Monthly Archives: July 2020

Chancery Court Sustains Breach of Fiduciary Duty Claims Against Nonparty to LLC Agreement

Taylor Bartholomew is an associate and Matthew Greenberg and Joanna Cline are partners at Troutman Pepper Hamilton Sanders LLP. This post is based on a recent Troutman Pepper memorandum by Mr. Bartholomew, Mr. Greenberg, Ms. Cline, and Christopher B. Chuff. This post 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).

In 77 Charters, Inc. v. Gould, the Delaware Court of Chancery refused to dismiss breach of fiduciary duty claims against an indirect, “remote controller” of a limited liability company in connection with a series of transactions whereby the controller purchased preferred interests in the limited liability company from a member and subsequently amended the limited liability company’s operating agreement to increase the preferred’s distribution preference to the detriment of the holder of the limited liability company’s common interests. The decision serves as a cautionary reminder to investors that their actions may not be insulated from fiduciary liability—no matter how many intermediaries are involved—unless the applicable operating agreement clearly and expressly disclaims fiduciary duties.


In 2007, as part of an investment in a retail shopping center, Cookeville Retail Holdings, LLC (Cookeville Retail) was formed by its managing member, Stonemar Cookeville Partners, LLC (Stonemar Cookeville), and its preferred member, Kimco Preferred Investor LXXIII, Inc. (Kimco). Around the same time, Stonemar Cookeville was formed by its managing member, Stonemar MM Cookeville, LLC (Stonemar MM), and its nonmanaging members, one of which is 77 Charters, Inc. (plaintiff). Jonathan D. Gould (Gould) is the managing member of Stonemar MM. Under the Limited Liability Company Agreement of Cookeville Retail (the CRA), Kimco was first allocated a 9 percent distribution on its capital contributions, while the excess was distributed to Stonemar Cookeville and its members (including the plaintiff). The following chart depicts the parties’ relationships.


Protecting Financial Stability: Lessons from the Coronavirus Pandemic

Howell E. Jackson is the James S. Reid, Jr., Professor of Law at Harvard Law School and Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law. This post is based on their recent paper.

The coronavirus pandemic has produced a public health debacle of the first-order. But, the virus has also propagated the kind of exogenous shock that can precipitate—and to a certain degree has precipitated—a systemic event for our financial system. This still unfolding systemic shock comes a little more than a decade after the last financial crisis. In a recently posted essay, Protecting Financial Stability: Lessons from the Coronavirus Pandemic, we contrast the current pandemic with the last financial crisis and then examine the steps that financial authorities have taken to safeguard financial stability against the effects of COVID-19. Our essay also explores the extent to which financial regulation might be reformed and supplemented in the future to address the emerging lessons of the pandemic crisis.

The last financial crisis is most vividly remembered as a top-down crisis starting with the failure of a series of major financial firms in 2008, culminating in a capital market meltdown in September following the bankruptcy of Lehman Brothers. The coronavirus pandemic, as yet, has not precipitated any similar financial failures, although capital markets did react dramatically in March of this year as the pathology of the virus and its potential implications on global economic activity started to come into focus. This new information produced an exogenous shock, prompting in many quarters a rush to cash and the evaporation of liquidity for many asset classes. The Federal Reserve Board, along with other central banks and financial regulators, responded promptly, drawing self-consciously on the emergency toolkit developed in the last financial crisis, as well as a number of counter-cyclical levers made available as part of regulatory reforms adopted in response to that last crisis. This intervention to stabilize capital markets (and financial firms) appears to have been successful, at least so far.


COVID-19: Navigating Core Audit Committee Responsibilities

Paula Loop is Leader, Paul DeNicola is Principal, and Stephen G. Parker is Partner at the PricewaterhouseCoopers LLP Governance Insights Center. This post is based on their PwC memorandum.

As businesses confront the profound operational, financial and workforce disruption brought on by the COVID-19 pandemic, there’s no such thing as business as usual. That’s as true for corporate boards as it is for frontline workers. In particular, audit committees will have a lot on their plates in the coming months to provide critical oversight of financial reporting in this environment (for a detailed discussion of financial reporting considerations see PwC’s COVID-19: Audit committee financial reporting guidebook). At the same time, audit committees will need to continue to focus on their other core responsibilities in areas like risk oversight, oversight of internal and external audit, and ethics and compliance.

