The Three Fiduciaries of Delaware Corporate Law — and Eisenberg’s Error

Delaware corporate law differs from other areas where fiduciary obligations apply – such as agency, LLCs, partnerships, and trusts.  Three distinct actors owe fiduciary duties – executive officers, directors, and controlling shareholders – and numerous aspects of their duties greatly differ.  But Delaware corporate law is not unique in the way many believe.  Conventional wisdom holds that, uniquely, corporate law’s standards of conduct (fiduciary duties) diverge from judicial standards of review, the latter being more deferential.  Yet, the two sets of standards often converge and are identical.  The supposed distinction is not uniformly accurate, and unenforceable standards of conduct may … Read more

Corporate Governance for Regulation A+ Issuers

Regulation A+, an exemption from registration that took effect in 2015 and allows small companies to issue stock to the general public, presents interesting questions of corporate governance.

The maximum offering size of $50 million means that most Reg A+ issuers will not qualify for listing on a national exchange, which means that they will not be subject to the minimum corporate governance requirements contained in the national exchanges’ listing standards.

This has led to some criticism of Reg A+ offerings on corporate governance grounds. In a recent comment letter, state securities regulators charged that Reg A+ issuers often:… Read more

On the Use of Option Grants as a Retention Tool

Firms regularly grant stock and stock options to their employees as a way to align the incentives of employees and shareholders. This is particularly relevant for executives, because they routinely make decisions that have an appreciable effect on firm value and their incentives often clash with those of shareholders. It is unclear, however, whether the alignment motivation is relevant for rank-and-file (R&F) employees, because their individual behavior in the workplace has a trivial effect on firm value.

An alternative motivation for awarding stock options is to reduce employee turnover. All firms incur costs from recruiting and training replacement employees, including … Read more

“If I Agreed With You, We’d Both Be Wrong:” Section 11 Claims as “Internal Corporate Claims” Under DGCL 115

Amazon, eBay, Etsy, and Pinterest offer hundreds of items, from t-shirts to coffee mugs to posters, warning against agreement for the sake of agreement.* My wife has, on more than one occasion, reminded me of the danger.[1] And now, Delaware’s Supreme Court has reason to be on alert.

In oral argument on the appeal of Sciabacucchi before the Delaware Supreme Court,[2] petitioners and respondents concurred that federal forum provisions are not “internal corporate claims” as defined by DGCL 115.[3] But neither side reconciled this assertion with the statute’s plain text or legislative history, and no justice pressed … Read more

Akin Gump Offers Top 10 Topics for Directors in 2020

Election and Impeachment

The presidential race will garner much of the attention during the 2020 election cycle, but there is fierce competition elsewhere, too. Republicans and Democrats are fighting for both U.S. House of Representatives and U.S. Senate seats in the 116th U.S. Congress, with the Republican Party trying to regain House majority. Meanwhile, impeachment proceedings against President Donald Trump are shaping up to be a potential game changer for certain members of the Senate who are running for president. They’ll lose valuable time on the campaign trail while serving as jurors for the duration of the impeachment trial.

International

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The Elusive Corporate Purpose

In a recent article[1] I explore the history of the law of corporate purpose, a subject recently highlighted by the Business Roundtable’s “Statement of the Purpose of a Corporation.” This August 19 statement was signed by more than 180 CEOs who committed to “delivering value to . . . customers,” “investing in . . . employees,” “dealing fairly . . . with suppliers,” “supporting . . . communities,” and “generating long-term value for shareholders.” “Each of our stakeholders is essential,” the statement concluded; “We commit to deliver value to all of them, for the future success of our companies, … Read more

Wachtell Lipton Discusses Purpose, Stakeholders, ESG, and Sustainable Long-Term Investment

