Monthly Archives: July 2023

The Developing Litigation Risks from the ESG Backlash in the United States

Rick S. Horvath, Julien Bourgeois, and Mark D. Perlow are Partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Horvath, Mr. Bourgeois, Mr. Perlow, David A. Kotler, James A. Fishkin and Stephen M. Leitzell. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto TallaritaStakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

Key Takeaways

  • In the past year, environmental, social, and governance (“ESG”) practices have faced heightened scrutiny in the United States from state attorneys general, state and federal legislators, other government officials, and private parties.
  • There has been a sudden increase in governmental inquiries and both public and private litigation critical of ESG-related decisions.
  • Corporate boards and members of the financial industry, as well as their attorneys and other advisors, should consider preparing for potential involvement in the growing ESG scrutiny.

The consideration of ESG factors as part of investment or corporate decision-making processes is at an important crossroads in the United States. Until recently, the ESG discussion has primarily taken place outside the courtroom. In the past year, however, private litigants, “red state” attorneys general, and other government officials in the United States have increasingly scrutinized the ESG-related decisions of corporate boards, investment managers, pension fiduciaries, and funds—including through litigation filings in state and federal courts. Meanwhile, some investors, “blue state” officials, foreign governments, and regulators continue to advocate for including ESG factors in business and investment decisions.

As the proper scope of incorporating ESG into business and investment decisions continues to be debated, and the current political environment remains unsettled, the risk of litigation and state inquiries is likely to continue, if not expand. In this environment of competing demands from different regulators and investors, corporate boards and investment managers will face increasingly difficult choices regarding their consideration of ESG factors, and should consider preparing to respond if their organization draws scrutiny over its ESG practices.


Utilizing Compensation Actually Paid to Evaluate Pay and Performance

Ira T. Kay is a Managing Partner, Mike Kesner is a Partner, and Ed Sim is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum. Related research from the Program on Corporate Governance includes Pay without Performance: The Unfulfilled Promise of Executive Compensation (discussed on the Forum here) by Lucian Bebchuk and Jesse M. Fried.

Does the SEC’s new Pay Versus Performance (PVP) disclosure provide an effective means to evaluate the alignment of pay and performance?

Key Takeaways

Based on our analysis, there are several key takeaways that shareholders and companies may find of interest, including:

  • CAP is more fit for purpose than SCT compensation disclosure for evaluating pay for performance.
  • A relative rank analysis against a company’s peer group or industry-specific index provides the most useful evaluation of the relationship between CAP and company performance.
  • The number of situations where a company’s compensation percentile rank significantly exceeds its TSR percentile rank drops dramatically when actual performance is considered when calculating compensation.
  • Significant differentials in relative TSR and CAP rank may help identify competitive deficits/surpluses in total pay opportunities, competitive discrepancies with incentive design features, potential issues with performance metric rigor or alignment with shareholder value, etc.


X Corp. v. Wachtell, Lipton, Rosen & Katz: Complaint

This post provides the text of the complaint filed July 5, 2023, by X Corp. against Wachtell, Lipton, Rosen & Katz.

Plaintiff X Corp., the successor-in-interest to Twitter, Inc. (“Twitter”), files this Original Complaint against Wachtell, Lipton, Rosen & Katz (“Wachtell”), and alleges as follows:


1. This action for equitable relief arises out of an effort by Wachtell to fundamentally alter its fee arrangement as litigation counsel in the twilight of its representation of Twitter to obtain an improper bonus payment in violation of its fiduciary and ethical obligations to its client. Wachtell exploited a corporate client left unprotected by lame duck fiduciaries who had lost their motivation to act in Twitter’s best interest pending its imminent sale to Elon Musk and his entities, X Holdings I, Inc. and X Holdings II, Inc. (together, the “Musk Parties”).

2. In the days and hours leading up to the closing of the sale of Twitter on October 27, 2022, Wachtell and its litigation department led by Bill Savitt were at the center of a spending spree by Twitter’s departing executives who ran up the tab at Twitter by, among other things, facilitating the improper payment of substantial gifts to preferred law firms like Wachtell on top of the firms’ full hourly billings by designating tens of millions of dollars in handouts to the firms as “success” or “project” fees. Despite having previously agreed to work on an hourly fee basis and subsequently charging millions in hourly fees under that arrangement, Wachtell disregarded both California law and its ethical and fiduciary duties in the final days of its four-month Twitter engagement to improperly solicit an unspecified—but clearly gargantuan—success fee, as part of a $90 million “total” fee that also purported to satisfy Wachtell’s earlier invoices that totaled $17,943,567.49. The $90 million fee collected from Twitter for a few months of work on a single matter represented nearly 10% of Wachtell’s gross revenue in 2022, and over $1 million per Wachtell partner.


