I have literally no idea if this is correct, I’m putting it forward as a set of facts that I think demonstrates the very complicated era we’re in from a corpgov perspective.

Ike Perlmutter was fired from Disney.  It’s very well known that he generally opposed attempts to diversify the MCU.

Nelson Peltz has teamed with Ike Perlmutter in his Disney proxy contest.  Nelson Peltz is a Trump supporter.  He’s also friends with Elon Musk, who has increasingly become a right wing culture warrior.

Disney has long been in the crosshairs of the right.  We all know about the fight with DeSantis and Don’t Say Gay; we also know that a Disney shareholder accused the company of abandoning shareholder value in order to promote a political agenda.

Elon Musk is furious about Disney pulling ads from ex-Twitter, and has openly criticized Disney’s diversity priorities.  He’s even bankrolling a suit by Gina Carano, alleging that Disney discriminated against her due to her conservative politics.

Bill Ackman has also criticized Disney for pulling ads from Twitter, specifically connecting that decision to the proxy fight with Peltz, and arguing that Peltz can right the ship.  

ISS is also a right wing target, on accusations that it recommends in favor of “woke” corporate governance instead of sticking to shareholder value.

ISS – I have to assume responding to this complaint – is creating a new “ESG skeptic” voting template, to go along with its other templates like Climate, Catholic, and SRI.

Glass Lewis recommended that shareholders vote for the Disney slate, against Nelson Peltz.  The Wall Street Journal recently published a fairly searing indictment of Peltz’s Trian fund.  And Jeffrey Sonnenfeld of the Yale School of Management, along with Steven Tian of the Yale Chief Executive Leadership Institute, argue that Trian has destroyed value at the companies where Peltz has won board seats.  

ISS just recommended in favor of Peltz in his bid for a Disney board seat.

I have no idea if ISS’s recommendation had anything to do with politics.  Certainly, it offered very plausible reasons for backing Trian, and the proxy fight itself does not involve (explicit) political accusations either way, notwithstanding Ackman’s hints.

But everything surrounding corpgov is so politicized these days that it’s impossible not to ask whether ISS thought that endorsing Peltz would help mitigate some of the right wing criticism.

I guess my point is, whether it’s a sign of the times or not, it is very hard to evaluate shareholder value in a manner that’s divorced from the political environment.  In the end, companies make money by appealing to popular tastes.  Politicians have every incentive to insist that their side is the “popular” one, and therefore that any appeals to other audiences must be unpopular, and therefore unprofitable.  Profitability is now a proxy for political popularity.  And when politicians threaten to legislate those preferences – functionally a legal dictate as to what is and is not profitable – we can’t tell if corporate actors are responding to the regulatory threats or their own independent judgment.

Edit 3/23: Remember how I said the fight does not involve (explicit) political accusations? Turns out, not so much: ‘Why do I need an all-Black cast?’ Disney criticizes Peltz remarks

On March 12, Chancellor McCormick issued a revised appraisal opinion in HBK Master Fund v. Pivotal Software, amending her calculations to award the petitioners 44 cents above deal price, rather than 17 cents below, as she had originally.  

But I somehow missed the original opinion, so my first read was the amended one.  Forgive me if this is old hat by now, but it was new to me, so.

The case involved a buyout of Pivotal by its sister company, VMWare, both controlled by Dell Technologies.  That raised the question whether the use of MFW procedures required deference to the deal price, in the same way it does in other kinds of appraisal actions.  Chancellor McCormick held no, because, critically, with a controlling shareholder, there can be no real market test – there are no other potential bidders, and even the shares themselves may trade at a discount to reflect the controller’s ability to extract rents.  Thus, the underpinning of cases like Dell v. Magnetar, 177 A.3d 1 (2017), is absent.

But that’s actually not what stood out to me. 

As is the usual course with these things, Chancellor McCormick began with a standard discussion of the process by which the deal was negotiated.  Along the way, she singled out the conduct of Marcy Klevorn, who was one member of a two-person Pivotal special committee, and who also held positions at Ford.  Here is what McCormick said:

Around this time, the Pivotal Special Committee decided not to canvas the market for other potential bidders….

One of the two Pivotal Special Committee members, Klevorn, was missing in action through much of this process.

• She missed the October 8, 2018 Board meeting. She later testified that her absence was likely due to separate duties at Ford.
• She missed the January 28, 2019 Board meeting.112 Klevorn testified that she was “probably traveling[.]”
• She arrived late to the March 15, 2019 Board meeting. She could not recall why.
• She missed the March 22, 2019 Board meeting. She could not recall why.
• She left early from the April 9, 2019 Board meeting due to a “prior engagement[.]” At this meeting, Lankton provided an update to the rest of the Board on the merger.

So, through April 2019, Klevorn missed, was late for, or left early from each Pivotal Board and Special Committee meetings. Klevorn testified that being on the Pivotal Special Committee was “a lot of work and I don’t know, to be honest, how I felt about it at the time.”

…

The Pivotal Special Committee met on July 31, 2019. Klevorn joined the meeting late because she was busy with a meeting at Ford.

