This is the fourth in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder.[1]  Relevant background can be found here and additional posts in this series can be found here.

In the first week of the CBS-NAI litigation, the Court of Chancery denied CBS’s request for a temporary restraining order (“TRO”), which would have prevented NAI from exercising its rights as a controlling stockholder to protect its voting control before the CBS board could meet and vote on a proposed stock dividend to dilute such voting control.[2]  In so ruling, the Court of Chancery resolved an “apparent tension” in the law between, on the one hand, past decisions suggesting the possibility that a board might be justified in diluting a controlling stockholder in extraordinary circumstances (arguably implying that, in such circumstances, the board should be permitted to act without interference by the controlling stockholder) and, on the other hand, cases recognizing the right of a controlling stockholder to have the opportunity to take action to avoid being disenfranchised.  The court found the well-established right of a controlling stockholder to take measures to protect its voting control “weigh[ed] heavily” against granting a TRO that would restrain it from doing so, and that “truly extraordinary circumstances” would therefore be required to support such a TRO.  At the same time, the court noted that it had the power to review and, if necessary, “set aside” any such action taken by the controlling stockholder after the fact (itself another reason why a TRO in these circumstances was not warranted). Continue Reading Lessons from the CBS-NAI Dispute: When (If Ever) Will the Court of Chancery Grant a TRO To Restrain a Controlling Stockholder From Taking Action to Prevent a Board From Diluting Its Voting Control?

This is the third in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder.[1]Relevant background can be found here and additional posts in this series can be found here.

As described in a prior post, on May 17, 2018, the majority of the CBS board (other than the three directors with ties to NAI) considered and purported to approve a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting NAI’s voting interest in CBS, with the payment of such dividend conditioned on Delaware court approval.  In addition to diluting NAI’s voting power from about 80% to about 20%, such dividend would have also diluted the voting rights of other Class A stockholders. Continue Reading Lessons From the CBS-NAI Dispute: Can Stockholders Rely on Stock Exchange Rules to Prevent Dilution of Their Voting and Economic Interests?

This is the second in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder.[1] Relevant background can be found here and additional posts in this series can be found here.

The vast majority of public company shares are owned in “street name” – e.g., through a broker.  When holding shares in “street name,” a stockholder’s brokerage account reflects his or her ultimate beneficial ownership of such shares, but the records of the issuer (maintained by the issuer’s transfer agent) indicate that the broker (or more often, another intermediary through which the broker holds the shares) is the record holder of such shares.  In the typical case of “street name” registration, Cede & Co., as nominee for the Depository Trust Company (“DTC”), is listed on the issuer’s records as the holder of record of most of the issuer’s shares.  DTC, in turn, keeps its own account records, which list the DTC participants that hold those shares through DTC, including a number of brokers.  Finally, those brokers keep their own account records, listing the ultimate beneficial owners of such shares.  Contrast this with direct registration, sometimes referred to as “record ownership,” where the ultimate beneficial holder holds the shares directly and therefore the records of the issuer indicate that such person is also the holder of record of such shares. Continue Reading Lessons From the CBS-NAI Dispute: The Limitations of “Street Name” Ownership in Effectively Exercising Stockholder Rights

This is the first in a series of posts discussing certain issues and lessons for practitioners arising out of the recently settled dispute between CBS and its controlling stockholder.

