As directors and shareholders become increasingly attuned to ESG considerations and stakeholder-oriented governance, they have sought guidance about how to incorporate these imperatives into the board’s decision-making process—particularly regarding decisions that entail trade-offs or an allocation of resources between and among stakeholders and ESG objectives. Our answer to this question is rooted in the classic bedrock of board functioning: directors must exercise their business judgment. This is not only the practical answer—it is the essential animating principle of Delaware law.
Recently, many who continue to advocate for shareholder primacy, and therefore reject stakeholder governance, have sought to portray stakeholder interests … Read more
The growing view that corporations should take into account environmental, social and governance (ESG) issues in running their businesses, and resistance from those who believe that companies should be managed solely to maximize share price, has intensified the focus on the more fundamental question of corporate governance: what is the purpose of the corporation?
The question has elicited an immense range of proposed answers. The British Academy’s Future of the Corporation Project, led by Colin Mayer, suggests that the purpose of the corporation is to provide profitable solutions to problems of people and planet, while not causing harm. The Business … Read more
In an article posted yesterday [March 2] on the Harvard Law School Forum on Corporate Governance blog, Professor Lucian Bebchuk rejects stakeholder governance and, in so doing, attacks the committed positions of influential institutions as varied as the Business Roundtable, the World Economic Forum, BlackRock, State Street, Vanguard, the UK Financial Reporting Council, and the European Union High-Level Expert Group on Sustainable Finance.
Professor Bebchuk summarizes his article as follows:
“Following the publication of the [Business Roundtable] statement, in December 2019 the World Economic Forum took the unusual step of publishing a manifesto that urged companies to move from the … Read more
Corporate litigation in Delaware continues to reflect the judicial trend toward honoring the decisions of informed stockholders and independent directors, thus limiting those decisions from costly after-the-fact legal attack. While the boundaries of stockholder ratification and director independence continue to be refined on a case-by-case basis, the broader conceptual trend—to give the last word on corporate action to independent directors and the stockholders who elect them—has taken firm root. Novel issues now rumbling under and through the judicial system implicate a different set of relationships—not between stockholders and directors, but between corporations and society at large. To meet these … Read more
The Business Roundtable’s recent call for a commitment to long-term sustainable economic value creation has prompted a vigorous debate about the optimal corporate governance model for achieving that goal.
Certain familiar arguments have reappeared in reaction to the Business Roundtable’s important statement rejecting shareholder primacy and embracing stakeholder governance. Various law firms and commentators insist that such innovation in corporate governance is constrained by an imperative to maximize shareholder value—the ideology that a corporation can have no purpose other than profit maximization for shareholder gain. Others assert that the path to effective governance reform lies with prescriptive regulation, presumptively by … Read more
The stakes for responsible corporate stewardship have never been higher.
Corporations today account for a greater proportion of our collective productivity than ever before. Of the 100 largest economies in the world, 71 are corporations, and only 29 are countries. U.S. corporations alone generated profits of $2.3 trillion in 2018 — the highest in history. Reflecting their unprecedented scale, U.S. corporations have been blamed for accelerating environmental degradation and aggravating disparities in income and wealth. Calls for the exercise of corporate social responsibility have become increasingly urgent. Recognizing this urgency, the Business Roundtable last month embraced broad stakeholder governance and … Read more
In a recent series of landmark decisions, the Delaware Supreme Court has constructed an orderly doctrinal framework designed to reduce wasteful post-closing merger litigation. These cases recognize that the market’s judgment is usually sound and that the costs of intensive litigation regarding transactions approved by informed and self-interested stockholders generally outweigh the benefits. A compelling corporate law question for 2019—and a practical challenge for transaction planners—is how that doctrinal framework will be implemented in the face of sustained attack by the class action plaintiffs’ bar.
In MFW, the Delaware Supreme Court held that where a controlling stockholder conditions a … Read more
A recent spate of appraisal decisions signals that the Delaware courts will be skeptical of claims that the “fair value” of a company’s stock, as determined in a judicial proceeding brought by a dissenter from the merger, will be higher than the price paid in the transaction. To the contrary, in the context of strategic transactions—which may include synergy value to which dissenting stockholders are not entitled under the appraisal statute—Delaware has made clear that the appraised value may well be less than the deal price.
