Tag: Related parties

SEC Approves NYSE’s Amended “Related Party” and “20%” Stockholder Approval Rules

Posted by Eleazar Klein and Evan A. Berger, Schulte Roth & Zabel LLP, on
Tuesday, April 20, 2021
, , , , , ,
More from: , ,

Eleazar Klein is partner and Evan A. Berger is an associate at Schulte Roth & Zabel LLP. This post is based on their SRZ 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).

On April 2, 2021, the Securities and Exchange Commission approved, on an accelerated basis, an amended proposal by the NYSE to amend certain of its stockholder approval rules set forth in the NYSE Listed Company Manual (“NYSE Manual”). The formal approval comes after the NYSE instituted a temporary waiver of these rules due to the challenges companies faced during the COVID-19 pandemic. See our Jan. 12, 2021 Alert and Oct. 9, 2020 Alert for more detail.

Rule 312.03(b) — As amended, the Related Party Stockholder Approval Rule:

  • No longer requires prior stockholder approval for issuances to the subsidiaries, affiliates or other closely related persons of directors, officers and substantial securityholders (“Related Party”) or to entities in which a Related Party has a substantial interest (except where a Related Party has a 5% or greater interest in the counterparty (as described below)).
  • No longer requires stockholder approval of cash sales to a Related Party if the sale meets the NYSE minimum price requirement, even where the number of shares of common stock to be issued (or the number of shares of common stock into which the securities may be convertible or exercisable) exceeds either 1% of the number of shares of common stock or 1% of the voting power outstanding before the issuance.
  • Requires stockholder approval of any transaction or series of related transactions in which any Related Party has a 5% or greater interest (or collectively have a 10% or greater interest), directly or indirectly, in the company or assets to be acquired or in the consideration to be paid in the transaction and the issuance of common stock, or securities convertible into common stock, could increase the outstanding common shares by 5% or more.
  • Deletes now irrelevant provisions relating to (i) cash sales that meet the NYSE minimum price requirement, and where the issuance does not exceed 5% of the shares of common stock or voting power before the issuance, to a Related Party where the Related Party involved in the transaction is classified as a Related Party solely because the person is a substantial security holder; and (ii) an exemption related to early stage companies.

Rule 312.03(c) — As amended, the 20% Stockholder Approval Rule:

  • Replaces the reference to “bona fide private financing” in the exception from shareholder approval for transactions relating to 20% or more of the company’s outstanding common stock or voting power with “other financing (that is not a public offering for cash) in which the company is selling securities for cash.” This would eliminate the 5% limit for any single purchaser participating in a transaction, thus permitting companies to consummate a financing to a single purchaser.
  • Requires shareholder approval if the securities in a financing are issued in connection with an acquisition of the stock or assets of another company and the issuance of the securities alone or when combined with any other present or potential issuance of common stock, or securities convertible into common stock, is equal to or exceeds either 20% of the number of shares of common stock or of the voting power outstanding before the issuance.

In addition, amendments to Section 314 of the NYSE Manual requires a company’s audit committee or other independent body of the board of directors to review related party transactions prior to any transaction and prohibit the transaction if it determines the transaction is not consistent with the interests of the company and its shareholders. For purposes of Section 314, related party transactions would mean those transactions required to be disclosed pursuant to Item 404 of Regulation S-K under the Securities Exchange Act of 1934, as amended (without giving effect to the transaction value threshold of that provision).

The Domains of Loyalty: Relationships Between Fiduciary Obligation and Intrinsic Motivation

Posted by Deborah DeMott (Duke University), on
Monday, February 1, 2021
, , , , ,
More from:

Deborah A. DeMott is David F. Cavers Professor of Law at Duke University School of Law. This post is based on her recent paper, forthcoming in the William & Mary Law Review.

