On 16 July 2018, the Financial Reporting Council (FRC) published the final, revised version of the UK Corporate Governance Code (UK CGC).[1] This will apply (on a “comply or explain” basis) to all companies with a premium listing in the UK for accounting periods beginning on or after 1 January 2019.

The new UK CGC is one of a range of corporate governance reforms currently being implemented in the UK in response to the UK Government’s wide-ranging Green Paper Consultation on UK corporate governance reform.[2] Its publication concludes a seven-month consultation by the FRC, following the publication of a draft revised UK CGC in December 2017.[3] The FRC received 275 responses to its consultation from a wide range of stakeholders and has made a number of changes to its original proposals to address the feedback received. We briefly explore the most significant of these changes below. Continue Reading New UK Corporate Governance Code Unveiled

As “social good” objectives (like the protection of the environment, the improvement of public health and the alleviation of poverty) rise up the corporate agenda in the UK, we examine how UK companies are reconciling the pursuit of these objectives with their directors’ duties, which normally require the prioritisation of the creation of shareholder value above other objectives. We also briefly explore the current trend of UK companies seeking to embed social and environmental purposes in their constitutions. Continue Reading Social Good, Shareholders’ Interests and Directors’ Duties: Recent Developments in the UK

When the staff (the “Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) released Staff Legal Bulletin No. 14I (“SLB 14I”) last fall, it seemed that the Staff was potentially signaling that it would be taking a more issuer-friendly approach in its review of no-action letter requests (“NALs”). In particular, the language in SLB 14I regarding the role of the board of directors suggested that the Staff may defer to the board’s determination of whether a shareholder proposal focuses on a significant policy issue, in the case of the “ordinary business” exception (Rule 14a-8(i)(7)), and whether the shareholder proposal is significantly related to the issuer’s business, in the case of the “economic relevance” exception (Rule 14a-8(i)(5)), as long as the NALs provided a sufficiently detailed discussion of the board’s analysis and the “specific processes employed by the board to ensure that its conclusions are well-informed and well-reasoned.” For example, SLB 14I stated that these types of “determinations often raise difficult judgment calls that the Division believes are in the first instance matters that the board of directors is generally in a better position to determine.” One could read that language to mean that including a well-developed board analysis could significantly influence the outcome for a NAL based on the “ordinary business” exception and/or the “economic relevance” exception. Continue Reading Making Sense of the SEC’s 2018 NALs on Shareholder Proposals for the Proxy Statement

In a previous post, we wrote that the UK Government announced a series of reforms to the UK Corporate Governance regime in August 2017. Some of these reforms are being addressed through the on-going consultation on revisions to the UK Corporate Governance Code (UK CGC) (see our previous post for further details). The UK CGC is the main corporate governance code in the UK and applies (on a “comply or explain” basis) to all UK companies with a premium listing in the UK.

Another of the announced reforms was the development of a corporate governance code for large private companies, backed by new reporting requirements. This was a significant proposal because corporate governance efforts in the UK have historically focussed on publicly listed companies where shareholders are often distant from executives running the company. The Government’s proposal was driven by evidence that private companies constitute a vast (and increasing) portion of the UK economy and its recent experience that their actions (including several recent large-scale failures) can have a significant impact on their employees, suppliers and other stakeholders. This reform is expected to have important implications for a wide variety of large private companies in the UK, including UK subsidiaries of multinational groups and UK portfolio companies of private equity funds.

Continue Reading UK Proposes a New Corporate Governance Code for Large Private Companies

Beyond the cacophonous din of voices calling for companies to serve a “social purpose,” adopt a variety of governance proposals, achieve quarterly performance targets, and listen to (and indeed even “think like”) activists, there is now, most promisingly, a call from genuine long term shareholders for public companies to articulate and pursue a long term strategy.[1]  This latest shareholder demand directly supports the achievement of traditional corporate purposes, and seems, more than any other shareholder demand of the last decade, the most likely to increase shareholder value.  Yet in current circumstances, where all corporate defenses have been stripped in the name of “good governance,” boards and management have been given zero space in which to formulate and implement a long term strategy.  Indeed, the very fact that shareholders must demand corporations focus on long term strategy demonstrates just how effectively the governance movement has been co-opted by market forces to serve the interests of short term activists and traders to the detriment of long term investors.  It is time for long term investors to recognize that aspects of the good governance movement have in fact come at significant cost to their own investors, to be perhaps a bit more wary of partnerships with activists, and to actively create the conditions that will allow boards and management to focus on the long term.  Exhortations are not enough. The first step should be to bring back staggered boards. Continue Reading Long-Term Investors Have a Duty to Bring Back the Staggered Board (and Proxy Advisors Should Get on Board)

