Monthly Archives: March 2020

Skye Mineral: Minority Investor “Blocking Rights” and Actual Control

Gail Weinstein is senior counsel and Warren S. de Wied and Erica Jaffe are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. de Wied, Ms. Jaffe, Brian T. Mangino, Shant P. Manoukian, and Bret T. Chrisope, 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 Perils of Small-Minority Controllers by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

In Skye Mineral Investors, LLC v. DXS Capital (U.S.) Limited (Feb. 24, 2020), the Delaware Court of Chancery found, at the pleading stage, that it was reasonably conceivable that the two key minority members of Skye Mineral Partners, LLC (“SMP”) had breached their fiduciary duties to SMP and the other members by intentionally using the contractual veto rights they had under SMP’s LLC Agreement to harm SMP and increase their own leverage. Also, the court found that members of the group that controlled these minority members, as well as certain affiliates of that group, may have aided and abetted the fiduciary breaches. In addition, the court found that one of these minority members and its authorized observer on the SMP board breached their confidentiality obligations by using information they learned, through the observation right, to advance the member’s interests at SMP’s expense.

The decision serves as an explicit reminder of the fiduciary and other obligations that LLC members and managers (and their affiliates) may have when the LLC agreement does not clearly and unambiguously provide otherwise. Further, the decision indicates that, under unusual circumstances, minority members may find themselves in the unexpected position of having fiduciary obligations as controllers–if their veto rights under the LLC agreement have put them in a position of “actual control” of the LLC (and particularly if they use that control to advance their own interests while harming the company).


Shareholder Proposals 2019—ESG No-Action Letter Trends and Strategies

Richard Alsop is a partner and Yoon-jee Kim is an associate at Shearman & Sterling LLP. This post is based on their Shearman & Sterling memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Shareholder proposals relating to ESG matters are frequent targets for exclusion by companies, and based upon a survey of the no-action letters submitted during the 2019 proxy season, this trend continues. Over 40% of the no-action letters we reviewed for the 2019 proxy season related to a variety of ESG matters, and the arguments and outcomes in those letters are instructive as to how companies and the SEC staff are approaching ESG proposals, especially in the wake of recent SEC staff guidance on its approach to requests based on the “economic relevance” (Rule 14a-8(i)(5)) and “ordinary business” (Rule 14a-8(i)(7)) exemptions, which are frequently cited grounds for excluding ESG-related shareholder proposals. [1] In terms of the subject matter of proposals for which exclusion was sought, the largest group related to environmental matters, sustainability and climate change, accounting for 34 out of the 105 ESG-related no-action letters we reviewed. Human rights issues also continued to appear as the subject of numerous proposals for which no-action letters were submitted, accounting for 18 no-action letters. Other shareholder proposal topics giving rise to no-action letters included topics such as political contributions and lobbying (ten), animal cruelty (five), drug pricing (four) and proposals relating to inequitable employment practices and the gender pay gap (eight). Other proposal topics that spawned no-action letters included “me too,” hate speech, immigrant detainees, diversity and privacy.


The Impact of COVID-19 on Performance-Based Compensation Programs

Scott A. BarshayBrad S. Karp, and Jean M. McLoughlin are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss memorandum by Mr. Barshay, Mr. Karp, Ms. McLoughlin, John C. Kennedy, Liza M. Velazquez, and Lawrence I. Witdorchic. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

As the coronavirus disease (COVID-19) pandemic continues and the economic consequences are becoming increasingly severe, this post examines its impact on public company compensation programs at this time of economic uncertainty and market volatility. In particular, we focus on the structure of performance-based compensation, in light of many companies adjusting their forecasts and announcing they will not meet first quarter guidance in light of the effects of COVID-19. This issue is particularly timely for companies whose Compensation Committees are in the process of being asked to approve executive compensation programs at regularly scheduled Board meetings or are in the process of mailing proxies for their annual shareholder meetings that describe such programs. [1]

If companies have set 2020 performance targets for their compensation programs (even if very recently), it very well may be appropriate and necessary to adjust those targets, since the dramatic shift in the economic forecast has rendered those targets seemingly impossible to reach. Without making appropriate adjustments to incentive compensation programs to account for the impact of COVID-19, companies run a risk of not properly incentivizing and compensating their employees at a time that increased dedication is necessary to maintain company stability. This issue is compounded by the fact that stock prices have as a general matter declined by more than 20%, and most senior executives will likely have experienced a decrease in the value of their compensation due to the heavy weighting of executive compensation towards equity.


