Corporate governance - Vigil

The world’s social media platforms and financial markets are abuzz about cryptocurrencies and “initial coin offerings” (ICOs).  There are tales of fortunes made and dreamed to be made.  We are hearing the familiar refrain, “this time is different.

The view that bankers’ compensation created the incentives that led to the latest financial crisis has prompted numerous proposals to regulate pay at financial institutions. [1] However, despite the attention devoted to executive pay by regulators, extant research provides mixed support for the hypothesis that CEO compensation in the run-up to the crisis influenced bank risk taking. Thus, although some authors find a positive relation between CEO risk-taking incentives and bank risk or policy choices, others find no such relation. Notably, Fahlenbrach and Stulz (2011) [2] find no significant relation between the most commonly used measure of the risk-taking incentives generated by executive compensation (vega) and bank performance during the crisis. [3]

Statutory appraisal actions remain one of the most closely watched areas of Delaware corporate law, and there have been significant developments in Delaware appraisal law. Recently, the Delaware Supreme Court provided additional guidance on appropriate valuation methodologies as it reversed and remanded the Delaware Court of Chancery in DFC Global Corporation v. Muirfield Value Partners, L.P., et al., C.A. No. 10107 (Del. Aug. 1, 2017).

Apple has submitted a letter to the SEC Staff arguing that the company should be able to exclude a shareholder proposal because its board has made a determination that the proposal is part of the company’s ordinary business.

Excessive risk-taking in the financial industry is thought to be one of the key contributor to the recent financial crisis (e.g., Diamond and Rajan, 2009; Financial Crisis Inquiry Commission, 2011; Freixas and Dewatripont, 2012).

Several recent decisions applying Delaware law offer helpful insight about the impact that activist investor involvement has on board decision-making leading to a transaction and how those decisions will be reviewed by the courts in any subsequent litigation. These cases demonstrate the importance of careful responses by boards of directors to satisfy their fiduciary duties in the face of activist pressure. Discussed below is a case addressing the implications of activism in the context of the Corwin doctrine and three cases addressing the potential effect activist involvement can have on the judicial standard of review of a transaction.

Debt contracts use covenants as a way to manage conflicts between debt holders and equity holders. Covenants accomplish this goal by limiting the ability of debtors to engage in excessive risk taking, dividend payouts, claim dilution, and other actions that can harm the interests of creditors. But different types of creditors go about limiting the agency costs of debt in quite different ways.

A Delaware court recently allowed a stockholder’s derivative complaint to proceed where the board of directors allegedly breached their duty of loyalty by knowingly allowing the company to violate a federal regulation.

Over the past several years, investors and other governance groups have sought expanded disclosures on how audit committees execute their duties. The Securities and Exchange Commission (SEC) also weighed in on the discussion when it issued a request for public comment in a July 2015 concept release titled Possible Revisions to Audit Committee Disclosures.

On November 15, 2017, the Securities and Exchange Commission Division of Enforcement released its annual report detailing its priorities for the coming year and evaluating enforcement actions that occurred during Fiscal Year (“FY”) 2017. The Report captures the SEC during a period of transition—Chairman Jay Clayton assumed the helm of the Commission in May 2017 and Stephanie Avakian and Steven Peikin were named co-directors of the Enforcement Division soon thereafter.

Shortly before the Thanksgiving holiday, Glass Lewis released its 2018 policy guidelines for U.S. and Canadian companies as well as updates to its guidelines on shareholder initiatives. In addition to clarifying several existing policies, this year’s policy update includes an important change regarding the threshold for board responsiveness along with new policies on board gender diversity, dual-class share structures and virtual-only meetings.