On Thursday and Friday, I attended Tulane’s 28^th Annual Corporate Law Institute. I’d never had the chance to go before, but now that I’m a member of the faculty, it’s a fabulous perk of the job. It was marvelous to get expert, practical analysis of the most pressing issues in corporate governance and M&A practice. I was also delighted to see a couple of my students in attendance – during one of the breaks, they told me how the speakers helped bring together the reality behind the theories they learned in their business courses (and, having never heard Chief Justice Leo Strine speak before, they were predictably … ahem … amazed by his comments).

I’ve compiled a (very) incomplete list of the particular remarks that struck me as interesting or enlightening – with a heavy disclaimer that I wasn’t able to take notes on everything, so this should not be viewed as representative of the conference as a whole. It’s more like, Things From Some Panels Ann Lipton Was Able to Jot Down Quickly. (And also it’s possible I misheard some comments – if so, I apologize!).

I’ll note that the orientation of the speakers was almost all defense-side practice – defending from lawsuits, and defending from activist investors – which made it all the more valuable and interesting when someone spoke up from the other side of the table, or even from a more centrist point of view (the SEC, ISS, M&A journalists, Strine, and Chancellor Andre Bouchard).

[More under the jump]

I should start by remarking that almost everyone had a Donald Trump joke – he seems to be the common touchstone for humor these days, and he’s clearly on everyone’s mind, although none of the panels involved a serious discussion of the political environment.

More seriously, one common theme across several panels concerned director quality – the value of expertise versus independence, the increased responsibility of directors in the age of activist investors, and how those responsibilities may limit opportunities to populate a board with quality candidates.

For example, Roger Altman of Evercore Partners said that he expects that based solely on age, a significant percentage of directors at Fortune 500 companies will need to be replaced in the coming years. He believes that the threat of investor activism renders the job unattractive to quality candidates with strong business experience, and expects to see a decline in board quality in the coming years as a result.

Andrew Ross Sorkin of the NYT had a similar complaint. He believes that the push for “independent” directors has caused a decline in the number of directors with a real understanding of the business. Instead, boards are populated with professors and other people who aren’t particularly knowledgeable, and they are actually less independent than insiders because for them, a board’s salary is more significant. (Sorkin was not the only panelist to lament the overrepresentation of professors on boards – I was not feeling the love!). He blamed activists and also journalists for promoting independence over knowledge, and even admitted that as a journalist, he’d felt pressured to hew to received wisdom that more independence was always better. (Cf. Urska Velikonja, The Political Economy of Board Independence)

David Benoit of the WSJ agreed that independent directors do not have the time or the knowledge to seriously monitor management. According to him, activists have told him that weak boards are made up of people who are well intentioned, but they receive hundreds of pages of documents shortly before a meeting and have no ability to seriously examine them. As a result, the CEO is functionally in control – and that’s what activists object to.

Strine had a view of independence that dovetails with his opinions in cases like Del. County Emples. Ret. Fund v. Sanchez, 124 A.3d 1017 (Del. 2015) and In re Oracle Corp. Derivative Litig., 824 A.2d 917 (Del. Ch. 2003), namely, that it is possible to be nominally independent by the rules of an Exchange while still being too comfortable and familiar with management. He did not advocate that directors have tenure limits, exactly, but he did suggest that after a certain period of time, directors should examine their role and their ties to management, and perhaps cycle on and off committees. (Further to that, I just read with interest this paper by Joshua Livnat, Gavin Smith, Kate Suslava, and Martin B. Tarlie, which finds that the optimal term length is about 9 years; after that, longer tenure becomes, in the authors’ words, a “drag” on valuation).

These were just a small collection of comments across several panels, but the most sustained focus on board qualifications came, unsurprisingly, in the Shareholder Activism panel on Friday morning.

For example, a person from Goldman Sachs (unfortunately, I missed his name and he apparently was not in the program; anyone know who it was?) pointed out that companies are more willing to settle with activists than they used to and grant them board representation. In the past, on average, settlements would occur 150 days after a campaign began; today, settlements come in 60 days, which has emboldened activists.

