Mergers and Acquisitions, Corporate Governance, Shareholder Activism
For the first time, the SEC’s staff issued guidance last week under its rule governing audit committees for listed issuers. The guidance addresses the composition of audit committees for issuers that are listed in both Brazil and the United States, and it takes the form of an interpretive letter from the Division of Corporation Finance to law firms Cleary Gottlieb and Simpson Thacher.
Please click here to read the full alert memorandum.
As 2018 draws to a close, both Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis are in the process of updating their 2019 proxy voting guidelines.
In mid-October, ISS launched its 2019 benchmark voting policy consultation period, pursuant to which ISS solicits feedback on certain of its proposed voting policies for the upcoming proxy season. This year, ISS requested comment on proposed policies for U.S. public companies related to board gender diversity and its pay-for-performance model, as described in greater detail below. ISS plans to announce its final policy changes in mid-November.
In addition, Glass Lewis recently released its 2019 shareholder initiatives and proxy voting guidelines, which include the implementation of previously announced policies that were in grace periods, new policies and codifications and clarifications of previously existing approaches to issuing vote recommendations.[1]
A summary of notable executive compensation and governance updates is provided below. The recent policy updates, and in particular the new Glass Lewis guidelines, are fairly extensive. In preparing for the 2019 proxy season, U.S. public companies should consider the applicability of the new and proposed policies in light of their individual facts and circumstances. Continue Reading Recent Updates to Proxy Advisory Firm Guidelines
There have been plenty of press reports about the SEC’s settlement with Elon Musk arising from his tweeting about taking Tesla private. But the concurrent settlement with Tesla itself provides interesting lessons for disclosure and governance at public companies.
Tesla agreed to pay a $20 million penalty and agreed to several “undertakings” to strengthen its governance and controls including a requirement that it add two independent directors to its Board. And, under his own settlement, Musk agreed to step down for three years as chairman of the Board of Directors, although he is allowed to continue as CEO. Continue Reading The Tesla Settlement – What It Means for Other Companies
Last month, former Uber executive Eric Alexander filed a complaint (the “Complaint”) against another former Uber executive, Rachel Whetstone. The Complaint alleges breach of a mutual non-disparagement clause in Whetstone’s separation agreement with Uber; a clause that Whetstone, during her negotiation with Uber, apparently insisted specifically name Alexander and preclude them from disparaging each other. In the Complaint, Alexander alleges that he is a third party beneficiary of the contract and can therefore enforce the non-disparagement obligation against Whetstone.
Continue Reading Shut Up! (Someone Is Actually Suing on the Basis of a Non-Disparagement Clause)
This memo provides further analysis and expands upon the discussion of the Synutra decision included in our prior post (which can be found here).
In its recent Synutra opinion, the Delaware Supreme Court clarified that take-private transactions will be reviewed under the business judgment rule, so long as the controlling stockholder commits to special committee approval and a majority-of-the-minority vote before “substantive economic negotiations” take place, even if the controlling stockholder fails to self-disable in its initial written offer.
The opinion, written by Chief Justice Strine, explained that the touchstone of the analysis is whether there was any “economic horse trading” before the conditions were put in place.
Please click here to read the full alert memorandum.
The Delaware Court of Chancery yesterday found an activist investor aided and abetted a target board’s breaches of fiduciary duty, most significantly by concealing from the target board (and from the stockholders who were asked to tender into the transaction) material facts bearing on a potential conflict of interest between the activist investor and the target’s remaining stockholders. See In re PLX Technology Inc. S’holders Litig., C.A. No. 9880-VCL (Del. Ch. Oct. 16, 2018). This decision serves as a reminder of the importance of full disclosure of material facts in cases involving potential conflicts (and not just of the potential conflicts themselves, but also of the ways in which such potential conflicts manifest themselves)—both at the board level and at the stockholder level. As this decision also demonstrates, in addition to the more familiar allegations of financial advisor conflicts, the court may find potential conflicts exist where an activist investor in the target with short-term interests that could be perceived to diverge from the interests of other stockholders is involved in merger negotiations. Continue Reading Delaware Decision Provides Further Lessons for Directors, Activist Investors, and Financial Advisors in Negotiating Mergers
The Delaware Supreme Court has clarified that controlling stockholder take-private transactions will be reviewed under the business judgment rule, rather than the less deferential entire fairness standard, if the controlling stockholder self-disables by committing to special committee and majority-of-the-minority approval before “economic negotiations” take place, even if the controlling stockholder fails to do so in its initial written offer. See Flood v. Synutra Int’l, Inc., No. 101, 2018 (Del. Oct. 9, 2018).[1]
The Delaware Supreme Court first announced in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) that business judgment review applies to a merger proposed by a controlling stockholder conditioned “ab initio” on two procedural protections: (1) the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and (2) the uncoerced, informed vote of a majority of the minority stockholders.[2] Continue Reading Delaware Supreme Court Provides Significant Guidance on Timing Requirement Under <i>MFW</i>
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 final installment in the series can be found here and a list of past editions can be accessed here.
Over the last few years, boards have come under mounting pressure to focus on board composition and refreshment, including length of tenure, individual and aggregate skills mix and diversity. A few years ago, CalPERS’ revised its Global Governance Principles to call for companies to conduct rigorous evaluations of director independence after twelve years’ service, and ISS’ QualityScore metric rewards companies where the proportion of non-executive directors with fewer than six years tenure makes up more than one-third of the board, in addition to scrutinizing boards where average tenure exceeds 15 years. Companies also face demands to justify the contributions of individual directors and to conduct rigorous evaluations to ensure that the board functions effectively and with the right mix of skills. Correspondingly, refreshment is one of the top areas of continued governance focus from other investors and advocates. This update is intended to provide boards with data that brings them up to date on developments in this area, since it is certain to be an area of continuing focus for various constituencies in the near future. Continue Reading Update on Board Diversity Developments
During the course of the last month, the Securities and Exchange Commission (“SEC”) brought two enforcement actions related to inadequate disclosure of perquisites. In early July, the SEC issued an order finding that, from 2011 through 2015, an issuer failed to follow the SEC’s perquisite disclosure standard,[1] which resulted in a failure to disclose approximately $3 million in named executive officer perquisites.[2] In addition to the imposition of a $1.75 million civil penalty, the SEC order mandated that the issuer retain an independent consultant (at its own expense) for a period of one year to conduct a review of its policies, procedures, controls and training related to the evaluation of whether payments and expense reimbursements should be disclosed as perquisites, and to adopt and implement all recommendations made by such consultant. Continue Reading Recent SEC Enforcement Actions on Inadequate Perquisite Disclosure
