The Delaware Supreme Court’s 2014 decision in Kahn v. M&F Worldwide Corp. (“MFW”)  provided business judgment rule protection for controlling stockholder transactions that are conditioned from the outset on certain procedural protections being utilized, including approval by (1) a fully-empowered independent special committee that meets its duty of care and (2) a fully-informed, uncoerced vote of a majority of the target minority stockholders unaffiliated with the controller. While MFW provided helpful guideposts for avoiding entire fairness review in controlling stockholder transactions, as with any new doctrine, questions remained as to the application of MFW to different types of deals and negotiations, and the consequences of small deviations from strict adherence to MFW. Recent guidance from the Delaware Court of Chancery has given way to updated ground rules for controlling stockholder transactions: (i) MFW also applies to deals where the controller is only on the sell-side; (ii) other conflicted controller transactions besides mergers, such as recapitalizations, are eligible for MFW protection; and (iii) small, alleged foot faults will not cause the business judgment rule protection afforded by MFW to be lost.
A year ago, State Street Advisors, one of the largest institutional investors in the country, commissioned the “Fearless Girl” statue as a symbol of the increased attention by investors and the public to the lack of gender diversity within corporate boardrooms in the U.S. In the year since the “Fearless Girl” appeared on Wall Street the push for gender diversity in boardroom has gained traction within the investor community. State Street voted against 400 corporate boards that failed to nominate female directors, the New York City Comptroller and the New York City Pension Funds launched their own initiative focusing on board diversity disclosure and ISS and Glass Lewis, the two largest and most influential proxy advisory firms have announced a new focus on gender diversity. Finally, in early February Blackrock updated its voting guidelines to state that it now expects to see at least two female directors on every public company’s board. Indeed, while in 2017 women still only comprised less than 17% of corporate boards, with over 600 boards still having no female directors at all, these actions by investors have made a difference. For the first time ever, women and minorities accounted for half of the 397 newest independent directors at S&P 500 companies.
This proxy season, after the Corp Fin staff permitted AES Corporation to exclude a shareholder proposal on the basis of Rule 14a-8(i)(9)—the exclusion for a proposal that directly conflicts with a management proposal—the Council of Institutional Investors sent a letter to William Hinman, director of Corp Fin, raising objections to the staff’s treatment of the proposal. (See this PubCo post.) The proposal, submitted by John Chevedden, had sought to reduce the threshold required for shareholders to call a special meeting from 25% to 10%. In its letter, CII charged that AES, by including in its proxy statement a conflicting management proposal to ratify the existing 25% threshold, was “gaming the system” and urged the SEC to revisit, once again, its approach to Rule 14a-8(i)(9). But what would be the impact of the CII letter? Would the CII letter induce the staff to revisit its prior position on the exclusion? Now, Corp Fin has issued a new no-action letter, in this instance to Capital One, once again allowing a company, following the same approach as in AES, to exclude a proposal that sought to reduce the special meeting threshold from 25% to 10% on the basis of Rule 14a-8(i)(9)—but with a twist. The question is: Is that the end of the story?
Maintaining a workplace environment free of discrimination, sexual harassment and other misconduct is critical to both the short-term productivity and long-term health of a business. Reports of sexual harassment allegations at public corporations can have material negative effects on stock price, with some corporations seeing double digit single day drops after accusations are made public. As we have written elsewhere, the primary obligation to manage these risks on a day-to-day basis falls to executive leadership.  But the #MeToo movement also has raised questions about the role of boards of directors to provide oversight of management and, to the extent that senior management may be a source of the problem, the board’s obligation to take more direct action.
This post discusses some key issues for General Counsel to consider as they advise corporate boards about how to navigate their responsibilities in this environment.
In a classic banking panic, holders of demand deposits want their cash back because they do not trust the value of the banks’ loan portfolios backing the deposits. Deposit insurance solves this problem. A banking panic in the current financial system is different. In the crisis of 2007-8 the holders of short-term debt, in the form of repo, came to distrust the bonds used as collateral and increased haircuts, generating a run on the banking system (see Gorton and Metrick (2012) and Gorton, Laarits, and Metrick (2017)). Have the many post-crisis legal and regulatory changes mitigated this problem? Or, have they instead exacerbated the shortage of good collateral, resulting in collateral damage?
