Monthly Archives: February 2020

Accelerating ESG Disclosure—World Economic Forum Task Force

David M. Silk and Sabastian V. Niles are partners and Carmen X. W. Lu is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

Reflecting the growing push among investors, asset managers, companies and other stakeholders for a standardized ESG disclosure framework, a task force sponsored by the International Business Council (IBC) of the World Economic Forum (WEF), has released a consultation draft proposing a set of common disclosures aligned with the UN Sustainable Development Goals for companies to consider. Entitled “Toward Common Metrics and Consistent Reporting of Sustainable Value Creation” and drawing from several existing standards and disclosure frameworks (notably, the Global Reporting Initiative (GRI), the Sustainability Accounting Standards Board (SASB) and the Task Force on Climate-related Financial Disclosures (TCFD)), the draft framework proposes a set of 22 “core” primarily quantitative metrics and disclosures believed to be readily reportable by companies and an additional set of “expanded” metrics and disclosures that serve as “a more advanced way of measuring and communicating sustainable value creation” and which could be made by companies for whom such disclosure is material and appropriate. The task force was chaired by Brian Moynihan, Chairman and CEO of Bank of America and Chairman of the IBC, and included experts from each of the Big Four accounting firms—Deloitte, EY, KPMG and PwC. Roughly 120 multinational companies and their CEOs are represented on the IBC, which launched this initiative to identify a core set of material ESG metrics and recommended disclosures with the objective that companies would begin reporting collectively on an aligned basis.

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Amending the Delaware Corporate Code by Going to Court: Some Thoughts on Sciabacucchi v. Salzberg

Zachary Gubler is the Marie Selig Professor of Law at Arizona State University Sandra Day O’Connor College of Law. This post is based on his recent paper, forthcoming in the Georgetown Law Journal Online, 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 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.

With the oral arguments now behind us, it’s anybody’s guess how the Delaware Supreme Court will rule in Sciabacucchi v. Salzberg. Personally, I think the Court should reverse the Chancery Court’s decision to invalidate charter provisions making federal court the exclusive forum for ’33 Act litigation. In a recent essay, I highlight two arguments that I think have flown under the radar but strongly favor this outcome. The arguments are related and have to do with how the Chancery Court went about interpreting Section 102(b)(1) of the DGCL, the provision establishing the permissible scope of the corporate charter.

The first argument is that the Chancery Court should never have interpreted the statute in light of the internal affairs doctrine. That doctrine is a choice of law provision, which says that all “internal affairs” of the corporation shall be decided by Delaware law. The Chancery Court took this to mean that whatever the scope of Section 102(b)(1), it must be limited to internal affairs. Thus, they were able to read a statutory provision that permits “any [charter] provision creating, defining, limiting and regulating the powers of . . . stockholders” to be limited to “the powers of . . . stockholders that are exclusive to stockholders and that arise exclusively under Delaware law.”

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Year in Review: Delaware Corporate Law and Litigation

Amy Simmerman, Brad Sorrels, and Lori Will are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Ms. Simmerman, Mr. Sorrels, Ms. Will, Ryan Greecher, Katherine Henderson, and David Berger, and is part of the Delaware law series; links to other posts in the series are available here.

Introduction

In 2019, the Delaware courts issued a broad range of important decisions addressing various corporate law and governance issues—including board compensation, controlling stockholder conflicts, board oversight obligations, M&A structuring issues, director liability for unlawful dividends, and advance notice bylaws. The case law from 2019 is relevant for both public and private companies—particularly because Delaware law generally does not distinguish between the two—and will help shape decision-making by boards, members of management, and investors in 2020. We provide an overview of these decisions—and related themes and issues that we are observing in practice—in our 2019 Delaware Corporate Law and Litigation Year in Review.

Alongside of the ever-evolving body of Delaware law, the Delaware judiciary has also continued to undergo transformation. The Chief Justice of the Delaware Supreme Court, Leo E. Strine, Jr., retired in October 2019.

