Corporate governance - Vigil

In what has been called a “breakout year” for gender diversity on U.S. public company boards, corporate America showed increasing enthusiasm for diversity-promoting measures during 2016. Recent studies have demonstrated the greater profitability of companies whose boards are meaningfully diverse.

Large institutional investors call for climate-competent boards as part of their fiduciary responsibility to preserve and enhance the long-term value.

Recognizing that the incentive for long-term investment is broken, leading institutional investors are developing a new paradigm (discussed on the Forum here) that prioritizes sustainable value over short-termism, integrates long-term corporate strategy with substantive corporate governance and requires transparency as to director involvement. We believe that the new paradigm can reduce or even eliminate the outsourcing of corporate governance and portfolio oversight to ISS and activist hedge funds.

This past year witnessed a number of new corporate governance initiatives. Among the most significant:

Dead Hand Proxy Puts are a contractual innovation in corporate debt agreements that change the nature of proxy fights. The term triggers default and immediate repayment of corporate indebtedness in the event that a dissident slate wins a majority of the seats on the target company’s board.

On January 13, 2017, the Supreme Court granted certiorari in Kokesh v. Securities and Exchange Commission (U.S. Jan. 13, 2017) (No. 16-529) to determine whether disgorgement claims are subject to the five-year statute of limitations applicable to enforcement proceedings seeking civil penalties. The decision would resolve a split between the Tenth Circuit, which held in Kokesh that the five-year limitations period does not apply, and the Eleventh Circuit, which has held that it does. Notably, courts, including the Eleventh Circuit, have held that there is no statute of limitations for injunctive and other equitable relief. The law has, until now, been mixed as to whether disgorgement is a form of equitable relief immune from the five-year statute of limitations.

On January 17, 2017, the Second Circuit Court of Appeals (the “Court”) held that Section 316(b) of the Trust Indenture Act of 1939, as amended (“TIA”), prohibits only non-consensual amendments to an indenture’s core payment terms (the amount of principal and interest owed and the date of maturity) [1]. This holding reversed the decision of the District Court for the Southern District of New York (the “SDNY”) [2], which had held that an out-of-court restructuring that involved the elimination of a parent guarantee and a significant asset transfer was impermissible under Section 316(b) of the TIA because such actions impaired the nonconsenting noteholders’ right to receive payment. [3]