Boards of Directors

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In the years since the financial reporting scandals and the Sarbanes-Oxley Act of 2002, and in particular following the financial crisis and the Dodd-Frank Act of 2010, boards of directors have faced greater burdens and more intense scrutiny of their activities and performance. One manifestation of this has been pressure to change the role of directors from one of partnership with and oversight of management to one of an almost quasigovernmental watchdog directly responsible for monitoring management’s performance, including its compliance with increasingly complex and burdensome regulation. In addition, activist investors continue to publicly push some boards to pursue strategies focused on short-term returns, even in instances where those strategies are inconsistent with the directors’ preferred, sustainable long-term strategies for the corporation.
Continue Reading Selected Issues for Boards of Directors in 2013

On November 14, 2012, the European Commission adopted a proposal for a directive (the “Proposed Directive”) that aims to substantially increase the number of women on EU corporate boards. In the Commission’s view, non-binding efforts to enhance female board representation1 have proven ineffective. The proposed measures are intended to be of a transitory nature (i.e., until sustainable progress has been reached in the gender composition of boards). Accordingly, the Proposed Directive would expire on December 21, 2028.
Continue Reading EU Proposes Gender Balance Quotas for Listed Company Boards

At its open meeting on August 15, 2012, the Public Company Accounting Oversight Board adopted Auditing Standard No. 16, Communications with Audit Committees, and related amendments to other PCAOB standards.[1]  AS 16 requires auditors to engage in certain communications with audit committees and is intended to foster a meaningful dialogue on important audit and financial statement matters.  The PCAOB expects more effective two-way communications to enhance audit quality and strengthen audit committee oversight.  The new standard is subject to approval by the Securities and Exchange Commission.
Continue Reading PCAOB Adopts Standard on Auditor Communications with Audit Committees

A recent opinion of the Delaware Chancery Court, Seinfeld v. Slager,[1] addresses the legal standard applicable to directors’ decisions about their own pay under Delaware law, an important topic as to which there is little prior law.  In an opinion by Vice Chancellor Glasscock, the Court held that a derivative claim alleging that directors breached their fiduciary duties by granting themselves excessive compensation survived a motion to dismiss.[2]  In so concluding, the Court also found that the directors’ action did not have the protection of the business judgment rule and was instead subject to “entire fairness” review.
Continue Reading Delaware Case Raises Question About Structuring Director Compensation

In 2002, the UK began requiring an advisory shareholder vote on the annual executive and non-executive director compensation practices of UK-incorporated quoted companies (“UK Companies”).  Eight years later, in July 2010, the US followed suit when President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), providing for an advisory say-on-pay vote for most large US public companies.[1],[2]
Continue Reading Binding Shareholder Say-on-Pay Vote on Route to Reality in the UK: US Companies Take Note

  1. Introduction

On 14 March 2012, the UK Government published a consultation on shareholder voting rights in connection with “executive” pay.  The consultation follows an earlier discussion paper in which, among other questions, the Government asked whether a binding vote on remuneration would improve shareholders’ ability to hold quoted companies to account on pay and performance.  The proposals form part of a package of measures the Government intends will address failings in the UK corporate governance framework for executive remuneration.
Continue Reading UK Government Consults on Increasing Shareholder Voting Rights in Relation to Quoted Company Directors’ Pay

At its recent open meeting, the Public Company Accounting Oversight Board proposed for comment a new auditing standard concerning related parties and amendments to existing standards addressing a company’s significant unusual transactions and financial relationships with executive officers.[1]  The PCAOB noted the auditor’s privileged vantage point in detecting improprieties involving these relationships and transactions, which have played a prominent role in numerous corporate scandals.[2]  The proposals build on existing risk assessment standards and are intended to improve investor protection by requiring additional audit procedures.  Like many of the PCAOB’s recent initiatives, the underlying current of the proposals is the dual need to improve the auditor’s professional skepticism and the audit committee’s appreciation of matters that are particularly susceptible to abuse.
Continue Reading PCAOB Issues Proposals on Related Parties, Significant Unusual Transactions and Financial Relationships with Executive Officers

In its recent decision regarding the acquisition of El Paso Corporation by Kinder Morgan, Inc.,[1] the Delaware Chancery Court concluded that El Paso’s sale process may have been tainted by conflicts of interest affecting the company’s CEO and financial advisors.  The court nevertheless denied plaintiffs’ request for a preliminary injunction on the grounds that enjoining the deal in the absence of a competing bid would pose a significant risk for El Paso shareholders who would have their own chance to judge the merits of the deal at a shareholder meeting.  The opinion, authored by Chancellor Strine, provides guidance, and simultaneously raises a number of questions, regarding how to approach relationships and interests that risk giving rise to conflict of interest allegations against directors, officers and financial advisors involved in a sale of control.
Continue Reading The El Paso/Kinder Morgan Opinion: Further Delaware Guidance on Sell-side Conflicts

Following the SEC’s decision not to seek a rehearing of the decision by the U.S. Court of Appeals for the District of Columbia Circuit vacating its “proxy access” rule (Rule 14a-11 under the Securities Exchange Act of 1934), the stay on the companion “private ordering” amendments to Rule 14a-8 was lifted and those amendments are now in effect. Companies can no longer exclude otherwise-qualifying shareholder proposals seeking to establish a procedure in a company’s governing documents to permit shareholder nominees to be included in the company’s future proxy statements. As with other shareholder proposals, in order to make an access proposal a shareholder need only own $2,000 of company stock and have held it continuously for one year.
Continue Reading Preparing for “Proxy Access” Shareholder Proposals

In In re Del Monte Foods Company Shareholders Litigation,* Vice Chancellor Travis Laster preliminarily enjoined a shareholder vote on an acquisition of Del Monte Foods by a group of private equity firms based on a preliminary finding that the sales process was tainted by the misconduct of the company’s investment banker, with the knowing participation of the buyers.  While the company had already mooted the plaintiffs’ disclosure claims through a supplemental proxy statement, the court delayed the vote for a period of 20 days, during which time the “no shop”, break-up fee and matching right provisions of the merger agreement would not apply, in order to enable competing bidders to make proposals.
Continue Reading Lessons of Del Monte Foods For Companies Running (or Considering) a Sale Process