This year, each of the major index fund managers, the Business Roundtable, the British Academy, the UK Financial Reporting Council, the World Economic Forum and a number of other organizations (both governmental and nongovernmental) announced that they did not support shareholder primacy and do support sustainable long-term investment and considering ESG matters.  However, the initial reaction of the Council of Institutional Investors in denouncing the BRT position from both an economic and legal standpoint, although quickly moderated, has continued to echo in Wall Street trading rooms, at activist hedge funds and in corporate boardrooms.  I continue to hear that the … Read more

Fried Frank Discusses Where Things Stand at Year-End 2019

Corporate Focus on the “Social Good”

Importantly, the Business Roundtable (an influential group of almost 200 CEOs of America’s most influential companies) issued a “Statement on the Purpose of a Corporation,” which has intensified a developing focus on the social impact of corporate decisions. The BRT Statement contains no specific commitments or directives and does not represent a change in law, but reflects a view that there is a social responsibility component to corporate decision-making. The Statement emphasizes that directors should not be single-focused on the maximization of profits for shareholders and should weigh heavily the interests of the other Read more

Does Missing Performance Goals Prompt More Opportunistic Insider Trading?

Tying executive pay to corporate performance has become increasingly important in creating incentives for corporate managers.  Theoretical models argue that compensation contracts that reward managers contingent on performance, especially performance relative to peer firms, can increase managerial effort (e.g., Holmstrom, 1979, 1982). The effectiveness of performance-based pay in motivating managers, however, could be limited, especially if self-interested managers can negate its incentive effect. In a new paper, I investigate one such action, insider trading.

Theoretical models suggest that insider trading may be a suboptimal way to compensate management. For instance, Fischer (1992) argues that allowing insider trading can exacerbate existing … Read more

Designing Dual Class Sunsets: The Case for a Transfer-Centered Approach

Dual class capital structures have spread exponentially in recent years across much of the corporate world, as has previously been reported on this blog. Dual class listed companies today account for around $4 trillion of US total stock market value including 9 percent of the S&P 100, and the dual class stock (“DCS”) phenomenon has become one of the most significant issues in global corporate governance today.

A dual class capital structure is one that gives certain inside investors voting rights disproportionate to their economic interest in a company. This enables them to prevail over less privileged outside investors on … Read more

Blockchain in Corporate Governance: Implications for Attorneys

Blockchain-based information storage, retrieval, and tracking have the potential to be more immediate, transparent, and credible means of business recordkeeping than alternatives involving a centralized point of control.[1] As a result it should be unsurprising that corporations have begun to adopt blockchain-based recordkeeping. The adoption of blockchain-based information-tracking by corporations is forecasted to grow rapidly and constitute a far greater and more permanent disruption to daily realities than other applications of blockchain have brought about to date. This practice has the potential to significantly alter aspects of corporate governance – specifically, those involving data-tracking or communication.

Our recent article, … Read more

The Board’s Marchand/Clovis Reaction Plan

Corporate boards may wish to adopt a plan of action in response to two recent Delaware decisions suggesting a shift in application of the historically director-friendly Caremark[1] standard for board oversight of a company’s compliance systems.  Such a plan would be designed to reduce director liability exposure, support director retention, and enhance the effectiveness of risk oversight.

It is well established that a Caremark claim is one of the most difficult theories in corporation law to win[2].  It requires particularized facts that either (i) “the directors completely fail[ed] to implement any reporting or information system or controls, … Read more

Wachtell Lipton Offers Thoughts for Boards of Directors in 2020

In hindsight, 2019 may come to be viewed as a watershed year in the evolution of corporate governance.  After years of growing alarm about endemic short-termism, the sustainability and competitiveness of businesses over a long-term horizon, and the role of corporate policies in contributing to socioeconomic inequality, there has been an emerging consensus that the prevailing corporate governance system is broken.  Initially, in the aftermath of the financial crisis of 2008, this critique was focused on short-termism as a root cause of systemic destabilization and decay.  In subsequent years, the concept of sustainability gained traction, and ESG (environmental, social and … Read more

Cahill Gordon Discusses Glass Lewis and ISS 2020 Voting Guidelines

Both Glass, Lewis & Co. (“Glass Lewis”) and Institutional Shareholder Services Inc. (“ISS”), the leading providers of corporate governance and proxy advisory services, have now published their 2020 proxy voting guidelines.  The Glass Lewis guidelines[1] will take effect for meetings held on or after January 1, 2020, and the ISS guidelines[2] will take effect for meetings held on or after February 1, 2020.  Below is a summary of the key changes in the guidelines affecting U.S. companies.

