Now that we are midway into the 2018 proxy season, most deadlines for shareholder submissions of director nominations for upcoming annual meetings have come and gone. Nevertheless, shareholder activists who have missed a nomination deadline for whatever reason should be aware that in certain circumstances they may have a second bite at the apple. Where a company experiences a material change in circumstances set in motion by its board of directors after the passing of the nomination deadline, the shareholder may have grounds to compel the company to reopen the nomination window if the shareholder can demonstrate that the change in circumstances would have been material to its decision whether or not to nominate directors had it been known at such time. There is already case law in Delaware holding that it is inequitable for directors to refuse to grant a waiver of an advance notice deadline under such circumstances.
In the 25th anniversary edition of NERA’s annual study, Recent Trends in Securities Class Action Litigation, we examine trends in securities class action filings and resolutions in 2017. New findings discussed in this year’s report include an increase in filings, again led by a doubling of merger-objection filings.Highlights of the 2017 report include:
- A record 432 federal securities class actions filed in 2017, the third straight year of growth, and a 44% increase over 2016.
- Federal merger-objection filings more than doubled for the second consecutive year to 197 in 2017.
- A total of 353 securities class actions were resolved in 2017—a post-PSLRA high. Of those, 148 cases settled, coming close to the 2007 record of 150.
- The average settlement in 2017 fell to less than $25 million, a drop of roughly two-thirds compared to 2016.
- Aggregate NERA-defined Investor Losses were $334 billion in 2017, a 50% increase over the five-year average.
- Aggregate plaintiffs’ attorneys’ fees and expenses were $467 million, a drop of roughly 65% to a level not seen since 2004.
Recent tech IPOs such as Snap, Square Inc., Blue Apron, Stitch Fix Inc. and, most recently, Spotify, have all made headlines. In terms of corporate governance, board classification and gender composition are typically a major focal point in these initial offerings. While they don’t have to immediately meet the same criteria as long-time public companies, companies that IPO must eventually comply with standard rules and regulations, and their shareholders expect them to align with best practices.
In that vein, a recent Equilar study analyzed differences between recent IPO companies and more established ones regarding board classification and gender composition. Using the companies in the Equilar 500 as a baseline for established companies, the data show stark dissimilarities in board classification and gender make-up.
What do good board chairs do in and outside the board room? To explore this questions, INSEAD Corporate Governance Centre launched a research project that included a survey of 200 board chairs from 31 countries, 80 interviews with chairs, and 60 interviews with board members, shareholders and CEOs.
An effective chair, the people in our study largely concurred, provides leadership not to the company but to the board, enabling it to function as the highest decision-making body in the organization. As one survey respondent put it: “The chair is responsible for and represents the board, while the CEO is responsible for and is the public face of the company.” That crucial distinction makes the chair’s job very different from the CEO’s, and it calls for specific skills and practices. Here are some of them.
Recently in In re Tesla Motors, Inc. Stockholder Litigation, the Delaware Court of Chancery (in an opinion by Vice Chancellor Slights) declined to grant defendants’ motion to dismiss because the court found it reasonably conceivable that Elon Musk, a 22.1% stockholder of Tesla Motors, Inc., was a controlling stockholder and therefore Tesla’s 2016 acquisition of SolarCity Corporation (of which Musk was the largest stockholder and founder) would be subject to a stringent entire fairness review. In this regard, it is rare for Delaware courts to find that a stockholder with such “relatively low” ownership levels is a controller. They have done so only, as was the case here, where there is other evidence that the stockholder exercised “actual domination and control over … [the] directors” and wielded more power than may be evidenced by the stockholder’s minority holdings. The court’s conclusion that Musk was a controller meant that stockholder approval of the acquisition did not ratify the transaction and invoke business judgment review because Corwin v. KKR Financial Holdings LLC does not apply to controller transactions.
What leads firms to engage in large-scale bribery of politicians? High-level politicians make decisions that shape the competitive landscape in the private sector, and recent years have witnessed a global surge in cases of blatant corruption involving prominent companies and senior politicians. But theory and evidence are scant about the firm-level determinants of corporate corruption involving large-scale bribes of top government officials. This study draws on sociology, behavioral economics, and criminology to examine what we call “threat of falling high status”—the condition in which a firm with longstanding high social status is threatened with an impending loss of status due to mediocre current economic performance relative to that of its industry peers. We examine whether this unexplored socioeconomic predictor can explain variability in large-scale corporate bribery of high-level government officials. Our article uses a novel data set from South Korea, where the internal accounting records of two presidents in the 1987–1992 era have been exposed to after-the-fact legal and public scrutiny.