The Delaware Supreme Court recently held that the reason a company’s founder and chairman had abstained on a vote to approve a merger was material information that should have been disclosed to the company’s stockholders. The court said that the abstaining director’s view that it was an inopportune time to sell the company and that mismanagement had negatively affected the sale process would be important to an investor who was considering the board of directors’ recommendation in favor of the transaction.
Thank you so much, David, for that kind introduction.  It’s great to be here at the Tulane Corporate Law Institute for what, I know, is one of the most highly-anticipated corporate-law conferences of the year. It also doesn’t hurt that it happens to be in New Orleans. 
Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s Staff. And let me add my own standard caveat: I hope someday to persuade my colleagues of the utter, absolute, and obvious correctness of my views.
The “exchange-traded fund” (ETF) is one of the key financial innovations of the modern era. Our article, A Regulatory Framework for Exchange-Traded Funds (forthcoming in Southern California Law Review, vol. 91, no. 5, 2018), is the first academic work to show the need for, or to offer a regulatory framework for ETFs.
The past year has seen continued evolution in the political, legal and economic arenas as technological change accelerates. Innovation, new business models, dealmaking and rapidly evolving technologies are transforming competitive and industry landscapes and impacting companies’ strategic plans and prospects for sustainable, long-term value creation. Tax reform has created new opportunities and challenges for companies too. Meanwhile, the severe consequences that can flow from misconduct within an organization serve as a reminder that corporate operations are fraught with risk. Social and environmental issues, including heightened focus on income inequality and economic disparities, scrutiny of sexual misconduct issues and evolving views on climate change and natural disasters, have taken on a new salience in the public sphere, requiring companies to exercise utmost care to address legitimate issues and avoid public relations crises and liability.
In an article recently published in the Harvard Business Review, Are Buybacks Really Shortchanging Investment?, Charles Wang and I use data to challenge the widely-held view that U.S. firms distribute too much cash to shareholders through stock buybacks and dividends, reducing these firms’ ability to innovate and invest for the long term.
Payout critics focus on the high volume of dividends and repurchases, often pointing to shareholder payouts routinely exceeding 90% of net income. For example, during the decade 2007-2016, S&P 500 firms distributed $7 trillion to shareholders, mostly via repurchases, totalling 96% of net income. These figures have led Larry Fink, CEO of Blackrock, to warn corporate leaders against seeking to “deliver immediate returns to shareholders, such as buy-backs… while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.” Vice-President Joseph Biden, reportedly mulling a run at the White House in 2020, claimed that the high level of buybacks “has led to significant decline in business investment” with “most of the harm …borne by workers.” Biden’s view is widely shared by prominent politicians in Washington, D.C. Just last week, Senate Democratic Leader Chuck Schumer, who claims buybacks “crowd out investment” that would benefit workers and firms, joined Senator Tammy Baldwin in introducing an amendment to the banking deregulation bill that gives the SEC the authority to block a stock buyback it deems to harm the corporation.
Regulation by litigation has been the dominant regulatory modality in U.S. corporate law for over a century. But that model is in crisis. The shareholder suit, the trigger of the state law-dominated, fiduciary duty-based model of regulation, has been drawn into disrepute. The crisis is most apparent in merger suits, which have been brought against virtually every deal, but which invariably generate no real benefit for anyone other than the lawyers that file and defend them. Delaware, the leading regulator in U.S. corporate law, has recently taken steps to address the problem, but the immediate result seems to have been a flood of litigation out of Delaware and into other fora. Regulation by litigation thus has demonstrated a tendency to devolve into rent seeking by attorneys.
Recently in In re Appraisal of AOL Inc., the Delaware Court of Chancery, in an opinion by Vice Chancellor Glasscock, relied solely on its own discounted cash flow (“DCF”) analysis to appraise the fair value of AOL Inc. below the deal price paid in its acquisition by Verizon Communications Inc. While reiterating that deal price is the best evidence of fair value, and must be taken into account, when appraising “Dell‑compliant” transactions (i.e., those where “(i) information was sufficiently disseminated to potential bidders, so that (ii) an informed sale could take place, (iii) without undue impediments imposed by the deal structure itself”), the court held this was not such a transaction. The court found that certain of the deal protections combined with informational disparities between potential bidders and certain actions of the parties were preclusive to other bidders, and therefore, the court assigned no weight to deal price in its fair value determination. Applying its own DCF analysis, the court ultimately determined fair value to be approximately 3% lower than the deal price (possibly due to synergies), thus continuing a string of recent appraisal decisions finding fair value at or below deal price.
