Monthly Archives: April 2023

Extending Dual Class Stock: A Proposal

David J. Berger is a partner at Wilson Sonsini Goodrich & Rosati, Jill E. Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Carey Law School and Steven Davidoff Solomon is Alexander F. and May T. Morrison Professor of Law, U.C. Berkeley School of Law. This post is based on their recent paper, forthcoming in Theoretical Inquiries in Law, 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 The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), The Perils of Small-Minority Controllers (discussed on the Forum here), Keynote Presentation on The Lifecycle Theory of Dual-Class Structures (discussed on the Forum here) all by Lucian Bebchuk and Kobi Kastiel.

Dual class stock has become common and ubiquitous in U.S. capital markets. Dual class structures, which have evolved over the last decade, now often include a variety of sunset mechanisms. These come in various flavors, including term-based sunsets, dilution thresholds, and life cycle events. As companies that adopted dual-class stock structures with sunsets at the time of their IPOs age, some sunset mechanisms, particularly term-based sunsets, are beginning to take effect. As early-adopters consider whether to follow their initial sunset mechanisms, boards, investors, their advisors and courts need to assess when and how dual class stock should be extended.

In some cases, companies have allowed sunsets to take effect, resulting in the collapse of the company’s dual class structure. In other cases, companies have attempted to extend or revise the length of existing dual class structures. Alphabet, for example, succeeded in such an extension by issuing nonvoting Class C shares, but Facebook withdrew a similar proposal in order to settle litigation challenging its proposed adoption. Despite Facebook’s failure, courts have upheld such extensions even when they are litigated to a judgment. In the recent case of City Pension Fund for Firefighters and Police Officers in Miami v. The Trade Desk, Inc., No. CV 2021-0560-PAF, 2022 WL 3009959 (Del. Ch. July 29, 2022), the Delaware Chancery Court, applying the MFW standard, Kahn v. M & F Worldwide Corp., 88 A.3d 635 (Del. 2014), found that an arrangement to extend the life of dual class stock was appropriate.


LGBTQ+ Board representation: identifying the barriers to entry

Richard Socarides is Founder and CEO of Kozani Capital, LLC, a venture capital and corporate advisory firm, and serves on the Board of Advisors, and Fabrice Houdart is Executive Director at the Association of LGBTQ+ Corporate Directors. Related research from the Program on Corporate Governance includes Politics and gender in the executive suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss; Will Nasdaq’s Diversity Rules Harm Investors? (discussed on the Forum here) by Jesse M. Fried; and Duty and Diversity (discussed on the Forum here) by Chris Brummer and Leo E. Strine Jr.

Between February and April, 2023, the Association of LGBTQ+ Corporate Directors surveyed existing and aspiring LGBTQ+ Directors to better understand their representation in the US boardrooms. It revealed three clear causes of their exclusion — but also some easy fixes.

Does it matter?

A prevailing myth in the boardroom is that the sexual orientation and gender identity of corporate directors does not matter. While many directors have gained an understanding of the barriers facing women, racial or ethnic minorities to access the boardroom, some continue to perceive the topic of LGBTQ+ representation as irrelevant to governance questions.

In a recent Dilbert’s cartoon strips, the boss is concerned his ESG score would fall if “we open a new factory that adds CO2 to the atmosphere,” adding “but we can balance that out by adding more diversity to our board.” And when the other character asks, “how much CO2 do you plan to add?” the boss replies: “One non-binary board member’s worth.”

The least represented group in the Boardroom

LGBTQ+ exclusion from the boardroom is no joke, as even a cursory reading of NASDAQ- listed companies’ board composition matrixes disclosed this year (and a manual tally of representation in Fortune 500 Boards shows).

The Association of LGBTQ+ Corporate Directors estimates that on average, 0.6% of all seats of publicly listed companies are occupied by out LGBTQ+ persons – although LGBTQ+ people are estimated to represent about 5.6% of the US population (see February 2021, Gallup, LGBT Identification Rises to 5.6% in Latest U.S. Estimate). “Out,” means directors who have revealed or no longer conceal their sexual orientation or gender identity and who self-identify in the companies’ Board composition matrix.


Looking Behind the Curtain: Corporate due diligence of political spending essential to protect companies from growing risks

Jeanne Hanna is Research Director, Bruce F. Freed is President and co-founder, and Karl J. Sandstrom is Strategic Advisor, at the Center for Political Accountability. Related research from the Program on Corporate Governance includes Corporate Political Speech: Who Decides? (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson Jr.; The Untenable Case for Keeping Investors in the Dark (discussed on the Forum here) by Lucian Bebchuk, Robert J. Jackson, Jr., James Nelson, and Roberto Tallarita; The Politics of CEOs (discussed on the Forum here) by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss; and Shining Light on Corporate Political Spending (discussed on the Forum here) by Lucian Bebchuk, and Robert J. Jackson Jr.

