Shades of Gray in Board Independence

A well-functioning independent board of directors is a pillar of effective corporate governance.  However, establishing and maintaining a truly functioning board remains a challenge for many companies. In response to apparent breakdowns in corporate oversight, policymakers have taken steps to encourage strong and independent boards. Most notably, following a series of high-profile corporate scandals involving the likes of Enron and WorldCom, Congress passed the 2002 Sarbanes-Oxley Act (SOX).  SOX, coupled with the subsequent shift in the major stock exchanges’ listing requirements, put in place a number of initiatives to encourage the active monitoring of independent directors.

A large body of … Read more

Gibson Dunn discusses Shareholder Activism in Mideast and North Africa

Shareholder activism is common in Western financial markets, where it is used to try to create shareholder value. Numerous studies on activism have found mixed results: while some validate the value creation claim and find activism beneficial, others conclude activism creates little or even negative value.

So what is it, and why don’t we see it in the Middle East and North African, otherwise know as MENA? What is shareholder activism? Simply put, shareholder activism is when a minority shareholder, usually a hedge fund or private equity fund, believes it can unlock and increase value in its investments by influencing … Read more

Debevoise & Plimpton Discusses SEC Anti-Retaliation Enforcement

Last week, the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) announced its second whistleblower retaliation case since the enactment of Dodd-Frank’s anti-retaliation provisions in 2011. The In the Matter of International Game Technology [1] case is also the first enforcement action to allege retaliation based on whistleblower activity that did not lead to a settlement of a substantive violation of the securities laws. The case is a stark reminder of the importance of implementing robust anti-retaliation policies that are consistently applied to alleged whistleblowers, even in those cases where the claims raised by the whistleblowers turn out … Read more


Hedge Fund Activism, Poison Pills and the Jurisprudence of Threat

Hedge fund activism is to corporate law’s early 21st century what the hostile takeover was to its late 20th century.  Like the hostile takeover, activism threatens incumbent managers and disrupts their business plans by successfully appealing to the shareholders’ interest in immediate returns.  Like the hostile takeover, activism occupies center stage in corporate law policy discussions, posing a choice between short-term gain and long-term investment.  But there is a glaring point of distinction.  Unlike the hostile takeover, activism has precipitated no significant changes in corporate law.  Where the hostile takeover triggered structural changes in state corporate codes and the federal … Read more


The Ethics of Representing Founders

Lawyers for startups typically serve as counsel to the new organization, with all of the complications that accompany representing an entity.  But consider those lawyers as they perform legal work for the enterprise before any organization exists.  Who are their clients?

Startup founders tend to be individuals.  Sometimes, the startup founders create an entity—an LLC, a subchapter S corporation, a subchapter C corporation, or some other structure—on their own, without seeing a lawyer.  In those instances, the eventual lawyer works with the “duly authorized representatives” of the established company, with the entity as the client.  But just as often, the … Read more


The Upside of Delaware Limits on Fee-Shifting and Forum Selection Provisions

Until very recently, it was not controversial to claim that shareholder litigation had entered a period of crisis.  A significant majority of deals involving publicly-traded corporations (most of which are organized in Delaware) were challenged in litigation, and to make matters worse, much of that litigation was multi-jurisdictional.  In large part, this resulted from the ability of plaintiffs’ firms to secure fee awards in connection with settlements that included no monetary relief.  In a typical “disclosure only settlement,” defendants agreed to provide additional, deal-related disclosures in exchange for a very broad release.  With the cooperation of released defendants, plaintiffs’ counsel … Read more

PwC Discusses New York’s Proposed Cybersecurity Rules

On September 13, 2016, the New York State Department of Financial Services (DFS) proposed a broad set of cybersecurity regulations for banks, insurers, and other financial institutions.[1] The proposal is largely consistent with existing guidance (e.g., under the NIST Cybersecurity Framework or the FFIEC[2] IT Handbook), but it goes further in some ways.