Steve Wolosky of Olshan argued that the reason for the faster settlements is that activists are proposing more qualified nominees. David Katz of Wachtell agreed; he pointed out that even a few years ago, it was a black mark for someone to agree to appear on a dissident slate, and that limited activists’ ability to propose qualified candidates. Today, that’s no longer the case, and sometimes activists propose candidates who are more qualified than the candidates the board itself has been able to recruit.

Joele Frank of Joele Frank agreed this was true for larger cap companies, but argued that for companies with a smaller capitalization – roughly under $2 billion – activists often did not propose good candidates. She called the activists who target smaller firms “ankle-biters,” and claimed that boards settle because they simply don’t have the resources to get proper counseling and put up a fight. She argued that large investors, like index funds, dislike these quick settlements, particularly when they result in the appointment of an activist shareholder to the board, rather than a quality candidate recruited by the activist for the purpose of improving corporate governance.

Wolosky defended the “ankle-biters.” In his view, a lot of the smaller companies are targeted precisely because they have long tenured, insular boards who are far too friendly with a CEO who similarly has been in place for decades. They settle quickly because they recognize these weaknesses.

The Goldman representative conceded that sometimes companies settle because the activist nominees are quality candidates, but he also agreed with Frank that in other cases, there is just too much expense and risk associated with a fight. Even if the company wins the fight, there’s no assurance that the activist will go away – especially if it’s a relatively close vote. And if the company loses, there’s a huge downside; the vote functions as a referendum on existing management and the remaining directors, and creates tension in the boardroom with the new directors. At least with a settlement, boardroom peace is maintained.

Chris Cernich of ISS chimed in that in his experience, there was a time – maybe 8 years ago – when he would see some truly terrible nominees proposed by activists. He was told that this was because the activists expected a settlement, and didn’t actually expect to run a proxy contest with a dissident slate, and found themselves scrambling at the last minute for names. He said that he does not see this anymore; today’s activists are bigger funds with larger investments, who take more care with their proposed nominees. He also expressed concern about quick settlements, however, because he believes that an activist campaign can educate the activist about which ideas are good and which won’t fly, which will win shareholder support, and so forth – quick settlements truncate that vetting process. He doesn’t object to settlements; he just wants to make sure there’s an adequate airing of ideas before the shareholders.

Cernich also noted that when there’s a dissident campaign, he’ll meet with both sides. He tells them to bring whoever they want to the meetings – that’s their decision, not his – but he’ll look askance when they don’t bring the director-nominees or the directors being challenged. The failure to do so suggests there’s a problem their trying to hide.

Dan Burch of MacKenzie Partners worries that activists won’t stop at simply putting qualified candidates on the board. When those candidates don’t take direction from the activist, the activist will then come back the next year and propose themselves as board members. A settlement, he suggested, only lets them get a foot in the door, and invites a proxy contest a year or two down the line.

Cernich discussed how he decides whether to back an activist, and pointed out that 46% of the time, ISS has recommended for a dissident. From his perspective, it’s not just about whether there’s a problem to be fixed, but about whether the activist has the right solution to the problem. If the activist can’t trace the problem back to the boardroom and identify how things went wrong, it looks suspicious.

He also objected to some of the terminology that had distinguished between economic activism and governance activism. From his perspective, a healthy balance sheet is part of governance. Shareholders don’t have perfect insight into what happens in the boardroom; the financial statements tell a story about whether the company is well run.

He additionally noted that shareholder proposals have been transformed; they are no longer just about gadflies. Large institutional investors have become involved. He argued that the single biggest development is that institutional investors have become willing to engage compensation via say on pay. Vanguard does approximately 800 engagements a year on compensation, and trains people specifically to handle those engagements.

The Goldman representative called it the “age of the engaged shareholder” that blurs the line between activists and not-activists. Today, it is the new normal that management has to explain its strategies and engage with investors. And they are no longer alarmed if an activist shows up in their stock; it’s become normalized. Apparently, 40% of the market capitalization of the S&P 500 is activist investment.

