Monthly Archives: February 2020

Weekly Roundup: February 7–13, 2020


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This roundup contains a collection of the posts published on the Forum during the week of February 7–13, 2020.

8-K Trading Gap Act




2020 Governance Outlook



Private Equity—Year in Review and 2020 Outlook


Strengthening the Board’s Effectiveness in 2020: A Framework for Board Evaluations


Leading Boards Rethinking Strategy and Enabling Innovation




Accelerating ESG Disclosure—World Economic Forum Task Force


Trends in Books and Records Litigation


Regulating Derivatives: A Fundamental Rethinking


S&P 500 CEO Compensation Increase Trends



Core Principles of Exculpation and Director Independence


Let’s Get Concrete About Stakeholder Capitalism


Actionable Claim to Inspect Books and Records


Report on Insider Trading by the Bharara Task Force


Technology and Life Science 2019 IPO Report

Technology and Life Science 2019 IPO Report

Richard Blake, Shannon Delahaye, and Lauren Lichtblau are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Blake, Ms. Delahaye, Ms. Lichtblau, Angela Chen, Andrew Gillman, and Brianna Murray.

Introduction

Wilson Sonsini Goodrich & Rosati’s 2019 Technology and Life Sciences IPO Report presents analysis related to the closing of 87 initial public offerings completed by U.S.-based technology and life sciences issuers between January 1 and December 31, 2019. (Source: CapitalIQ) The report includes IPO filing, pricing, and value statistics for both sectors; governance and board of director details; ownership and deal structure factors; and defensive measure data points.

2019 was another vibrant year for tech and life sciences IPOs, with just a slight decline from 2018 despite the U.S. government shutdown and market volatility that slowed IPO activity in early 2019. Comparing this year’s report with the firm’s 2018 year-end edition, the number of IPOs in 2019 fell only six short of the 93 tech and life sciences IPOs in 2018.

Technology

Twenty-seven technology companies priced IPOs during 2019. Application software led all technology sub-sectors, with seven IPOs. Other active sub-areas included internet and e-commerce, systems software, interactive media, and transportation technology. Combined, the above categories made up more than 70% of the technology IPOs in 2019. Although there were more than twice as many life sciences IPOs as tech deals, tech IPOs generated much larger deal values. Of the 27 tech IPOs, 12 had a total deal value exceeding $500 million.

Life Sciences

Sixty life sciences companies priced IPOs during 2019—more than double the total number of tech IPOs. Of the 60 life sciences IPOs, more than half were by biotech companies, followed by 16 IPOs involving medical device companies, and 10 IPOs by pharmaceutical companies. Despite having a larger number of IPOs, deal value sizes for life sciences companies were generally much lower than for tech issuers. Only four of the life sciences IPOs had a total deal value over $500 million.

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Report on Insider Trading by the Bharara Task Force

Preet Bharara is Chair of the Bharara Task Force. This post is based on a report authored by the Task Force whose members are Preet Bharara (NYU School of Law), Hon. Joseph A. Grundfest (Stanford Law School), Joon H. Kim (Cleary Gottlieb Steen & Hamilton LLP), Melinda Haag (Orrick, Herrington & Sutcliffe), John C. Coffee, Jr. (Columbia Law School), Joan E. McKown (Jones Day), Katherine R. Goldstein (Milbank), Hon. Jed S. Rakoff (United States District Court for the Southern District of New York). Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Executive Summary

For too long, insider trading law has lacked clarity, generated confusion, and failed to keep up with the times. Without a statute specifically directed at insider trading, the law has developed through a series of fact-specific court decisions applying the general anti-fraud provisions of our securities laws across a broadening set of conduct. As a consequence, the law has suffered—and continues to suffer—from uncertainty and ambiguity to a degree not seen in other areas of law, with elements of the offense defined by—and at times, evolving with—court opinions applying particular fact patterns. The rules of the road have been drawn and redrawn around these judicial decisions, and not always consistently across the country or over time. Although there have been attempts in the past to codify the law to bring greater certainty and clarity to the offense of insider trading, none has succeeded. This has left market participants without sufficient guidance on how to comport themselves, prosecutors and regulators with undue challenges in holding wrongful actors accountable, those accused of misconduct with burdens in defending themselves, and the public with reason to question the fairness and integrity of our securities markets.

