Yearly Archives: 2021

Delaware Supreme Court Holds That Fraud Is Insurable Under D&O Policy

Posted by Andrew J. Noreuil and Michael J. Gill, Mayer Brown LLP, on
Tuesday, March 23, 2021
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Andrew J. Noreuil and Michael J. Gill are partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court unanimously affirmed a trial court judgment requiring a directors and officers (D&O) excess insurer to pay a claim for losses predicated on fraudulent conduct of the director and CEO of a corporation, holding that such losses are insurable under Delaware law and coverage is not barred by Delaware public policy.

The Court also held that Delaware law applied to the insurance policy in the case, stating that a choice of law analysis for a D&O policy will most often reveal that a corporation’s state of incorporation has the most significant relationship to the insurance policy.

Background

The insurance coverage at issue in RSUI Indemnity Company v. Murdock (March 3, 2021) [1] involved claims for breach of fiduciary duty and federal securities law violations under a $10 million excess D&O liability insurance policy issued by RSUI Indemnity Company to Dole Food Company, Inc. In November 2013, affiliates of David Murdock, the CEO and a director of Dole, completed a transaction to take Dole private for $13.50 per share. In 2015, the Delaware Chancery Court issued a memorandum opinion finding, among other things, that Murdock had breached his duty of loyalty and engaged in fraud in connection with the transaction, which drove down Dole’s premerger stock price, undermining it as measure of value and affecting the Dole Special Committee’s negotiating position. The Chancery Court awarded damages to unaffiliated stockholders in an amount equal to $2.74 per share (approximately $148 million in the aggregate). Dole then informed its insurers it was engaging in settlement negotiations, to which all responded by reserving their rights regarding coverage. Thereafter, Dole negotiated a settlement without further involvement of its D&O insurers, and Murdock paid the settlement amount in full.

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BlackRock’s 2021 Engagement Priorities

Posted by Sandra Boss and Michelle Edkins, BlackRock, Inc., on
Monday, March 22, 2021
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Sandra Boss is Global Head of Investment Stewardship and Michelle Edkins is Managing Director of Investment Stewardship. This post is based on a BlackRock Investment Stewardship memorandum by Ms. Boss, Ms. Edkins, Giovanni Barbi, Victoria Gaytan, Hilary Novik-Sandberg, and Ariel Smilowitz.

BlackRock Investment Stewardship (BIS) undertakes all investment stewardship engagements and proxy voting with the goal of advancing the economic interests of our clients, who have entrusted us with their assets to help them meet their long-term financial goals. Our conviction is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities and their shareholders. We use our voice as a shareholder to urge companies to focus on important issues, like climate change, the fair treatment of workers, and racial and gender equality, as we believe that leads to durable corporate profitability.

2021 Priorities

Engagement is core to our stewardship efforts as it enables us to provide feedback to companies and build mutual understanding about corporate governance and sustainable business practices. Each year, we set engagement priorities to focus our work on the governance and sustainability issues we consider to be top of mind for companies and our clients as shareholders. We believe an intensified focus on these issues advances practices and contributes to companies’ ability to deliver the sustainable long-term financial performance on which our clients depend.

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Common Ownership and Competition in the Ready-to-Eat Cereal Industry

Posted by Matthew Backus (Columbia University), Christopher Conlon (NYU), and Michael Sinkinson (Yale), on
Monday, March 22, 2021
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Matthew Backus is the Philip H. Geier Jr. Associate Professor at Columbia Business School; Christopher Conlon is Assistant Professor of Economics at NYU Stern School of Business; and Michael Sinkinson is an Assistant Professor of Economics at the Yale School of Management. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here); and Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

An exciting and controversial idea at the intersection of corporate governance, economics, and finance is what is known as the “Common Ownership Hypothesis”. Simply put, it states that because investors hold portfolios of stocks which include horizontal competitors, for managers to do right by their investors, they may want to internalize some of the effects their actions have on their competitors. This is in many ways an old idea, with its roots going back to the 1980’s and the analysis of joint ventures, but there is renewed interest today for several reasons: (a) that investors have become increasingly diversified and hold portfolios that are similar both to the index and to one another; and (b) the largest institutional investors (Vanguard, BlackRock, and State Street) are often among the largest investors in most publicly traded firms—holding 4-6% of most S&P 500 constituents.

