Corporate governance - Vigil

On November 1 2017, the Securities and Exchange Commission (“SEC”) released guidance (Staff Legal Bulletin No. 14I (“SLB 14I”)) clarifying the scope and application of the ordinary business and economic relevance grounds for excluding a shareholder proposal under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from a company’s proxy statement.

The differential treatment of large financial institutions has drawn substantial interest in recent financial regulatory discussions. In particular, several regulatory measures put in place after the 2008 financial crisis have singled out large banks as subjects of increased regulatory scrutiny. At the same time, the U.S. banking industry has experienced a secular increase in concentration: The total number of U.S. banks has dropped from 25,000 in the 1920’s, to 14,000 in the 1970’s, to less than 6,000 as of today, while the top 10 bank holding companies now control more than 50% of total bank assets. These developments suggest that concerns about too-big-to-fail banks are now more important than ever before.

2017 has seen interest in board composition intensify. Investors have long scrutinized individual directors’ qualifications; however, increasingly they are asking how those individuals complement each other, and whether the overall board reflects a diverse mix of backgrounds, skills and qualifications. Investors want to know how boards ensure that they are recruiting directors whose expertise aligns with company strategy, and numerous investment firms have updated their proxy voting policies to punish boards that lack diversity.

On December 20, 2017, Congress voted to enact the most sweeping US tax reform bill in decades. The Tax Cuts and Jobs Act (the “TCJA” or the “Act”) will reduce business tax rates and revamp the US international tax system. While the President may not sign the Act until January 2018, its adoption into law appears virtually certain.

On December 13, 2017, the Delaware Supreme Court issued an opinion, In re Investors Bancorp, Inc. Stockholder Litigation, Case No. 169, holding that, except under limited circumstances, the court will not apply the deferential “business judgment rule” in reviewing challenges to director compensation awards granted pursuant to stockholder-approved equity plans. Instead, such awards are subject to an “entire fairness” standard of review. The ruling increases the likelihood that a plaintiff will defeat a motion to dismiss and potentially embroil the company in costly litigation and discovery.

Stretching back to Central Bank v. First Interstate, [1] a series of Supreme Court opinions have limited shareholders’ ability to bring claims under Rule 10b-5 against auditors. Prior literature has noted the changes in auditor liability and questioned whether the current law provides auditors with efficient incentives (e.g., Park, 2017; Coffee, 2006; Partnoy, 2001). However, our paper, The Changing Landscape of Auditor Litigation and Its Implications for Audit Quality, is the first to provide empirical evidence that recent court opinions have led to declines in Rule 10b-5 liability exposure and have implications for audit quality.

On November 23rd, 2015, pharmaceutical giant, Pfizer, officially announced that it had reached an agreement with its competitor, Allergan, to merge the two companies in a deal that would have created the largest pharmaceutical company in the world. The combined company would have been called Pfizer and would have been led by Pfizer’s current CEO, Ian Read, but the deal was being structured so that, at least on paper, Allergan would have been the buyer. By making Allergan the purchaser, Pfizer would be able to change its country of incorporation from the U.S. to Ireland (where Allergan is currently incorporated) and reduce its tax bill in the process.

Boards of directors and their compensation committees will soon shift attention to the 2018 compensation season. Key considerations in the year ahead include the following:

On December 11, 2017, the Delaware Court of Chancery issued a decision that will be important for companies looking to implement measures to extend or make changes to dual-class voting structures and for companies with controlling stockholders. The decision addressed stockholder fiduciary duty challenges to a recapitalization undertaken by NRG Yield, Inc. (the “Company”), which, prior to the recapitalization, had a dual-class stock structure and a controlling stockholder. The court held that the transaction was conflicted because it was specifically designed to benefit the controlling stockholder. Despite this conflict, the court dismissed the litigation because of the process employed by the Company in adopting the recapitalization.

Credit rating agencies produce one of the key technologies of the financial system. Ratings have been in use for more than a century, and their application has continuously expanded to new types of financial securities and contracts. Regulations, contracts, investment mandates, capital requirements, loan pricing, all frequently rely on credit ratings.

Despite vigorous attempts, through judicial decisions, [1] and legislative provision on forum selection and fee shifting provisions [2] to limit the number of post-merger litigation filings, the fact remains that in 2016, almost a third of the mergers and acquisitions (“M&A”) in Delaware resulted in such filings. [3]

A number of companies have recently gone public with dual-class share structures, allowing founders to retain control. Most of these companies’ articles of incorporation contain a provision that requires any merger consideration to be distributed pro rata among all shareholders. These equal treatment clauses, in effect, give away founders’ control premium to minority shareholders. On first glance, these clauses seem to provide some protection to minority shareholders, who know that, in the event of a change-of-control, they will be compensated at the same rate as founders. But, as my recent paper explores, there are agency costs lurking beneath the surface of these clauses.

From 2009-2012, China’s initial public offering (IPO) market was characterized by a regulatory environment in which the government did not control offer prices. If there was excess demand, underwriters were required to allocate shares on a pro rata basis, without favoring one group of clients over another, in contrast to the bookbuilding procedure that is widely used in the West. Furthermore, coverage by a stock before it went public by analysts working for brokerage firms not involved in the underwriting of an IPO was widespread, with an average IPO having coverage from 10 unaffiliated analysts before trading starts.