Monthly Archives: July 2020

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

Meredith Kotler and Paul Tiger are partners and Marques Tracy is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In a 94-page opinion issued last Thursday, Vice Chancellor Laster denied defendants’ motion to dismiss in In re Dell Technologies Inc. Class V Stockholders Litigation, [1] finding that the complaint alleged facts that made it “reasonably conceivable” that the safe harbor established by Kahn v. M&F Worldwide Corp. (“MFW”), 88 A.3d 635 (Del. 2014), would not apply and thus that entire fairness could be the operative standard of review, rather than the more favorable business judgment standard. While the facts in Dell are unique, the opinion offers helpful guidance to boards seeking the benefit of MFW, particularly on issues relating to establishment of a special committee, its role in negotiations, potential threats or coercion, and director independence.


In 2016, Dell Technologies (“Dell” or the “Company”) acquired EMC Corporation with a combination of cash and newly-issued shares of Class V stock. A critical feature of the Class V shares was the existence of a conversion right: if the Company listed its Class C shares on a national exchange, then the Company could forcibly convert the Class V shares into Class C shares pursuant to a pricing formula that the Court characterized as “superficially simple” and that commentators had suggested could be influenced to the disadvantage of the Class V stockholders by the existence of the conversion right itself.


Roadmapping Practical Human Capital Management Considerations

Pamela L. Marcogliese is a partner, Elizabeth Bieber is counsel, and Thomas Lair is an associate at Freshfields Bruckhaus Deringer LLP. This post is based on their Freshfields memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

As discussed in our previous post, in order for companies to successfully manage HCM issues arising in 2020, it will be important for them to be proactive. How companies do that will be a function of each company’s profile, its available resources and its individual culture, but there will be some common themes that emerge. At the highest level, companies will need to be proficient in two ways: viewing HCM through a broader lens as a key component of the company’s strategic focus and effectively communicating ongoing efforts with stakeholders in a meaningful way.

Creative Solutions During Difficult Times

Many companies have been faced with difficult choices regarding compensation. There isn’t a right or wrong way to handle these difficult decisions—in practice, we have seen a panoply of options and opportunities for companies to demonstrate the value they place on their workforce, even if they are reducing compensation costs. These decisions depend on each company’s facts and circumstances.


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

Kyle DeYoung is partner, Lex Urban is special counsel, and Wesley Wintermyer is an associate at Cadwalader, Wickersham and Taft LLP. This post is based on their Cadwalader memorandum.

On June 22, 2020, the U.S. Supreme Court threw the SEC a lifeline in the highly-anticipated decision of Liu v. SEC. In an 8-to-1 decision, the Justices held that the SEC may continue to obtain disgorgement in federal court, albeit in a significantly narrowed fashion.

Although the SEC has routinely sought, and often secured, disgorgement as a form of “equitable relief” in federal courts since the 1970’s, commentators questioned this practice, as the SEC’s authorizing statutes do not list disgorgement as an available judicial remedy. The issue came to the fore in June 2017, when the Supreme Court decided Kokesh v. SEC, in which the Justices reasoned that disgorgement was a “penalty” subject to a five-year statute of limitations. In an attention-grabbing footnote, the Court stressed that it was not passing judgment on “whether courts possess authority to order disgorgement in SEC enforcement proceedings or on whether courts have properly applied disgorgement principles in this context.” Many commentators read this to signal the Court’s willingness to consider the unresolved question of the SEC’s disgorgement authority. Liu v. SEC presented that opportunity. The Court upheld disgorgement as an available remedy, but held that disgorgement awards must be limited to wrongdoers’ net profits as opposed to their gross illicit gains. The Court also cast doubt on whether the SEC may obtain disgorgement in cases were funds will be remitted to the U.S. Treasury as opposed to returned to identifiable victims.


Does Common Ownership Explain Higher Oligopolistic Profits?

Edward B. Rock is the Martin Lipton Professor of Law at New York University School of Law and Daniel L. Rubinfeld is Professor of Law at New York University School of Law. This post is based their recent paper. Related research from the Program on Corporate Governance includes Horizontal Shareholding (discussed on the Forum here) and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding (discussed on the Forum here) both by Einer Elhauge; Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here).