While data are generally available on how much investors hold in various stocks via SEC 13f filings, less is known about how corporate governance actually works, and how managers choose which investors to pay attention to (and which to ignore). This is particularly challenging when investors disagree about the direction they wish management to pursue (such as expanding output and reducing price or reducing output and increasing prices). Our previous work examines how to map assumptions on corporate governance into “profit weights” which measure how one firm values the profits of another firm relative to $1.00 of its own profits. To frame ideas, a merger of two firms would be represented by a profit weight of one on a rival’s profits. In that work, we showed that typical S&P500 constituents might value $1.00 of competitor profits as close to $0.20 of their own in 1980, but closer to $0.70 in 2017 given the rise in common ownership. At the same time, we documented substantial asymmetries in these relationships: Kellogg’s might value the profits of General Mills as $0.22 of their own profits, but General Mills might simultaneously treat one dollar of Kellogg’s profits as $0.60 of their own. In some sense these asymmetric relationships are one of the unique predictions of the theory of common ownership.

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Corporate Officers Face Personal Liability for Steering Sale of the Company to a Favored Buyer

Posted by Gail Weinstein, Philip Richter, and Steven Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Monday, March 22, 2021
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Gail Weinstein is senior counsel, and Philip Richter and Steven Epstein are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Warren S. de Wied, Brian T. Mangino, and Roy Tannenbaum, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In In re Columbia Pipeline Group, Inc. Merger Litigation (Mar. 1, 2021), the Delaware Court of Chancery held that the CEO-Chairman and the CFO (“Skaggs” and “Smith,” respectively; together, the “Officers”) of Columbia Pipeline Group, Inc. (the “Company”) may have breached their fiduciary duties in connection with the $13 billion merger in 2016 of the Company with TransCanada Corporation (the “Merger”).

Vice Chancellor Laster found it reasonably conceivable, at the pleading stage of litigation, that the Officers had tilted the sale process to favor TransCanada, and that they were motivated by their plans to retire and their desire to receive their change-in control benefits that would be triggered on the Company’s sale. The court held that Corwin “cleansing” of the breaches was not available because the disclosure to stockholders relating to the Merger was inadequate. In addition, the court held that TransCanada may have aiding and abetting liability as it was reasonably conceivable that it knew that the Officers were violating their fiduciary duties in connection with the sale process and it “exploited the resulting opportunity.”

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Speech by Commissioner Roisman on ESG Regulation

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on
Sunday, March 21, 2021
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Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his recent public statement. 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.

AMAC’s Careful and Collaborative Approach

Thank you, Ed [Bernard] and members of this Committee, not only for your work, but for the thoughtful process you have undertaken to develop recommendations for the Commission. AMAC’s approach has been methodical, iterative, and transparent: discussing complex issues, developing subcommittee recommendations in draft form, presenting those ideas to the full Committee, and inviting a lot of engagement. While such an approach may not yield quick results—and it likely demands increased time and attention from each of you—it provides opportunities to consider new perspectives and new information. Ultimately, I believe it should make any final recommendations you adopt more comprehensive and useful for the Commission itself.

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Poison Pills After Williams: Not Only for When Lightning Strikes

Posted by Ethan Klingsberg, Paul Tiger, and Elizabeth Bieber, Freshfields Bruckhaus Deringer LLP, on
Sunday, March 21, 2021
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Ethan Klingsberg and Paul Tiger are partners and Elizabeth K. Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Mr. Tiger, Ms. Bieber, and Victor Ma, 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 Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

The board of The Williams Companies (“Williams”), in March 2020, became the only board among the S&P 500 companies to respond to the volatility of the pandemic by adopting a shareholder rights plan (also known as a poison pill). [1] On February 26, 2021, Vice Chancellor McCormick of the Delaware Court of Chancery enjoined the Williams poison pill in her post-trial opinion in The Williams Companies Stockholder Litigation. [2] Vice Chancellor McCormick’s thorough opinion about the extraordinary pill adopted by the Williams board is worth reflecting upon from the perspective of over three decades of poison pill litigation.

