As passive investing via funds that track market indices continues to grow, the terrain where investors are fighting battles over governance reform is now expanding beyond contested stockholder meetings and into debates over the criteria for eligibility of issuers for inclusion in these indices. Indeed, in this era of index fund investing, a company focused on the future trading price of its shares should be much more concerned about gaining entry into and maintaining eligibility for indices than whether there will be a withhold vote recommendation on the members of its governance committee. If this direction continues to gain traction, we could end up with a market dominated by passive strategy investing where the current importance of familiarity with the hot button governance concerns of proxy advisory firms and institutional investors becomes subsidiary to understanding how to navigate new, governance-related eligibility requirements of major equity indices. Continue Reading Index Eligibility as Governance Battlefield: Why the System is Not Broken and We Can Live With Dual Class Issuers
Questions for Boards and Management
On April 10, 2017 Wells Fargo released the independent directors’ report on sales practices at its community bank. While the report covers familiar elements of the widely-publicized accounts-creation problems at the bank, it also takes an inside look at the organization to determine what caused the problems in the first place and what allowed them to persist for years before last fall’s regulatory enforcement actions. The report cites the following as principal causes: Continue Reading With the Benefit of Hindsight: The Wells Fargo Sales Practices Investigation Report
When reviewing a corporation’s financial statements and internal controls, independent auditors frequently request copies of materials that were prepared for ongoing or anticipated litigation. Auditors may wish to examine reports from internal investigations, legal opinions addressing potential liabilities, or presentations about prospective litigation prepared for the board of directors, among other materials. Indeed, it is becoming more and more common for auditors to conduct their own “shadow investigation” of a company’s internal investigation and, as part of that shadow investigation, to request access to the internal investigation’s underlying work product: the collection of documents that the company’s lawyers have deemed “key,” the analysis of transactions tested by forensic accountants working at counsel’s direction, and notes from interviews conducted by counsel in the course of the investigation. Auditors may make similar requests when investigating the possibility of “illegal acts” at a company, as required under Section 10A of the Securities Exchange Act of 1934. Continue Reading Audits and Adversaries: Making Disclosures to Your Auditors Without Waiving Your Privilege
Last month, in Vento v. Curry, the Delaware Chancery Court preliminarily enjoined the Consolidated Communication Holding (“Consolidated”) shareholder vote on the company’s all-stock acquisition of FairPoint Communications (“FairPoint”) due to Consolidated’s failure to adequately disclose the compensation its financial advisor would receive for participating in the acquisition financing. The court’s ruling ultimately had very little impact on the transaction – Consolidated subsequently disclosed that its financial advisor would receive $7 million in financing fees and the Consolidated shareholders overwhelmingly approved the transaction without any delay. Vento nonetheless provides important guidance for principals and financial advisors in evaluating whether disclosure of a financial advisor’s transaction-related compensation is required when seeking shareholder approval of an M&A transaction. Continue Reading Assessing Financial Advisor Compensation Disclosure Following Vento v. Curry
Quick settlements with activist hedge funds to recompose boards and adjust strategic plans have resulted in hundreds of new directors and changes to stand-alone plans in the S&P 500 over the last two years. The arguably outsized influence of these activists, which often own less than 5% of their targets’ public floats, led one of the leading hosts of index funds, State Street, to issue publicly a position paper earlier this year in opposition to this “quick settlement” trend. Underlying State Street’s concern is the view that incumbent directors frequently settle to avoid the painful scrutiny and distraction of proxy contests while failing to take into account the sentiments of their companies’ broader shareholder bases. The views of State Street and the other major index funds matter not only because these “passive”-strategy funds regularly control up to 40% of the public floats of listed companies, but also because that figure is likely to continue to rise steeply, along with similar increases in the interest of these funds in (as well as the number of personnel at these funds scrutinizing) governance, board composition and processes, and strategic shifts at publicly traded companies. As a result, targets of activist campaigns are increasingly struggling with balancing the benefits of a quick and comprehensive settlement with activist hedge funds against the desirability of assuring that there is broad shareholder support, especially among long-term institutional holders, for making concessions to the activists. Continue Reading Balancing Concessions to Activists Against Responsiveness to the Broader Shareholder Base: Lessons from a Recent Settlement with an Activist