There is compelling evidence that both concentration and profitability in oligopolistic industries have increased over the past two decades. Over roughly the same time period, the concentration of shareholding in the hands of the largest institutional investors has dramatically increased, with an increase in the degree to which investors (such as Vanguard, State Street and BlackRock) own large equity stakes in competing portfolio companies. A number of authors—focusing initially on airlines and commercial banking—have argued that the growth in this “common ownership” has caused the increase in oligopoly profits. They have followed this with a variety of policy responses.

We start with the core puzzle. The “Structure-Conduct-Performance paradigm”—which asserts a connection between concentration and profits—has long been a staple of antitrust policy. Yet, compelling empirical support for this connection has historically been sparse, for reasons well discussed in the Industrial Organization literature. Interestingly, according to the empirical evidence, something changed around 2000. Since then, the evidence for a link between concentration and profitability has become quite strong. As a result, an adequate theory must explain two things. First, why is there a correlation between concentration and profitability? Second, why has there been a strong(er) correlation post 2000 than pre-2000?


COVID-19 and Executive Pay

Joseph E. Bachelder is special counsel at McCarter & English LLP. This post is based on an article by Mr. Bachelder published in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of the article.

COVID-19 has caused many illnesses and deaths worldwide. It also has caused significant economic loss for many business enterprises and this may impact, in turn, on the compensation those enterprises pay their executives. Today’s column discusses the impact COVID-19 may have on executive compensation.

On March 13, 2020, the President of the United States declared a national emergency beginning as of March 1 based on COVID-19. On March 27, 2020, the President signed into law the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”). COVID-19-related decisions include picking the date to separate pre-COVID-19 and post-COVID-19 periods (the “COVID Start Date”) for compensation or other purposes. For most companies, at the present time, such decisions are at the discretion of the individual company. Exceptions may include companies receiving loans from, or loans guaranteed by, the U.S. Treasury Department. Such loans may be contingent upon agreement by the borrowing company to certain conditions, including the date to be treated as the COVID Start Date.


Weekly Roundup: June 26–July 2, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 26–July 2, 2020.

Response to US Critics of the French Securities Regulator Position on Activism

Supreme Court Limits SEC Disgorgement Remedy

Asset Manager Perspective: Shareholder Proposals on Sustainability

Time to Rethink the S in ESG

Justice Department Updates Its Guidance on Corporate Compliance Programs

Human Capital Management: The Mission Critical Asset

MFW Pitfalls: Bypassing the Special Committee and Pursuing Detrimental Alternatives

The Hostile Bid Is Dead. Long Live the Hostile Bid?

Some Thoughts for Boards of Directors in 2020: A Mid-Year Update

Some Thoughts for Boards of Directors in 2020: A Mid-Year Update

Martin Lipton is a founding partner, and Steven A. Rosenblum, William Savitt are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Rosenblum, Mr. Savitt, Karessa L. Cain, Hannah Clark, and Bita Assad. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The past six months have been marked by a profound upheaval that has accelerated the growing focus on both the purpose of the corporation and the role of the board in overseeing and leading the corporation in ways that promote sustainable business success. For a number of years, there has been a growing sense of urgency around issues such as climate change, environmental degradation, globalization, workplace inequality and the need to keep pace with rapidly evolving technologies. Then, in recent months, the COVID-19 pandemic prompted a systemic shock, which has been accompanied by a long overdue awakening regarding endemic racial injustice. The convergence of these events has accelerated the focus on environmental, social and governance (ESG) issues and stakeholder capitalism as operational and strategic imperatives that are core to corporations’ abilities to compete and succeed. The well-being of employees and other stakeholders, and the ability to engage in more sustainable ways of doing business, are not a nice-to-have luxury or a branding exercise, but rather a basic building block of corporate value. There is an essential nexus between “value” and “values.”


Key Takeaways and Best Practices from Virtual Shareholders Meetings in 2020

Douglas K. Chia is the President of Soundboard Governance LLC. This post is based on his Soundboard Governance memorandum.