The proposed rule is the result of DFS’ focus on cybersecurity over the past several years, in which DFS conducted three industry surveys, held cybersecurity discussions with various financial institutions, and issued a letter to US regulators asking for feedback on potential cyber-specific requirements.[3]Read more


Do Bosses’ First Impressions Last? Evidence from Professional Baseball

As the saying goes, “You only get one chance to make a first impression.” The importance of making a good first impression with your employer is well established in conventional wisdom. But what about second and third impressions? In our recent paper, “Do first impressions last? The impact of initial assessments and subsequent performance on promotion decisions,” available here, we examine how readily employers revise their initial opinion about a worker’s quality and potential after observing actual on-the-job performance. We find that managers continue to make promotion decisions in part based on assessments that were made as … Read more


Are Activist Investors Good for Targeted Companies?

In recent years, activist investors and the companies they target have attracted considerable attention—in the press, in the business and legal communities, in the political arena, and in academia. The fundamental question under debate is whether activist interventions create or destroy firm value. We have conducted a study of the issue, available here. Our sample includes thousands of activist campaigns conducted over the two decades from 1994 to 2014. We examine five types of evidence: stock market reactions, analyst recommendations, short sales, financial statement fundamentals, and institutional ownership.

We find the initial market reaction to the announcement of an … Read more


General Counsel’s Growing Prominence May Prompt Privilege Problems

An emerging best practice of granting general counsel greater organizational prominence can create risks and benefits for corporate governance The general counsel’s ability to serve as a business partner of management helps establish the credibility essential to the successful performance of her roles as legal advisor and guardian of the corporation’s reputation. Yet this valuable business partnership can have the unintended consequence of weakening the attorney-client privilege that generally cloaks the general counsel’s advice to management.

The model of the organizationally prominent general counsel is rooted in the post-Sarbanes-Oxley era’s emphasis on corporate responsibility.  Important policy monographs from the American … Read more


The Unintended Consequences of Corporate Innovation

According to a recent survey of over 1,500 chief executive officers, creativity is the single most important leadership skill needed for enterprises to navigate today’s complex global business environment.[1] This is not surprising; innovative company culture has many benefits. However, research in psychology and organizational behavior suggests that a strongly innovation-focused culture could have unintended negative consequences. For example, past studies have found that innovative thought can lead to more dishonesty and risk-taking.[2],[3]

These downsides of creative culture could develop in many parts of the company. However, the greatest opportunity for self-interested behavior may exist when … Read more

Yvan Allaire and Francois Dauphin

Should Say-on-Pay Votes Be Binding?

The practice of allowing shareholders to cast non-binding say-on-pay votes has spread quickly and broadly throughout the world. It seemed that investors would finally get the opportunity to express their dissatisfaction with outrageous or ill-conceived compensation packages.

The practice was, at first, voluntary, with companies having the option of submitting their compensation policies to a vote. As the number of volunteers remained small, though, investors submitted proposals for requiring companies to carry out the non-binding votes.

In some jurisdictions like the United States, non-binding say-on-pay votes were made mandatory. In Canada, say-on-pay votes are not required, but 80 percent of … Read more


Recession CEOs Have an Edge

Much recent work in finance and economics aims to understand the role that chief executive officers and other top managers play in the firms they run. Traditional theories about firm decisions on matters such as capital structure or investments don’t consider the role of CEOs or they assume that rational managers will behave identically if faced with the same problem. However, the more recent literature suggests that CEOs behave in very different ways that matter to the firms that they run. Several papers have shown substantial changes in a firm’s stock price and accounting performance when its top management changes. … Read more