Boards of directors (boards) often cut CEO pay following poor performance. These paycuts can go beyond the general pay-for-performance relation. Agency theory suggests that such paycuts can act as a disciplining mechanism against the CEO and, therefore, can lead to better performance in subsequent periods. Consistent with this line of reasoning, there is some empirical evidence that firm performance improves following a CEO paycut.
In our article, Accounting and Economic Consequences of CEO Paycuts, forthcoming in the Journal of Accounting and Public Policy, we examine the possibility that cutting the pay of an incumbent CEO might also induce an adverse response. Specifically, we examine whether, in response to paycuts, CEOs actually increase their efforts to improve the underlying economic performance of the firm, or simply resort to managing measured performance through activities such as accruals manipulation and real activities management. These latter activities may be designed to boost reported earnings in the short-run at the expense of long-term shareholder value. Since CEO pay is often linked to reported earnings performance, CEOs have incentives to engage in earnings management after a paycut because such activities can lead to faster improvement in reported performance and, hence, to speedier restoration of their pay to prior levels. Thus, the efficacy of a CEO paycut as a disciplining mechanism is unclear.
The mass shooting at a high school in Parkland Florida has focused renewed attention on the issue of gun violence. While regulators debate the appropriate actions to take, a number of companies and investors have recently made moves to address the issue.
For example, both Walmart and Dicks Sporting Goods announced at the end of February that they would place new restrictions on gun sales. Specifically, Dicks Sporting Goods announced that it would immediately end the sales of military-style semi-automatic rifles and its sale of high-capacity magazines. Walmart, which does not sell bump stocks, high capacity magazines or similar accessories, stated that it was removing from its website items that resembled assault-style rifles, including nonlethal guns and toys. In addition, both retailers stated that they would not sell firearms to customers under the age of 21.
Thank you, Chairman Clayton, and thank you to the extraordinary Staff in the Division of Investment Management for all of the hard work reflected in this proposal. I appreciate your and the Staff’s engagement—and your willingness to answer my questions—a great deal.
Unfortunately, I cannot join the majority in approving this proposal. The Commission today [March 14, 2018] takes the unusual step of re-proposing an already-final, unanimously-approved rule to give mutual-fund investors less, not more, information about the risks that they face. I fear that the result will be to allow large institutions to avoid the costs of a liquidity crunch, leaving Main Street investors holding the bag. For the following three reasons, I respectfully dissent.
I am honored to be here for Dalia Blass’s first open meeting as Director of Investment Management. Dalia has already shown herself to be a fantastic fit for the job. I greatly appreciate the staff’s work on this release. Having sat in your seats during my last stint at the Commission, I know how much work goes into getting a recommendation ready for an open meeting. I am particularly grateful for your efforts to keep the release short—in a relative sense anyway.
Today [March 14, 2018], we are considering a proposal to amend Forms N-PORT and N-1A to rescind the requirement that certain open-end funds disclose aggregate liquidity classification information about their portfolios. We are considering replacing that disclosure with a new requirement to disclose information about the operation and effectiveness of funds’ liquidity risk management programs in their annual report to shareholders. The proposed amendments also would allow funds to classify the liquidity of their investments pursuant to their liquidity risk management programs required by rule 22e-4 in multiple liquidity classification categories for a single position. Finally, we are considering amendments to Form N-PORT to require reporting of holdings of cash and cash equivalents.
I would like to join Chairman Clayton in thanking the staff for their work on this release—in particular, Zeena Abdul-Rahman, Thoreau Bartmann, and Sarah ten Siethoff.
While I sincerely appreciate the staff’s efforts, I am not persuaded that we should amend our liquidity rule and take useful disclosure away from investors.
