Monthly Archives: February 2020

The Business Roundtable Comment Letter on Proposed Amendments to Rule 14a-8

This post is based on a Business Roundtable comment letter to the SEC in response to request for comments on the proposed rule regarding the submission and resubmission of shareholder proposals (discussed in posts here and here).

This letter is submitted on behalf of Business Roundtable, an association of chief executive officers who collectively lead companies with more than 15 million employees and $7 trillion in revenues. Business Roundtable members invest nearly $147 billion in research and development. In addition, our companies annually pay $296 billion in dividends to shareholders and generate $488 billion in revenues for small and medium-sized businesses.

We appreciate the opportunity to comment on the proposed rules issued by the Securities and Exchange Commission (the “Commission” or “SEC”) on November 5, 2019, entitled Procedural Requirements and Resubmission Thresholds under Exchange Act Rule 14a-8 (the “Proposing Release”). [1] Business Roundtable agrees that it is imperative to reform the shareholder-proposal process so that it is transparent, productive and oriented toward long-term value creation. Indeed, a more effective and efficient shareholder-proposal process will facilitate the ability of corporate boards and management to drive long-term value, which serves all corporate stakeholders including investors, employees, communities, suppliers and customers. We believe that the changes included in the Proposing Release support this goal, and this letter provides our comments on the proposed amendments. We have also included feedback from our member companies on the need for Rule 14a-8 reform and on the Proposing Release, which was obtained through surveys we distributed to our member companies in 2019 and anonymized for purposes of this public submission.

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Society for Corporate Governance Comment Letter on Proposed Amendments to Rule 14a-8

Darla Stuckey is President and CEO of the Society for Corporate Governance. This post is based on a Society for Corporate Governance comment letter to the SEC in response to request for comments on the proposed rule regarding the submission and resubmission of shareholder proposals (discussed in posts here and here).

The Society for Corporate Governance (the “Society”) appreciates the opportunity to provide comments to the U.S. Securities and Exchange Commission (“SEC” or “Commission”) on the Procedural Requirements and Resubmission Thresholds under Exchange Act 14a-8 (the “Proposed Rule”).

Founded in 1946, the Society is a professional membership association of more than 3,700 corporate and assistant secretaries, in-house counsel, outside counsel and other governance professionals who serve approximately 1,700 entities, including 1,000 public companies of almost every size and industry. Society members are responsible for supporting the work of corporate boards of directors and the executive managements of their companies on corporate governance and disclosure matters.

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Spotlight on Boards

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. The wide embrace of ESG, stakeholder governance and sustainable long- term investment strategies by the Business Roundtable, the World Economic Forum, the British Academy, BlackRock, Vanguard, State Street and other investors and asset managers is another inflection point in the responsibilities of the board of directors of companies. The statement by the World Economic Forum is a concise and cogent reflection of all.

The purpose of a company is to engage all its stakeholders in shared and sustained value creation. In creating such value, a company serves not only its shareholders, but all its stakeholders—employees, customers, suppliers, local communities and society at large. The best way to understand and harmonize the divergent interests of all stakeholders is through a shared commitment to policies and decisions that strengthen the long-term prosperity of a company.

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Business Roundtable Comment Letter to SEC on Proposed Proxy Rules for Proxy Voting Advice

Tami Groswald Ozery is a co-Editor of the Forum and a Fellow at the Harvard Law School Program on Corporate Governance. This post is based on the text of the Business Roundtable comment letter to the SEC in response to request for comments on the proposed rule regarding proxy advisors (discussed in posts here and here).

This letter is submitted on behalf of Business Roundtable, an association of chief executive officers who collectively lead companies with more than 15 million employees and $7 trillion in revenues. Business Roundtable members invest nearly $147 billion in research and development. In addition, our companies annually pay $296 billion in dividends to shareholders and generate $488 billion in revenues for small and medium-sized businesses.