As the 2024 election cycle begins in earnest, companies must act on their fiduciary responsibility to more closely monitor their political spending and the accompanying risks. Too often corporate leaders fail to fully assess and scrutinize the ultimate beneficiaries of political contributions from corporate treasury funds. This oversight constitutes a lapse in corporate officers’ duty of care to protect and advance the interests of the company and its shareholders.

This duty is ever more crucial as corporate political engagement is increasingly scrutinized by the media, employees, investors, regulators, and consumers. This new reality has exponentially increased the financial risks companies face when their political spending directly or indirectly associates their brand with controversial political issues and outcomes and claims of corruption. Without the necessary due diligence, this new political landscape can also negatively affect the environment companies need to compete and operate in the long term and may expose a company to legal liability.

The Center for Political Accountability has spent the past two decades examining these risks as part of its effort to make corporate political disclosure and accountability a norm. Responsible business leaders must act on their legal obligations to protect companies from harm by increasing their scrutiny of corporate political spending and its ultimate beneficiaries and impacts. Companies can no longer give to politically active groups without giving close attention to the consequences or to what their political spending might enable. They must look behind the curtain and demand to know how their money is spent and what risks their company is assuming.

Risky Business

At both the state and federal level, public companies are often legally prohibited from donating to political campaigns or face strict limitations in how much they are allowed to donate directly to candidates.

Many companies, instead, choose to contribute indirectly to third-party groups –politically active trade associations; social welfare groups; partisan, state focused 527 committees; and super PACs — that engage in political spending and activities at both the state and national levels. These organizations then use the companies’ funds for election-related spending, often without informing corporate donors of their intentions. Corporate donations may be transferred to additional third-party groups before being spent on an election. Ultimately, a company’s donation may pass through several intermediaries before making its way to a final beneficiary (see Image below).

When companies donate to third-party groups, they typically lose the ability to control or to know how their money is eventually spent. Importantly, company leaders are frequently unaware of the issues and controversies the company may be associated with or what their money enables through the ultimate beneficiaries of their donations.

A 2021 report by the Center for Political Accountability illustrates how third-party contributions seriously undermined numerous companies’ commitments to democracy, addressing climate change, LGBTQ rights, reproductive healthcare, and other issues that are keenly tracked by consumers, employees, and shareholders. Careless political spending decisions can also place companies and corporate executives in legal jeopardy, as demonstrated by the recent investigations and federal criminal convictions associated with FirstEnergy in Ohio.

Indirect political donations and the ensuing controversies have repeatedly exposed a serious gap in corporate due diligence. This lapse has created serious risks that companies must confront. 

Pull back the curtain & control the risk

To mitigate these risks, corporate leaders can and should demand a full accounting from all recipients of how its corporate treasury funds are spent. Companies should apply standards similar to those already in use to monitor and regulate corporate contributions to charitable and philanthropic organizations. Applying similarly robust standards of due diligence to their political giving enables corporations to pull back the curtain, assert the necessary control over their corporate funds and in doing so fulfill their fiduciary responsibilities.

The CPA-Wharton Zicklin Model Code of Conduct for Corporate Political Spending provides a framework for corporate leaders to apply due diligence, honor their duty of care, and manage risks associated with political spending. Specifically, the Code requires companies to obligate all trade associations and other third-party groups receiving corporate treasury funds that can be used for election-related spending to report to the company how its contributions are spent and who the ultimate beneficiaries of corporate funds are. This information empowers senior management and directors to more accurately assess the risks of that spending and to avoid the risks created by ill-considered spending.

Anticipating Activist Attacks

David A. Katz and Sabastian V. Niles are partners, and Carmen X. W. Lu is Counsel at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism (discussed on the Forum here) by Lucian Bebchuk, Alon Brav, and Wei Jiang; Dancing with Activists (discussed on the Forum here) by Lucian A. Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch; 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.

The surge in campaigns by activist hedge funds against companies of varying market caps, industry sectors and governance/structural profiles is not abating. It is unlikely that today’s elevated level of activism will be curbed by legislation, regulation or market forces in the near term. While some of these campaigns have been public, there are a number of private campaigns putting pressure on public companies, with more expected heading into 2024. Both well-established and newer so-called “junior varsity” activist funds are setting their sights on old and new targets and sectors. Activist advisors are also seeking to bring non-traditional players and 14a-8 proposal proponents into the fold, training them on proxy contest techniques and proclaiming that “non-traditional activists and even non-profits are exploring the possibility of using the universal proxy card” to run director candidates next year, foreshadowing the possibility that single interest proponents may attempt to use the universal proxy card framework to support their causes.