Societies throughout the world utilize a wide range of corporate governance mechanisms to govern their corporations. Normally, most societies use rules and norms to get corporations to conform to traditional corporate governance practices; and most corporations do conform to this national governance logic. However, some corporations do not conform to the logic in which they are embedded. When this deviation happens, we note that corporate governance deviance has occurred. The purpose of our article was to explain what corporate governance deviance is, and why, when, and how firms engage in governance deviance.
Our research examines whether there is a gender pay gap in CEO compensation. Issues surrounding the gender pay gap have attracted considerable academic and media attention over the past few decades (Blau & Kahn, 2017). The growing presence of women in CEO roles has spurred interest in understanding how gender may affect the treatment of those who, against significant odds, manage to reach the top of the organizational hierarchy. Compensation captures the monetary value an organization subscribes to the contributions and importance of its individual employees, including the chief executive. The remuneration given to a manager for his or her job has “many consequences for that manager, the top management team, the organization, and stakeholders in the organization”, so that executive compensation is of compelling interest to researchers and practitioners (Finkelstein, Hambrick, & Cannella, 2009). It is therefore not surprising that a large and vibrant body of research exists on the topic of CEO compensation, though much less consideration has been given to the possible influence of gender on CEO compensation (perhaps, because of the relative scarcity of women CEOs in the past).
Source: Activist Insight, FactSet and public filings as of 3/31/2018.
Note: All data is for campaigns conducted globally by U.S. and European activists at companies with market capitalizations greater than $500 million at time of campaign announcement.
1. Activist activity reached new heights in 1Q 2018 both in terms of capital deployed and campaigns initiated
- ~$25bn of capital was deployed in new campaigns in 1Q 2018—the most in any quarter on record
- 1Q 2018 saw major campaigns by emerging activists such as SailingStone, Jericho Capital and Vulcan Value, while some traditional activists such as Corvex, Pershing Square and Trian were relatively inactive
- 73 new campaigns were initiated in 1Q 2018—the highest quarterly activity on record
- 65 Board seats were won in 1Q 2018—well ahead of 2016 YTD and 2017 YTD—while an additional 78 seats are “in play”
- Starboard Value was the leading activist in forcing Board turnover, with 41 seats targeted in 1Q 2018
Recent corporate scandals linked to problematic company cultures have resulted in questions such as “where was the board?” and “shouldn’t the board have known?” In some cases, board members themselves may have wondered why they were not informed of cultural problems and asked, “should we have conducted more due diligence?”
These and similar questions, and the responsibility to protect both their companies’ and their own reputations, are leading directors to look for ways to better monitor corporate culture and to understand potential cultural risks and address problems before they get out of control.
The purposes of this post are to help define “culture” and why it matters, and to provide practical suggestions for overseeing culture risk.
Posted by John Mark Zeberkiewicz and Stephanie Norman, Richards, Layton & Finger, P.A., on Friday, April 13, 2018 Tags: Appraisal rights, Charter & bylaws, Delaware law, DGCL, DGCL Section 102, DGCL Section 204, DGCL Section 205, DGCL Section 262, Mergers & acquisitions, Shareholder voting, State law Dodd-Frank is a Pigouvian Regulation
Posted by Aaron M. Levine (Sullivan & Cromwell LLP) and Joshua C. Macey, on Friday, April 13, 2018 Tags: Capital requirements, Compliance and disclosure interpretation, Divestitures, Dodd-Frank Act, Financial institutions, Financial regulation, Incentives, Risk, Risk management, SIFIs, Spinoffs, Systemic risk Portfolio Manager Compensation in the U.S. Mutual Fund Industry
Posted by Linlin Ma (Northeastern University), Yuehua Tang University of Florida), and Juan-Pedro Gomez (IE University Business School), on Saturday, April 14, 2018 Tags: Agency costs, Asset management, Compensation regulation, Contracts, Financial institutions, Financial regulation, Fund managers, Fund performance, Incentives, Mutual funds, Ownership structure, Profitability, Securities regulation Are Dual-Class Companies Harmful to Stockholders? A Preliminary Review of the Evidence
Posted by David J. Berger (Wilson Sonsini Goodrich & Rosati) and Laurie Simon Hodrick (Stanford Law School), on Sunday, April 15, 2018 Tags: Boards of Directors, Capital structure, Controlling shareholders, Dual-class stock, Firm performance, Index funds, Institutional Investors, Minority shareholders, Shareholder primacy, Shareholder voting Activists are Hereby on Notice: Board Authority to Reject Deficient Director Nominations