We appreciate the opportunity to comment on the proposed rules, issued by the Securities and Exchange Commission (the “Commission” or “SEC”) on November 5, 2019, entitled Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice (the “Proposing Release”). Business Roundtable supports the implementation of reasonable disclosure and procedural requirements for proxy voting advice businesses (or “proxy advisors”) that avail themselves of certain existing exemptions from the information and filing requirements of the federal proxy rules. We believe the changes included in the Proposing Release will make the proxy voting process significantly more transparent, accurate and effective both for companies and investors, and this letter provides our comments on the proposed amendments to Rules 14a-2(b) and 14a-9 of the Securities Exchange Act of 1934. We also have included feedback from our member companies on the need for Rule 14a-2(b) and 14a-9 reform and on the Proposing Release, which was obtained through surveys we distributed to our member companies in 2019 and anonymized for purposes of public submission.

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Society for Corporate Governance Comment Letter to SEC on Proposed Proxy Rules for Proxy Voting Advice

Darla Stuckey is President and CEO of the Society for Corporate Governance. This post is based on a Society for Corporate Governance comment letter to the SEC in response to request for comments on the proposed rule regarding proxy advisors (discussed in posts here and here).

The Society for Corporate Governance (the “Society”) appreciates the opportunity to provide comments to the U.S. Securities and Exchange Commission (“SEC” or “Commission”) on the Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice (the “Proposed Rule”).

Founded in 1946, the Society is a professional membership association of more than 3,700 corporate and assistant secretaries, in-house counsel, outside counsel and other governance professionals who serve approximately 1,700 entities, including 1,000 public companies of almost every size and industry. Society members are responsible for supporting the work of corporate boards of directors and the executive managements of their companies on corporate governance and disclosure matters.

I. Introduction: Background and Context

The practices and influence of proxy advisors has been a long-standing focus area of the Society. We believe the firms influence as much as % or more of the vote at most registrants, yet their recommendations are not subject to a regulatory framework that provides for independent oversight or other protections to help ensure their accuracy. Proxy advisor reports and voting recommendations are not generally made available to the public to read (except to the institutions that purchase them). In fact, proxy advisors are the only participants in the proxy voting system who are not regulated in some way. Issuers, asset managers, proxy processors, shareholders, and anyone soliciting a proxy, are regulated. While one of the proxy advisory firms is a registered investment advisor, the business of vote recommendations has had no unique or relevant regulatory scheme.

Until now.

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SEC Charges for Failure to Disclose Material Trends

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

The SEC has just settled an action against Diageo PLC, a producer of liquor, wine and beer, for failure to disclose known trends and uncertainties. Diageo’s omission resulted in materially misleading disclosures regarding its financial results and material inflation of key performance indicators—organic net sales growth and organic operating profit growth. It’s worth noting that the SEC has not been reluctant to take enforcement action against companies that have misled investors by inflating KPIs, such as subscriber counts, revenue-per-subscriber, number of vehicles sold monthly, net new customers added, backlog and now organic net sales growth and organic operating profit growth. These types of metrics—typically outside of the financial statements—are metrics on which investors and analysts often rely to assess performance, and companies have been held to account if their presentations are materially inaccurate or misleading or the related controls are inadequate.

Faced with declining market conditions, employees of the company’s North American subsidiary (DNA) engaged in “channel stuffing,” pushing shipments of unneeded inventory to third-party distributors. These actions were part of an effort to meet performance targets and report higher growth in particular KPIs that were closely followed by analysts and investors. With distributors overstocked with excess inventory, sales were highly likely to decline in the future—a known trend that the company failed to disclose, in part because of inadequate procedures. According to the SEC, the failure to disclose the channel stuffing meant that the company’s financial results were material misleading and the KPIs materially inflated.

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Weekly Roundup: February 21–27, 2020


More from:

This roundup contains a collection of the posts published on the Forum during the week of February 21–27, 2020.


