On July 10, 2018, The Conference Board and Cleary Gottlieb Steen & Hamilton LLP hosted a panel discussion on the highlights of the 2018 proxy season and the key topics, including shareholder proposals trends, including with respect to environmental and social issues; the most surprising moments in the 2018 proxy season; the effect of the Staff’s release of Staff Legal Bulletin 14I; board composition, refreshment and diversity; shareholder engagement; and significant institutional investor developments. Participants in the panel discussion included Pamela Marcogliese, Partner, Cleary Gottlieb, Elizabeth Bieber, Associate, Cleary Gottlieb, Jason Alexander, Managing Director, Okapi Partners and Bill Ultan, Managing Director, Corporate Governance, Morrow Sodali. Continue Reading Cleary Gottlieb Participates in Panel Discussion on Highlights of the 2018 Proxy Season
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
On June 26, 2018, the U.S. House of Representatives passed its version of the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). Just over a week earlier, the U.S. Senate passed the National Defense Authorization Act for Fiscal Year 2019, which incorporated its version of FIRRMA. The bills, which passed their respective chambers by very wide margins, would update the statute authorizing reviews of foreign investment by the Committee on Foreign Investment in the United States (“CFIUS”) to reflect changes in CFIUS’s practice over the ten years since the last significant reform, expand CFIUS’s jurisdiction, and make significant procedural alterations to the CFIUS process. Introduced to “modernize and strengthen” review of foreign investment in the United States, FIRRMA would cement a relatively aggressive approach to foreign investment review. However, ultimately FIRRMA’s changes to current CFIUS practice are modest, and many of the changes merely codify practices in place since the later years of the Obama Administration.
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At the 2018 National Conference of the Society for Corporate Governance, partner Pamela L. Marcogliese moderated a panel on Disclosure Committees and the current market practice at public companies.
The panelists engaged in a discussion about the reasons for establishing a Disclosure Committee including centralizing and organizing disclosure responsibilities, helping to comply with disclosure obligations under the federal securities laws and supporting the Chief Executive Officer and Chief Financial Officer certifications under Sarbanes-Oxley in providing oversight of the company’s disclosure controls and procedures. Continue Reading Cleary Partner Moderates Panel on Disclosure Committees
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.
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Major transactions are driving the German M&A market. After several fruitless attempts, Deutsche Telekom and Softbank entered into a business combination agreement to merge T-Mobile US with its rival, Sprint. German building materials maker Knauf agrees the $ 7 billion takeover of competitor USG, while Merck sells its OTC business to Procter & Gamble for around € 3.4 billion. Vonovia continues to drive the consolidation of the residential property market, submitting a takeover bid of around € 900 million for Swedish real estate company Victoria Park. Daimler and BMW combine their mobility businesses, including car-sharing subsidaries Car2Go and DriveNow, forming five joint ventures in total. Continue Reading
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.
On May 29, 2018, the U.S. Supreme Court issued an unanimous opinion in Lagos v. United States. Lagos presented the issue of whether costs incurred during and as a result of a corporate victim’s investigation (rather than a governmental investigation) must be reimbursed by a criminal defendant under the Mandatory Victims Restitution Act (“MVRA”). Resolving a circuit split, the Court narrowly held that restitution under the MVRA “does not cover the costs of a private investigation” commenced by a corporate victim on its own initiative and not at the Government’s invitation or request.
The Court’s decision is notable for rejecting the Government’s broad interpretation of the MVRA and for recognizing the “practical fact” that such a broad interpretation would invite “significant administrative burdens.” But the opinion is also notable for what it does not decide. The Court’s opinion expressly leaves unaddressed the question of whether professional costs incurred during a private investigation performed at the Government’s request would be covered by the MVRA.
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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. 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)