So what is the staff proposing be taken away? Starting next year, certain investment funds, such as mutual funds, are supposed to give investors information about the liquidity of the funds’ investments.  The proposal before the Commission today [March 14, 2018] would take away that public disclosure requirement.
When you boil it down, liquidity is all about one question. How long does it take to do something? We ask that question in all sorts of situations. How long does it take to travel from point A to point B? How long does it take to sell a house or a car? Or, in this case, how long does it take for a fund to sell an underlying investment without affecting its price?
I would first like to thank the Director of the Division of Investment Management, Dalia Blass, for moving this proposal forward. Also, thank you to the staff who worked so hard devising and drafting its contents.
I support this recommendation to improve the reporting and disclosure of liquidity information by investment companies. Nevertheless, I am disappointed that the Commission is missing a golden opportunity.
Seventeen months ago, the Commission adopted rules aiming to promote effective liquidity risk management throughout the fund industry and to provide investors with information to help them understand a mutual fund’s or exchange-traded fund’s (“ETF”) liquidity and redemption practices.  I supported the final rule, because it reflected the staff’s thoughtful consideration and incorporation of the public comments received on the proposal. 
Posted by James D. Cox Duke (Duke University) and Randall S. Thomas (Vanderbilt University), on Friday, March 9, 2018 Tags: Board independence, Boards of Directors, Delaware articles, Delaware cases, Delaware law, Disclosure, Fiduciary duties, Hedge funds, In re Revlon, In re Trulia, Management, Merger litigation, Mergers & acquisitions, Settlements, Shareholder activism, Shareholder suits, Shareholder voting, Unocal v. Mesa The Rise of Blockchains and Regulatory Scrutiny
Posted by Stuart Levi, Gregory Fernicola and Eytan Fisch, Skadden, Arps, Slate, Meagher & Flom LLP, on Friday, March 9, 2018 Tags: Bitcoin, Blockchain, Contracts, Cryptocurrency, Derivatives, Financial regulation, ICOs, Money laundering, SEC, SEC enforcement, Securities regulation Are Financial Constraints Priced? Evidence from Textual Analysis
Posted by Matthias Buehlmaier (University of Hong Kong) and Toni M. Whited (University of Michigan), on Saturday, March 10, 2018 Tags: Capital formation, Debt, Financial constraints, Financial reporting, Firm performance, Information asymmetries, Information environment, IPOs, Market efficiency, Small firms The Narrowing Scope of Whistleblower Anti-Retaliation Protections
Posted by Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on Saturday, March 10, 2018 Tags: Compliance & ethics, Dodd-Frank Act, Misconduct, Sarbanes–Oxley Act, SEC, SEC enforcement, Securities enforcement, Securities regulation, Supreme Court, Whistleblowers Delaware Appraisal Litigation: Non-Arm’s-Length Transactions, Arm’s-Length Transactions and the Anna Karenina Principle
Posted by Arthur H. Rosenbloom (Consilium ADR) and Gilbert E. Matthews (Sutter Securities), on Sunday, March 11, 2018 Tags: Delaware articles, Delaware cases, Delaware law, Fair values, Fairness review, Firm valuation, Merger litigation, Mergers & acquisitions, Related party transactions, Shareholder suits Dunkin’ Brands and SEC Economic Relevance Exclusion of Shareholder Proposal
Posted by Keith F. Higgins and Craig E. Marcus, Ropes & Gray LLP, on Sunday, March 11, 2018 Tags: Boards of Directors, Corporate Social Responsibility, ESG, Institutional Investors, No-action letters, Rule 14a-8, SEC, SEC enforcement, Securities regulation, Shareholder proposals Taxation and Executive Compensation: Evidence from Stock Options
Posted by Andrew Bird (Carnegie Mellon University), on Monday, March 12, 2018 Tags: Board capture, Canada, Equity-based compensation, Executive Compensation, Executive performance, Incentives, Internal Revenue Code, International governance, IRS, Long-Term value, Management, Stock options, Tax Cuts and Jobs Act, Taxation An Identity Theory of the Short- and Long-Term Investor Debate
Posted by Claire A. Hill (University of Minnesota Law School), on Monday, March 12, 2018 Tags: Agency costs, Boards of Directors, Institutional Investors, Investor horizons, Long-Term value, Management, Shareholder activism, Short-termism SEC and CFTC Testimony on Virtual Currencies: Is More Regulation on the Horizon?