Market Changes and the Emergence of New Players Are Impacting Activism

Demetrius A. Warrick, Richard J. Grossman, and Neil P. Stronski are Partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Warrick, Mr. Grossman, Mr. Stronski, and Alexander J. Vargas. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian A. Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian A. 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 Frankl and Kushner Leo E. Strine, Jr. (discussed on the Forum here).

Key Points

  • The ultimate impact of the SEC’s new universal proxy rules is not yet clear, but they could make some individual directors more vulnerable to activist challenges.
  • Despite the drop-off in M&A activity, the share of activist campaigns urging some kind of strategic transaction has remained at roughly historical levels, with a refocusing on corporations’ capital allocation practices.
  • Activists seemingly are more interested in keeping engagement with companies private, often reaching agreements in response to private demands without a public fight.
  • As always, companies should have strategies in place to address activist pressure before it arises, including ongoing stockholder communications programs and monitoring systems to detect activist trading.

Despite a slowdown in M&A activity and macroeconomic headwinds, stockholder activism remains a potentially powerful tool for investors aiming to extract value from companies. The activism landscape continues to evolve as new players enter the fray, activist campaigns and tactics are tailored to market conditions and the impact of the universal proxy card becomes clearer.


Shareholder Activism: Lessons from the First Season of Universal Proxy

Shaun J. Mathew and Daniel E. Wolf are Partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis memorandum by Mr. Mathew, Mr. Wolf, Edward J. Lee, and Evan Johnson. Related research from the Program on Corporate Governance includes Universal Proxies (discussed on the Forum here) by Scott Hirst.

The much-anticipated first proxy season under the SEC’s new universal proxy rules is now largely in the books. Looking back, did the new regime mark a paradigm shift in how proxy fights are conducted? Or was this truly a technical change with limited effects on corporate and activist behavior? While the answer was always likely to be somewhere in between, we took a closer look at this inaugural season to determine how companies, activists, institutional investors and proxy advisors adapted to the new regime and how strategy, tactics and outcomes did – and did not – change.

Key Takeaways

  • Activity levels: Activism levels remained high, but fewer campaigns resulted in proxy fights while more settled
  • Target size: Activism campaigns targeted companies of all sizes, but the vast majority of proxy fights occurred at smaller companies
  • Number of nominees: Activists did not nominate more candidates per slate
  • Proxy fight costs: While universal proxy theoretically lowered the cost of entry for an activist, proxy fight costs did not come down and there was no surge in bare-bones campaigns
  • Proxy advisor recommendations: While ISS and Glass Lewis continue to require that activists make a case for change, they are placing greater emphasis on individual director qualifications
  • Litigation: In a highly litigious proxy season, companies challenged the validity of activist nominations at unprecedented levels
  • Success level: Universal proxy may be increasing the odds of at least some activist success, but it has not opened the floodgates


Amending Charters to Address Universal Proxy, Shareholder Activism and Officer Exculpation

Maia Gez and Thomas W. Christopher are Partners and Danielle Herrick is an Attorney at White & Case LLP. This post is based on a White & Case memorandum by Ms. Gez, Mr. Christopher, Ms. Herrick, Jennifer Chu, Colin J. Diamond, and Scott Levi. 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 Universal Proxies (discussed on the Forum here) by Scott Hirst.

As the 2023 proxy season winds down for calendar year companies, it is a good time to consider possible bylaw and charter amendments to address recent developments with respect to universal proxy, shareholder activism and officer exculpation.

  • The 2023 proxy season to date sheds light on the general acceptance by shareholders of amendments to bylaws to address universal proxy and amendments to certificates of incorporation to provide for officer exculpation. In addition, decisions of the Delaware Court of Chancery over the last several months provide guidance with respect to the validity of enhanced advance notice bylaws requiring greater disclosure by shareholders nominating directors for election and about the nominees themselves.
  • In this alert, we review these corporate governance developments and identify key takeaways for public companies.

Part I: Bylaw Amendments to Address the Universal Proxy Rule and Shareholder Activism

In November 2021, the SEC adopted Rule 14a-19 under the Securities Exchange Act of 1934 (the “Exchange Act”), which requires the use of a universal proxy card in any contested director election after August 31, 2022. Under the new rule, shareholders and companies involved in proxy fights are now required to use a universal proxy card that includes both the company’s and the dissident’s director nominees. This change allows shareholders to mix-and-match their preferred nominees from the company’s and the dissident’s slates rather than requiring them to vote for either the entire company slate or the entire dissident slate. [1]


Out with Fiduciary Out?

Adi Libson is an Assistant Professor, at Bar-Ilan University Faculty of Law, and Guy Firer is a Partner at S. Horowitz & Co. and a Ph.D. candidate at Bar-Ilan University. This post is based on their recent article, forthcoming in the Journal of Corporation Law, and is part of the Delaware law series; links to other posts in the series are available here.