Earlier this month, following three hours of deliberation, a California federal jury found that Bio-Rad Laboratories, Inc. had violated the federal whistleblower provisions by unlawfully firing Sanford Wadler, its former general counsel, and awarded Wadler nearly $11 million in damages. Wadler had sued his former company under the Sarbanes-Oxley Act of 2002, the Dodd-Frank Act and California state law, asserting that he was wrongfully terminated in retaliation for investigating and reporting to senior management potential violations of the Foreign Corrupt Practices Act (“FCPA”) in China. The pre-trial proceedings and three-week trial involved several whistleblower-friendly rulings that promise to generate additional litigation. Those legal determinations, as well as the jury’s prompt finding of liability and imposition of a substantial award in the face of an aggressive corporate defense, bring to the forefront significant issues relevant to public companies, directors and other corporate stakeholders – not the least of which is the precedent of a general counsel in the role of whistleblower. Continue Reading Jury Awards Ousted General Counsel Nearly $11 Million in Whistleblower Retaliation Action – Key Takeaways
President Trump has repeatedly used his Twitter account to single out companies for criticism of their business practices, raising the question for a broad range of public companies of how to prepare for and potentially respond to such criticism. Of course, rhetorical attempts by politicians to influence the conduct of private enterprise – commonly referred to as “jawboning” – are an old political tactic. The nature and frequency of jawboning in the current environment makes this a serious issue for boards and management at a wide variety of public companies, in a way that it has not been in the recent past.
Crisis plans maintained by public companies for other circumstances may provide useful guidance for how to respond to a politician’s social media attack (an “SMA”). However, every type of crisis raises unique concerns and considerations. Many companies should carefully consider the appropriate response to an SMA in advance.
This note is intended to aid public companies for a discussion at the board level concerning SMAs. It covers three main areas that public companies should specially consider: (i) governance, (ii) executive compensation- and employment-related issues and (iii) communications, and provides senior legal advisors with an outline of relevant considerations. While the principal considerations relevant to responding to an SMA will not typically be legal concerns, corporate governance considerations constitute threshold legal issues and employment-related and communications considerations implicate important legal issues.
Please click here to read the full memo.
By the end of 2016, the world was facing a considerably greater level of global uncertainty than it had experienced in recent years. It is clear that while some old challenges will continue, new challenges will also be brought into the boardroom in 2017. The trends discussed in each of the sections below will increasingly be a focus of boards of directors and companies in the United States and across the globe, particularly as boards consider how best to assess and assist in mitigating associated risks. A strong understanding of the issues and challenges facing boards and companies over the next year and beyond will assist boards in addressing the issues and complexities that will undoubtedly arise in 2017.
- Global Issues in Taxation
- Privacy and Global Investigations
- Recent Developments in Cybersecurity
- Department of Justice Foreign Corrupt Practices Act Enforcement Initiatives
- Board Refreshment Disclosure
- Claim Extinguishment in M&A Litigation
- Environmental, Sustainability and Governance Activities and Disclosure
- Compensation Considerations
- The Change in Administration in the United States and Brexit and Political Uncertainty in the United Kingdom and Europe
Playing a Zynga game often requires patience. Patience, and persistence, were a winning combination for the plaintiff Thomas Sandys who brought a derivative suit against Zynga for alleged breaches of fiduciary duties after the Zynga Board approved a secondary sale of company stock by insiders, including Zynga’s controlling shareholder and then-CEO (“controlling shareholder/CEO”) during a blackout period. Shortly after the sale, a disappointing earnings announcement resulted in a significant stock price drop. Continue Reading From the Game Room to the Board Room – Reconsidering the Independence of Independent Directors
In a recent decision, Vice Chancellor Laster of the Delaware Court of Chancery clarified certain issues related to the obligations of a controlling stockholder that often arise in connection with going private and similar transactions. The case involved a relatively conventional proposal by a controlling stockholder (the Anderson family) to acquire the remaining shares of Books-A-Million, Inc. (“BAM”) from BAM’s minority stockholders. The family structured the proposal with the goal of satisfying the conditions of the MFW decision so that any challenge to the transaction would benefit from the favorable “business judgment” level of judicial review. Continue Reading Delaware Chancery Applies MFW to Dismiss Challenge to Going Private Transaction and Clarifies Obligations of Controlling Stockholders