Background and key terms of the Williams pill

The Williams board adopted the shareholder rights plan with a one-year term when the Williams stock price was hitting an all-time low, although the company’s market cap remained above $10 billion and there were no indications of hostile actors in the stockholder profile or on the takeover front. The pill provided that if an “acquiring person” were to either “beneficially own” more than 5% of Williams stock or commence a tender offer to increase its beneficial ownership in excess of 5%, then the acquiring person would be subject to the massive dilution that results from the triggering of a poison pill. Pills adopted by other companies to protect their NOLs from being unwound by a change of control under the federal tax laws have had thresholds in the 5% range. But, as the Court observed, a pill with a threshold as low as 5% is otherwise virtually unheard of. The Williams board wanted to be different.

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Gensler and SEC’s 2021 Examination Priorities Highlight ESG and Climate Risk

Posted by Betty Moy Huber, Aaron Gilbride, and David A. Zilberberg, Davis Polk & Wardwell LLP, on
Saturday, March 20, 2021
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Betty Moy Huber, Aaron Gilbride, and David A. Zilberberg are counsel at Davis Polk & Wardwell LLP. This post is based on their Davis Polk 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); For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

SEC Chair Hearing

[On March 2, 2021], the U.S. Senate Committee on Banking, Housing, and Urban Affairs held a nomination hearing to consider Gary Gensler’s candidacy for Chair of the Securities and Exchange Commission, or SEC. Throughout the hearing, Gensler fielded numerous questions on environmental, social and corporate governance and disclosure matters. This post synthesizes the most salient points from his testimony. The post also provides information on the SEC’s 2021 examination priorities and legislative bill activity occurring in parallel.

Climate Risk Disclosure

Gensler affirmed that as SEC Chair, he may pursue further climate-related disclosure requirements. He explained that in his view not only do investors want this information, but also that issuers would benefit from “such guidance.”

Political Contributions Disclosure

Gensler showed an interest in examining additional requirements related to political contributions, especially in light of investor attention, which he saw manifested in the nearly 80 shareholder proposals on this topic during last year’s proxy season. Rather than look at the financial significance of a single donation, he reiterated that his assessment would be grounded both in the legal test of materiality, defined as what reasonable investors want in the total mix of information, and in economic analysis.

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Delaware Court Enjoins Poison Pill Adopted in Response to Market Disruption

Posted by Mark McDonald, James Langston, and Kyle Harris, Cleary Gottlieb Steen & Hamilton LLP, on
Saturday, March 20, 2021
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Mark McDonald, James Langston, and Kyle Harris are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. McDonald, Mr. Langston, Mr. Harris, Roger Cooper, and Pascale Bibi, 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 Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

On February 26, 2021, the Delaware Court of Chancery (McCormick, V.C.) issued a memorandum opinion in The Williams Companies Stockholder Litigation enjoining a “poison pill” stockholder rights plan adopted by The Williams Companies, Inc. (“Williams”) in the wake of extreme stock price volatility driven by the double whammy of COVID-19 and the Russia-Saudi Arabia oil price war. While the pill adopted by the board in this case had unusual features (such as a 5% trigger and a broad “acting in concert” provision), the Court’s decision provides important reminders for boards in considering whether (and when) to adopt a poison pill in the face of a threat to the corporation. This includes the types of “threats” that will justify the adoption of a pill, and the scope of protections that will be considered a “proportionate” response to those legitimate threats.

