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

DOJ has expanded its efforts to give more concrete guidance to companies facing FCPA risk to M&A transactions and the question of successor liability.  In a speech on July 25, 2018, at the American Conference Institute’s 9th Global Forum on Anti-Corruption Compliance in High Risk Markets, Deputy Assistant Attorney General Matthew S. Miner highlighted DOJ’s views on successor liability for FCPA violations by acquired companies.[1]  Miner sought to clarify DOJ’s policy regarding the voluntary disclosure of misconduct by successor companies and to highlight the benefits of such disclosure as spelled out in the joint DOJ and SEC FCPA Resource Guide (the “Resource Guide”).[2]  In general, as with other recent pronouncements and actions by DOJ, such as the FCPA Corporate Enforcement Policy,[3] Miner’s speech seemed intended to highlight ways in which firms can gain cooperation credit (up to and including a declination) in FCPA investigations. Continue Reading DOJ Remarks Provide Guidance on Addressing FCPA Risk in M&A Transactions

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

A recent report in the Wall Street Journal, drawing on a source “familiar with the matter”, indicates that the Securities and Exchange Commission’s Division of Enforcement has launched a probe into whether certain issuers may have improperly rounded up their earnings per share to the next higher cent in quarterly reports. While the SEC has neither confirmed the report nor otherwise disclosed the existence of any such investigation, the Journal reports that the SEC has sent inquiries to at least 10 companies requesting information about such accounting adjustments that could have inflated reported earnings. The targeted companies have not yet been identified. Whether the reported inquiries amount to a broad-based sweep of issuer accounting practices remains to be seen. However, such an investigation would be consistent with SEC Chairman Jay Clayton’s announced enforcement priorities, which include a focus on public-company accounting practices and the protection of retail investors.

Please click here to read the full alert memorandum.

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 21, 2018, The Conference Board and Cleary Gottlieb Steen & Hamilton LLP hosted a panel discussion on the work of the Sustainability Accounting Standards Board (SASB). Participants in the panel discussion included Alan Beller, Senior Counsel at Cleary Gottlieb, Tom Riesenberg, Director of Legal Policy and Outreach at SASB and Stephanie Tang, Director of Legal, Corporate Securities at Stitch Fix.

Moderator Doug Chia, executive director of The Conference Board, and the panelists outlined the history and mission of SASB, including the development and implementation of industry-specific standards for sustainability reporting. They discussed the robust processes by which these standards were developed, and how they have been received by both companies and investors. The session also focused on the standard of materiality and the issues of liability in the context of the SEC’s reporting requirements. Additionally, the panelists discussed the board of directors role and the governance considerations undertaken by management and the board of directors in the context of sustainability reporting.

A replay of the webcast is available (please note that your browser may require you to run an Adobe plugin to access this content).