By imposing obligations of loyalty, does fiduciary law “crowd out” the force of intrinsic motivations to act loyally? Or does fiduciary law reinforce (and thereby “crowd in”) intrinsic motivations to trust and to act in a trustworthy fashion? This paper examines relationships between the formal domain of fiduciary law and other factors that shape conduct, including intrinsic motivation and markets for professional services, as well as the force of reputation in  a market or an industry. The paper demonstrates that looking across domains—from the legal to the extra-legal and back to the legal—places the distinctiveness of fiduciary law into sharp relief. The relationships to which this body of law applies are ones that necessarily make one party vulnerable to the other to some degree; the prospectively vulnerable party “has to trust” that the other will prove trustworthy. Fiduciary law undergirds intrinsic motivations to repose trust by addressing the risk of betrayal intrinsic to relationships in which one party must to some degree trust the other; the law also addresses the risk of aversion to the prospect of being duped or made a chump by reposing trust in another. Surveying relevant behavioral research, the paper examines its significance for fiduciary law, which the paper argues is invulnerable to critique on crowding-out grounds.

READ MORE »

NYSE Extends Waiver of “Related Party” and “20%” Stockholder Approval Rules

Posted by Eleazer Klein, Adriana Schwartz, and Clara Zylberg, Schulte Roth & Zabel LLP, on
Tuesday, October 27, 2020
, , , , ,
More from:

Eleazer Klein is partner and Adriana Schwartz and Clara Zylberg are special counsel at Schulte Roth & Zabel LLP. This post is based on their SRZ memorandum.

Recognizing that companies need quick access to capital due to the unprecedented disruption caused by COVID-19 and to mitigate against the NYSE stockholder approval rules presenting a hurdle to raising capital, the NYSE and the SEC approved the temporary waiver (“NYSE Waiver”) of certain NYSE stockholder approval rules set forth in Section 312.03 of the NYSE Listed Company Manual (“NYSE Manual”). The NYSE Waiver was last set to expire on Sept. 30, 2020, but, effective Sept. 28, 2020, has been extended through Dec. 31, 2020. [1] The relevant NYSE rules require a listed company to obtain stockholder approval before it issues 1% (or, in certain circumstances, 5%) of its outstanding shares of common stock or voting power pre-issuance to certain Related Parties [2] and before issuing in excess of 20% of its outstanding shares of common stock or voting power pre-issuance at a discount to the “NYSE Minimum Price.” [3]

READ MORE »

Self-Dealing in a Comparative Light

Posted by Andrew Tuch (Washington University), on
Friday, February 7, 2020
, , , , , , ,
More from:

Andrew F. Tuch is Professor of Law at Washington University School of Law. This post is based on his recent article, published in the Fordham Law Review.

Scholars have long disagreed over which of two fiduciary rules is more effective for controlling self-dealing. Some scholars defend the “strict” no-conflict rule, which categorically bans self-dealing by directors (Marsh, 1966; Brudney, 1985; Criddle, 2017). Others prefer the “flexible” and “pragmatic” fairness rule, which allows self-dealing if it is fair to the corporation and its shareholders (Easterbrook & Fischel, 1991; Langbein, 2005). Proponents of this approach claim that the pragmatic fairness rule better distinguishes between beneficial and harmful self-dealing. The debate has dragged on for decades, beyond corporate law and across the common law world (Kershaw, 2012; Licht, 2019).

In my article Reassessing Self-Dealing: Between No Conflict and Fairness, I challenge a central assumption underlying the debate: that the rules operate differently, to different effect. In practice, the difference between these rules is not as important as scholars believe. Today, this is best seen by comparing the United Kingdom—which continues to employ the traditional no-conflict rule—to the United States (more specifically, Delaware), which adopted the fairness rule.

READ MORE »

Weeds & Words: A Quantitative Analysis of Cannabis Disclosure

Posted by Krista Bennatti-Roberts, Carol Hansell, and Harlan Tufford, Hansell LLP, on
Saturday, August 3, 2019
, , , , , , , ,
More from: , , ,

Krista Bennatti-Roberts is a Data Scientist, Carol Hansell is Senior Partner, and Harlan Tufford is a Senior Governance Consultant at Hansell LLP. This post is based on their Hansell memorandum.

