Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.
Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure … Read more
In its widely followed Allergan decision, the Delaware Court of Chancery declined to apply collateral estoppel to dismiss a Delaware derivative complaint even though a California federal court dismissed (with prejudice) essentially the same complaint brought by different stockholders. The Court of Chancery had reasoned that there was no privity between the derivative stockholders because, until a stockholder survives a motion to dismiss based on failure to make demand, the stockholder is not acting on behalf of the corporation. Moreover, the Court of Chancery found that the California plaintiffs were inadequate representatives because they filed suit before seeking corporate books … Read more
The imbalance in the supply and demand of venture capital of the past few years has led parties to look for new escape routes from the industry. There is the ‘survival of the fittest’ evidence that the number of active venture capital funds have significantly declined over the last five years. Other venture capital firms, hoping for a better future, are extending the duration of their funds. Only high quality funds seem to have a reasonable chance of receiving continuous funding for their activities. Under the circumstances, institutional investors are taking an active approach to the management of funds, evidenced … Read more
Yesterday, the Securities and Exchange Commission (SEC) directly addressed the application of Regulation Fair Disclosure (Regulation FD) to corporate use of social media outlets such as Facebook and Twitter. In a Report of Investigation—a format used by the SEC to issue general guidance based on a specific situation—the SEC expressly stated that Regulation FD applies to social media in the same manner as it does to company websites: Any of these communication channels can serve as effective, legal means of broadly disseminating material information to investors, if access to them is unrestricted and if the company has provided advance notice … Read more
The Dodd-Frank Act gave the SEC the authority to adopt, but did not require it to adopt, a uniform fiduciary standard of conduct for both broker-dealers and investment advisers when providing personalized investment advice about securities to retail customers. On March 1, 2013, the SEC requested data and other information on such a uniform fiduciary standard of conduct, and also requested comments on proposed concepts for such a uniform standard for broker-dealers and investment advisers.1 The SEC requests potential respondents to quantify information and data in numerous areas, although in some instances the information requested does not easily lend itself … Read more
Something new and significant is taking shape. For a variety of reasons—the impact of the JOBS Act, the growing popularity of equity private placements, the appearance of new trading markets for venture capital and other non-reporting companies—a new tier of companies is growing rapidly that is composed of issuers that are not “reporting” companies, but that do have a significant number of shareholders. In terms of the size of their shareholder class, these companies overlap with public companies, but they trade in the dark—and actively. More importantly, as their number grows, it is predictable that existing and new trading venues will begin to compete to attract and capture the trading interest in these stocks. This column will call these firms “semi-public companies” to reflect their intermediate status, midway between truly private firms (such as early stage venture capital startups and family-held firms) and public companies. Read more
In the paper, “Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay”, which was recently made publicly available on SSRN, my co-author (David Oesch of the University of St. Gallen) and I examine the peculiar non-binding shareholder votes required by the Dodd-Frank Act on the frequency of Say-on-Pay (SOP) votes (with a choice between every 1, 2, or 3 years). Our purpose is to obtain a direct estimate of management’s influence on investors. We also investigate whether management influence varies across firms and whether there is evidence of strategic use of management … Read more
Plaintiffs’ attorneys have continued to bring, or threaten, litigation against U.S. companies following the filing of their annual proxy statements. These complaints generally allege disclosure deficiencies in connection with the approval of equity compensation plans and/or the advisory shareholder “say-on-pay” vote and, as with merger-related “strike suits,” seek to enjoin the annual meeting. Early cases gained some traction, resulting in settlements yielding additional proxy disclosures and legal fees for the plaintiffs, though most companies have resisted settling. While some companies have taken the heightened litigation risk into account in crafting 2013 proxy disclosure, it seems likely that no level of … Read more
This week, New York State Comptroller Thomas P. DiNapoli and New York City Public Advocate Bill de Blasio urged the Securities and Exchange Commission to respond to a petition I co-authored with my colleagues John Coffee, Ronald Gilson and Jeffrey Gordon asking the Commission to develop rules requiring public companies to disclose whether and how they spend shareholders’ money on politics. The New York officials argue that, upon her confirmation as the new Chairman of the Commission, Mary Jo White should make our petition, and the need for transparency in political spending at public companies, a top priority.
