Tag: Staggered boards


Delaware Rules on “Without Cause” Director Removal

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently held that a corporation without a classified board or cumulative voting may not restrict stockholders’ ability to remove directors without cause. In re Vaalco Energy S’holder Litig., C.A. No. 11775-VCL (Dec. 21, 2015). The ruling gives rise to questions for the many companies with similar charter or bylaw provisions.

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SEC Guidance on Unbundling in M&A Context

Nicholas O’Keefe is a partner in the Corporate Department at Kaye Scholer LLP. This post is based on a Kaye Scholer memorandum authored by Mr. O’Keefe. The complete publication, including Annex, is available here. Related research from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

On October 27, 2015, the SEC issued new Compliance and Disclosure Interpretations (the 2015 C&DIs) regarding unbundling of votes in the M&A context. The 2015 C&DIs address the circumstances under which either a target or an acquiror in an M&A transaction must present unbundled shareholder proposals in its proxy statement relating to provisions in the organizational documents of the public company that results from the deal. The 2015 C&DIs replace SEC guidance given in the September 2004 Interim Supplement to Publicly Available Telephone Interpretations (the 2004 Guidance). According to public statements of the SEC, and contrary to perceptions created by the news media, [1] the 2015 C&DIs represent a slight change from, and clarification to, the 2004 Guidance. The following is a brief overview of the unbundling rules, a summary of key differences between the 2015 C&DIs and the 2004 Guidance, and some observations about the practical implications of the changes.

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Private Control Premium and Option Exercises

Vyacheslav Fos is Assistant Professor of Finance at Boston College. This post is based on an article by Professor Fos and Wei Jiang, Professor of Finance at Columbia Business School.

In our paper, Out-of-the-Money CEOs: Private Control Premium and Option Exercises, forthcoming in the Review of Financial Studies, we examine the effects of proxy contests on CEOs’ option exercise policies. When faced with a challenge to insider control, we find that CEOs value company shares significantly more than the market due to the potentially decisive role their attendant voting rights could play in ex ante close proxy contests. By demonstrating that the strategic exercise of vested options is a potentially effective defensive tactic, we provide further support for the role of aggressive shareholder activism in market-based corporate governance.

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ISS 2016 Voting Policies

Andrew R. Brownstein is partner and co-chair of the Corporate practice group, and David A. Katz is a partner specializing in the areas of mergers and acquisitions, corporate governance and activism, and crisis management at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Brownstein, Mr. Katz, David M. Silk, Trevor S. NorwitzSabastian V. Niles, and S. Iliana Ongun.

[November 20, 2015], ISS announced its final U.S. voting policies for the 2016 proxy season. ISS had previously released draft proposals on several of the topics in October. Changes to non-U.S. policies were also announced, including with respect to Brazil, Canada, France, Hong Kong & Singapore, India, Japan, the Middle East & Africa and the U.K. & Ireland. ISS also released an updated equity plan scorecard “FAQ,” which contains a new model index for large companies that are newly public or emerging from bankruptcy, as well as other minor adjustments to scorecard factors.

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Seven Myths of Boards of Directors

David Larcker is Professor of Accounting at Stanford University. This post is based on an article authored by Professor Larcker and Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford University. Related research from the Program on Corporate Governance includes The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen, and How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment by Alma Cohen and Charles C. Y. Wang.

Corporate governance experts pay considerable attention to issues involving the board of directors. Because of the scope of the board’s role and the vast responsibilities that come with directorship, companies are expected to adhere to common best practices in board structure, composition, and procedures. Our paper, Seven Myths of Boards of Directors, which was recently made publicly available on SSRN, reviews seven commonly accepted beliefs about boards of directors that are not substantiated by empirical evidence.

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The Iliad and the IPO

Andrew A. Schwartz is an Associate Professor of Law at the University of Colorado Law School. This post is based on Professor Schwartz’s recent article published in The Harvard Business Law Review, available here.

Many public companies have shed takeover defenses in recent years, on the theory that such defenses reduce share price. Yet new data presented in my latest article, Corporate Legacy, shows that practically all new public companies—those launching their initial public offering (IPO)—go public with powerful takeover defenses in place, which presumably depresses the price of the shares. This behavior seems strange, as pre-IPO shareholders both have a strong incentive to maximize the value of the shares being sold in the IPO and are in position to control whether to adopt takeover defenses. Why do founders and early investors engage in this seemingly counterproductive behavior? In Corporate Legacy, I look to a surprising place, the ancient Greek epic poem, the Iliad, for a solution to this important puzzle, and claim that pre-IPO shareholders adopt strong takeover defenses, at least in part, so that the company can remain independent indefinitely and thus create a corporate legacy that may last for generations.

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What the Allergan/Valeant Story Teaches About Staggered Boards 

Arnold Pinkston is former General Counsel at Allergan, Inc. and Beckman Coulter, Inc. This post comments on the work of institutional investors working with the Shareholder Rights Project, (discussed on the Forum here, here, and here) which successfully advocated for board declassification in about 100 S&P 500 and Fortune 500 companies.

Until March 2015, I was the Executive Vice President and General Counsel of Allergan, Inc. For much of 2014 my job was to address the hostile bid launched by Valeant and Pershing Square to acquire Allergan.

With that perspective, I followed with interest the debate surrounding staggered boards, and in particular the success of institutional investors working with the Shareholder Rights Project in bringing about board declassification in over 100 S&P 500 and Fortune 500 companies. From my perspective, the debate did not seem to fully reflect the complexity of the relationship between a company and its shareholders—i) that each company and each set of shareholders is unique; ii) that destaggering a board can affect the value of companies positively, negatively or hardly at all; and iii) that shareholders, each from their own unique perspective, will be searching for factors that will determine whether annual elections are in their own best interests—not the company’s. For that reason, I respectfully offer my thoughts regarding the campaign to destagger boards.