Introduction

  • National Amusements, Inc. (“NAI”) owns approximately 80% of the voting shares of CBS Corporation and Viacom Inc., and in early 2018, NAI proposed that CBS and Viacom consider a merger. Each of the boards of CBS and Viacom formed a special committee of independent directors unaffiliated with NAI to consider and potentially negotiate such a merger.[1]
  • On Sunday, May 13, 2018, the CBS special committee met and took steps:
    • to call a special meeting of the full CBS board on May 17 to consider and vote on a dividend of a fraction of a Class A (voting) share to be paid to holders of both CBS’s Class A (voting) common stock and Class B (nonvoting) common stock for the express purpose of diluting – very substantially – NAI’s voting interest in CBS; and
    • to commence litigation against NAI in the Chancery Court of Delaware seeking approval of the proposed dilutive dividend and moving for a temporary restraining order to block NAI from taking certain steps as the controlling stockholder of CBS, including any actions prior to the special board meeting that would interfere with the proposed dilutive dividend.
  • On May 16, prior to the special board meeting (and prior to a scheduled court hearing on the directors’ motion for a TRO), NAI exercised its right as the holder of a majority of CBS’s voting shares to act by written consent to adopt amendments to the CBS bylaws (the “Bylaw Amendments”).[2] These Bylaw Amendments imposed a 90% supermajority voting requirement on any Board declaration of dividends or any board adoption of bylaw amendments, and also imposed certain procedural requirements for any such actions.  Since three of the fourteen CBS directors were individuals with ties to NAI, the Bylaw Amendments, if valid and in effect, would effectively preclude the declaration and payment of the proposed dilutive dividend.
  • The CBS board met the next day as scheduled (and following the court’s decision not to grant the TRO) and purported to approve the dilutive stock dividend by a majority vote of less than 90% of the directors, which would dilute the voting power of NAI to about 20% (and also dilute the voting rights of other Class A stockholders), the payment of such dividend conditioned on Delaware court approval.
  • On September 9 (after several months of motion practice and discovery), CBS and NAI entered into a settlement agreement providing for the rescission of the dividend, a reconstitution of the CBS board and dismissal of the litigation.

Continue Reading Lessons From the CBS-NAI Dispute: The Applicability of Rule 14c-2 and the 20-day Waiting Period to Stockholder Actions by Written Consent

One of the surprises of the 2018 proxy season was the use of Notices of Exempt Solicitation by shareholders that almost certainly did not meet the $5 million holding threshold that would require filing under Exchange Act Rule 14a-6(g).  Rule 14a-6(g) requires a person who owns more than $5 million of the company’s securities and engages in a solicitation without seeking to collect, or act as, a proxy to file solicitation materials with the SEC. Continue Reading SEC Staff Releases Two New C&DIs on the Use of Notices of Exempt Solicitation

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

On May 11, 2018, the SEC’s Division of Corporation Finance released new Compliance and Disclosure Interpretations (“C&DIs”) regarding the interpretations of the proxy rules and Schedules 14A and 14C.  These replace the telephone interpretations contained in the Proxy Rules and Schedule 14A Manual of Publicly Available Telephone Interpretations and the March 1999 Supplement to the Manual of Publicly Available Telephone Interpretations (collectively, the “Telephone Interpretations”).  The C&DIs are available here.

Certain C&DIs reflect minor substantive or technical changes from the telephone interpretations.  The SEC has indicated that questions 124.01, 124.07, 126.02, 151.01, 161.03 and 163.01 reflect substantive changes from the answers provided in the Telephone Interpretations.  Additionally C&DIs 126.04, 126.05, 158.01 and 158.03 reflect technical revisions.  The remaining C&DIs have only non-substantive changes from the versions in the Telephone Interpretations.

For a comparison of the telephone interpretations against the new C&DIs in which substantive or technical changes were noted, please see here.

2017 began with a heightened level of uncertainty as the beginning of the year brought significant change in the legal environment, including a change in administration that promised to significantly alter the tenor of regulation. While certain changes did occur in 2017, in many respects, 2018 is setting itself up as the year to watch for continuing developments in areas that are likely to fundamentally transform how companies operate and interact with an increasingly larger number of vocal stakeholders. The trends discussed in each of the sections of this memorandum 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. The role that the board and its oversight plays in guiding companies in these times will be critical and 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 2018.

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

For a PDF of the full memorandum, please click here.

Selected Issues for Boards of Directors 2018 (Home Page)

Developments in Best Practices in the Boardroom

Significant Regulation and Reform Under the Trump Administration

Activism in 2018

Cybersecurity and Data Privacy Updates

The New DOJ FCPA Corporate Enforcement Policy Highlights the Continued Importance of Anti-Corruption Compliance

Evolution or Revolution for Companies with Multi-Class Share Structures

Corporate Governance in the Context of Brexit and Political Uncertainty in the United Kingdom and Europe

 

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.

In a case of first impression, GAMCO Asset Management (“GAMCO”) recently nominated a director to the board of National Fuel Gas Company (“NFG”) pursuant to NFG’s recently adopted proxy access bylaw.[1]  As far as we know, this is the first time any shareholder has nominated a director using proxy access.  Continue Reading Proxy Access in Action: Is This What Everyone Wanted?