Testing Compliance

Brandon L. Garrett is the L. Neil Williams, Jr. Professor of Law at Duke Law School and Gregory Mitchell is the Joseph Weintraub–Bank of America Distinguished Professor of Law at the University of Virginia School of Law. This post is based on their paper, forthcoming in Law and Contemporary Problems.

Corporations must comply with a wide array of laws and regulations. To accomplish this complex task, corporations increasingly turn not just to the legal department and outside counsel but also an in-house group of specialists who seek to educate and motivate personnel with respect to obligations under the law and the corporation’s code of conduct. The programs they put in place aim to prevent a wide range of misconduct, from government bribery and financial fraud to environmental disasters and the creation of dangerous working conditions that jeopardize employees’ physical and mental health.

Beyond the enormity of the task, what makes the compliance enterprise deeply uncertain and problematic is that the information generated by compliance efforts is simultaneously useful and dangerous. Even the most craven corporate officers and directors seek to prevent behaviors that may jeopardize employee performance, customer satisfaction, and stock prices. However, documenting problematic behaviors creates a record that may be used against the corporation in future administrative, criminal or civil proceedings, or may become the subject of a media exposé. Officers and directors, and the in-house compliance team, may sincerely hope compliance programs are effective, but they may quite rationally avoid testing that hope. The end result will often be rational ignorance with respect to the effectiveness of corporate compliance programs. This dynamic—the hope that greater attention to compliance will reap benefits drives more resources toward compliance efforts, yet fears about what examining the effects of those efforts might reveal hinders validation of compliance programs—creates a “compliance trap” that can ensnare corporations and regulators alike.


New ESG Disclosure Obligations

Anna Maleva-Otto is a partner and Joshua Wright is an associate at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

The EU regulation on Sustainability-Related Disclosures (“Disclosure Regulation”) [1] will take effect on March 10, 2021. Its aim is to enhance transparency regarding integration of environmental, social and governance matters (“ESG”) into investment decisions and recommendations. Many of the requirements of the Disclosure Regulation will apply to investment managers that do not focus on ESG mandates.

The Disclosure Regulation forms part of a package of legislative initiatives designed to promote the engagement of financial services providers in building a sustainable economy of the future. These legislative initiatives also include the draft Taxonomy Regulation [2] which establishes a framework for classifying financial products as “sustainable investments”—a measure directed at tackling so-called “greenwashing” of financial products. Other elements of the package include proposed amendments to MiFID II, [3] AIFMD and UCITS [4] that will require asset managers to integrate ESG considerations into their organisational and operational controls, and risk management processes.


2019 ESG Proxy Voting Trends by 50 U.S. Fund Families

Jackie Cook is Director of Manager Research and Jon Hale is head of sustainability research for Morningstar, Inc. This post is based on their Morningstar memorandum. Related research from the Program on Corporate Governance includes  Social Responsibility Resolutions by Scott Hirst (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).

Key Takeaways

  • Asset-manager proxy voting support for ESG-related shareholder resolutions has increased considerably over the past five years, with average support across 50 large fund families rising to 46% from 27%.
  • Funds offered by Allianz Global Investors, Blackstone, Eaton Vance, and PIMCO were the most likely to support shareholder-proposed ESG resolutions in 2019, voting for these resolutions more than 87% of the time.
  • Five of the 10 largest fund families—Vanguard, BlackRock, American Funds, T. Rowe Price, and DFA Funds offered by Dimensional Fund Advisors—voted against more than 88% of ESG-related shareholder resolutions.
  • Large fund groups voting against ESG-related shareholder resolutions kept many of these initiatives from achieving majority support. Nineteen of 23 resolutions earning more than 40% support would have passed if supported by just one of the largest two asset managers.

Fund Proxy Votes Reflect Asset Managers’ ESG Stewardship

Since 2004, U.S.-domiciled open-end and exchange-traded mutual funds have been required to report their annual proxy voting records in SEC filings. Each year at the end of August, asset managers must disclose—fund by fund, item by item—how they voted on portfolio company ballots for meetings held in the preceding proxy calendar year, which runs from July through June.


