Monthly Archives: April 2021

Fair Price for Delaware Fiduciary Actions Can Exceed Appraisal Fair Value

Gilbert E. Matthews is Chairman and Senior Managing Director of Sutter Securities Financial Services, Inc., and Matthew L. Miller is an associate at Abrams & Bayliss LLP. 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here); and Appraisal After Dell by Guhan Subramanian.

Can fiduciaries of Delaware corporations breach their duties and face damages for a merger that provides stockholders with the equivalent of fair value in a judicial appraisal? The answer, which may surprise some, is yes. On March 1, 2021, the Delaware Court of Chancery issued an opinion, In re Columbia Pipeline Group, Inc. Merger Litigation, 2021 WL 772562 (Del. Ch. Mar. 1, 2021) (the “2021 Decision”) that expressly stated that breaches of fiduciary duty can lead to damages that exceed appraisal fair value.


It has long been accepted that Delaware courts use the same valuation methodologies to determine fair value in a judicial appraisal and fair price in a fiduciary duty action. [1] There is no real debate that, “in general, the techniques used to determine the fairness of price in a non-appraisal stockholder’s suit are the same as those used in appraisal proceedings.” Gesoff v. IIC Industries, Inc., 902 A.2d 1130, 1153, n.127 (Del. Ch. 2006). However, the precise relationship between fair price in a fiduciary duty action and fair value in a related appraisal action is often unclear.


2020 in Hindsight: Key Considerations for Directors in 2021

Teresa L. Johnson and Ben Fackler are partners at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter memorandum by Ms. Johnson, Mr. Fackler, Nicholas O’Keefe, Ronald R. Levine II, and Edward A. Deibert.

As the stewards of American enterprise, Boards of Directors are rightly focused on helping their companies navigate through the challenges and opportunities the United States and the world face today. While vaccines offer the promise of normality, the pandemic continues to rage on. The political environment remains volatile and deeply divided. And we continue to struggle with fundamental racial, gender and economic equality and inclusion, as well as the path to a sustainable future. Crisis management often seems to be the order of the day. But directors must of course look beyond the current turmoil and ensure the company is well positioned to survive and thrive in the coming months and years. This Advisory elaborates on several key focus areas for Boards in the current environment.

Understanding the responsibilities that a seat on the Board bestows on you in the current context is critical. It is perhaps somewhat reassuring that, from a purely legal perspective, your fundamental fiduciary duties as directors remain largely unchanged. Your decisions as directors will be protected so long as made on an informed basis, in good faith, and in the honest belief that the decision was in the best interest of the company. That is not to say that directors needn’t be concerned. While legal precepts haven’t evolved significantly, the world in which your company operates, and mostly likely the way in which your company operates, have changed fundamentally in the past year. These changes require a rethinking of risk management, corporate strategy and the mission of the company. For example, under the Caremark line of cases, directors are responsible for ensuring that the company has in place information and reporting systems reasonably designed to provide the Board and senior management with timely, accurate information sufficient to support informed judgments about the risks facing the company. The tectonic shifts in the world over the past year—political, social and economic—have made it imperative for the Board to reassess the kind and degree of risks that the company’s business faces presently and in the coming months and years, understand how those risks are being addressed at the company and ensure that appropriate, updated systems are in place to effectively monitor those current and emerging risks.


Changing Investment Stewardship Practices in a Post Covid-19 World

Dan Konigsburg is Senior Managing Director at the Deloitte Global Center for Corporate Governance, Dr. Aurelien Rocher is Manager at the Deloitte Global Center for Corporate Governance, and Andrew Gebelin is VP of Research at Glass, Lewis & Co. This post is based on their Deloitte-Glass Lewis memorandum.

Just as the COVID-19 pandemic has had a significant impact on society, business and public policy, it has also led to significant changes to corporate governance. Companies experienced new ways of organizing annual general meetings (“AGM”) of shareholders, in a virtual or hybrid manner. We have also seen a raft of new voting trends emerge. Concurrent to the current lockdowns and restrictions associated with the pandemic, companies are facing pressure from institutional investors who are adjusting their voting policies as part of their evolving stewardship practices which are increasingly focused on material ESG topics. Even though the definition of stewardship can vary depending on language and culture, we see common patterns around the world. For example, the International Corporate Governance Network (ICGN) has revised its Global Stewardship Principles to create an explicit link between fiduciary duty and long-term value creation and to encourage investors to disclose more about their stewardship activities. These changes have occurred in the context of wider public initiatives around what might be called “sustainable corporate governance”. Many scholars are also encouraging implementation of the Business Roundtable (BRT) statement on corporate purpose, through which CEOs of a number of large companies committed to lead their organisations for the benefit of all stakeholders, not just shareholders. In this publication, we highlight new and innovative investment stewardship practices, both from the perspective of institutional investors and proxy advisory firms. Given the importance of this topic, we have asked the global proxy advisory firm Glass Lewis to share their views on these renewed stewardship practices.