Wolosky spoke about how activists choose their targets. There are, unsurprisingly, many factors, including whether the company has takeover defenses like a staggered board, whether it’s an alternative entity – like those formed in Maryland – which has outsourced out management functions in a manner that contractually protects against any changes. New CEOs chosen through a valid selection process make it hard to wage a proxy contest; longterm underperformance with a longterm CEO, however, makes for a ripe target. Activists also look at CEO compensation, and whether it focuses on the right metrics, whether ISS and Glass Lewis have made withhold recommendations, and whether the company has failed to implement shareholder proposals even after they’ve been approved.

Cernich added that it may be a sign of shareholder discontent if a director is approved with only 70% of the votes.

A couple of remaining notes:

 On the subject of SEC rules:

There was a bit of a skirmish between Strine and Michele Anderson, associate director of the SEC’s CorpFin division. After she described the Commission’s new guidance on unbundling, Strine declared that the guidance was “ludicrous” and that the unbundling rules represent an improper encroachment on state law. He argued that shareholders are already voting whether to approve a deal or make charter amendments; additional, separate votes are unnecessary. He essentially demanded that the SEC begin notice and comment procedures for repealing the unbundling rules entirely. Anderson stated that the rules are intended to allow shareholders to express their views and “have a say.”

Strine also argued that the SEC should have more stringent disclosure rules for activist investors. In particular, he advocated rules that would require transparency on their full positions, especially whether they are long on the targeted company.

Anderson discussed the SEC’s deliberations on the universal proxy. The SEC is looking at the matter from the point of view of the shareholder who wants to vote for a mixed set of candidates, and does not want to favor either existing management or the dissidents. The SEC is sensitive to the fact that control of the board may be at stake, and therefore is carefully considering the details. Among other issues, the SEC is considering whether a universal proxy should be mandatory or optional and under what circumstances, whether it should be used in every election or only ones where minority control is at stake, and whether each side would be required to use identical presentation.

On recent Delaware caselaw:

Strine and Bouchard both commented on the degree of concern that had been prompted in boardrooms and among investment banks after RBC Capital Mkts., LLC v. Jervis, 129 A.3d 816 (Del. 2015). They agreed that the reaction to the decision was overblown; in their view, it was important to keep in mind that the case involved fairly egregious facts, and the standard for liability was extremely high, requiring knowing misconduct. Strine suggested that defense attorneys caused undue panic by sending out hyperbolic “client alerts” on the decision – useful as marketing tools, but blowing the threat of liability out of proportion.

Bouchard commented that the analysis in RBC had come as a surprise to him, because the Delaware Supreme Court used the Revlon standard in a damages case, shortly after announcing in Corwin v. KKR Fin. Holdings LLC, 125 A.3d 304 (Del. 2015) that Revlon was more appropriate for claims seeking injunctive relief. He said that he was waiting along with everyone else to see whether this ambiguity in the law would be clarified in the next few years.

He also remarked that the linguistics used to describe aiding and abetting liability in this context represents a poor fit with the actions deemed to be wrongful. After all, aiding and abetting requires that there be a breach of duty and knowing participation in that breach; this works well enough for violations of loyalty, but where the claim is that the banker created an “informational vacuum,” the “knowing participation” standard suggests joint conduct that does not accurately describe the facts. He would prefer that the test be described as intentionally causing a breach, or knowing deprivation of information.

Media issues

Sorkin defended his column on designated counsel in private equity transactions. I gather there was some controversy about it, perhaps because of a sense of “so what?” – namely, that all the players are sophisticated and with strong bargaining power, so who cares if banks want to agree to let their clients pick their lawyers for them. In Sorkin’s view, we have so many new regulations intended to ensure bank’s stability and protect them from high risk transactions that it hardly makes sense to tolerate these kinds of conflict-ridden arrangements. He described how after the column appeared, he heard from bank CEOs who apparently had no idea that this practice was going on in their institutions.

Finally, Robert Kindler of Morgan Stanley congratulated Sorkin for his role in creating Showtime’s “Billions,” but speculated that seeing the way hedge funds are performing these days, they’re thinking of putting parentheses around the name. *rimshot*

And that’s all I’ve got! In short, the conference was a lot of fun, and I look forward to attending in future years.