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.[1]  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)

On May 31, 2018, Cleary Gottlieb submitted a comment letter to MSCI regarding its public consultation on the treatment of unequal voting structures in the MSCI Equity Indexes.  Cleary’s letter asserts that the approach in the proposal is highly problematic, arguing that the composition of broad equity market indexes is the wrong mechanism to address the relationship between equity interests and voting rights, and “one share, one vote” is the wrong principle.

Cleary’s letter focuses on the impact on Latin American equities.  Dual-class structures are more common in Latin America than in the United States, so MSCI’s proposal would have more significant consequences for Latin American markets than in the United States.  The proposal fails to take into account the alternative shareholder protections provided by law in many Latin American countries, and the specific characteristics of classes other than common stock in each jurisdiction.  Cleary’s letter urges MSCI to instead consider following the example of the U.S. Securities and Exchange Commission and the principal U.S. securities exchanges, which broadly defer to home country corporate governance rules.

Please click here to read the full comment letter.

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).

Public and private businesses today face many decisions that do not arise from, and have consequences far beyond, solely financial performance.  Rather, these decisions are primarily driven by, and implicate, important social, cultural and political concerns.  They include harassment, pay equity and other issues raised by the #MeToo movement; immigration and labor markets; trade policy; sustainability and climate change; the manufacture, distribution and financing of guns and opioids; corporate money in politics; privacy regulation in social media; cybersecurity; advertising, boycotts and free speech; race relations issues raised by the pledge of allegiance controversy; the financing of healthcare; the tension between religious freedom and discrimination laws; and the impact of executive pay on income inequality, among others.  If the nature of the issues is not unprecedented, the number, diversity and polarization seem to be.  Continue Reading <i>Caremark</i> and Reputational Risk Through #MeToo Glasses

Many clients are now turning from their annual meeting to plans for off-cycle engagements with their institutional investors, including the passive strategy behemoths (Blackrock, State Street and Vanguard which tend to own, in the aggregate, around 20% of many of our mid- and large-cap clients), traditional actively managed funds, pension funds, and hedge funds.[1]  The rationale for these meetings is that postponement of outreach until a threat of a contested situation (such as a short-slate proxy contest or aggressive shareholder proposal) may be “too little, too late” and that these one-on-one meetings on “sunny days” (and even “partly cloudy days”) are critical, if not for locking up support, at least for establishing a foundation for obtaining support if and when the storm clouds arrive. Continue Reading How to Avoid Bungling Off-Cycle Engagements With Stockholders

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.

On May 8, 2018, partners Benet O’Reilly and Adam Fleisher participated in a panel co-hosted by The Conference Board and Cleary Gottlieb to discuss Private Investment in Public Equity (PIPE) transactions, both for capital formation and strategic purposes.

Moderator Doug Chia, executive director of The Conference Board, Benet and Adam outlined the framework for a PIPE transaction, including the topics a company should consider when contemplating a PIPE. They covered the different structures and types of securities frequently used in the PIPE market, as well as typical types of PIPE investors.

The session also focused on related governance considerations and regulatory approvals. Additionally, they addressed how to manage the confidential nature of the PIPE and when disclosure may be necessary. They also explained what securities filings may be triggered for investors.

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

In Varjabedian v. Emulex, the Ninth Circuit recently held that plaintiffs bringing claims under Section 14(e) of the Securities Exchange Act of 1934 (“Exchange Act”)—which prohibits misstatements, omissions or fraudulent conduct in connection with a tender offer—need only show that defendants acted negligently, rather than with scienter.

This decision marks a conspicuous divergence from the decisions of every other circuit court to consider the issue.  Those other courts have uniformly held that Section 14(e) claims require a plaintiff to demonstrate that defendants acted knowingly or with a reckless disregard of the truth, a significantly higher burden.  The Ninth Circuit’s ruling, thus, sets up a clear circuit split that may necessitate resolution by the Supreme Court.  In the meantime, however, it remains to be seen whether there will be a migration of tender-offer litigation to the Ninth Circuit.

Please click here to read the full alert memorandum.

On April 24, 2018, Altaba, formerly known as Yahoo, entered into a settlement with the Securities and Exchange Commission (the “SEC”), pursuant to which Altaba agreed to pay $35 million to resolve allegations that Yahoo violated federal securities laws in connection with the disclosure of the 2014 data breach of its user database.  The case represents the first time a public company has been charged by the SEC for failing to adequately disclose a cyber breach, an area that is expected to face continued heightened scrutiny as enforcement authorities and the public are increasingly focused on the actions taken by companies in response to such incidents.  Altaba’s settlement with the SEC, coming on the heels of its agreement to pay $80 million to civil class action plaintiffs alleging similar disclosure violations, underscores the increasing potential legal exposure for companies based on failing to properly disclose cybersecurity risks and incidents.

Please click here to read the full alert memorandum.

On April 18, 2018, the U.S. Supreme Court heard oral argument in Lagos v. United States.  Lagos presents the important issue of whether a corporate victim’s professional costs—such as investigatory and legal expenses—incurred as a result of a criminal defendant’s offense conduct must be reimbursed under the Mandatory Victims Restitution Act.

The court’s decision will impact a company’s considerations when deciding whether and how to conduct an internal investigation, particularly when the corporation is the potential victim of a crime.

Please click here to read the full alert memorandum.