In … Read more
In our paper, The Evolution of Shareholder Voting Rights: Separation of Ownership and Consumption, which was recently made publicly available on SSRN, we show how the ownership patterns of early business corporations shaped their peculiar governance structure. While the nineteenth century saw the standardization and rapid spread of the modern business corporation around the world, those early corporations differed from their contemporary counterparts in important ways. Most obviously, they commonly deviated from the one-share-one-vote rule that is customary today, instead adopting regressive voting schemes that favored small over large shareholders. In recent years, both legal scholars and economists have … Read more
The following post comes to us from Trevor Norwitz, a partner at Wachtell, Lipton, Rosen & Katz in New York and a lecturer-in-law at Columbia Law School:
In the upcoming proxy season, shareholders at several major corporations will be asked to vote on proposals submitted by shareholder activists requesting that the board of directors facilitate the ability of shareholders to act by written consent. This means that, rather than the most important decisions being made at an annual or specially called shareholders meeting, such fundamental changes as replacing the board or even selling the company could be made, in many … Read more
In a 2010 article in the Texas Law Review entitled “Embattled CEOs”, Professors Marcel Kahan and Ed Rock argued that, over the past decade or so, CEOs of US public companies have gradually been losing power to their boards and their shareholders. In their view, the days of the “imperial CEO” are now numbered. In early 2013, the growing tension they identified between CEO and board power was on display at two major corporations in different continents – J.P. Morgan Chase & Co in the United States and Rio Tinto in Australia.
At J.P. Morgan on January 15, 2013, Jamie … Read more
In Kallick v. SandRidge Energy, Inc., the Delaware Court of Chancery, in an opinion by Chancellor Strine, enjoined the incumbent board of SandRidge Energy, which faced a consent solicitation initiated by a large stockholder seeking to de-stagger and replace the board, from, among other things, soliciting against or otherwise impeding the consent solicitation until the board approved the rival slate for purposes of a “proxy put” provision in SandRidge’s credit agreements. The Kallick decision, along with the Court of Chancery’s earlier decision in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, confirm that corporations, as a … Read more
In three relatively low profile decisions issued by the Delaware Court of Chancery in February 2013, the court reached seemingly atypical results given the issued involved and the procedural postures of the respective cases. The first decision was on February 6 in In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (TRANSCRIPT). There, Chancellor Strine denied from the bench a motion to dismiss a claim alleging that the defendant directors had breached their duty of loyalty by failing to monitor the company’s officers. This result is noteworthy in that such so-called Caremark claims have been characterized by the … Read more
With the recent increase in activism, some on Wall Street are blaming shareholders for the short-term mentality of corporate boards.
But many of these activists represent a small subset of investors in publicly held companies. As a result, corporate boards around the country should re-examine their priorities and figure out to whom they owe their fiduciary duties.
One of the major problems of this newfound activism is the focus on short-term results. That is not to say that our economy isn’t gripped by a short-term mentality, whether it’s individuals saving less and seeking immediate satisfaction or corporations forgoing long-term sustainable … Read more
Delaware dominates the corporate chartering market in the U.S—it is the only state that attracts a significant number of out-of-state incorporations. As a result, incorporation decisions are “bimodal,” with public and private firms typically choosing between home-state and Delaware incorporation.
Much ink has been spilled in the debate over whether Delaware’s dominance arose because it offers high-quality or low-quality corporate law. Under the “race-to-the-top” view, Delaware has prevailed because its law maximizes firm value. Under the “race-to-the-bottom” view, Delaware has won by offering corporate law that favors insiders at other parties’ expense.
But a firm today may choose Delaware law … Read more
My new Essay Should Angel-Backed Start-ups Reject Venture Capital? challenges the conventional wisdom that venture capital is a necessary – and even desirable – source of financing for all start-ups. In particular, this Essay argues that some start-ups that attract angel investors should stop there, rejecting proffers of venture capital that may follow. The Essay challenges the notion that venture capital is a necessary condition for start-up success, and argues the counterintuitive proposition that venture capital may actually be harmful to entrepreneurs and angel investors in some situations.
At the outset, I observe that angels are now able to fund … Read more
My draft article, Blocking the Ax: Shielding Corporate Counsel from Retaliation as an Alternative to White Collar Hypercriminalization, recommends that the NYSE and Nasdaq amend their corporate governance listing standards to require that termination of a public company’s general counsel and lead outside corporate transactional and securities regulatory counsel be approved in advance by the company’s independent audit committee.
The article is written from the perspective of one who worked for many years in private practice as full equity partner at two major AmLaw 100 firms and during 2005-2006 served in a senior capacity with the Securities and Exchange … Read more
More and more companies appear with strange abbreviations behind their business name. Consider Chrysler Group LLC (instead of Inc.) or LVMH Montres & Joaillerie France SAS. Some even speak about the “endangered corporate form” and point to the rise of the uncorporation. In the paper, “A Primer on the Uncorporation, ” Erik Vermeulen, Priyanka Priydershini and I examine how the uncorporation has evolved in the United States and, more recently, in other economies around the world. The growth in non-listed business forms in Europe, Latin America and Asia has been shaped by a mixture of learning and professional advice arising … Read more
A shareholder typically brings a derivative suit on behalf of a corporation against the company’s current or former officers or directors in one of two contexts: either after the shareholder has demanded that the board cause the company to bring suit on its own and the board refuses, or when the shareholder brings the suit directly on the basis that demand on the board would have been futile because a majority of the board is not sufficiently disinterested to make the decision as to whether to sue. In either case, the company’s board (or board committee, such as a special … Read more