Posted by Michael H. Krimminger, Colin D. Lloyd & Zachary Baum, Cleary, Gottlieb, Steen & Hamilton LLP, on Monday, March 12, 2018 Tags: Bitcoin, CFTC, Commodities, Cryptocurrencies, Financial regulation, Financial technology, ICOs, Investor protection, SEC, SEC enforcement, Securities enforcement, Securities regulation What a Difference a (Birth) Month Makes: The Relative Age Effect and Fund Manager Performance
Posted by Kevin Mullally (University of Alabama), on Tuesday, March 13, 2018 Tags: Human capital, Institutional Investors, Management, Managerial style, Mutual funds, Risk-taking The Hidden Power of Compliance
Posted by Stavros Gadinis and Amelia Miazad (Berkeley Law School), on Tuesday, March 13, 2018 Tags: Accountability, Board communication, Boards of Directors, Compliance & ethics, Delaware articles, Delaware law, Misconduct, Securities enforcement, Securities litigation SEC Guidance on Public Company Cybersecurity Disclosures
Posted by Lillian Brown, Meredith Cross, and Benjamin Powell, Wilmer Cutler Pickering Hale and Dorr LLP, on Tuesday, March 13, 2018 Tags: Boards of Directors, Cybersecurity, Disclosure, Financial reporting, Insider trading, Materiality, Mergers & acquisitions, Oversight, Regulation FD, Risk, Risk disclosure, SEC, Securities regulation The Importance of Conviction in the Face of Litigation Risk
Posted by Edward D. Herlihy and David E. Shapiro, Wachtell, Lipton, Rosen & Katz, on Wednesday, March 14, 2018 Tags: Acquisition premiums, Appraisal rights, Arbitrage, Delaware cases, Delaware law, Fair values, Fairness review, Merger litigation, Mergers & acquisitions, Shareholder suits Investor Ideology
Posted by Enrichetta Ravina (Northwestern University), on Wednesday, March 14, 2018 Tags: BlackRock, Boards of Directors, Environmental disclosure, ESG, Executive Compensation, Glass Lewis, Institutional Investors, institutional Shareholder Services Inc., Mutual funds, Proxy advisors, Say on pay, Shareholder proposals, Shareholder voting, Vanguard Remarks to the SEC Investor Advisory Committee
Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Wednesday, March 14, 2018 Tags: Arbitration, Dual-class stock, Institutional Investors, Investor protection, IPOs, SEC, SEC enforcement, Securities litigation, Securities regulation, Shareholder voting Overview of Proposed Revisions to the UK Corporate Governance Code
Posted by Jason Halper, Steven Baker and Janaki Tampi, Cadwalader, Wickersham & Taft LLP, on Thursday, March 15, 2018 Tags: Board composition, Board independence, Boards of Directors, Executive Compensation, Institutional Investors, International governance, Securities regulation, Shareholder voting, UK, Whistleblowers Spring Awakening: Notes from This Year’s CII Meeting
Posted by Nell Minow, ValueEdge Advisors, on Thursday, March 15, 2018 Tags: Boards of Directors, Corporate culture, Corporate Social Responsibility, Dual-class stock, Environmental disclosure, ESG, Index funds, Institutional Investors, Pension funds, Risk management, Securities regulation, Shareholder voting, Stewardship Statement on Proposed Amendments to Public Reporting of Fund Liquidity Information
Posted by Jay Clayton, U.S. Securities and Exchange Commission, on Thursday, March 15, 2018 Tags: Accounting, Disclosure, Exchange-traded funds, Financial reporting, Investor protection, Liquidity, Mutual funds, Risk management, Securities regulation, Transparency
Today [March 14, 2018], the Commission will consider a proposed rule that would amend the liquidity risk management rules for open-end funds that the Commission adopted in October 2016. Specifically, staff will recommend that the Commission propose amendments to revise the manner in which information about funds’ liquidity risk management practices is provided to investors in those funds. These recommendations are designed to address the potential for investor confusion presented by a few aspects of the current rule.