A Revised Monitoring Model Confronts Today’s Movement Toward Managerialism

James D. Cox is the Brainerd Currie Professor of Law of Duke Law School and Randall S. Thomas is John S. Beasley II Chair in Law and Business at Vanderbilt Law School. This post is based on their recent paper, forthcoming in the Texas Law Review. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk; and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

This paper is motivated by our belief that the shareholder vote is important as a source of validating the power held by the board, but most importantly as an “error correction/protection” device. We therefore find it odd that with the ever-growing concentration of ownership of public companies among various financial institutions (and not retail customers) there are at the same time numerous legal developments reviewed in the paper that have the effect, and likely intended effect, of quieting the shareholders’ voice. These developments are occurring at a time when the prevailing governance structure for public firms is the monitoring model, whereby boards are independent of management so that they can best reflect the concerns of the shareholders. We thus find recent developments in corporate law incongruous with the monitoring model’s initial aspirations. To make this point we review the multiple social, financial and regulatory forces that ushered the monitoring model into broad adoption. Foremost among these is the dramatic failure of managerialism, the philosophy pursued by American corporations post-WWII.

In the decades immediately following WWII American companies were largely run by unfettered CEOs purportedly for the benefit of their stakeholders. Stockholders were dispersed, weak, and with few exceptions, universally ignored. Corporate directors were underlings, or friends of the CEO, and often rubberstamped whatever the CEO told them to approve. This continued throughout the ‘50s and ‘60s, with corporate boards dominated by inside directors, friends of the CEO, and outsiders with deep commercial relationships with the company, such as its investment bankers or lawyers, and thus not truly independent of management. And, under the stakeholder model boards were not focused exclusively on increasing shareholder value, seeing this as just one of many objectives managers were to pursue within the broader mission of balancing the sometimes competing interests of the firm’s many stakeholders. Thus, the stakeholder model required and got what it needed: a dominant CEO and a docile board of directors. Directors were weak.


SEC Brings Rare Regulation FD Enforcement Case

Craig Warkol and Charles Clark are partners at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

On March 5, 2021, the Securities and Exchange Commission charged AT&T with violating Regulation FD (“Reg FD”) for selectively disclosing material nonpublic information (“MNPI”) to research analysts. [1] The SEC has brought only a handful of Reg FD cases since its enactment in 2000, and this case may have significant implications for investment professionals.

Regulation FD prohibits issuers, or persons acting on their behalf, from disclosing MNPI to certain third parties without disclosing that same information to the general public. Reg FD was enacted, primarily, to prevent public companies from selectively providing nonpublic earnings information to securities analysts and certain shareholders. The goal of Reg FD was to level the playing field between individual and institutional investors following publicized reports of institutional investors profiting in advance of corporate earnings announcements. Final Rule: Selective Disclosure and Insider Trading, Exchange Act Rel. No. 43154, 65 Fed. Reg. 51, 721 (Aug. 15, 2000) (

According to the SEC’s complaint filed against AT&T last week, AT&T had experienced an unanticipated decline in its first quarter 2016 smartphone sales. To avoid falling short of Wall Street’s consensus revenue estimate, the SEC alleged that AT&T investor relations executives made private, one-on-one phone calls to equity analysts at approximately 20 different sell-side firms during which they disclosed the disappointing sales data. The SEC contends that these calls were made in an effort to lower Wall Street’s expectations such that AT&T would avoid missing the consensus estimate for the third consecutive quarter. According to the SEC, the disclosures were material and not shared with the general public. Notably, the case was not settled at the time of its filing, indicating AT&T’s intent to defend itself against the SEC’s charges.


Observations About the March 2020 Market Turmoil and Regulated Funds

Eric J. Pan is President & Chief Executive Officer of the Investment Company Institute. This post is based on his remarks at the 2021 ICI Mutual Funds and Investment Management Conference.

Please let me express my sincere gratitude to everyone who has been part of putting this conference together, as well as everyone in attendance today. This conference is the premier event in the United States for legal and compliance professionals working in the regulated fund industry, and it is an honor to speak before you today as the Investment Company Institute’s new president and chief executive officer.

Since I came onboard four months ago, I have met with our Board of Governors as well as numerous other leaders of member firms to identify their priorities and concerns amid the challenges posed by this pandemic. It is abundantly clear that ICI must always be a strong and productive voice for the regulated fund industry with respect to the development of the rules, regulations, and policies that govern our financial system. All of you are key partners with ICI in carrying out our mission to promote and protect the interests of fund investors.

In that context, I would like to speak with you today about the discussions US and international policymakers are having about the March 2020 market turmoil and their work to make the financial markets more resilient in the face of a similar liquidity shock. Such work is taking place in international bodies like the Financial Stability Board (FSB) and International Organization of Securities Commissions with the active participation of US financial regulators.


A Response to Calls for SEC-Mandated ESG Disclosure

Amanda M. Rose is Professor of Law at Vanderbilt University Law School and Professor of Management at Vanderbilt University Owen Graduate School of Management. This post is based on her recent paper. 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 Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Max M. Schanzenbach and Robert H. Sitkoff (discussed on the Forum here).

