Corporate Governance

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Spoiler alert:  wrongful refusal of demand and bad faith standards are the same in recent Delaware Court of Chancery case: Andersen v. Mattel, Inc., C.A. No. 11816-VCMR (Del. Ch. Jan. 19, 2017, Op by VC Montgomery-Reeves).  

But sometimes a reminder that the law is the same and can be clearly stated is worth a blog post in its own right.  Professors can use this as a hypo or case note and those in the trenches can update case citations to a 2017 (and 2016) case.

In Andersen v. Mattel, Inc., VC Montgomery-Reeves dismissed a derivative suit, holding that plaintiff did not prove wrongful refusal of pre-suit demand.  The derivative action claimed that the Mattel board of directors refused to bring suit to recover up to $11.5 million paid in severance/consulting fees to the former chairman and chief executive officer who left in the wake of a falling stock price. Plaintiff challenged disclosure discrepancies over whether Stockton resigned or was terminated and the resulting entitlement to severance payments.  Mattel’s board of directors unanimously rejected the demand after consultation with outside counsel, 24 witness interviews and a review of approximately 12,400 documents.

The relied upon case law is unchanged, but the clear…

Bernard Sharfman, a prolific author on corporate governance, has written his fourth article on the business judgment rule. The piece provides a thought-provoking look at a subject that all business law professors teach. He also received feedback from Myron Steele, former Chief Justice of the Delaware Supreme Court, and William Chandler III, former Chancellor of the Delaware Court of Chancery during the drafting process. I don’t think I will assign the article to my students, but I may take some of the insight when I get to this critical topic this semester. Sharfman has stated that he aims to change the way professors teach the BJR.

The abstract is below:

Anyone who has had the opportunity to teach corporate law understands how difficult it is to provide a compelling explanation of why the business judgment rule (Rule) is so important. To provide a better explanation of why this is so, this Article takes the approach that the Aronson formulation of the Rule is not the proper starting place. Instead, this Article begins by starting with a close read of two cases that initiated the application of the Rule under Delaware law, the Chancery and Supreme Court opinions in Bodell v.

The New York Times DealB%k reports today on the role women are playing in shaping corporate governance at the largest mutual funds.

 “The corporate governance heads at seven of the 10 largest institutional investors in stocks are now women, according to data compiled by The New York Times. Those investors oversee $14 trillion in assets.”  

Mutual and pension funds are some of the largest stock block holders casting crucial votes in director elections and on shareholder resolutions that will span the gamut from environmental policy to political spending to supply chain transparency.  While ISS and other proxy advisory firms have a firm hand shaping proxy votesFN1 (and have released new guidelines for the 2017 proxy season), that $14 trillion in assets are voted at the behest of women is new and noteworthy.  As the spring proxy season approaches– it’s like New York fashion week, for corporate law nerds, but strewn out over months and with less interesting pictures–these asset managers are likely to vote with management. FN2 Still, there is growing consensus that institutional investors’ corporate governance leaders are “working quietly behind the scenes to advocate for greater shareholder rights” fighting against dual class stock and fighting for gender…

On Friday, I will present as part of the American Society of International Law’s two-day conference entitled Controlling Corruption: Possibilities, Practical Suggestions & Best Practices. The ASIL Conference is co-sponsored by the University of Miami School of Business Administration, the Business Ethics Program of the University of Miami School of Business Administration, UM Ethics Programs & the Arsht Initiatives, the Zicklin Center for Business Ethics Research, Wharton, University of Pennsylvania, Bentley University, and University of Richmond School of Law.

I am particularly excited for this conference because it brings law, business, and ethics professors together with practitioners from around the world. My panel includes:

Marcia Narine Weldon, St. Thomas University School of Law, “The Conflicted Gatekeeper: The Changing Role of In-House Counsel and Compliance Officers in the Age of Whistle Blowing and Anticorruption Compliance”

Todd Haugh, Kelley School of Business, Indiana University, “The Ethics of Intercorporate Behavioral Ethics”

Shirleen Chin, Institute for Environmental Security, Netherlands, “Reducing the Size of the Loopholes Caused by the Veil of Incorporation May lead to Better Transparency”

Edwin Broecker, Quarles &Brady LLP, Indiana,& Fernanda Beraldi Cummins, Inc, Indiana, “No Good Deed Goes Unpunished: Possible Unintended Consequences of Enforcing Supply Chain Transparency”

Stuart Deming, Deming PLLC…

The late December announcement of Carl Icahn as a special advisor overseeing regulation piqued my professional interest and raises interesting tension points for both sides of the aisle, as well as for corporate governance folks.  