Over the past two years Canadian investors have given a hearty welcome to the cannabis industry. Although only a few cannabis companies booked a profit in 2018, stock valuations have been high. The industry has also attracted naysayers and short-sellers, of course. As debates about the state of the cannabis industry continue, we wondered what cannabis companies have to say about themselves; and if they are saying it any differently than the Canadian industries with which investors are more familiar.

We looked at the question by programmatically analyzing the text of the Management Discussion & Analysis (MD&A) of 35 Canadian-listed cannabis companies. We compared the results with the results of the same analysis of small and large-cap TSX-listed companies in more established industries [1] (we refer to companies from these more established industries as “veteran” companies).

This post is part of an ongoing series exploring the application of a variety of data science disciplines to the field of governance. Our first piece in the series explored the CEO letters of Warren Buffett and others. This series seeks to examine the ways machine learning and other new technologies can augment analysis and uncover insight.

READ MORE »

Related Investing: Corporate Ownership and Capital Mobilization During Early Industrialization

Posted by B. Zorina Khan, Bowdoin College and NBER, on
Thursday, February 23, 2017
, , , , , , , , , , , ,
More from:

B. Zorina Khan is Professor of Economics at Bowdoin College and a Research Associate with the National Bureau of Economic Research. This post is based on her recent paper.

Family businesses and concentrated ownership have been the norm across time and place. Business historians like Alfred Chandler have noted these patterns with disapproval, attributing the decline of European industrial dominance in part to subjective “family capitalism,” and the advance of the United States to its development of objective and impersonal “managerial capitalism.”

According to economic models, market efficiency implies depersonalized transactions where outcomes are based on prices and fundamentals rather than the identity of participants. Personal or familial connections can serve as conduits for inefficiency, with the potential for nepotism, corrupt governance, and exploitation of other stakeholders. Outsider investors face the risk that both internal and external control mechanisms may be too weak to protect them from “tunneling” or corruption in the firm. By contrast, others maintain that such personalized institutions as family firms or venture capital might provide a mechanism to reduce risk or asymmetries in information, and to increase trust, social capital and the enforceability of contracts. The intergenerational links that characterize family membership can similarly provide a cost-effective signal to outsiders that a firm values continuity and future exchange.

READ MORE »

Observations on the FDIC’s Examination Guidance for Third-Party Lending

Posted by Pratin Vallabhaneni, Arnold & Porter LLP, on
Saturday, September 3, 2016
, , , , , , , , , , , ,
More from: ,

Pratin Vallabhaneni is an Associate at Arnold & Porter LLP. This post is based on an Arnold & Porter publication.

On July 29, 2016 the Federal Deposit Insurance Corporation (“FDIC”) released its proposed Examination Guidance for Third-Party Lending (“Proposal”). [1] The Proposal, which supplements the FDIC’s Guidance for Managing Third-Party Risk (“Third-Party Guidance”), [2] is directed primarily at banks whose primary federal regulator is the FDIC that maintain partnerships with third-party firms (e.g., marketplace lenders) in connection with their provision of credit products. The FDIC has stated that it will accept written comments on the Proposal until October 27, 2016. The Proposal is significant, both in terms of its regulatory policy and practical implementation implications. This post provides background context and select considerations for banking, specialty finance, and financial technology (“FinTech”) firms to consider as they grapple with the Proposal’s implications.

READ MORE »

Inversions: Recent Developments

Posted by Peter J. Connors & Jason M. Halper, Orrick, Herrington & Sutcliffe LLP, on
Thursday, January 28, 2016
, , , , , , , , , , , ,
More from: , ,

Peter J. Connors is a tax partner at Orrick, Herrington & Sutcliffe LLP. Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group. This post is based on an article authored by Mr. Connors and Mr. Halper, that was previously published in Law360.

