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As 2019 begins, companies continue to face global uncertainty, marked by volatility in the capital markets and global instability. And while change is inevitable, what has been particularly challenging as we enter this new year is the frenzied pace of change, from societal expectations for how companies should operate, to new regulatory requirements, to the evolving global standards for conducting business.

As companies navigate how to adapt, they are being held to increasingly higher standards in executing a coherent, thoughtful and profitable long-term strategy in this ever-evolving landscape. This memorandum identifies the issues across a number of different areas on which boards of directors, together with management, should be most focused.

We invite you to review these topics by clicking on the links below.

For a PDF of the full memorandum, please click here.…
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In In re Xura, Inc. Stockholder Litigation,[1] decided earlier this week, the Delaware Court of Chancery denied the target CEO’s motion to dismiss claims that he breached his fiduciary duties by “steer[ing]” the company into an allegedly unfair acquisition by a private equity firm that promised to retain him post-acquisition, while knowing that his job was in jeopardy if the target remained independent.  This case is yet another example of why disclosures are so important in the post-Corwin[2] era:  Vice Chancellor Slights rejected the CEO’s argument that the claims against him were extinguished by the stockholder vote approving the transaction, finding that a number of material omissions precluded a finding that the stockholders’ vote was fully informed.  The vote was thus ineffective to invoke the business judgment rule at the pleading stage.…
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Voting rights held by shareholders who are “acting in concert” are mutually attributed for purposes of the German Securities Trading Act (“WpHG”) and the German Takeover Act (“WpÜG”).  Such attribution may thus not only trigger (additional) voting rights notifications, if the relevant voting rights thresholds are reached or crossed, but also the obligation to launch a mandatory offer, if based on the voting rights so attributed a shareholder acquires control of a company.  In light of these implications, the question of what type of behavior constitutes acting in concert is of high practical relevance.  Unfortunately, the definition in statutory law is open-ended, and several details are heavily disputed.  In its decision of September 25, 2018 (II ZR 190/17), the German Federal Court of Justice (“FCJ”) had the opportunity to clarify two important questions:

First, the coordination of shareholder behavior in an individual case does not qualify as acting in concert. According to the FCJ, the question of whether coordination among shareholders is limited to an “individual case” is to be determined applying a formal rather than substantive test. Second, mutual coordination of conduct among shareholders does not constitute acting in concert if it is aimed at maintaining an existing corporate strategy (or defining it for the first time), rather than at bringing about a permanent and material change to an existing corporate strategy.…
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The Delaware Court of Chancery recently denied Corwin cleansing[1] in a case involving the sale of a public company while it was engaged in a restatement of its prior audited financial statements.  See In re Tangoe, Inc. S’holders Litig., C.A. No. 2017-0650-JRS (Del. Ch. Nov. 20, 2018).  If this sounds familiar, that is because it is the second time in two years that the Court of Chancery has denied a motion to dismiss shareholder litigation on Corwin grounds where the target was in the middle of a restatement process.[2]  Together, these decisions suggest that if a board decides to sell the company while under a cloud of an ongoing restatement process, it would need to satisfy a heightened level of scrutiny of its disclosures in order to obtain the benefit of Corwin.  The court in Tangoe, however, sought to reassure practitioners that it is not impossible to satisfy Corwin in a case involving an ongoing restatement by the target, and provided a checklist of the kinds of facts that, if disclosed, would result in pleading stage dismissal of a shareholder lawsuit in such a case.…
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Following its 2019 benchmark voting policy consultation period, Institutional Shareholder Services (“ISS”) recently released its updated voting guidelines for the 2019 proxy season.[1]

A summary of notable governance and compensation policy updates is provided below.  Most significantly, the updated guidelines suggest that ISS continues to be focused on enhancing shareholder rights through increased board responsiveness and accountability.  In general, the updated proxy voting guidelines will be in effect for annual meetings occurring on or after February 1, 2019.  In connection with their preparations for the 2019 proxy season, U.S. public companies should consider the applicability of the new guidelines in light of their individual facts and circumstances.…
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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…

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.…
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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. …
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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.
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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. (This memo expands upon our prior discussion of the Synutra decision, which was posted to the Cleary M&A and Corporate Governance Watch on October 10, 2018.)…
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