Public and private businesses today face many decisions that do not arise from, and have consequences far beyond, solely financial performance.  Rather, these decisions are primarily driven by, and implicate, important social, cultural and political concerns.  They include harassment, pay equity and other issues raised by the #MeToo movement; immigration and labor markets; trade policy; sustainability and climate change; the manufacture, distribution and financing of guns and opioids; corporate money in politics; privacy regulation in social media; cybersecurity; advertising, boycotts and free speech; race relations issues raised by the pledge of allegiance controversy; the financing of healthcare; the tension between religious freedom and discrimination laws; and the impact of executive pay on income inequality, among others.  If the nature of the issues is not unprecedented, the number, diversity and polarization seem to be.  Continue Reading <i>Caremark</i> and Reputational Risk Through #MeToo Glasses

A challenge to a transaction between a Delaware corporation and its controlling stockholder generally will be subject to the highest level of judicial review—“entire fairness”.  As a result, a critical factual question often is whether a significant, but minority, stockholder could be viewed as controlling the corporation.

In a recent decision,[1] the Delaware Court of Chancery (the “Court”) concluded that it was reasonably conceivable that Elon Musk, the founder and the owner of 22.1% of the stock of Tesla, Inc. (“Tesla”), was a controlling stockholder of Tesla and controlled Tesla’s board of directors in connection with its decision to acquire (the “Acquisition”) SolarCity Corporation (“SolarCity”), another company founded by Musk and his cousins and of which Musk owned 21.9% of its stock.  As a result, the transaction could be subject to the heightened entire fairness standard of review notwithstanding that it was approved by the holders of a majority of Tesla’s disinterested shares.

Continue Reading Delaware Chancery Court Denies Motion to Dismiss and Permits Discovery into 22.1% Minority Stockholder’s Controller Status

Earlier this month, partners Jennifer Kennedy Park and Kimberly Spoerri participated in a panel co-hosted by The Conference Board and Cleary Gottlieb to discuss the board’s oversight role in issues related to sexual harassment.

Moderator Doug Chia, executive director of The Conference Board, Jen and Kim discussed relevant legal regulations and frameworks and the risks of non-compliance, as well as the policies, procedures and best practices boards and senior management can employ to mitigate risks.  They discussed the responsibility the board has in setting company culture through tone at the top, and how the failure by the board and senior management to be proactive in this area can affect compliance and oversight throughout a company.  The discussion also included ways the board can tangibly address these issues.  Continue Reading Cleary Partners Participate in Panel Discussion on Board Oversight of Sexual Harassment

Maintaining a workplace environment free of discrimination, sexual harassment and other misconduct is critical to both the short-term productivity and long-term health of a business.  Reports of sexual harassment allegations at public corporations can have material negative effects on stock price, with some corporations seeing double digit single day drops after accusations are made public.  As we have written elsewhere, the primary obligation to manage these risks on a day-to-day basis falls to executive leadership.[1]  But the #MeToo movement also has raised questions about the role of boards of directors to provide oversight of management and, to the extent that senior management may be a source of the problem, the board’s obligation to take more direct action.

This note discusses some key issues for General Counsel to consider as they advise corporate boards about how to navigate their responsibilities in this environment.  Continue Reading Bringing The #MeToo Movement Into The Board Room

Forbes has published an interesting article that opens as follows:

Every CEO and every board member of every publicly traded company (and every thinking-about-being-publicly traded company) should drop whatever they are doing and read two short things right now:

  • This week’s annual letter to CEOs from BlackRock chief executive Larry Fink; and
  • The January 8 client bulletin from Cleary Gottlieb, “The Schizophrenic Investor Landscape: The Significance for Boards and Management of the JANA/CalSTRS Letter to Apple.”

BlackRock is the largest investor in the world, managing $6 trillion in assets. Cleary is one of the largest and most prestigious international law firms in the world. These are two of the most influential institutions that drive the behavior of the corporations that shape our society and our lives. . . . Let’s hope . . . that investors are beginning to see—and will begin to act—more “Cleary”-eyed.

Click here for the Forbes article and here for the original Cleary blog post by our partner Ethan Klingsberg.