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Actionable Claim to Inspect Books and Records

Jason M. Halper and Ellen Holloman are partners, and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP.  This post is based on their Cadwalader memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In Lebanon County Employees’ Retirement Fund, et al. v. AmerisourceBergen Corporation, the Delaware Court of Chancery ordered the inspection of the books and records of AmerisourceBergen Corporation, one of the leading opioid distributors in the country, for the purpose of investigating potential mismanagement or breaches of fiduciary duty in connection with the company’s distribution of opioids. In his decision, Vice Chancellor J. Travis Laster confirmed that stockholders are not required to show that the misconduct central to the investigation supports an actionable claim in order to meet their low burden to enforce inspection rights under Section 220 of the Delaware General Corporation Law. The decision also reinforced that, in appropriate circumstances, the Court will allow stockholders to inspect both board-level documents reflecting the directors’ decisions at formal board meetings and less formal communications by and among directors, officers, and senior-level managers. This decision is notable because the Court rejected the company’s efforts to impose heightened burdens on stockholders seeking to discover additional information about the types of books and records a company may or may not have, and in what formats those records exist. This decision also serves as a reminder to boards considering inspection demands that stockholders bear a low burden to show they are entitled to enforce their inspection rights under Delaware law, and if stockholders meet clear this threshold—which is seemingly easier in the context of publicly scrutinized events—Delaware courts are increasingly likely to find that stockholders are entitled to inspect minutes and other sources of information. Companies confronted with inspection demands should be strategic in what demands to oppose, and consider whether negotiation with the stockholder ultimately may produce a more favorable outcome than litigating the issue in court.

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Let’s Get Concrete About Stakeholder Capitalism

Michelle Greene is President of the Long-Term Stock Exchange. Related research from the Program on Corporate Governance includes Toward Fair and Sustainable Capitalism by Leo E. Strine, Jr. (discussed on the Forum here).

Being a stakeholder-focused company means upping the influence of workers, customers, the community and others critical to long-term success

The leaders from the worlds of business and finance who descended on Davos for The World Economic Forum’s latest annual gathering left the mountain resort after four days of discussion devoted to giving concrete meaning to stakeholder capitalism.

Now that the panels are over, how can these paragons of capitalism realize the ambitions they set at the Swiss resort? The gathering followed a year that saw nearly 200 members of the Business Roundtable pivot from the group’s decades-long “shareholder primacy” doctrine to one that demands the interests of stakeholders be considered. From the “new paradigm” proposed by Martin Lipton to the “Embankment Project” propounded by Ernst & Young and the Coalition for Inclusive Capitalism, the calls for reimagining capitalism continue to grow.

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Core Principles of Exculpation and Director Independence

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here); and Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

The Delaware Supreme Court recently reaffirmed important principles defining the scope of director liability for derivative claims. McElrath v. Kalanick, No 181, 2019 (Del. Jan. 13, 2020).

In 2016, to jumpstart its self-driving car program, Uber purchased Ottomotto LLC and hired employees with relevant technical expertise away from Google. When it later came to light that the new hires had misappropriated proprietary Google information, Uber fired the key new employee and paid $245 million in stock to settle Google’s claims. A stockholder plaintiff then sued Uber’s board, alleging that the directors breached their duties by approving the Ottomotto transaction. In a carefully reasoned opinion upholding the dismissal of the suit, the Supreme Court reaffirmed two important pleading requirements that shield directors from unsubstantiated derivative litigation:

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TIAA Comment Letter on Proposed Rules on Proxy Voting Advice and Shareholder Proposals

Amy M. O’Brien is Senior Managing Director and Head of Responsible Investing and Yves P. Denizé is Senior Managing Director and Division General Counsel, both at Nuveen, the investment manager of TIAA. This post is based on a TIAA comment letter to the SEC.

Like many institutional investors, TIAA takes its responsibilities as a shareholder seriously, and we work hard to make informed proxy voting decisions and participate thoughtfully in annual shareholder meetings. We believe it is important to maintain a careful balance between the rights of shareholders and those of operating companies, and we appreciate the Commission’s continued efforts to do so. However, we are concerned that certain aspects of the Proposals may ultimately make the proxy voting process more costly and difficult without providing meaningful benefits to investors or the market. We respectfully offer our thoughts and perspectives on the Proposals below in hopes that we may assist the SEC in its worthy goal of effectively and efficiently improving the U.S. proxy voting process.