In October 2015, press reports began appearing suggesting that Pfizer Inc., one of the world’s largest pharmaceutical companies, and Allergan, an Irish publicly traded pharmaceutical company, were considering entering into the largest inversion in history. Within weeks, the IRS launched its latest missive against inversion transactions. It also put the tax community on notice that more regulatory activity was yet to come.

Companies invert primarily because of perceived disadvantages associated with the U.S. corporate tax system, which has one of the world’s highest tax rates and levies taxes on worldwide income, including income earned by foreign subsidiaries (generally referred to as “controlled foreign corporations”) when repatriated and, at times, prior to repatriation. In its broadest terms, an inversion is the acquisition of substantially all the assets of a U.S. corporation or partnership by a foreign corporation. If a transaction triggers Internal Revenue Code Section 7874, the post-transaction foreign corporation will be treated as a U.S. corporation, and gain that is otherwise recognized on the transaction will not be offset by tax attributes of the U.S. entity, such as net operating losses (NOLs).

READ MORE »

Practice Points Arising From the El Paso Decision

Posted by John E. Sorkin, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Thursday, June 4, 2015
, , , , , , , , ,
More from: , , , ,

John E. Sorkin is a partner in the corporate practice at Fried, Frank, Harris, Shriver & Jacobson LLP. The following post is based on a Fried Frank publication authored by Mr. Sorkin, Philip Richter, Abigail Pickering Bomba, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Chancery Court recently ruled, in In re El Paso Pipeline Partners, L.P. Derivative Litigation (Apr. 20, 2015), that the general partner of a master limited partnership (MLP) was liable to the MLP for the $171 million by which the court determined that the MLP had overpaid for liquefied natural gas (LNG) assets purchased from its parent company for $1.4 billion in a typical “dropdown” transaction. In a separate memorandum (available here and discussed on the Forum here), we have discussed the decision and our view that it will have limited applicability given the unusual factual context. We note that the court’s extremely negative view of the conduct of the conflict committee and its investment banker offers a blueprint for how not to conduct a conflict committee process. We offer the following practice points arising out of the decision.

READ MORE »

Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal)

Posted by Luca Enriques, University of Oxford, on
Thursday, June 4, 2015
, , , , , , , ,
More from:

Luca Enriques is Allen & Overy Professor of Corporate Law at University of Oxford, Faculty of Law.

Transactions between a corporation and a “related party” (a director, the dominant shareholder, or an affiliate of theirs) are a common instrument for those in control to divert value from a corporation, especially in countries with concentrated ownership. While direct evidence of value diversion via related party transactions (RPTs) is obviously hard to obtain, widespread use of RPTs has been observed for example in China (in the form of inter-company loans) and South Korea (also as a tool to transfer wealth from one generation of controllers to the next in avoidance of inheritance taxes), has been vividly reported for post-privatization Russia and Italy (where corporate scandals, such as Parmalat and, more recently, Fondiaria-Sai, often go together with significant RPT activity). Anecdotal evidence of value extraction via RPTs also exists with regard to the US (think of the Hollinger case and those reported in Atanasov et al.’s paper on law and tunneling, available here). Their (ab)use at Russian and East-Asian companies listed in the UK has recently prompted the UK Listing Authority to stiffen its already strict provisions on RPTs (see here; for a news report on RPTs at one of these East-Asian companies—Bumi, now renamed Asia Mineral Resources—see here).

In my article Related Party Transactions: Policy Options and Real-world Challenges (with a Critique of the European Commission Proposal), published in 16 European Business Organization Law Review 1 (2015), and available here (and here as a working paper), I provide a comparative and functional overview of how laws deal with RPTs and criticize a recent European Commission proposal for a harmonized EU regime on RPTs (see Article 9c of the Proposal for a Directive of the European Parliament and of the Council amending Directives 2007/36/EC and 2013/34/EU, available here).

READ MORE »

Page 1 of 2
1 2