Corporate Purpose and Culture


Tax and ESG



London’s Premium Segment and High-Growth Companies: Return of the Dual-Class Structure


Proposed New Tier for Nasdaq Thinly Traded Securities


Going the Distance



The Top 100 U.S. Class Action Settlements of All Time



Carving Out IPO Protections


Want to Join a Corporate Board? Here’s How


The Persistent Effect of Initial Success: Evidence from Venture Capital


Investors’ Expectations from the 2020 Proxy Season


ESG Factors and Antitrust



Corporate Opportunity Doctrine: Litigation Continues into 2020

Corporate Opportunity Doctrine: Litigation Continues into 2020

Nate Emeritz is Of Counsel and Brian Currie is an associate at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In a short order from the Delaware Court of Chancery, Vice Chancellor Kathaleen McCormick held that a former director may have usurped a corporate opportunity by successfully bidding against his company for a contract to operate a local public access television channel. Leased Access Preservation Assoc. v. Thomas, C.A. No. 2019-0310-KSJM (Del. Ch. Jan 8, 2020) (ORDER). This decision addressed the scope of what constitutes a corporate opportunity and when a director is acting in a fiduciary capacity, each for purposes of the corporate opportunity doctrine. In doing so, this litigation picked up on issues also addressed in several cases in 2019 and suggests that the corporate opportunity doctrine may continue to be an important topic in Delaware corporate law in 2020.

Leased Access case

Leased Access, a case about a Delaware non-profit, non-stock corporation (Leased Access Preservation Association or “LAPA”) that had operated a local public access television channel on a yearly basis for five years, marks the first foray by the Court of Chancery into the corporate opportunity doctrine in 2020. In that case, when proposals were solicited for a new contract on the television channel, one of LAPA’s directors (who later claimed to have already resigned) secretly submitted a competing bid and allegedly disseminated negative information about LAPA’s operational practices, based on information he had learned as a director. An entity controlled by the director was ultimately awarded the contract. As described by the Delaware Supreme Court, the corporate opportunity doctrine “holds that a corporate officer or director may not take a business opportunity for his own if: (1) the corporation is financially able to exploit the opportunity; (2) the opportunity is within the corporation’s line of business; (3) the corporation has an interest or expectancy in the opportunity; and (4) by taking the opportunity for his own, the corporate fiduciary will thereby be placed in a position inimical to his duties to the corporation.” Broz v. Cellular Info. Sys., 673 A.2d 148 (Del. 1996).

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Monitoring the Monitor: Distracted Institutional Investors and Board Governance

Ronald Masulis is Scientia Professor of Finance at University of New South Wales Australian School of Business. This post is based on a recent paper, forthcoming in the Review of Financial Studies, authored by Professor Masulis; Claire Liu, Assistant Professor of Finance at the University of Technology Sydney; Angie Low, Associate Professor of Finance at Nanyang Technological University; and Le Zhang, Senior Lecturer of Finance at Australian National University. 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

The board is a particularly powerful governance mechanism for monitoring firm performance in the U.S., with the power to initiate and approve major corporate decisions and to reward or discipline managers. However, director monitoring incentives do not appear to be particularly strong. Past studies show that the labour market for directors does not punish poorly performing directors sufficiently (Fahlenbrach, Low, and Stulz, 2017). Furthermore, independent directors generally have weak financial incentives to actively monitor a firm’s management on a consistent basis (Yermack, 2004). This raises some important questions. How reliable are boards of directors in representing shareholder interests? What motivates directors to monitor? Who monitors the board monitors? In our forthcoming paper in the Review of Financial Studies, we examine whether monitoring by institutional investors, a major class of shareholders, affects director behavior. We show that institutional investor monitoring on a regular basis significantly improves director incentives to expend effort in monitoring management.

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ESG Factors and Antitrust

Damian G. Didden is a partner and Christina C. Ma is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Recently, the World Economic Forum (“WEF”) released a Consultation Draft of proposed common standards for corporate disclosure of environmental, social, and governance (“ESG”) factors. The draft proposal highlights the need for a common framework from which to evaluate corporate actions and their impact on ESG factors. While it is unclear precisely which of the proposed standards will ultimately prevail, it is clear that we are poised to enter a new era of corporate governance and disclosure, and that there is an increasingly acute need to better understand how these standards may affect all aspects of corporate regulation, including antitrust.

It is not immediately apparent whether the adoption of these new standards will directly impact antitrust regulation of mergers, acquisitions or joint ventures, but there are some intriguing possibilities. Fundamentally, antitrust analysis is underpinned by the economic assumption that corporations are motivated by profit maximization. This bedrock principle drives the analysis of whether any given transaction will create or change incentives to raise price or reduce output, innovation, or quality in a way that is harmful to consumers.

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