In our forthcoming article, “Out with Fiduciary Out?” we offer justification for one of the most renowned and highly controversial decisions in Delaware in the last 20 years, Omnicare, Inc. v. NCS Healthcare, Inc., 818 A.2d 914 (Del. 2003).

Merger and acquisition agreements (“M&A”) play a crucial role in the life cycle of a corporation. They determine the direction in which a corporation is heading and have a direct impact on shareholders’ returns, and hence entail a very complicated and costly process. The process is further complicated by the time gap between the signing of the agreement after the boards’ approval, and the closing of the deal after the shareholders’ approval. A potential acquirer does not want to incur significant expenses only to find that it was outbid by a competitor. Management and boards often prefer to avoid the uncertainty of M&A transactions. Therefore, the parties may agree to lock-up the agreement, namely, agree that the target shall not consider any other offers once the deal is signed.

In Omnicare, the Delaware Supreme Court (in a rare, 3-2, split decision) ruled that the board of a public target company cannot decide to completely lock up a merger. Hence, in most cases the merger agreement must include a fiduciary out clause, enabling the board and the company, inter alia, to terminate the agreement if a superior offer arrives before the deal is approved by the shareholders. If the agreement does not include such an exit clause, the deal may be deemed as “preclusive and coercive” and the board may be regarded as having failed in fulfilment of  its duties.


Embracing Technology in the Future Boardroom

James Beasley is Head of Board Advisory in the EMEA region at Nasdaq. This post is based on a publication by Nasdaq Governance Solutions.

Technology is transforming how businesses operate and communicate. Businesses of all shapes and sizes are constantly assessing how new technologies might expedite and enhance ways of working—the boardroom is no exception. Technological developments in the boardroom can help enhance oversight and decision-making effectiveness and free up time.

As the current debate around rapid developments in artificial intelligence (AI) has shown, it is important to consider the risks alongside the potential benefits of emerging technologies. The work that boards perform, as well as the nature of the information they receive, means that any decisions around embracing new technologies carry weight. But that doesn’t mean that boards should shy away from innovation.

I recently discussed the opportunities for board members to embrace technology in the boardroom as a guest on The Chartered Governance Institute UK & Ireland’s podcast, where I offered some perspective for boards looking to improve their efficiency and decision-making.


Shareholder Proposal No-Action Requests in the 2023 Proxy Season

Marc S. Gerber is a Partner and Ryan J. Adams is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum.

Key Points

  • Companies lodged fewer no-action requests for the exclusion of shareholder proposals in the 2023 proxy season after the SEC Staff outlined new guidelines in 2021 and the Staff rejected many requests in the 2022 season.
  • Companies are finding it more difficult to predict how their no-action requests will be treated, but some lessons can be drawn from the SEC Staff’s responses in the 2023 proxy season about the types of requests that will fare best.
  • The SEC Staff continues to grant no-action requests in some cases where companies argue that a shareholder proposal relates to ordinary business matters, would result in micromanagement or suffers from a procedural defect, among other things.

Following a tumultuous 2022 shareholder proposal no-action letter season, the 2023 season contained fewer surprises from the Staff of the Division of Corporation Finance (Staff) of the Securities and Exchange Commission (SEC). Nevertheless, companies continued to struggle to decipher the contours of the Staff’s approach to requests for no-action relief regarding shareholder proposals.


English High Court Rejects Climate Case Against Energy Company Board

Elise Edson is Counsel, and Nick Withers and Jonathan Swil are Partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling memorandum by Ms. Edson, Mr. Withers, Mr. Swil, Richard Porter, and Michael Scargill. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders? (discussed on the Forum here) both by Lucian A. Bebchuk and Roberto TallaritaStakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian Bebchuk, Kobi Kastiel, Roberto Tallarita; and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.

Key Takeaways

  • The claim alleged breaches of the U.K. Companies Act 2006, including of the directors’ duty to promote the success of the company, as well as the related duty to exercise reasonable care, skill and diligence.
  • The High Court held that ClientEarth had failed to establish a prima facie case, which was fatal to the application.
  • The reasoning of the High Court reinforces the English courts’ longstanding reticence to interfere in company management, including on climate change matters. The Court emphasized the array of risks a large and complex global business such as Shell faces, requiring the directors to balance a range of competing considerations in their decision making, in respect of which the courts were ill-equipped to intervene.
  • The High Court rejected attempts to formulate specific directors’ duties in respect of climate change. In this regard, the Court confirmed that approaches to managing climate risk fell to be assessed within the existing statutory framework, which affords company managers considerable latitude in the performance of their duties.
  • The High Court moreover stressed the relevance of a shareholder’s motivation in bringing a derivative claim, finding that ClientEarth’s de minimis shareholding gave rise to a clear inference that the claim had been brought for a purpose other than promoting the success of the company for the benefit of its members as a whole.


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