Although the Court struck down the pill in this case, that should not prevent boards from considering adoption of a pill in a situation where they are facing an identifiable threat, whether from a potential takeover or activist shareholder, and tailoring the terms of such a pill to the threat posed.

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SEC Announces It Will Aggressively Scrutinize Issuers’ Climate Change Disclosure

Posted by Marc E. Elovitz, Brian T. Daly, and Tarik M. Shah, Schulte Roth & Zabel LLP, on
Friday, March 19, 2021
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Marc E. Elovitz and Brian T. Daly are partners and Tarik M. Shah is an associate at Schulte Roth & Zabel LLP. This post is based on an SRZ memorandum by Mr. Elovitz, Mr. Daly, Mr. Shah, Craig S. Warkol, Kelly Koscuizka, and Christopher S. Avellaneda.

On March 3, 2021, the SEC’s Division of Examinations released its 2021 Examination Priorities (“Exam Priorities”). While the Exam Priorities address the Division of Examinations’ focus for all of the SEC’s registrants, certain focus areas will be of particular interest to private fund managers. Consistent with what we have seen during examinations over the last 12 to 18 months, those focus areas include conflicts of interest, compliance programs, ESG and climate change, digital assets, alternative data and structured products.

  • Compliance Programs. Not unexpectedly, the Division of Examinations will continue its focus on the overall strength of investment adviser’s compliance programs, to confirm that “policies and procedures are reasonably designed, implemented, and maintained.” Of particular relevance to private fund managers, the examination staff identified the following areas for assessment, “portfolio management practices, custody and safekeeping of client assets, best execution, fees and expenses, business continuity plans, and valuation of client assets for consistency and appropriateness of methodology.” This reinforces the SEC staff’s focus on ensuring that investment advisers understand and effect their core responsibilities under the Compliance Rule (Rule 206(4)-7), particularly following the Division of Examination’s November 2020 Risk Alert, which identified these same areas as being common sources of examination deficiencies.

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Equality Metrics

Posted by Veronica Root Martinez (Notre Dame) and Gina-Gail Fletcher (Duke University), on
Friday, March 19, 2021
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Veronica Root Martinez is Professor of Law at the University of Notre Dame Law School; and Gina-Gail S. Fletcher is Professor of Law at Duke Law. This post is based on their 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); Companies Should Maximize Shareholder Welfare Not Market Value by Oliver Hart and Luigi Zingales (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).

In the wake of the deaths of George Floyd and Breonna Taylor, protests engulfed U.S. cities during the summer of 2020 as activists, politicians, and everyday citizens demanded changes to the system of policing that has repeatedly resulted in the death of Black citizens at the hands of White police officers. Notably, these demands extended beyond the criminal justice system and led to an examination of the myriad of ways systemic racism and racial inequities pervade daily life in America—from education, to health care, to corporate America. Conversations that initially focused on the role of police within American society turned into larger debates about how to create an America that values Black lives; and these discussion spilled into living rooms, permeated workplaces, and ultimately infiltrated boardrooms across the U.S.

For the first time, since the founding of the Black Lives Matter (BLM) movement in 2013, many large, well-known corporations publicly aligned themselves with the growing social movement. Corporations’ responses ranged from a lack of support, on one end of the spectrum, to detailed statements in support of BLM, coupled with significant outlays of resources to address systemic inequality both internally and externally. The majority of corporations fell somewhere between these two extremes—that is, most corporations made statements broadly in support of the social movement, but committed to limited or no tangible actions to improve demographic diversity and enhance racial equality within their own corporate structures or their contracting partners’. Our Essay focuses on these corporations in the middle—corporations for which support of BLM has been little more than a marketing campaign. We examine how to incentivize corporations to move away from mere statements and towards the types of actions more likely to tackle systemic racism and racial inequalities in a sustained, meaningful manner. To achieve this goal, we suggest harnessing the power and influence of institutional investors to encourage firms to implement strategies crafted to address discrimination, bias, and racism within firms’ own organizational structures and supply chains.

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