Justice Collins J. Seitz, Jr. took his place as Chief Justice, and former Wilson Sonsini partner Tamika Montgomery- Reeves was appointed and confirmed as a Justice to the Supreme Court from the Delaware Court of Chancery, replacing Justice Seitz. In early January 2020, Delaware Governor John Carney announced the nomination of practitioner Paul A. Fioravanti, Jr. to the resulting open seat on the Delaware Court of Chancery, which consists of one Chancellor and six Vice Chancellors following an expansion of the Court in 2018. We will continue to monitor developments in the Delaware courts in the year ahead.

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Leading Boards Rethinking Strategy and Enabling Innovation

Steve W. Klemash is Americas Leader at the EY Center for Board Matters and Kris Pederson is Corporate Governance Leader, Americas Advisory at EY. This post is based on their joint EY and Corporate Board Member memorandum.

Staying future focused can lead to sustainability

In November 2019, the EY Center for Board Matters welcomed a group of corporate directors—who collectively represent more than 80 boards and $1 trillion in market capitalization—to its Strategy and Innovation Board Summit in New York City. The objective was to share experiences and discern how boards can be more effective in their oversight of strategy and innovation amid rapidly evolving technology and market disruption.

The session started at the New York Stock Exchange, with directors experiencing the excitement of the trading floor and watching employees of a newly admitted company ring the bell, which served as a direct reminder for board directors to be mindful of their key role as stewards of the financial health of the companies they represent. The summit featured highly interactive discussions on topics such as the necessity of balancing short- and long-term performance, how boards are changing their approach to strategic planning and governance, and the importance of bringing outside perspectives to the boardroom. This post captures the key insights from the summit to help advance the strategy and innovation agenda for directors.

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

 Lyuba Goltser is a partner and Aabha Sharma is an associate at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum.

The board self-evaluation process has evolved from a “check-the-box” obligation into a highly effective tool to help boards of directors take a critical look at their capabilities and readiness to meet the growing expectations of investors and other corporate stakeholders. As directors think about the opportunities and challenges their companies face in 2020 and beyond, the self-assessment process should be an important part of the board’s agenda. We describe below a flexible six step framework for conducting and enhancing the benefits of this process.

Overview

Boards of directors are under pressure to achieve a multitude of goals, among them to foster a company culture that supports long-term value creation, improve the diversity of the board and the management team, focus on sustainability issues affecting the company’s long-term strategy, enhance oversight of risk, and strengthen engagement efforts with stakeholders. As boards tackle these challenges, a thoughtful self-assessment process can improve board alignment around key issues, reveal gaps in composition, provide fresh perspectives on the board’s and management’s functioning and strengthen the effectiveness of the board’s procedures and practices.

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Private Equity—Year in Review and 2020 Outlook

Andrew J. NussbaumSteven A. Cohen, and Karessa L. Cain are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

Private equity had a strong finish to the decade. Global PE-backed buyout volume reached nearly $400 billion by year end, which represented a 20% decline relative to 2018 but was still quite robust by historical standards, fueled by a number of megadeals, significant dry powder and record-low interest rates.

We review below some of the key themes that drove PE deal activity in 2019 and our expectations for 2020.

Megadeals. There were a number of $10 billion-plus PE deals in 2019, including Blackstone’s $18.7 billion purchase of the U.S. warehouse portfolio of Singapore-based GLP (the largest private real estate deal in history), EQT’s $10.1 billion purchase of Nestlé’s skincare unit, and the $14.3 billion sale of communications infrastructure services provider Zayo Group to Digital Colony Partners and EQT. In addition, in November, it was reported that KKR had approached drugstore giant Walgreens Boots Alliance about a potential $70 billion take-private transaction—a deal that, if successful, would be the largest LBO in history.

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Delaware Year-End Review: M&A and Shareholder Litigation

Sameer Advani, Shaimaa Hussein, and Tariq Mundiya are partners at Willkie Farr & Gallagher LLP. This post is based on a Willkie memorandum by Mr. Advani, Ms. Hussein, Mr. Mundiya, Alexander Cheney, Charles Cording, and Vanessa Richardson. This post is part of the Delaware law series; links to other posts in the series are available here.