Icahn’s deregulatory agenda has the SEC in his sights.  Deregulation, especially of business, is a relatively safe space in conservative ideology.  Several groups such as the Chamber of Commerce and the Business Roundtable may be pro-deregulation in most areas, but, and this is an important caveat– be at odds with Icahn when it comes to certain corporate governance regulations.  Consider the universal proxy access rules, which the SEC proposed in October, 2016.  The proposed rules would require companies to provide one proxy card with both parties’ nominees–here we don’t mean donkeys and elephants but incumbent management and challengers’ nominees.  Including both nominees on a single proxy card would allow shareholders to “vote” a split ticket—picking and choosing between the two slates.  The split ticket was previously an option only available to shareholders attending the in-person meeting, which means a very limited pool of shareholders.  “Universal” proxy access– a move applauded by Icahn–is opposed by House Republicans, who passed an appropriations bill – H.R. 5485 –that would eliminate SEC funding…

The members of Friday’s AALS discussion group about which I wrote last week came to an inescapable–if unsurprising–overall conclusion: the U.S. Supreme Court’s opinion in the Salman case does little to address major unresolved questions under U.S. insider trading law.  That having been said, we had a wide-ranging and sometimes exciting discussion about the Court’s opinion in Salman and what might or should come next.  I found the discussion very stimulating; a great way to start a new semester–especially one in which I am teaching Securities Regulation and Advanced Business Associations, both of which deal with insider trading law.  I will offer brief outtakes from the proceedings here for your consideration and (as desired) comment.

John Anderson and I framed three questions around which we structured the formal part of the discussion session (which commenced after brief introductory comments from each participant).

  • What, if anything, does the Court’s Salman opinion say by its silence?
  • What, if anything, is left of the Second Circuit opinion in the Newman case after Salman?
  • Is law reform needed after Salman, and if so, should we continue to permit it to occur through further, incremental judicial developments or should reform be undertaken through legislation or regulatory rule-making or guidance?

The…

As regular readers of this blog know, I am skeptical of many disclosure regimes, particularly those related to conflict minerals. I am, however, a fan of the Sustainability Accounting Standard Board’s (SASB’s) efforts to streamline the disclosure process and provide industry-specific metrics that tie into accepted definitions of materiality.

Dr. Jean Rogers, the CEO and Founder of SASB, presented at the Association of American Law Schools yesterday with other panelists discussing the pros and cons of environmental, social, and governance disclosures. To prove SASB’s case that investors care about sustainability, Dr. Rogers noted that in 2016, sustainable investment strategies came into play in one out of every five dollars under professional management. She cited a number of key sustainability initiatives that investors considered including the United Nations Principles for Responsible Investments ($59 trillion AUM), the Carbon Disclosure Project ($95 trillion AUM), the International Corporate Governance Network ($26 trillion AUM), and the Investor Network on Climate Risk ($13 trillion AUM).

Despite this interest, SASB argues, investors lack information that equips them with an apples to apples comparison on material information related to sustainability. What might be material in the beverage industry such as water usage for example, may…

Last week, friend of the BLPB Steve Bainbridge published a great hypothetical raising insider trading tipper issues post-Salman.  He invited comments.  So, I sent him one!  He has started posting comments in a mini-symposium.  Mine is here.  Andrew Verstein’s is here.  There may be more to come . . . .  I will try to remember to come back and edit this post to add any new links.  Prompt me, if you see one before I get to it . . . .

Postscript (January 5, 2017): James Park also has responded to Steve’s call for comments.  His responsive post is here.

Postscript (January 9, 2017, as amended): Mark Ramseyer has weighed in here.  And then Sung Hui Kim and Adam Pritchard added their commentary, here and here, respectively.  Steve collects the posts here.

Tomorrow, I am headed to the Association of American Law Schools (“AALS”) Annual Meeting in San Francisco (from Los Angeles, where I spent NYE and a bit of extra time with my sister).  I want to highlight a program at the conference for you all that may be of interest.  John Anderson and I have convened and are moderating a discussion group at the meeting entitled “Salman v. United States and the Future of Insider Trading Law.”  The program description, written after the case was granted certiorari by the SCOTUS and well before the Court’s opinion was rendered, follows:

In Salman v. United States, the United States Supreme Court is poised to take up the problem of insider trading for the first time in 20 years. In 2015, a circuit split arose over the question of whether a gratuitous tip to a friend or family member would satisfy the personal benefit test for insider trading liability. The potential consequences of the Court’s handling of this case are enormous for both those enforcing the legal prohibitions on insider trading and those accused of violating those prohibitions.

This discussion group will focus on Salman and its implications for the future of insider…

In her post on Saturday, co-blogger Ann Lipton offered observations about possible legal issues resulting from the President-Elect’s tweets regarding public companies.  She ends her post with the following:

So, it’s all a bit unsettled. Let’s just say these and other novel legal questions regarding the Trump administration are sure to provide endless fodder for academic analysis in the coming years.

Probably right.

Today, I take on a somewhat related topic.  I briefly explore the President-Elect’s conflicting interests through the lens of a corporate law advisor.  For the past few weeks, the media (see, e.g., here and here and here) and many folks I know have been concerned about the potential for conflict between the President-Elect’s role as the POTUS, public investor and leader of the United States, and his role as “The Donald,” private investor and leader of the Trump corporate empire.

The existence of a conflicting interest in an action or transaction is not, in and of itself, fatal or even necessarily problematic.  In a number of common situations, fiduciaries have interests in both sides of a transaction.  For example, a business founder who serves as a corporate director and officer may lease property she owns to the corporation.  What matters under…