda, both continuations of our ongoing work to modernize and enhance the accuracy, transparency and effectiveness of our proxy voting system. [1]

I want to make two general observations. First, today’s recommendations are the fruits of a rigorous and well-functioning rulemaking process where final rules reflect and benefit from the input of a wide array of market participants with a myriad of interests and perspectives. The proposing release that the Commission issued for public comment last November was informed by, among other things, SEC initiatives that spanned almost a decade—from the Commission’s 2010 Concept Release on the U.S. Proxy System to the more recent 2018 roundtable that brought together, and engendered robust discussion from, investors, issuers, investment advisors, proxy voting advice businesses and other market participants. [2] A review of the 2010 Concept Release, the 2018 roundtable and the comments received in response to our November proposing release demonstrates longstanding concerns regarding, and the need for Commission action with respect to, the use of proxy voting advice by investment advisers and other market participants.

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Testimony by Commissioner Pierce for Senate Nomination Hearing

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Thursday, July 23, 2020
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Hester M. Peirce is Commissioner at the U.S. Securities and Exchange Commission. This post is based on her testimony for her nomination hearing before the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

Chairman Crapo, Ranking Member Brown, and members of the Committee, thank you for considering my nomination to be a member of the Securities and Exchange Commission. Having served as a Commissioner for two and a half years, I am honored that the President has nominated me to serve another term. If confirmed, I look forward to using the next five years—alongside the dedicated, experienced SEC staff—to unleash the power of our securities markets in order to brighten more children’s futures, build more Americans’ retirement nest eggs, transform more communities across the nation, and rebuild an economy weakened by COVID. I am delighted about the possibility of serving with Caroline Crenshaw, whose experience at the Commission, in the military, and in private practice would enrich our deliberations as a Commission.

I have spent the last twenty years working on financial regulation. Part of that time was spent working for Senator Shelby on this Committee, and more than half of that time has been at the SEC. The agency has been extremely productive under the effective leadership of Chairman Jay Clayton. I have enjoyed helping to carry out his regulatory, compliance, and enforcement agenda.

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