1. Proxy advisors should not be required to give registrants an opportunity to review and provide feedback on voting advice before it is disseminated to clients.

The Proxy Advice Proposal includes proposed amendments to Rule 14a–2(b) of the Exchange Act that would require proxy advisory firms to give registrants one standardized opportunity for timely review of and feedback on proxy voting advice before disseminating the advice to clients, regardless of whether the advice is adverse to the registrant’s own recommendation. The amount of time a given registrant would have to conduct its review and provide feedback would depend on how far in advance of the shareholder meeting the registrant files its definitive proxy statement. Registrants that file their proxy statement between 25 and 44 days before their next shareholder meeting would be given at least three business days for review and feedback, while registrants that file their definitive proxy statement 45 days or more before their next shareholder meeting would be given at least five business days. Registrants would also have the option under the proposed amendments to request that a proxy advisor’s final voting advice include a hyperlink provided by the registrant directing the recipient of the advice to a written statement that sets forth the registrant’s views on the advice.

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S&P 500 CEO Compensation Increase Trends

Aubrey Bout is a Managing Partner, and Brian Wilby and Perla Cruz are consultants at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein; Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); and The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

Introduction and Summary

CEO pay continues to be discussed extensively in the media, in the boardroom, and among investors and proxy advisors. CEO total direct compensation (TDC; base salary + actual bonus paid + grant value of long-term incentives [LTI]) increased at a moderate pace in the first part of the last decade —in the 2-6% range for 2011-2016. CEO pay accelerated with an 11% increase in 2017, likely reflecting sustained robust financial and total shareholder return (TSR) performance, before returning to 3% in 2018, which is more in line with historical rates. Our CEO pay analysis is focused on historical, actual TDC, which reflects actual bonuses; this is different from target TDC or target pay opportunity, which uses target bonus and is typically set at the beginning of the year.

As proxies are filed in early 2020, we expect to find that 2019 CEO TDC increases will be modestly higher (in the low single digits) due to low 2018 TSR (-4% S&P 500 TSR) and economic uncertainty during Q1 2019 when LTI grants were made. Increases in 2019 actual pay will be primarily driven by higher cash bonuses as most companies had strong financial performance in 2019 and exceeded annual goals.

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Regulating Derivatives: A Fundamental Rethinking

Steven L. Schwarcz is Stanley A. Star Professor of Law & Business at Duke University School of Law. This post is based on his recent paper.

Many regard derivatives as exotic and uniquely risky financial instruments. That perception has given rise to a regulatory patchwork described as confusing, incomplete, and contradictory. This paper, Regulating Derivatives: A Fundamental Rethinking, rethinks how derivatives should be regulated.

The paper begins by de-mystifying derivatives. The outstanding scholarship discusses derivatives according to somewhat arcane industry-derived categories, which do not provide an analytical foundation for regulating derivatives. To provide that foundation, this paper shows that derivatives can be deconstructed more intuitively, by their economic functions, into two categories of traditional legal instruments—option contracts and guarantees.

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Trends in Books and Records Litigation

Ed Micheletti is partner and Bonnie David and Alexis Wiseley are associates 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.

Recently, the frequency of stockholder demands to inspect corporate books and records pursuant to Section 220 of the Delaware General Corporation Law has increased. In turn, the case law concerning Section 220 demands is rapidly developing. Section 220 demands were once conceived as the primary “tools at hand” available to stockholder plaintiffs to draft and file detailed derivative complaints. Now, given the marked decrease in M&A injunction requests and the corresponding decrease in discovery records created for that purpose, stockholder plaintiffs have increasingly turned to Section 220—particularly in the merger context—for access to documents in advance of filing post-closing class action complaints for money damages.

One practical result of decisions permitting plaintiffs to obtain merger-related documents under Section 220—which imposes the lowest possible burden under Delaware law—is a departure from long-standing precedent that required plaintiffs to withstand a motion to dismiss before obtaining discovery relating to a deal. Another general development is that books-and-records demands now frequently seek not only formal board materials, such as minutes and presentations, but also electronic communications, such as emails and text messages from personal accounts and devices. As a result, in a number of recent cases, Delaware courts have been forced to grapple with the types of electronic documents, including communications, that constitute corporate records and are required to be produced in response to a Section 220 demand. Recent decisions have addressed other issues as well, such as whether stockholders are entitled to books and records to aid in proxy contests, and the confidential status of documents produced in response to books-and-records requests.

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