Wachtell Lipton Discusses Stakeholder Governance and the Fiduciary Duties of Directors

There has recently been much debate and some confusion about a bedrock principle of corporate law – namely, the essence of the board’s fiduciary duty, and particularly the extent to which the board can or should or must consider the interests of other stakeholders besides shareholders.

For several decades, there has been a prevailing assumption among many CEOs, directors, scholars, investors, asset managers and others that the sole purpose of corporations is to maximize value for shareholders and, accordingly, that corporate decision-makers should be very closely tethered to the views and preferences of shareholders.  This has created an opportunity for … Read more

Wachtell Lipton Discusses Stakeholder Corporate Governance: Business Roundtable and CII

The failure of the Council of Institutional Investors to join the Business Roundtable in rejecting shareholder primacy and embracing stakeholder corporate governance is misguided.  The argument that protection of stakeholders other than shareholders should be left to government regulation is an even more serious mistake.  It would lead to state corporatism or socialism.

The failure to recognize the existential threats of inequality and climate change, not only to business corporations but also to asset managers, institutional investors and all shareholders, will invariably lead to legislation that will regulate not only corporations but also investors and take from them the ability … Read more

Wachtell Lipton Puts a Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a major public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  So too, legislation like the Accountable Capitalism Act introduced by Senator Elizabeth Warren in 2018, and the position paper on the problems of shareholder capitalism and the merits of industrial policy by Senator Marco Rubio in 2019.

A very … Read more

Wachtell Lipton Discusses Capitalism at an Inflection Point

Dissatisfaction with corporations is near the top of the political agenda for both the left and for the right.

The Accountable Capitalism Act, a bill that would make all corporations with $1 billion or more of annual revenue subject to a federal corporate governance regime (by requiring them to be chartered as a United States corporation), was introduced this past August by Senator Elizabeth Warren.  Among other things, this regime would mandate that not less than 40% of the directors of a United States corporation be elected by employees, and that directors must consider the interests of all corporate stakeholders—including … Read more

Wachtell Lipton on the State of Play of Activism at Year-End 2018

As we noted in early 2018, the threat of activism continues to be high, and has become a global phenomenon.  The conclusion of a volatile and dynamic 2018 prompts a brief update of the state of play.

  • Activist assets under management remain at elevated levels, encouraging continued attacks on large successful companies in the U.S. and abroad.  In many cases, activists have been taking advantage of recent stock market declines to achieve attractive entry points for new positions.  These trends have been highlighted in several recent media reports, including in The Wall Street Journal and Bloomberg.
  • While the robust

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Wachtell Lipton Puts a Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:

  • Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy from global, political, social, and technological developments;
  • Determine the board’s response to proposed legislation like Senator Elizabeth

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Wachtell Lipton Discusses the State of Play in Activism

As we approach the 2019 proxy season, developments since September 2017 prompt a brief updated review of the state of play.

  • The threat of activism remains high, and has become increasingly global.
  • Activist assets under management remain at elevated levels, encouraging continued attacks on many large successful companies in the U.S. and abroad.
  • In the current robust M&A environment, deal-related activism is prevalent, with activists instigating deal activity, challenging announced transactions (g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.
  • “Short”

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Corporate Governance—The New Paradigm—A Better Way Than Federalization

While “The Accountable Capitalism Act” introduced on August 15 by Senator Elizabeth Warren contains several very worthwhile provisions, it is premised on the federalization of all public corporations with revenues in excess of $1 billion. Mandatory federal incorporation and the creation of a federal office to make regulations and supervise compliance would be a major incursion into state corporation law. It is reminiscent of proposals by Ralph Nader some half-century ago to achieve control of major corporations by mandatory federal incorporation. Warren’s proposal should not receive any more support than Nader’s. However, like Nader’s proposal led to significant changes in … Read more

Wachtell Lipton Discusses UK Corporate Governance Code

The Financial Reporting Council on July 16 issued a revised corporate governance code and announced that a revised investor stewardship code will be issued before year-end. The code and related materials are available at www.frc.org.uk.

The revised code contains two provisions that will be of great interest. They will undoubtedly be relied upon in efforts to update the various U.S. corporate governance codes. They will also be used to further the efforts to expand the sustainability and stakeholder concerns of U.S. boards.