The acronym “ESG” is used as shorthand for a dizzyingly broad array of “environmental,” “social,” and “governance” topics affecting businesses. The topics spanned include climate change, human capital management, supply chain management, human rights, cybersecurity, diversity and inclusion, corporate tax policy, corporate political spending, executive compensation practices, and more. Members of the ESG movement are similarly diverse, in both identity and motivation. They include financially motivated investors and traditional asset managers who believe companies’ approach to (at least certain) ESG topics will bear on the companies’ long-term performance, or the long-term performance of the investors’ or asset managers’ broader investment portfolios. They also include values-based investors who care about whether, and how, corporations address (at least certain) ESG topics due to religious or sociopolitical commitments. The ESG umbrella also shelters various non-investor corporate stakeholders and third parties who care about whether, and how, corporations address (at least certain) ESG topics because they are personally affected (e.g., employees vis-à-vis labor practices) or due to religious or sociopolitical commitments (e.g., environmentalists vis-à-vis environmental impact). ESG proponents also include members of an emerging corps of people and institutions who profit from the movement, including corporate sustainability officers, providers of ESG ratings and indices, accounting firms that offer ESG-related services, and managers of specialized ESG-investment vehicles.


Twenty Years Later: The Lasting Lessons of Enron

Michael Peregrine is partner at McDermott Will & Emery LLP, and Charles Elson is professor of corporate governance at the University of Delaware Alfred Lerner College of Business and Economics.

This spring marks the 20th anniversary of the beginning of the dramatic and cataclysmic demise of Enron Corp. A scandal of exceptional scope and impact, it was (at the time) the largest bankruptcy in American history. The alleged business practices of its executives led to numerous individual criminal convictions. It was also a principal impetus for the enactment of the Sarbanes-Oxley Act and the evolution of the concept of corporate responsibility. As such, it is one of the most consequential corporate governance developments in history.

Yet a new generation of corporate leaders has assumed their positions since then; for others, their recollection of the colossal scandal may have faded with the years. And a general awareness of corporate responsibility principles is no substitute for familiarity with the governance failings that reenergized, in a lasting manner, the focus on effective and responsible governance. A basic appreciation of the Enron debacle and its governance implications is essential to director engagement.

Enron was formed as a natural gas pipeline company and ultimately transformed itself, through diversification, into a trading enterprise engaged in various forms of highly complex transactions. Among these were a series of unconventional and complicated related-party transactions (remember the strangely named Raptor, Jedi and Chewco ventures) in which members of Enron’s financial leadership held lucrative financial interests. Notably, the management team was experienced, and both its board and its audit committee were composed of a diverse group of seasoned, skilled, and prominent individuals.


Greenshoe Options and Underwriter Principal Trading

Patrick M. Corrigan is Associate Professor of Law at Notre Dame Law School. This post is a reply to a recent response to his earlier post.

I am very grateful to Mr. Evans for his thoughtful reply to my prior post on the Forum. His reply raises important interpretive issues that I hope that the SEC and FINRA will directly address.

In connection with U.S. initial public offerings (IPOs), underwriters usually trade in the issuer’s stock for their own principal accounts, including by short selling the issuer’s stock and by exercising a green shoe option. I have argued that applicable U.S. law permits underwriters, subject to certain compliance measures, to monetize the value of their principal trading positions.

Mr. Evans’s reply post makes the empirical claim that underwriters do not use the green shoe option to profit from IPO stock pops. Mr. Evans asserts this empirical claim on the basis of deductive logic. According to Mr. Evans, Regulation M permits underwriters to pick one and only one of the following two activities: (1) making a market in an issuer’s stock as soon as exchange trading begins, and (2) profiting from IPO stock pops. Since we observe underwriters making markets once exchange trading begins, Mr. Evans concludes, underwriters do not use green shoe options to profit from IPO stock pops.


What Boards Need to Know About Shareholder Activism

Steve Klemash is EY Americas Center for Board Matters Leader, and David Hunker is EY Americas Shareholder Activism Defense Leader. This post is based on their EY memorandum. 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).

Shareholder activism has proved to be a permanent part of the global capital markets. In 2009, activist hedge funds had approximately $39b in assets under management. Today, that number is closer to $130b.

Considering assets under management for all hedge funds that pursue activism in at least one of their strategies, the total amount of capital available for deployment globally by activists is many multiples of that number.

The narrative around shareholder activism has also evolved from its early days as an offshoot of so-called corporate raiders, whose post-acquisition cost-cutting strategies were widely panned as lining their own pockets at the expense of the average worker. Shareholder activists now promote themselves as defenders of shareholder value, holding management teams and boards accountable for the destruction of (or alleged failure to maximize) shareholder value. With this carefully crafted shareholder-focused narrative, activism has steadily gained momentum with institutional investors. High-profile campaigns in recent years make clear that large institutional holders are willing to be vocal in both their criticism of targeted companies and their support for an activist’s agenda.


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