In an increasingly crowded landscape, the risk of being “swarmed” by multiple activists amid new breeds of “activist wolfpacks” piling on has increased, with companies having to navigate funds with varying time horizons, distinct personalities, and sometimes competing priorities (some of which may be at odds with the interests of long-term investors and the company’s preferred strategies). Companies are also striking back, playing offense and reaching favorable outcomes aligned with the views of their long-term investors and minimizing disruptive impact while benefiting from constructive input.


The Board’s Oversight of Employee Voice

Benjamin Colton is Global Head of Asset Stewardship, and Holly Fetter is Vice President of Asset Stewardship at State Street Global Advisors. This post is based on their SSGA memorandum.

In July 2021, State Street Global Advisors, Russell Reynolds Associates, and the Ford Foundation
partnered to study best practices for effective board oversight of racial and ethnic diversity,
equity, and inclusion (“The Board’s Oversight of Racial and Ethnic Diversity, Equity, and Inclusion”). We reconvened in 2022 to research a topic of increasing importance: board oversight of human capital management, with a specific focus on employee voice. We define “employee voice” as the perspectives, interests, and needs of the workforce.

State Street Global Advisors recognizes that there are increasing investment risks and opportunities relating to human capital management, particularly given the state of the labor market and the continued focus on diversity, equity, and inclusion. We believe that if corporate boards gain a better understanding of employee experience through employee voice mechanisms, they will be more effective in their oversight of the firm’s human capital management strategy which we believe drives long term value.

To collect this research, the State Street team partnered with Russell Reynolds Associates, due to their board governance expertise and extensive relationships with corporate directors, as well as the Ford Foundation, whose grantees are increasingly centering worker voice and opportunity as essential for business success and sustainability.

We conducted interviews with public board directors in the US and UK who bring a wide range of boardroom perspectives on employee voice. These conversations informed the development of this
paper, the board- employee voice maturity model, and guidance around how to integrate employee voice into board oversight. Our research provides a view on how to strengthen boardroom discussions of human capital management and offers insights into how companies can solicit better insights from the workforce to improve organizational health.


Weekly Roundup: April 14-20, 2023

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 14-20, 2023.

Guidance on Effective Board Oversight

Back to the Future: Option Repricing

Proxy season 2023: increased expectations and unintended consequences

Governance and Disclosure Reminders for Public Companies

What to Watch for in Proxy Season 2023: Officer Exculpation

Private Equity and the Corporatization of Health Care

What The First Universal Proxy Card Contests Say About the Future of Activism

Law and Courts in an Age of Debt

Early CEO Compensation and PvP Disclosure Trends From the 2023 Proxy Season

Amit Batish is Director of Content at Equilar, Inc. This post is based on an Equilar memorandum by Mr. Batish and Courtney Yu. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein; Stealth Compensation via Retirement Benefits Lucian Bebchuk and Jesse M. Fried; and Politics and gender in the executive suite (discussed on the Forum here) by Alma Cohen, Moshe Hazan, and David Weiss.

The 2023 proxy season is officially underway. Public companies based in the United States will file their proxy statements (DEF14A), highlighting the various components of their governance policies, over the next few months. Among the most prominent and highly discussed issues featured in proxies are those related to executive compensation. Of course, this year’s proxy season is the first to feature newly required Pay Versus Performance (PvP) disclosures following the SEC’s August 2022 announcement.

In this post, Equilar analyzes a sample of early proxies filed by Equilar 500 companies—the 500 largest U.S. public companies by revenue—as of March 14, 2023. While several thousands more proxy statements will be filed in the months to come, the purpose of this study is to offer a preview of executive compensation pay packages from 2022 and key trends to watch for this proxy season, including those around PvP disclosures.

CEO Pay Continues to Surge

From 2018 to 2020, CEO pay remained relatively flat around $12 million at the median for Equilar 500 companies. However, in 2021, compensation jumped 18.3% to $14.2 million. The significant bump in 2021 could be credited to the fact that many companies elected to reward their CEOs for guiding them through the turbulence of the COVID-19 pandemic in the form of bonuses. Additionally, 2021 was a strong market year prior to any inflation and recession concerns.


Law and Courts in an Age of Debt

Jared Ellias is a Professor of Law at Harvard Law School; Elisabeth de Fontenay is a Professor of Law at Duke University. This post is based on their recent paper, forthcoming in the University of Pennsylvania Law Review.