First, the introduction to the code makes note that shareholder primacy needs to be moderated and that … Read more

Wachtell’s Lipton Shines a Spotlight on Boards for 2018

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior.  Today, boards are expected to:

•        Oversee corporate strategy and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy;

•        Be aware that sustainability has become a major, mainstream governance topic that encompasses a wide … Read more

The Purpose of the Corporation

Whether the purpose of the corporation is to generate profits for its shareholders or to operate in the interests of all of its stakeholders has been actively debated since 1932, when it was the subject of dueling law review articles by Columbia law professor Adolf Berle (shareholders) and Harvard law professor Merrick Dodd (stakeholders).

Following “Chicago School” economics professor Milton Friedman’s famous (some might say infamous) 1970 New York Times article announcing ex cathedra that the social responsibility of a corporation is to increase its profits, shareholder primacy was widely viewed as the purpose and basis for the governance of … Read more

Wachtell Lipton Discusses Risk Management and the Board of Directors

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 … Read more

Wachtell Lipton Discusses Investor Engagement in the New Paradigm for Corporate Governance

The accelerated interest in sustainability, ESG, corporate social responsibility and investment for long-term growth and value creation (the new paradigm) as most cogently exemplified by Value Act’s newly formed Spring Fund focusing on promoting environmental and social goals of the companies in which it invests; by the promotion by the World Economic Forum of “The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth;” by the creation of the Investors’ Stewardship Group and its issuance of its principles for stewardship which embrace ESG and long-term investment; and, finally,

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Wachtell Lipton Offers Thoughts for Boards of Directors in 2018

As 2017 draws to a conclusion and we reflect on the evolution of corporate governance since the turn of the millennium, a recurring question percolating in boardrooms and among shareholders and other stakeholders, academics and politicians is:  what’s next on the horizon for corporate governance?  In many respects, we seem to have reached a point of relative stasis.  The governance and takeover defense profiles of U.S. public companies have been transformed by the widespread adoption of virtually all of the “best practices” advocated to enhance the rights of shareholders and weaken takeover defenses.

While the future issues of corporate … Read more

Wachtell’s Lipton Reviews the State of Play in Activism

As we approach the start of the 2018 proxy season, developments since January 2015 prompt a brief review of the state of play.

  • There has been no slowdown in the U.S.; there has been a significant increase in other countries.
  • Perhaps the most cogent description of what can be expected is contained in a must-read Bloomberg article, The World’s Most Feared Investor. “Aggressive, tenacious and litigious to a fault, Paul Singer may be the most feared activist investor in the world—by hedge fund rivals, companies and even countries. Singer’s Elliott Management Corp., which manages $34 billion of

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Wachtell Lipton Discusses the Classified Board Duels

Professor Lucian Bebchuk has engaged in two rounds of law-review-article duels with Professor Martijn Cremers and Professor Simone Sepe over classified boards. The weapons were statistics (and common sense). Cremers and Sepe wore the classified-board-stakeholder colors; Bebchuk, the agency-model-shareholder-democracy colors. Cremers’ and Sepe’s riposte was decisive.

The field for these duels was chosen by Bebchuk in 2011 when he chartered the Harvard Law School Shareholder Rights Project (the “Harvard Project”). Bebchuk described the Harvard Project as an academic program designed to “contribute to education, discourse, and research related to efforts by institutional investors to improve corporate governance arrangements at publicly … Read more

Wachtell Lipton Shines a Spotlight on Boards for 2017

This past year witnessed a number of new corporate governance initiatives. Among the most significant:

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Wachtell Lipton discusses Short-Term Investors, Long-Term Investments, and Firm Value

A January 2016 study, Short-Term Investors, Long-Term Investments, and Firm Value, by Martijn Cremers, Ankur Pareek and Zacharias Sautner, provides substantial “empirical” evidence for the fact that, in the current corporate governance environment, short-term investors possess the undue ability to pressure companies into maximizing near-term gains at the expense of long-term growth.

The study finds that after short‐term investors become shareholders of companies, those companies tend to decrease spending on R&D, and tend to experience temporarily increased earnings and stock prices. The results further indicate that when the short-term investors leave, these trends are all reversed, “so that … Read more