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
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
Cleary Gottlieb and PwC’s Governance Insights Center have teamed up to create the Executive Compensation Series, which looks at the factors motivating boards to increasingly engage with shareholders about executive compensation. The first edition of the series is now available and discusses issues such as the impact of Dodd-Frank on executive compensation, elements of effective CD&A design and the influence of proxy advisors on compensation. Continue Reading Boards, Shareholders and Executive Pay
In the wake of President Obama’s signing into law the Defend Trade Secrets Act (“DTSA”) on May 11, 2016, companies will want to revisit their practices for protecting their trade secrets, especially in the employee/HR context. The DTSA expands the body of trade secrets law, an area that has traditionally been the subject only of state law, by creating a federal civil cause of action for trade secret misappropriation. The Act provides for injunctive relief and compensatory damages, and, if a trade secret is “willfully and maliciously misappropriated,” exemplary damages and attorney’s fees. The legislation enables trade secret owners to protect their innovations by seeking redress in federal court, in the same way that owners of other forms of intellectual property, including copyrights, patents, and trademarks, can seek remedies in federal court for violations of their rights. Continue Reading Implications of the Defend Trade Secrets Act for Employers
On March 28, 2016, on remand from the First Circuit, the United States District Court for the District of Massachusetts held that Sun Capital Fund III and Sun Capital Fund IV were jointly and severally liable for the multiemployer pension plan withdrawal liability of their bankrupt portfolio company, despite the fact that these funds were not parallel investment funds, generally had different investors and neither fund individually held an 80% or greater ownership interest in the portfolio company. Under the Employee Retirement Income Security Act or “ERISA”, an entity such as a corporation or a partnership engaged in a trade or business may have liability for pension liabilities of other entities in the same “controlled group”. Although the rules are complicated and technical, entities that are under 80% or more common control with each other will generally be considered to be in the same controlled group for these purposes. In the Sun Capital case, the District Court concluded that the funds’ coordinated efforts in forming the limited liability corporation through which they held their respective investments resulted in the funds having formed an undocumented general partnership-in-fact that was engaged in a trade or business. As the 100% owner of the LLC formed by the funds, such de facto partnership was found to be in the portfolio company’s controlled group and its partners, the two funds, were held to be joint and severally responsible for the withdrawal liability of the portfolio company under general partnership unlimited liability principles. Continue Reading Most Recent Sun Capital Decision Expands Reach of Controlled Group Liability Under ERISA
The Pension Benefit Guaranty Corporation’s (the “PBGC”) widely reported recent settlement agreement with The Renco Group, Inc. (“Renco”) illustrates the risks inherent in pursuing certain transactions where underfunded pensions are present. Among the highlighted risks is the potential for the joint and several liability provisions of federal pension law to enable the PBGC to reach for assets unrelated to a pension plan sponsor’s business, including personal assets of controlling persons, to satisfy underfunded pension claims.
Based on published reports, the Renco settlement, after a trial but before a decision was handed down by the Federal court in New York, is unusual in three respects. First, the PBGC returned the plans at issue to Renco – that is, “restored” the plans – rather than negotiating for Renco or an affiliate to make payments to improve the plans’ funded status. Second, the situation involves a rare instance in which the PBGC has pursued a litigation on the basis of a claim under Section 4069 of ERISA, the anti-evasion section of the pension termination provisions of ERISA. Third, the PBGC used the controlled group joint and several liability provisions of ERISA to assert claims against entities that are not involved in the steel business but that are controlled by Renco and its controlling shareholder Ira Rennert. While the PBGC has on many occasions used the controlled group liability provisions of ERISA to reach controlled group affiliates that are in separate lines of business from the plan sponsor, the facts in Renco are reminiscent of the PBGC’s lengthy fight with Carl Icahn beginning in the early 1990’s over responsibility for TWA’s underfunded pension obligations. Continue Reading PBGC-Renco Settlement Highlights Risk and Reach of ERISA’s Pension Underfunding Joint and Several Liability Provisions
The Delaware Court of Chancery’s recently published opinion in Amalgamated Bank v. Yahoo!, Inc. (the “Opinion”) provides a reminder for directors about the importance of process in satisfying fiduciary duties when evaluating and approving executive compensation packages. In the Opinion, which deals with Amalgamated’s demand under Section 220 of the Delaware General Corporation Law to inspect certain books and records of Yahoo! in connection with the hiring and firing of its Chief Operating Officer, Vice Chancellor Laster discusses practices that should be routine in a board’s review of executive compensation proposals and highlights procedural pitfalls that have been noted in numerous Delaware law decisions dating back at least to the series of cases involving compensation practices at Disney beginning more than a decade ago. Continue Reading Delaware Court of Chancery Offers Practical Lessons for Compensation Committees
It is well known that specified employees of publicly-traded companies must wait at least six months following a separation from service to receive payments of deferred compensation triggered by such separation. The six-month delay requirement must be set forth in the plan establishing the right to the payment of deferred compensation on or before the date the applicable individual first becomes a specified employee. Failure to do so, either as a matter of documentary or operational compliance, could result in the imposition of draconian penalty taxes and interest charges on the service provider under Section 409A of the Internal Revenue Code of 1986 (the “Code”). Continue Reading Section 409A and the Six Month Delay – Don’t Forget Your Directors
After several years that seemed defined by turmoil and uncertainty, 2015 delivered some unexpected and much-needed clarity for corporate directors on issues such as proxy access, compensation disclosure, investor expectations regarding board composition, certain director and financial advisor conflicts of interest, and audit committee processes and related disclosure. The past year also saw corporations adopting a less alarmist and more measured approach toward potential shareholder activism. The task of the director, however, will remain a challenging one in 2016. Much of the welcome guidance received during 2015 remains to be implemented, shareholders and regulators will continue to actively and closely monitor boards, and new complexities will undoubtedly arise. This memorandum discusses issues that we believe will require the attention of boards of directors and management in 2016.
Please click here to read the full alert memorandum.