Highly leveraged firms are now commonplace in many U.S. industries. Shifting from equity to debt financing is not simply a matter of optimizing a firm’s cost of capital, however. It also has profound implications for the firm’s behavior and investor outcomes.

In Law and Courts in the Age of Debt, we describe one underappreciated feature of the shift from equity to debt, which is that courts resolve disputes among shareholders and among creditors using strikingly different rules and decision frameworks. Shareholder disputes are typically resolved using equitable doctrines such as fiduciary duties, with the explicit goal of reaching a substantively fair result. In creditor disputes, by contrast, courts tend to limit their role to formal contract interpretation and procedural oversight, often reaching results at odds with both market expectations and notions of fairness. For example, a controlling stockholder attempting a minority freezeout faces punishing scrutiny aimed at ensuring fair terms for the minority stockholders, while majority creditor groups today can, and increasingly do, receive judicial blessing for transactions that simply extract wealth from other creditors (an outcome colorfully referred to by practitioners as “lender-on-lender violence”).


What The First Universal Proxy Card Contests Say About the Future of Activism

Kai H.E. Liekefett and Derek Zaba are partners with Sidley Austin LLP and co-chairs of its Shareholder Activism and Corporate Defense Practice, and Eric S. Goodwin is a managing associate with Sidley and a member of its Shareholder Activism and Corporate Defense Practice. This post is based on their recent piece. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst. 

The Spring 2023 proxy season is in full swing, and each week we are seeing more contested proxy statements filed and settlements with activists announced.  This proxy season is shaping up to be an uncommon tempest for companies and shareholders alike:  macro-economic conditions are stressing corporate performance, trading multiples are depressed, and—last, but not least—the universal proxy card regime has finally come into effect.

Universal proxy cards dramatically alter how shareholders vote for directors at contested shareholder meetings.  Whether they will cause companies, dissidents, proxy advisors, and shareholders to change their behavior in proxy contests has been hotly debated by market participants and observers since even before the universal proxy card rule was originally proposed by the Securities and Exchange Commission (SEC) in 2016.  Now that universal proxy cards are mandatory for all contested director elections, these predictions are starting to give way to preliminary observations.

This post discusses how the mandated use of the universal proxy card has changed the tactical and legal considerations of a proxy contest through the lens of the some of the first proxy contests and attempted proxy contests of the universal proxy card era.  The following key observations are discussed in more detail below.

  • Success in a proxy contest has not been guaranteed by having a slate composed of highly qualified candidates, nor by having a compelling argument that is disconnected from the composition of the slate.
  • Dissidents are seeking to exploit the change to candidate-based voting in the universal proxy card to warp settlement negotiations in their favor, leading certain activists to take aggressive settlement positions.
  • Taking advantage of the elimination of the “short slate” rule in the universal proxy card rules, some activists are more frequently nominating larger and “control” slates to achieve favorable leverage in negotiating settlements.
  • Because only validly nominated candidates must be included on a universal proxy card, advance notice provisions are even more important for companies to obtain relevant information about dissidents and their candidates and ensure that dissidents comply with the requirements of the new rules.
  • Special interest and other non-traditional activists may seek to leverage the universal proxy card to make nominations and launch proxy campaigns with non-traditional objectives, but despite expressed interest these activists have not yet successfully taken advantage of this possibility in large numbers.


Private Equity and the Corporatization of Health Care

Mark A. Hall is the Fred D. and Elizabeth L. Turnage Professor of Law at Wake Forest University. Erin C. Fuse Brown is the Catherine S. Henson Professor of Law at Georgia State University. This post is based on their article, forthcoming in the Stanford Law Review.

Six decades ago, Nobel economist Kenneth Arrow wrote a seminal article justifying various “nonmarket social institutions” that shielded health services from normal market conditions. Subsequent generations of scholars, including one of us, viewed several of Arrow’s positions as anachronistic barriers to pro-social market innovations in health.  For a discussion of Arrow’s theories and evolving health care markets, see this symposium.  Recent developments, however, put Arrow’s insights into new light, showing that he may have been as prescient as he was analytic.

Over the past decade, private equity investment in physician services has emerged as a driving trend toward the financialization of health care, with investors mining health services organizations to extract wealth. The primary goal of financialized health care is profit, while the quality of the patient care is a secondary concern. This obviously challenges a number of the professional and ethical norms that Arrow noted distinguish medical providers from general profit-seeking businesses. Among those is the “corporate practice of medicine” doctrine, which in many states prohibits nonphysicians from owning or controlling businesses that provide licensed clinical services.


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