Glass Lewis Voting Guidelines 

Excluded Shareholder Proposals

In September 2019, the Securities and Exchange Commission (“SEC”) announced a new policy pursuant … Read more

Gibson Dunn Discusses EU and U.S. Expectations for Internal Compliance Programs

The European Union has become more active in addressing EU common foreign and security policy (“CFSP”) objectives with the help of what it calls “restrictive measures,” i.e., EU Financial and Economic sanctions. As indicated in our recent client alert, The EU Introduces a New Sanctions Framework in Response to Cyber-Attack Threats and even more recent by introducing a framework for EU Financial Sanctions against Turkey,[1] it has also specifically started to unilaterally implement sanctions addressing EU security concerns, including issues beyond traditional areas addressed by sanctions such as “traditional” sanctions imposed due to terrorism and international relations-based … Read more

Davis Polk Discusses Recent Delaware Decisions on Director Oversight

Two recent Delaware decisions may give ammunition to stockholder plaintiffs seeking to assert claims against directors under a Caremark theory for failing to comply with their oversight obligations.  The decisions—Marchand v. Barnhill (“Blue Bell”) and In re Clovis Oncology, Inc. Derivative Litigation—make clear that courts will not give business-judgment rule deference when presented with allegations that directors acted in bad faith by failing to implement or monitor systems of oversight.  Although each case was before the courts on a motion to dismiss and therefore did not finally adjudicate the question of director liability, each decision undoubtedly … Read more

Addressing the Auditor Independence Puzzle: Regulatory Models and Proposal for Reform

Auditors play a major role in corporate governance and capital markets. They facilitate firms’ access to financing by creating trust among public investors with efforts to prevent misbehavior and financial fraud by corporate insiders. In order to fulfill these goals, however, in addition to having the adequate knowledge and expertise, auditors should perform their functions in an independent manner. Unfortunately, auditors are subject to conflicts of interest by, for example, providing non-audit services or the mere fact of being hired and paid by the audited company. Therefore, even if auditors act independently, investors have reason to think otherwise. This lack … Read more

Litigation Risk and the Independent Director Labor Market

A recent decision by the Delaware Supreme Court, In re Investors Bancorp, Inc. Stockholder Litigation (“Investors Bancorp”), increased the risk of litigation against directors, bucking a dec Edit visibilityades-long trend. The decision reversed a Chancery Court ruling and substantially changed the standard that Delaware courts use to review shareholder derivative litigation dealing with director equity grants (Skadden 2017). We use the decision to examine two related issues: (1) is litigation risk a material issue in the independent director employment market and (2) is there an optimal level of litigation risk as a corporate governance mechanism that … Read more

Shearman & Sterling Discusses New Delaware Guidance on Books and Records Requests

Following Corwin v. KKR Financial Holdings and other Delaware cases that have reinforced the standards that stockholder suits must meet to survive dismissal, would-be litigants have increasingly invoked Section 220 of the Delaware General Corporate Law (“Section 220”) to try to obtain corporate books and records in order to use those materials to bolster claims in subsequent litigation. In Donnelly v. Keryx Biopharmaceuticals, Inc., C.A. No. 2018-0892-SG (Del. Ch. Oct. 24, 2019), the Delaware Court of Chancery revisited the issue of what is a proper purpose under Section 220 and to what extent a stockholder’s purpose must match the … Read more