Paul Weiss delves into Delaware Chancery Dismissal of Post-Closing Merger Suit

In Larkin v. Shah, issued on August 25, the Delaware Court of Chancery dismissed a stockholder challenge to a merger due to the cleansing effect of fully informed stockholder approval, applying the Delaware Supreme Court’s recent Corwin v. KKR Financial Holdings LLC decision (which held that fully informed and uncoerced stockholder approval of a merger not subject to entire fairness review invokes the business judgment rule rather than heightened scrutiny under Revlon).  The Larkin opinion confirms that, other than with respect to transactions to which entire fairness applies ab initio (i.e., transactions involving a conflicted controlling stockholder or group), … Read more


The Downside of Cultural Diversity on Corporate Boards

Diversity in corporate boards is a hot topic. We contribute to the debate on the role of diversity by empirically documenting that greater national cultural diversity in corporate boards leads to lower performance at UK firms accounting for more than 95 percent of the market value of London Stock Exchange-listed companies. The negative impact is economically significant, with a reduction in return on equity of 1.43 percent for firms with higher levels of cultural diversity (those at or above the 75th percentile) versus firms with lower levels of cultural diversity (those at or below the 25th percentile). Why … Read more


Prominent Investors Do Startups a Favor by Booting Their CEOs

The role that investors play in replacing chief executive officers of startup companies has been the subject of heated debate in the investing community, and it remains controversial whether investors in startups do better by replacing incumbent CEOs. Our recent working paper, available here, provides for the first time causal evidence showing that the likelihood of startup-CEO replacement rises as more prominent investors participate in financing. Our paper also demonstrates that successor CEOs are drawn disproportionately from a particular talent pool – outsiders with prior startup-CEO experience – and, critically, that prominent-investor led CEO replacements produce large and robust startup … Read more


Gadflies at the Gate: Why Do Individual Investors Sponsor Proxy Resolutions?

Individual investors are active participants in the shareholder resolution process. According to Proxy Monitor, shareholder proposals sponsored by individual investors represent approximately one-quarter of the total number of shareholder resolutions voted on each year.[1] During the 10-year period 2006-2015, individual investors brought forth over 1,100 resolutions at Fortune 500 companies. These resolutions span a vast array of topics, including proposed changes to board structure, executive compensation, shareholder rights, and corporate social policy (see Figure 1). [2]


Figure 1: Individual Shareholder Resolutions, per Company (2006-2015)

Individual activism is a controversial topic. Critics contend that the large number of proposals filed … Read more

Shearman & Sterling offers the Lowdown on EU General Data Protection Law

On April, 27 2016, the European Council and Parliament finally adopted a new data protection law: the General Data Protection Regulation (GDPR).  The following is a summary of key issues and a checklist of initial tasks to help you prepare for the new regulation.

 When Will the GDPR Take Effect?

It will apply directly in all EU Member States from May 25, 2018.  It will repeal and replace Directive 95/46EC and its Member State implementing legislation.

Expanded Territorial Scope

The GDPR rules (like the Directive) will apply to both controllers and processors in the EU.

The GDPR will also apply … Read more


How New CEOs Use Disclosure to Cut Uncertainty and Boost Their Careers

For chief executive officers, communication is essential. It allows them to help stakeholders understand a company’s strategies and form opinions  about the company’s prospects as well as the CEO’s ability to create value. While effective communication is important at every stage of a CEO’s career, it is most salient at times of increased uncertainty around CEO transitions. A new CEO does not get a second chance to make a good first impression on employees, customers and investors, and because a CEO is in the spotlight as the company’s leader, a CEO’s every statement and move are scrutinized for what he … Read more


A Plea for a Better Response to a Failed Say on Pay Vote

The 2010 Dodd-Frank Act provided shareholders of U.S. public corporations the right to vote on chief executive officers’ compensation, at least every three years. The so–called say on pay vote is advisory but was designed to curb overly generous executive pay packages.

Since 2011, the financial press, consultants and academic scholars have considered how shareholders make use of this right. According to the latest results of Semler Brossy[1], 93 percent of the Russell 3000 companies received say on pay support of more than 70% in 2016, and the failure rate dropped to 1.7 percent, the lowest level since … Read more