In 2009, Broadridge Financial Services launched its virtual shareholders meeting platform, pitching it to companies as a convenient and economical alternative to traditional in-person annual meetings and a way to increase shareholder participation. Four companies used the platform that first year, with only one using it completely in lieu of an in-person meeting (now commonly referred to as “virtual-only”). After 2009, uptake was slow, with the number of companies adopting the virtual-only shareholders meeting (“VoSM”) format not breaking 100 until 2016. [1] The pace of VoSM adoption picked up, but only to 212 in 2017 and 300 in 2019. [2] A committee of interested constituents was convened in 2018 to develop a set of “best practices” for virtual annual meetings. [3] However, the sample size the group had to study was small—236 total, both virtual-only and in-person supplemented with virtual (now commonly referred to as “hybrid”).

As we have witnessed, the COVID-19 pandemic forced companies with annual meetings scheduled during the months of March through June 2020 (i.e., almost all December fiscal year-end companies) to seek alternatives to their already-planned in-person meetings, with VoSMs being the most obvious solution. [4] And they did what was necessary to make the switch happen quickly and en masse. By May 1st, 65 percent of S&P 500 companies had held or announced plans to hold VoSMs, with almost 90 percent of those companies adopting it for the first time. [5]

Soundboard Governance produced the following analysis based on attendance at a sampling of ten [6] VoSMs during the spring 2020 annual meeting season.


The Hostile Bid Is Dead. Long Live the Hostile Bid?

Aaron Atkinson is a partner and Mathieu Taschereau and Shane Freedman are associates at Davies Ward Phillips & Vineberg LLP. This post is based on their Davies memorandum. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

With much of the world focused on the immediacy of the COVID-19 pandemic, including its heavy human and economic toll, we have cast our eyes optimistically on the (near, we hope) future when companies regain sufficient confidence to re-enter the public M&A market in large numbers. Although attention has largely centred on businesses that are in a struggle for survival, certain businesses will emerge stronger owing to factors such as shifts in consumer needs and preferences or more durable balance sheets. As a result, the post-pandemic corporate landscape may be ripe for consolidation, with relatively larger and better-capitalized issuers seizing the opportunity to acquire their weakened competitors. It is also possible that in certain capital-intensive industries, such as mining, competitors may be more inclined to cast aside their differences and consolidate their balance sheets, a trend that is already showing some momentum.

We will be tracking activity levels to assess whether the foregoing theories prove correct; however, our analysis of Canadian public M&A activity (both friendly and hostile) from 2012 to the end of 2019 suggests that expectations of significant consolidation activity should be tempered, at least insofar as it involves acquisitions of Canadian-listed issuers. In particular, we found that hostile bids declined by 50% after May 9, 2016, the date on which Canadian securities regulators implemented fundamental changes to the takeover bid rules, which were designed to “rebalance” the prevailing bid dynamics and place more power in the hands of target boards.[1] Digging deeper into the data, we found that financial buyers—who would already be expected to shy away from the potentially significant costs and uncertainty of launching a hostile bid—vacated the field entirely after the new rules were adopted. As a result, every hostile bid under the new regime has been commenced by a strategic purchaser. We found a similar downward trend in friendly acquisitions of Canadian-listed issuers, with such transactions declining by 24% in the same four-year period. In fact, this statistic masks a more significant 30% decline in the number of friendly acquisitions by strategic purchasers since the start of 2016.


SEC Should Mandate Disclosures on COVID-19 Risks and Responses

Carter Dougherty is Communications Director at Americans for Financial Reform. This post is based on a joint letter to the U.S. Securities and Exchange Commission from 98 investors, state treasurers, public interest groups, labor unions, asset managers and securities law experts.

June 16, 2020

The Honorable Jay Clayton Chairman
U.S. Securities and Exchange Commission 100 F Street, NE
Washington, DC 20549

Re: Comprehensive disclosure requirements to allow investors and the public to analyze companies during the COVID-19 pandemic.

Dear Chairman Clayton,

Investors and the general public are struggling to understand how the COVID-19 pandemic is impacting the economy and the financial markets. At the same time, the federal government is distributing trillions of dollars in financial support to mitigate the economic impact of the pandemic. We urge the Securities and Exchange Commission to institute new disclosure requirements to allow investors and the public to analyze how companies are acting to protect workers, prevent the spread of the virus, and responsibly use any federal aid they receive.

Companies who sell their stock to the public must register with the SEC and fulfill periodic disclosure obligations, as defined by the Commission. These disclosures are available to investors and the general public and help contribute to the public understanding of a company’s financial performance and the risks and opportunities that might go along with investing in that company.


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