Posted by Kai Haakon Liekefett, Andrew W. Stern, and Beth E. Peev, Sidley Austin LLP, on Monday, April 16, 2018 Tags: Advanced notice, Boards of Directors, Charter & bylaws, Shareholder activism, Shareholder meetings, Shareholder nominations, Shareholder proposals, Shareholder voting, State law Tax-Exempt Lobbying: Corporate Philanthropy as a Tool for Political Influence
Posted by Raymond J. Fisman (Boston University), on Monday, April 16, 2018 Tags: Corporate Social Responsibility, Lobbying, Philanthropy, Political spending, Taxation Median Employee Pay Not Quite the Spectacle Anticipated
Posted by Deb Lifshey, Pearl Meyer & Partners, LLC, on Tuesday, April 17, 2018 Tags: Compensation disclosure, Compensation ratios, Disclosure, Dodd-Frank Act, Executive Compensation, Public firms, Public perception Appraisal Rights: Navigating the Maze After DFC Global, Dell, and Aruba
Posted by Jeffrey J. Rosen and William D. Regner, Debevoise & Plimpton LLP, on Tuesday, April 17, 2018 Tags: Agency costs, Appraisal rights, deal, Delaware cases, Delaware law, Fair values, Firm valuation, In re Appraisal of Dell, In re Appraisal of DFC Global, Mergers & acquisitions, Shareholder suits, Target firms The Investor View on Executive Compensation in 2018
Posted by Chris Wightman and David Martin, CamberView Partners LLC, on Wednesday, April 18, 2018 Tags: Compensation disclosure, Compensation ratios, Disclosure, Executive Compensation, Institutional Investors, Say on pay, Section 162(m), Securities regulation Ten Crypto-Financing Caveats
Posted by John Reed Stark, John Reed Stark Consulting, LLC, on Wednesday, April 18, 2018 Tags: Blockchain, Cryptocurrency, Equity offerings, Financial technology, FinCEN, Howey test, ICOs, Money laundering, SEC, SEC enforcement, Securities enforcement, Securities fraud, Securities regulation HLS Program Seeks Academic Fellows
Posted by Matt Filosa, Harvard Law School, on Wednesday, April 18, 2018 Tags: How Should Financial Regulators Handle the Bitcoin Era?
Posted by William Magnuson (Texas A&M Law School), on Thursday, April 19, 2018 Tags: Banks, Bitcoin, Blockchain, Crowdfunding, Cryptocurrency, Financial institutions, Financial regulation, Financial technology, ICOs, SEC, Securities enforcement, Securities regulation, Systemic risk Measuring Effectiveness: Roadmap to Assessing System-Level and SDG Investing
Posted by Steve Lydenberg and William Burckart, The Investment Integration Project, on Thursday, April 19, 2018 Tags: Climate change, Corporate Social Responsibility, Environmental disclosure, ESG, Impact investing, Information environment, Sustainability, Transparency The Importance of Alleging Control: Between Corwin and MFW
Posted by Steven M. Haas and Meghan Garrant, Hunton Andrews Kurth LLP, on Thursday, April 19, 2018 Tags: Business judgment rule, Controlling shareholders, Corwin, Cross-border transactions, Delaware cases, Delaware law, Fairness review, Fiduciary duties, Merger litigation, Mergers & acquisitions, REITs
The Delaware Court of Chancery recently held that individual members of Rouse Properties Inc.’s board of directors, who negotiated and approved a merger with the company’s largest stockholder in 2016, were protected under Corwin  by the business judgment rule from claims by plaintiff stockholders that the board, allegedly controlled by the stockholder, had breached their fiduciary duties.Background
In Re Rouse Properties, Inc. Fiduciary Litigation  arose out of the 2016 merger between Rouse Properties Inc. (“Rouse”), a Delaware corporation and real estate investment trust, and Brookfield Asset Management, Inc. (“Brookfield”), a Canadian global asset management corporation. In January 2016, Brookfield, owning 33.5% of the outstanding shares of Rouse, made an offer to acquire all of Rouse’s remaining outstanding shares for $17 per share. In response, Rouse formed a special committee of independent directors to negotiate with Brookfield and consider strategic alternatives. The parties ultimately agreed on a price of $18.25 per share and signed a merger agreement, which was subsequently approved by 82.44% of Rouse’s non-Brookfield-affiliated shares.
As responsible investment in its various forms  makes increasing inroads into the investment community, the question of how such investors set their goals and measure their progress toward these goals is of ever greater importance.
As to their financial goals, the answer is relatively clear: traditional investors integrating environmental, social and governance concerns into the security selection are seeking either competitive or enhanced returns, while investors with a philanthropic mission may be willing to accept concessionary returns or combine conventional investments with philanthropic activities.