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Commissioner Gallagher’s and Professor Grundfest’s Wrongful Attack on the Shareholder Rights Project

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post relates to a paper by Commissioner Daniel M. Gallagher and Professor Joseph A. Grundfest, Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors, described on the Forum in a post by Professor Grundfest here. Earlier posts by Professor Macey on the Gallagher/Grundfest paper appear on the Forum here, here, and here, with responses by Professor Grundfest here and here. A joint statement by thirty-four senior corporate and securities law professors from seventeen leading law schools, opining that the allegations in the Gallagher/Grundfest paper are meritless and urging the paper’s co-authors to withdraw these allegations, is available on the Forum here.

Earlier this month, at a University of Pennsylvania Law School’s Institute for Law & Economics Corporate Roundtable, Professor Joseph Grundfest presented to a audience of practitioners and academics the same accusations against Harvard and the Shareholder Rights Project (SRP) that he advanced in his paper (co-authored with soon-to-be departing SEC Commissioner Daniel Gallagher), “Did Harvard Violate the Federal Securities laws? The Campaign Against Classified Boards of Directors” (available here and described on the Forum here). Given Grundfest’s persistence in making these accusations, which have been widely viewed as meritless by corporate and securities law academics (see the statement by 34 senior law professors here ), readers might find of interest a new paper I just posted on SSRN, Commissioner Gallagher’s and Professor Grundfest’s Wrongful Attack on the Shareholder Rights Project, available here.

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Why Do Dual-Class Firms Have Staggered Boards?

The following post comes to us from Mira Ganor, professor at the University of Texas School of Law. Recent work from the Program on Corporate Governance about staggered boards includes: How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment (discussed on the Forum here).

The paper, Why Do Dual-Class Firms Have Staggered Boards?, which was recently made publicly available on SSRN, identifies a relatively high incidence of the combination of two of the strongest anti-takeover mechanisms: a dual-class capital structure with a staggered board. On its face this combination seems superfluous and redundant. If we already have a dual-class capital structure, why do we need a staggered board?

Even more puzzling are the results of the empirical studies of the combined use of staggered boards and dual class capital structures that find a negative correlation between staggered boards and firm value (as measured by Tobin’s Q) similar to the correlation found in firms with single class capital structures. This statistically significant and economically meaningful correlation persists even when controlling for special cases such as founder firms and family firms. Similarly, there are no significant changes in the results when controlling for effective dual class structures, i.e., dual class structures that grant de jure control and not merely the likelihood of de facto control.

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What Sitting Commissioners Should and Shouldn’t Do

Tamar Frankel is a Professor of Law at Boston University School of Law. This post relates to a paper by Commissioner Daniel Gallagher and Professor Joseph Grundfest, described on the Forum here. An earlier post about this paper by Professor Tamar Frankel, titled Did Commissioner Gallagher Violate SEC Rules?, is available on the Forum here. The Forum also featured last week (here) a joint statement by thirty-four senior corporate and securities law professors from seventeen leading law schools—including at Boston University, Chicago, Columbia, Cornell, Duke, George Washington, Georgetown, Harvard, Michigan, New York University, Northwestern, Stanford, Texas, UCLA, Vanderbilt, Virginia and Yale—opining that the paper’s allegations against Harvard and the SRP are meritless and urging the paper’s co-authors to withdraw these allegations. In addition, the Forum published earlier posts about the paper by Professor Grundfest (most recently here) and by Professor Jonathan Macey (most recently here), and replies by Professor Richard Painter and Harvey Pitt (available here and here) to Professor Frankel’s first post.

In an earlier post (available here), I expressed concerns about Commissioner Gallagher’s decision to issue (jointly with Professor Joseph Grundfest) a paper accusing Harvard University and the Shareholder Rights Project (SRP) of violating securities laws when they assisted investors submitting declassification proposals. Subsequently, a group of thirty-four senior corporate and securities law professors (including myself) issued a joint statement (available on the Forum here). In addition to opining that the allegations in the paper were meritless, the joint statement expressed concerns that a sitting SEC Commissioner has chosen to issue such allegations. However, others have taken the view that sitting Commissioners should be as free as other individuals to express opinions that specific individuals or organizations violated the law. I beg to differ, for the following reasons.

Sitting Commissioners may, and should be encouraged, to publicly discuss policy problems and issues. However, they should avoid publishing accusations against specific individuals or organizations, except as part of the SEC process. Publishing such accusations should not be an acceptable behavior by a sitting SEC Commissioners. That is even though during their tenure, SEC Commissioners are likely to disagree with others about potential legal accusations against specific parties.

So what is wrong with a publication of a Commissioner’s views about possible actions against Harvard University? Most persons could do the same with impunity. The answer is that the Commissioner is bestowed with power to participate in a decision to bring a suit by the SEC. None of us has this power. Yet, the Commissioner’s power is not granted for his own use. The power to participate in these decisions is bestowed on the Commissioner as a fiduciary for the purpose of serving this country and only pursuant to the processes of the Agency.

I hope that this Commissioner and future Commissioners will distinguish between expressing a policy opinion and issuing accusations of legal violations against specific parties. I hope that the discussions and disagreement on this issue will guide future Commissioners’ speeches: Please speak your mind. But do not give any whiff of accusations against specific parties except by following carefully and fully the Commission’s process. Thus, regardless of scholarly and legal arguments, and regardless of the motivation of the Commissioner’s actions, his inappropriate statements are at issue, and I am very sorry he made them.