Yearly Archives: 2020

Termination of Merger Agreement and Material Adverse Effect

Jason Halper, William Mills, and Joshua Apfelroth are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Messrs. Halper, Mills, Apfelroth, and Sara Bussiere, 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 Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here); and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

In Channel Medsystems, Inc. v. Boston Scientific Corporation, the Delaware Court of Chancery rejected an attempt by Boston Scientific to terminate and thus avoid consummating a merger agreement with Channel on the grounds that a material adverse effect as defined in the parties’ agreement had occurred. In so holding, Chancellor Andre Bouchard signaled that last year’s Court of Chancery decision in Akorn, Inc. v. Fresenius Kabi AG, in which the Court of Chancery for the first time found the existence of a material adverse effect permitting merger agreement termination, was not necessarily a watershed moment that would make such findings more common. The decision also provides important guidance on merger agreement drafting and litigation strategy and pitfalls.


Channel was a privately held medical technology company and developer of a single product, Cerene. Boston Scientific, a publicly traded medical technology company, agreed to acquire Channel pursuant to the merger agreement, dated November 1, 2017 (“Agreement”). Prior to that time, in 2013, Boston Scientific had acquired approximately 15% of Channel’s equity and had an “observer” on Channel’s board of directors. Upon executing the Agreement, this observer (Christopher Kaster, Boston Scientific’s Vice President of Business Development and Venture Capital), became a “full board member.” In this pre-merger agreement period, Boston Scientific received periodic updates about Channel from Kaster and from Channel itself.


Dealing with Activist Hedge Funds and Other Activist Investors

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, and Sabastian V. Niles. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).


Activists set a new record in 2019. According to the Bloomberg 2019 Global Activism Market Review, there were 518 companies targeted by activists deploying stakes aggregating $76 billion. There were a record 99 activist interventions in M&A transactions. There were 118 proxy fights. Elliott Management, followed by Icahn Associates, were the top activists by stake value. Elliott and Starboard Value were the most active by number of targets, with 17 and 13, respectively. Among the 2019 targets were AT&T, CVS Health and Bristol-Myers Squibb. As we have previously noted, regardless of industry, size or performance, no company should consider itself immune from hedge fund activism. No company is too large, too popular, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have come under fire.

Although a number of asset managers and institutional investors are beginning to question whether hedge fund activism should be supported or resisted, and will act independently of activists, the relationships between activists and asset managers and investors in recent years have encouraged frequent and aggressive activist attacks. A number of hedge funds have also sought to export American-style activism abroad, with companies throughout the world now facing classic activist attacks. In addition, the line between hedge fund activism and private equity continues to blur, with some activist funds becoming bidders themselves for all or part of a company, and a handful of private equity funds exploring activist-style investments in, and engagement with, public companies.


The Global Sustainability Footprint of Sovereign Wealth Funds

Hao Liang is Assistant Professor of Finance at Singapore Management University and Luc Renneboog is Professor of Finance at Tilburg University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes 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); Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Over the last 15 years and especially around the time of the financial crisis, interest in and attention to the investment policies of sovereign wealth funds (SWFs) have grown. According to the SWF Institute, global assets under management by SWFs have exceeded $8 trillion, and the Norway Government Pension Fund Global manages over $1 trillion of wealth. While SWFs have been in existence for many decades, it has attracted attention only until recent years, especially since the global financial crisis. The purchase of a $3 billion in equity in the Blackstone Group in 2007 by China Investment Corporation (CIC)—the SWF of China—sparked public interest. Several Asian and Persian Gulf-based SWFs bought $60 billion of newly issued equity in large American and European banks in 2008, thereby playing a critical stabilizing role in the aftermath of the crisis. Still, the lack of transparency and political motivations lead host country governments and firms to react cautiously to SWFs’ investments. As SWFs are government-owned, they do not need to exclusively focus on financial returns, but can also add a stakeholder perspective to their investment goals. Examples of SWF who explicitly have a corporate social responsibility (CSR) perspective include the Norwegian Oil fund, as well as the SWFs of New-Zealand and France (United Nations Environment Programme, 2017). It is challenging to investigate SWFs considering that many lack transparency and differ significantly in terms of their purpose, geographical focus, and funding source, etc.

Since the global financial crisis of 2007-2008, more than 30 new SWFs have been established, such as the Turkey Wealth Fund in 2016 and the Japan Investment Corporation in 2018. Currently, SWFs are among the largest investors in the world, with Norway’s Government Pension Fund Global (or Norges Bank Investment Management) controlling more than $1 trillion in assets under management (AUM) (SWF Institute, 2019).