These decisions follow the important and welcome rulings of the Delaware Supreme Court in … Read more
In an important ruling last week, the Delaware Supreme Court reaffirmed that control of Delaware companies lies in the boardroom and held that the deferential business judgment rule is the “appropriate standard of review for a post-closing damages action” when a third-party merger “has been approved by a fully informed, uncoerced majority of the disinterested stockholders.” Corwin v. KKR Fin. Holdings LLC, No. 629, 2014 (Del. Oct. 2, 2015) (en banc).
The ruling affirms the Court of Chancery’s dismissal of a case challenging KKR’s $2.6 billion acquisition of KKR Financial Holdings LLC (“KFN”), about which we previously wrote. … Read more
In a recent paper, Professors Lucian Bebchuk and Robert Jackson have extended Professor Bebchuk’s extreme and eccentric campaign against director-centric governance into a new realm—that of the Constitution of the United States. They claim that “serious questions” exist about the constitutionality of the poison pill—or, more precisely, “about the validity of the state-law rules that authorize the use of the poison pill.” It is likely, they argue, that these state-law rules violate the Supremacy Clause of the Constitution, and are thus preempted, because they frustrate the purposes of the Williams Act, the 1968 federal statute that governs tender-offer timing … Read more
Last week, the Delaware Court of Chancery ruled that an acquiring merger party obtains legal control of all of a target’s attorney-client communications, absent an express provision in a merger agreement to the contrary. Great Hill Equity Partners IV, LP v. SIG Growth Equity Fund I, LLLP, C.A. No. 7906-CS (Del. Ch. Nov. 15, 2013). In so ordering, the Delaware court declined to follow a decision of the New York Court of Appeals, Tekni-Plex, Inc. v. Meyner & Landis, 89 N.Y.2d 123 (1996), which held that a selling party retains control of those privileged pre-merger communications that … Read more
In a series of recent rulings, the Delaware Court of Chancery has provided guidance for boards coping with dissident directors. Kalisman v. Friedman, C.A. No. 8447-VCL.
OTK Associates, LLC is the largest stockholder of Morgans Hotel Group Co. Jason Kalisman is a founding member of OTK and a member of the Morgans board and, since late 2011, was a member of a special committee of the Morgans board tasked with evaluating the company’s strategic alternatives. In mid-March 2013, OTK announced that it intended to run a proxy contest for control of Morgans at its next annual meeting, then scheduled for … Read more
The Delaware Court of Chancery this week held that the use of both an independent special committee and a majority-of-the-minority vote condition in a go-private merger between a controlled company and its controlling stockholder will result in application of the deferential business judgment rule standard of review rather than the onerous entire fairness standard. In re MFW S’holders Litig., C.A. No. 6566-CS (Del. Ch. May 29, 2013).
The case arose out of a stockholder challenge to a merger in which MacAndrews & Forbes acquired the 57% of M&F Worldwide it did not already own. The transaction was subject to … Read more
This year, the practice of activist hedge funds engaged in proxy contests offering special compensation schemes to their dissident director nominees has increased and become even more egregious. While the terms of these schemes vary, the general thrust is that, if elected, the dissident directors would receive large payments, in some cases in the millions of dollars, if the activist’s desired goals are met within the specified near-term deadlines.
These special compensation arrangements pose a number of threats, including:
- undermining Board prerogatives to set director pay and select the timeframe over which corporate goals are to be achieved;
- creating a
… Read more
NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute have jointly filed a rulemaking petition with the SEC, seeking prompt updating to the reporting rules under Section 13(f) of the Securities Exchange Act of 1934, as well as supporting a more comprehensive study of the beneficial ownership reporting rules under Section 13. The petitioners urge the SEC to shorten the reporting deadline under Rule 13f-1 from 45 days to two business days after the relevant calendar quarter, and also suggests amending Section 13(f) itself to provide for reporting on at least a monthly, … Read more
In a second Chancery transcript ruling on the subject in recent weeks, Chancellor Leo E. Strine, Jr. has made clear that Delaware has no per se rule against “Don’t Ask, Don’t Waive” standstill provisions (which prohibit a party subject to a standstill, including a losing bidder in an auction, from requesting a waiver from its standstill obligations). The Chancellor also provided guidance for using such a provision as an “auction gavel” to secure the best price reasonably available to a target company involved in a sales process. Last week’s ruling in In Re Ancestry.com is a welcome clarification that will … Read more