Risk oversight

In its role overseeing risk, audit committees will want to understand how management is evaluating the effects of COVID-19 on the business operations and the way people work, and whether those effects trigger an event-driven reassessment of business risk, control risk and the effectiveness of the related controls. As examples, the company might be entering into new or different business contracts or the operating environment might have dramatically changed due to social distancing and different working practices.


Accounting and Auditing Enforcement Activity—2019 Review and Analysis

Elaine M. Harwood is Vice President and Alison M. Forman is a Principal at Cornerstone Research. This post is based on their Cornerstone memorandum.

The SEC and PCAOB publicly disclosed 81 accounting and auditing enforcement actions during 2019. Monetary settlements totaled approximately $628 million, $626 million of which was imposed by the SEC.

Research Sample and Data Sources

This research examines trends in accounting and auditing enforcement actions that were publicly disclosed by the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) between 2014 and 2019. [1]

Accounting and auditing enforcement actions include (1) SEC Accounting and Auditing Enforcement Releases (AAERs) listed in the SEC Division of Enforcement Annual Reports and available on the SEC’s website at (“SEC actions”), and (2) PCAOB settled and adjudicated disciplinary orders available on the PCAOB’s website at (“PCAOB actions”). SEC actions exclude follow-on administrative proceedings. SEC and PCAOB auditing actions exclude actions unrelated to the performance of an audit (e.g., failure to register with the PCAOB or to timely disclose certain reportable events to the PCAOB).


Doubt On Merger Disclosure Claims in a Rare Federal Court Decision

Roger Cooper, James Langston, and Mark McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Cooper, Mr. Langston, Mr. McDonald, and Charity E. Lee.

These days, most public company mergers continue to attract one or more boilerplate complaints, usually filed by the same roster of plaintiffs’ law firms, asserting that the target company’s proxy statement contains materially false or misleading statements. These complaints usually also assert that the stockholder meeting to approve the merger should be enjoined unless and until the company “corrects” the false or misleading statements by making supplemental disclosures. While not too long ago cases like this tended to be filed in the Delaware Court of Chancery and other state courts asserting breaches of state-law fiduciary duties, including the duty of disclosure, after Trulia the vast majority of these cases today are filed in federal court under Section 14 of the Securities Exchange Act of 1934. [1]

Almost none of these cases, however, are actually litigated. Instead, they usually follow a by-now-familiar pattern: After one or more complaints are filed, defendants (usually the target company and its board of directors) offer to make supplemental disclosures to “moot” the plaintiffs’ claims (even though defendants rarely believe there is any merit to the claims); perhaps after some back-and-forth negotiation (sometimes not), the plaintiffs agree to withdraw their claims in light of the supplemental disclosures; the plaintiffs’ lawyers then seek a “mootness fee,” supposedly in compensation for the “benefit” provided in the form of the supplemental disclosures; and the defendants (usually after some negotiation) agree to pay such fees, which ends the case. (Because no class-wide release is obtained, the courts typically never get involved.) This practice has been widely criticized as imposing a “merger tax” without providing any benefits to companies or stockholders. But, given the strong incentives to avoid delaying the overall transaction, as well as to minimize litigation costs and risk, most defendants elect not to litigate these cases (despite their weaknesses on the merits), and so the practice continues.


Statement by Commissioner Lee on the Proposal to Substantially Reduce 13F Reporting

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.

The Commission proposes today [July 10, 2020] to increase the reporting threshold by 35 times for institutional investment managers that must report equity holdings on Form 13F, thus eliminating visibility into portfolios controlling $2.3 trillion in assets. [1] This proposal joins a long list of recent actions that decrease transparency and reduce both the Commission’s and the public’s access to information about our markets. [2]

I’m unable to assess the wisdom of today’s proposal because it lacks a sufficient analysis of the costs and benefits. The costs of losing transparency are glossed over in brief narrative form and largely discounted. And to the extent the proposal purports to capture benefits in the form of cost savings, those cost savings rest largely on new Paperwork Reduction Act (PRA) estimates of the costs of compliance. The Commission’s legal obligation to do a thorough economic analysis under the National Securities Markets Improvement Act, however, cannot be satisfied by simply substituting PRA estimates. [3] What’s more, the asserted cost savings derived from the PRA estimates in the final draft of this proposal reflect a quadrupling of our current estimate using assumptions that depart substantially from those used by the Commission for over a decade.

I am concerned that the projected cost savings in today’s proposal are greatly overstated and wholly inconsistent with the Commission’s past analysis—and, importantly, that the actual cost savings do not justify the loss of visibility into portfolios controlling $2.3 trillion in assets. Additionally, the Commission’s assertion of authority to raise the threshold conflicts with the plain text in the Exchange Act that requires us to collect the information. Specifically, section 13(f)(1) withholds authority from the Commission to raise the threshold, and the proposal fails to address that conflict.