The 2020 Boardroom Agenda

Debbie McCormack is a managing director and Robert Lamm is an independent senior advisor at the Center for Board Effectiveness, Deloitte LLP. This post is based on their Deloitte memorandum.


The role of the board of directors and its committees is rapidly and constantly expanding. New matters seem to arise all the time, and the board is viewed, in the court of public opinion if not in courts of law, as being responsible for everything the company does or does not do. As both a result and an example of this perception of the board’s role, it is not surprising that when anything negative happens to a company, the first question asked is often “Where was the board?”

There are many items that have been on the board’s agenda for many years. These include oversight of risk, strategy, and executive compensation. At the same time, a number of items appearing on board agendas in recent years have taken up more of the board’s time and attention. These include board composition, culture, and shareholder engagement. And the newest items that boards are grappling with include challenges such as the role and responsibilities of the company in society and sustainability, which itself includes topics ranging from environmental concerns to employee activism and more.

This post discusses some of the matters expected to occupy much of the board’s attention and time in 2020. This list is not all-inclusive, nor should it be, as there are many matters that will be the subject of board focus, as well as a wide range of new matters that will likely arise and command the board’s attention.


Recent Developments in Charges of Insider Trading

Derek A. Cohen and James Gatta are partners and Zoe Bellars is a law clerk at Goodwin Procter LLP. This post is based on their Goodwin Procter memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

In a recent decision, the Second Circuit in United States v. Blaszczak may have made the prosecution of insider trading significantly easier by ruling that the government is not required to prove that an insider received any “personal benefit” in exchange for sharing material, nonpublic information with a trader when the crime is charged under the wire fraud and securities fraud statutes in Title 18 of the United States Code. This ruling establishes an explicit distinction between what the government must prove to convict defendants of insider trading charges brought under Title 18 rather than those charged under the Securities Exchange Act of 1934, found in Title 15 of the United States Code (the “Exchange Act”).

Since the Supreme Court’s 1983 decision in Dirks v. SEC, federal prosecutors pursuing insider trading cases under Title 15 have had to prove that insiders received some “personal benefit” in exchange for tips that they passed to traders. Several post-Dirks rulings from the Second Circuit and the Supreme Court have further refined the personal benefit test, entrenching the test in Title 15 insider trading analysis. In Blaszczak, however, the Second Circuit specifically “decline[d] to graft the Dirks personal-benefit test onto the elements of Title 18 securities fraud,” reasoning that, among other things, the securities fraud sections added to Title 18 as part of the Sarbanes-Oxley Act in 2002 were intended to serve as a broader enforcement mechanism than their Title 15 counterparts. This decision therefore potentially expands federal prosecutors’ ability to criminally charge insider trading cases, with Title 18 charges as a different, and potentially more flexible, vehicle to pursue such conduct.


Sinclair Broadcast: Designation of a Special Litigation Committee

Nate Emeritz is Of Counsel at Wilson Sonsini Goodrich & Rosati. This post is based on his WSGR memorandum. 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).

Several decisions in 2019 addressed special litigation committees (“SLCs”), including one out of the U.S. District Court for the District of Maryland. [1] In that federal case, Judge Catherine Blake considered technical and policy issues around the designation of such a committee by the board of directors of Sinclair Broadcast Group, Inc. (“Sinclair Broadcast”) in connection with potential claims related to a failed merger between Sinclair Broadcast and Tribune Media Company (“Tribune Media”). On the disputed preliminary record regarding formation of the committee, Judge Blake declined to dismiss the complaint or stay the litigation pending that committee’s investigation.


2020 Global and Regional Corporate Governance Trends

Rusty O’Kelley III is the Global Head of the Board Consulting and Effectiveness Practice and Anthony Goodman is a member of the Board Consulting and Effectiveness Practice at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Goodman, Andrew Droste, and Sarah Oliva.

Introduction and Background

For the first time, in 2020, we see the focus on the “E” and the “S” of environment, social and governance (ESG) as the leading trend globally, including in the United States, where it traditionally has not received as much attention by boards. Indeed, many of the key global trends for 2020, such as board oversight of human capital management (HCM), can be seen as subsets of ESG.

This year, as in the previous four years, Russell Reynolds Associates interviewed over 40 global institutional and activist investors, pension fund managers, proxy advisors and other corporate governance professionals to identify the corporate governance trends that will impact boards and directors in 2020. This year we have recognized that the UK is expected to leave the EU on January 31, 2020 and we have also added Australia to our global survey.