Financial regulators in the United States and abroad have recently trained their sights on innovations at the intersection of finance and technology. Cryptocurrencies like Bitcoin and Ethereum have come under fire, as have other fintech firms. But despite a flurry of activity and increasing attention to the issue, regulators have struggled to apply old law to new facts. In a recent article, Financial Regulation in the Bitcoin Era, forthcoming in the Stanford Journal of Law, Business & Finance, I argue that existing models of financial regulation are ill-equipped to handle the problems that will arise in the Bitcoin era, and I propose a set of guiding principles for a more effective financial regulatory regime.
The Harvard Law School Program on Corporate Governance is seeking applications from highly qualified candidates who are interested in working with the Program, and Program Director Lucian Bebchuk, as Post-Graduate Academic Fellows in the areas of corporate governance and law and finance. Candidates should be interested in spending two to three years at Harvard Law School (longer periods may be possible). Candidates should have a J.D., LL.M., or S.J.D. from a U.S. law school, or a Ph.D. in economics, finance, or related areas by the time they commence their fellowship. Candidates still pursuing an S.J.D. or Ph.D. are eligible so long as they will have completed their program’s coursework requirements by the time they start.
During the term of their appointment, Post-Graduate Academic Fellows work on research and corporate governance activities of the Program, depending on their skills, interests, and Program needs. Fellows may also work on their own research and publishing in preparation for a career in academia or policy research. A significant number of former Fellows of the Program now teach in leading law schools in the U.S. and abroad.
Applications are considered on a rolling basis, and the start date is flexible. Interested candidates should submit a CV, transcripts, a writing sample, a list of references, and cover letter to the coordinator of the Program, Ms. Jordan Figueroa, at email@example.com. The cover letter should describe the candidate’s experience, reasons for seeking the position, career plans, and the kinds of projects and activities in which he or she would like to be involved at the Program. The position includes Harvard University benefits and a competitive fellowship salary.
Floyd “Money” Mayweather is one of the greatest pound-for-pound boxers in history, while DJ Khaled is a brilliant musical artist and wildly popular Internet phenomenon. The two superstars actually have a lot in common.
They are both: astute, accomplished and prosperous entrepreneurs; larger-than-life personas, with tens of millions of online followers and fans; and extraordinary success stories rooted in hard work, endless creativity and brilliant execution.
But those are not the only traits they share.
In the first few months of 2018, significant media attention has been focused on new pay-ratio disclosures and how the repeal of the Section 162(m) performance-based compensation tax deductions will impact executive-compensation decisions. But behind the headlines, top of mind for investors voting proxies are perennial and emerging topics such as the alignment of metrics with company strategy, rigor of goal setting, pay magnitude and the responsiveness of compensation committees to low say-on-pay votes. This proxy season, companies should be prepared to engage with investors on their evolving view of compensation as a window into long-term value creation.
It’s easy to throw up your hands at the current state of the law on appraisal rights in Delaware. In a bit more than a decade an appraisal arbitrage industry has emerged—spawned by decisions that shares purchased post record date may be the subject of an appraisal proceeding without proof that they were not voted in favor of the transaction  and abetted by amendments to the statute creating a strong presumption that the interest rate on appraisal awards should be five percentage points above the Federal Reserve discount rate. 
Congress—in the aftermath of the financial crisis in 2010—enacted a law requiring public companies to identify the compensation of their median-paid employee, compare that to the CEO as a ratio, and disclose it each year. As noted by the SEC in enacting rules to implement the legislation, Congress provided no rationale for the rule, although presumably it was intended to highlight perceived inequities between executive and average worker pay. Even more importantly, it required companies to disclose for the first time, not what executives were making, but what the median worker was paid. Fast forward eight years and we are left questioning whether the legislation is actually accomplishing its supposed intent. Based on our review of 500 proxies (as of March 30, 2018) tracked on our CEO Pay Ratio page, we think the answer is a resounding no, although it will have the unintended consequences of meddling with employee relations and keeping the media busy for a while.
Donald Trump came to office in part on his promises to “drain the swamp”—as an independently wealthy outsider candidate, he would be insulated from the influence of special interests that had corrupted Washington politics At least in this regard, Trump follows in a long tradition. For as long as there has been a U.S. government (and going much, much further back), there have been reformers labeling it as corrupt and putting themselves forward as the one to clean it up.
But anticorruption reformers quickly come up against the reality that special interests have a great many instruments of influence. Politicians may be swayed by campaign contributions from political action committees, promises of lucrative employment or consulting opportunities after they leave office (recall the allegations that Hillary Clinton was corrupted by the six figure speeches she gave on Wall Street), or favors given to friends or family.