Public versus Private Equity

René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on his recent paper.

Over the last twenty-five years, the U.S. has undergone a dramatic transformation in the role of public equity. The number of public firms has fallen by roughly half since 1997. In contrast, the number of companies backed by private equity (PE) funds has doubled from 2006 to 2017 according to McKinsey. Why is it that public markets appear to be struggling while private markets are expanding rapidly and attracting considerable capital? Does this contrasting evolution mean that the public form of corporate organization is less suited to the business models of firms in the 21st century than it was to the business models of firms last century? Or is it that regulatory changes have decreased the advantage of the public form of organization? Another way to put this is: Are public markets doing less well because firms have changed or because public and/or private markets have changed? I address these issues in my paper titled Public versus Private Equity.

I present a framework that makes it possible to evaluate the relative benefits and costs of public versus private ownership and why these relative benefits and costs have changed over time. I then show that two important changes have taken place that help understand the relative evolution of private and public firms: First, the net benefit of private ownership falls as information asymmetry between insiders of a corporation and potential investors increases and the increase in the role of intangible assets in corporations has increased this information asymmetry; second, funds available for private equity investments have increased sharply partly because of deregulation and partly because of the institutionalization of investment.


Glass Lewis Guidelines Update on Virtual-Only Meetings Due to COVID-19

Aaron Bertinetti is Senior Vice President of Research and Engagement at Glass, Lewis & Co. This post is based on his Glass Lewis memorandum.

The COVID-19 pandemic has caused significant disruption to people and companies around the world. In order to ensure the health and safety of employees and shareholders, and to comply with government-issued orders and guidelines, a number of North American companies are breaking with convention to hold their shareholder meetings on a virtual-only basis, including when a proxy statement has already been filed.

While Glass Lewis acknowledges concerns regarding virtual-only meetings, given the current situation, we believe that such meetings provide compelling advantages for both companies and shareholders to preserve the timing, certainty, agendas and voting of shareholder meetings. We do not believe discouraging virtual-only meetings during this time serves the interests of shareholders or companies.

Immediate Policy Update

For the duration of the 2020 proxy season (March 1, 2020 through June 30, 2020), we will take into account the extenuating circumstance of the COVID-19 pandemic when applying our policy on virtual-only shareholder meetings. We will review these on a case-by-case basis and will also note whether companies state their intention to resume holding in-person or hybrid meetings under normal circumstances.


Federal Forum Selection Charter Provisions Validated by Delaware Supreme Court

William B. Chandler III, David Berger, and Brad Sorrels, are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR memorandum by Mr. Chandler, Mr. Berger, Mr. Sorrels, and Andrew Berni. This post is part of the Delaware law series; links to other posts in the series are available here.

[On March 18, 2020] the Delaware Supreme Court issued an important en banc decision [1] upholding the right of Delaware corporations to adopt forum-selection provisions in their charters requiring claims under the Securities Act of 1933 (the “’33 Act”) to be brought in federal court (the “Federal Forum Provisions”). The Supreme Court’s decision provides a critical tool for pre-IPO companies to address the increase in the number of lawsuits brought in state court asserting claims under Section 11 of the ’33 Act challenging disclosures in their registration statements. Prior to this ruling, many such claims were brought in state courts which had led to inconsistent and unpredictable rulings. As a result, D&O insurance premiums for such claims have increased dramatically in recent years.


Corporate Governance Survey—2019 Proxy Season Results

David A. Bell is partner at Fenwick & West LLP. This post is based on portions of a Fenwick publication titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies (2019 Proxy Season).

Since 2003, Fenwick has collected a unique body of information on the corporate governance practices of publicly traded companies that is useful for Silicon Valley companies and publicly traded technology and life science companies across the U.S. as well as public companies and their advisors generally. Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the technology and life science companies included in the Fenwick – Bloomberg Law Silicon Valley 150 List (SV 150). [1]

Significant Findings

Governance practices and trends (or perceived trends) among the largest companies are generally presented as normative for all public companies. However, it is also somewhat axiomatic that corporate governance practices should be tailored to suit the circumstances of the individual company involved. Among the significant differences between the corporate governance practices of the SV 150 technology and life science companies and the uniformly large public companies of the S&P 100 are:


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