It has been another busy year for the Delaware courts, with opinions issued in a number of key areas. The Delaware Supreme Court confirmed that Caremark claims, although generally very difficult to maintain, can survive a motion to dismiss. Meanwhile, the Court of Chancery showed that there is still a high bar to establishing a material adverse effect that will permit termination of a merger agreement, and that justifications by buyers to walk away from binding contracts will be heavily scrutinized. The courts’ decisions continued to clarify what information boards must disclose in order to ratify a third-party transaction under Corwin, what it means to be a “controlling stockholder,” and when the MFW standard of review will apply to transactions with a controller. The courts also re-emphasized the importance of deal price in determining fair value in an appraisal action, and expanded the types of documents that may be available to stockholders in a books and records action. Finally, the courts addressed the enforceability of advance notice bylaws and analyzed several recurring issues in the context of post-closing disputes.

Chief Justice Strine’s retirement in 2019 also marked the end of an era and resulted in some reshuffling on the Delaware courts. Justice Seitz was selected to replace Chief Justice Strine, and Vice Chancellor Montgomery-Reeves was elevated to become the first person of color and the third woman to serve on the Delaware Supreme Court. Earlier this month, her replacement, Paul Fioravanti Jr., was confirmed by the Delaware Senate as the newest Vice Chancellor of the Court of Chancery.

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2020 Governance Outlook

Friso van der Oord is the Director of Research and Reaa Chadha is a Senior Research Analyst at the National Association of Corporate Directors. This post is based on their NACD report.

Today, the accelerating pace and intensifying complexity of change are creating a fundamentally different operating reality that is putting the competitiveness and governance of many businesses to the test. NACD’s most recent Public Company Governance Survey found that looking forward to 2020, directors are most concerned about the impact of growing business-model disruptions, the slowing global economy, increased competition for talent, changing cybersecurity threats, and rapid technology changes. [1] Each of these trends alone could drive companies out of business. But, as we reveal in this year’s NACD Blue Ribbon Commission Report, Fit for the Future: An Urgent Imperative for Board Leadership, “what makes the current epoch uniquely unpredictable and hard to navigate is the fact that these changes are happening concurrently, interacting with and amplifying each other….” [2] For example, the exponential changes in digital capabilities have increased vulnerabilities to cyber threats and unleashed a war for talent, while worsening geopolitical turbulence, including concerns about increasing trade protectionism, is casting a dark cloud over global economic growth in 2020.

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CII Letter to SEC on Proposed Amendments to Exemptions from the Proxy Rules for Proxy Voting Advice

Kenneth A. Bertsch is Executive Director and Jeffrey P. Mahoney is General Counsel at the Council of Institutional Investors. This post is based on their recent 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 focuses on claims by certain corporate representatives that there are pervasive factual inaccuracies in proxy advisors’ reports, claims that we believe were relied on in the Release and in the decision of a majority of SEC commissioners to support proposing a new regulatory regime for independent proxy advisors. We believe that the claims of pervasive errors are unfounded and misleading and do not provide a basis for rulemaking. As CII and other investor organizations and various investors have indicated, the paucity of evidence of pervasive factual errors by proxy advisors suggests that, in fact, no regulatory intervention is necessary or justified.

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Self-Dealing in a Comparative Light

Andrew F. Tuch is Professor of Law at Washington University School of Law. This post is based on his recent article, published in the Fordham Law Review.

Scholars have long disagreed over which of two fiduciary rules is more effective for controlling self-dealing. Some scholars defend the “strict” no-conflict rule, which categorically bans self-dealing by directors (Marsh, 1966; Brudney, 1985; Criddle, 2017). Others prefer the “flexible” and “pragmatic” fairness rule, which allows self-dealing if it is fair to the corporation and its shareholders (Easterbrook & Fischel, 1991; Langbein, 2005). Proponents of this approach claim that the pragmatic fairness rule better distinguishes between beneficial and harmful self-dealing. The debate has dragged on for decades, beyond corporate law and across the common law world (Kershaw, 2012; Licht, 2019).

In my article Reassessing Self-Dealing: Between No Conflict and Fairness, I challenge a central assumption underlying the debate: that the rules operate differently, to different effect. In practice, the difference between these rules is not as important as scholars believe. Today, this is best seen by comparing the United Kingdom—which continues to employ the traditional no-conflict rule—to the United States (more specifically, Delaware), which adopted the fairness rule.

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