BlackRock Nudges Companies Toward a Common Standard (SASB + TCFD)

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 Lipton publication. Related research from the Program on Corporate Governance includes  Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here); 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); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

A common concern among companies, investors, asset managers and other stakeholders considering voluntary ESG-related disclosures is the lack of a uniform standard that would permit reliable and consistent comparability. In yesterday’s annual letter to CEOs, BlackRock’s Chairman and Chief Executive Officer Larry Fink advocated for standardized and accelerated sustainability disclosures and endorsed both the industry-specific standards developed by the Sustainability Accounting Standards Board (SASB) and the climate-specific framework developed by the Task Force on Climate-related Financial Disclosures (TCFD) as the benchmark frameworks.

Pointedly, and building on selected private engagements with companies, BlackRock will now request its investee companies to disclose in accordance with SASB’s (or similar) and TCFD’s guidelines by year-end. The request has teeth: BlackRock “will be increasingly disposed to vote against management and board directors when companies are not making sufficient progress on sustainability-related disclosures and […] plans underlying them.” Going forward, formal Rule 14a-8 shareholder proposals seeking SASB- and TCFD-aligned sustainability reporting may receive greater investor support where companies have not committed to expanded disclosures.


Sustainability as New Standard for Investing

Barbara Novick is Vice Chairman and co-founder at BlackRock, Inc. This post features the text of a letter sent by BlackRock, Inc. to its clients. A related letter sent to CEOs by BlackRock CEO Larry Fink is available on the Forum here.

Dear Client,

Since BlackRock’s founding in 1988, we have worked to anticipate our clients’ needs to help you manage risk and achieve your investment goals. As those needs have evolved, so too has our approach, but it has always been grounded in our fiduciary commitment to you.

Over the past few years, more and more of our clients have focused on the impact of sustainability on their portfolios. This shift has been driven by an increased understanding of how sustainability-related factors can affect economic growth, asset values, and financial markets as a whole.

The most significant of these factors today relates to climate change, not only in terms of the physical risk associated with rising global temperatures, but also transition risk—namely, how the global transition to a low-carbon economy could affect a company’s long-term profitability. As Larry Fink writes in his 2020 letter to CEOs, the investment risks presented by climate change are set to accelerate a significant reallocation of capital, which will in turn have a profound impact on the pricing of risk and assets around the world.

As your fiduciary, BlackRock is committed to helping you navigate this transition and build more resilient portfolios, including striving for more stable and higher long-term returns. Because sustainable investment options have the potential to offer clients better outcomes, we are making sustainability integral to the way BlackRock manages risk, constructs portfolios, designs products, and engages with companies. We believe that sustainability should be our new standard for investing.

Over the past several years, we have been deepening the integration of sustainability into technology, risk management, and product choice across BlackRock. We are now accelerating those efforts in the following ways.


Testimony by PCAOB Chairman William D. Duhnke before the House Committee on Financial Services

William D. Duhnke III is Chairman of the Public Company Accounting Oversight Board (PCAOB). This post is based on his recent testimony before the U.S. House of Representatives Committee on Financial Services Subcommittee on Investor Protection, Entrepreneurship, and Capital Markets as part of a Hearing on “Overseeing the Standard Setters: An Examination of the Financial Accounting Standards Board and the Public Company Accounting Oversight Board.”

Chairman Sherman, Ranking Member Huizenga, and distinguished members of the subcommittee, thank you for the opportunity to appear before you today to discuss the important work of the Public Company Accounting Oversight Board (PCAOB). [1]

I joined our five-member board in early 2018, along with four other new board members. Not since the PCAOB was first founded in 2003 have five new Board members joined the organization at roughly the same time. With such a significant change in the Board’s composition, came a significant opportunity. We had the chance to reflect on lessons learned over the prior 15 years, to innovate, and to improve how we approach audit oversight.

In 2018, we used the opportunity to perform a comprehensive assessment of the PCAOB. To help our assessment, we engaged in significant public outreach. We sought input from our core stakeholders on what we were doing well, what we needed to improve, and how we could best improve audit quality. We heard from the SEC, investors, audit committees, financial statement preparers, audit firms, academics, and others. The message we received back was loud and clear: The PCAOB was ripe for change. The PCAOB had, in many respects, lost the public’s trust. The organization was out of touch with market developments and stakeholders’ needs. It had not matured significantly since opening its doors in 2003. During that time, it developed a culture that lacked internal accountability. And, its integrity had been compromised in 2017 by employees leaking confidential inspections information to those we are charged to regulate.


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