Final Volcker 2.0: Summary for Fund Activities

Joseph P. Vitale is a partner and Nicholas A. Wilson is an associate at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

On June 25, 2020, the Federal Reserve Board, the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the U.S. Securities and Exchange Commission and the U.S. Commodity Futures Trading Commission (collectively, the “Agencies”) approved a new final rule (“Final Rule”) to simplify and tailor the “covered fund” provisions of the regulations implementing section 13 of the Bank Holding Company Act, commonly known as the “Volcker Rule.” [1] A copy of the Final Rule is available at It will become effective Oct. 1, 2020.

On the day the Final Rule was approved, we published an Alert that provided an executive summary. [2]

This post supplements that Alert by examining each of the Final Rule’s provisions in detail.


Under the Volcker Rule, a banking entity [3] is generally barred from acquiring or retaining, as principal, an ownership interest in a “covered fund,” subject to certain exceptions. Further, a banking entity generally cannot sponsor a covered fund unless (i) it abides by a series of requirements or (ii) the sponsorship falls within an exception for non-U.S. activities.


Opening Remarks by Commissioner Roisman at the Emerging Markets Roundtable

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent opening remarks at the Emerging Markets Roundtable. 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.

Good morning, and welcome to everyone who is joining us today [July 9, 2020]. Thank you to the panelists who are participating virtually and a very big thank you to the SEC staff for organizing and hosting this event. Today’s agenda covers a wide array of issues that affect the work of many SEC divisions and offices, as well as the functioning of several different parts of our markets. The issues we will discuss today are not new, but have arisen in separate contexts for many years. I am happy that we have a forum to focus on these topics altogether, convening experts from different areas of our markets to share their perspectives.

The world economy is growing ever more interconnected—a development which bodes well for wealth creation for investors around the world, including for U.S. investors. Promoting investor access to potentially lucrative investments is something I advocate for regularly. However, I never suggest that such investment opportunity should be provided without regard to investor protection, and it is clear that these growth prospects come with certain risks. Different jurisdictions implement different regulatory regimes in their markets, making for a complicated and constantly shifting landscape in which investor protections may be uneven. We at the SEC must continually consider how this agency can best protect U.S. investors as they encounter these new opportunities.


Do Bank Insiders Impede Equity Issuances?

Martin Goetz is Associate Professor at Goethe University Frankfurt; Luc Laeven is Director-General, Research Department at the European Central Bank; and Ross Levine is the Willis H. Booth Chair in Banking and Finance at the University of California, Berkeley Haas School of Business. This post is based on their recent paper.

(This post reflects our own views, see disclaimer).

Banks with more equity tend to lend more, create more liquidity, and have higher probabilities of surviving crises. Moreover, adverse shocks to bank equity predict contractions in lending and aggregate output, and lower bank equity ratios slow recoveries from crises. The strong linkages between bank equity, bank lending, and economic activity raise a critical question: what factors shape the differing degrees to which banks issue new stock to replenish bank equity in response to crises?

In this paper, we address a debate concerning the impact of bank ownership structure on the degree to which banks sell stock to replenish equity following adverse shocks. In the presence of large private benefits of control, a bank’s controlling owners may resist new stock issuances to protect those rents. From this “dilution reluctance” perspective, greater insider ownership will reduce stock sales, potentially making the economy less resilient to aggregate shocks. In contrast, other research suggests that banks with greater insider ownership can more effectively coordinate the actions of diverse stakeholders with differing interests during crises, allowing such banks to sell more stock than banks with less insider ownership. The overall impact of insider ownership on stock sales in times of crisis, therefore, is an open empirical question.


Weekly Roundup: July 3–9, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 3–9, 2020.

COVID-19 and Executive Pay

Does Common Ownership Explain Higher Oligopolistic Profits?

An Analysis of the Supreme Court’s Decision in Liu v. SEC

Roadmapping Practical Human Capital Management Considerations

Chancery Court Denies Motion to Dismiss and Application of MFW Safe Harbor

Fiduciary Duty of Disclosure Does Not Apply to Individual Transactions with Equityholders

Keynote Speech at the Society for Corporate Governance National Conference

8 Steps for Audit Committees to Navigate the Pandemic

What Board Members Need to Know about the “E” in ESG

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