…

The next day, the Pivotal Special Committee held a meeting to decide whether to counteroffer, accompanied by Morgan Stanley, Mee, and other members of Pivotal leadership.  Klevorn attended, reluctantly. A few days prior, Klevorn’s assistant asked her if she could attend that meeting from 5:30 p.m. to 7:00 p.m. Klevorn responded, “[u]gh. Was planning to do a bunch of returns at [S]omerset. I thought it was at 2???” After her assistant responded about the timing, Klevorn replied, “[l]ife ruiner. Ok.”

On August 14, 2019, the VMware Special Committee made what it termed a “best and final offer” of $15.00 per share.  The Pivotal Special Committee held a meeting to consider it; Klevorn was absent.

Oof.

Did Klevorn’s neglect have a bearing on the outcome?  Reader, it did not.  After McCormick explained why MFW procedures could not cleanse the transaction, she pretty much moved on from any discussion of this particular process, except to briefly note that Klevorn’s absence called into doubt certain base projections – which McCormick ended up accepting anyway.  (Op. at 88-89).  Sure, I suppose Klevorn’s conduct could have had some kind of influence on McCormick’s thought process, but if so, it’s not explicit in the opinion.

Why am I mentioning this? 

Because a while ago, Edward Rock argued that Delaware’s courts operate more through parables of “good” and “bad” boards, reputational sanctions, and public shaming, than through actual interference with business decisions.  And though I can think of a certain billionaire, now 25% poorer, who might disagree with that assessment, McCormick’s somewhat gratuitous swipes at Klevorn (“life ruiner”) would seem to bear out the thesis.

If you don’t want to serve on a special committee, don’t do it.  At the very least, don’t put it in an email/text.

For a long time, compensated non-attorney representatives (NARs) have been a blight on FINRA’s securities arbitration forum.  PIABA released a report highlighting problems with these groups in 2017.  After considering the issue, FINRA moved to largely ban non-attorneys from representing investors in securities arbitration.  The proposed rule change expressly permits law school clinics or their equivalent to continue to appear on behalf of investors.  The proposal was even approved by the SEC’s Division of Trading and Markets on January 18, 2024 pursuant to its delegated authority. 

Despite the lack of any opposition in the comment file, an unknown SEC Commissioner blocked the rule from going into effect under “Rule 431 of the Commission’s Rules of Practice” on January 19, 2024.  That rule provides that:

An action made pursuant to delegated authority shall have immediate effect and be deemed the action of the Commission. Upon filing with the Commission of a notice of intention to petition for review, or upon notice to the Secretary of the vote of a Commissioner that a matter be reviewed, an action made pursuant to delegated authority shall be stayed until the Commission orders otherwise. . . .

As it stands, the change has been indefinitely delayed.  Compensated NARs cause problems for investors because they operate in lieu of attorneys without being bound by the ethical constraints governing attorneys.  As one comment letter explained, this ethics gap leads to major problems.  The NARs charge non-refundable up-front fees and settle cases without client approval.  St. John’s Securities Arbitration Clinic has filed multiple letters in support of addressing this problem.  As a 2017 letter from St. John’s explained:

NARs are not governed by the same constraints governing attorneys. Most notably, there are no ethical rules limiting the conduct of the NARs. Individuals who fail to receive competent representation from an NAR may have no recourse.

If an incompetent attorney botches a case, the client has a claim for malpractice.  When an incompetent NAR does the same, the client cannot bring a professional malpractice claim because the NAR owes no professional ethical duties.

Hopefully, the SEC will allow the rule change to go into effect.

Dear BLPB Readers,

I wanted to share that the Journal of Financial Market Infrastructures (where I’m an Associate Editor), in addition to the Bank for International Settlements Innovation Hub, and Quinan & Associates will host a seminar, The Evolution of Financial Markets: Digital Money and Atomic Settlement, on March 19th.  It will be on the early side for those in the U.S., but it looks really interesting!  A pdf flyer of the event is below.  

Download Joint-Seminar-Agenda-Flyer

Last week, Chancellor McCormick decided Sjunde AP-Fonden v. Activision Blizzard, which held that former shareholders of Activision had stated a claim that Activision’s board failed to comply with DGCL 251(b) when it approved the merger agreement with Microsoft.  The draft agreement that the board reviewed was missing key details, such as consideration, the disclosure letter, and a plan to handle dividend payments between signing and closing.  Those details were obviously filled in later, but the full board never formally approved the revised merger agreement – dividends, for example, were handled by committee.  McCormick held that while a board need not review a formal, final version of the agreement, Section 251(b) requires that they at least review a version that includes essential terms, and plaintiffs had for pleading purposes alleged that the Activision board failed to do so.  Due to the statutory violations, McCormick ultimately concluded, the plaintiffs had stated a claim for unlawful conversion of their shares.

So, here’s the thing.  Of course boards should formally review the essential terms of a merger agreement before declaring the deal’s advisability for statutory purposes.  How could it be otherwise?  But at the same time, it seems, you know, likely, that the individual Activision board members eventually came to learn the full essential terms and approved them, at least in practice if not through formal action.  Or, to put it another way, I think it’s unlikely there will be evidence that if the board had called a formal meeting to formally approve the final final merger, signed with a quill pen on a vellum scroll, the deal terms would have been any different. 

So the shareholders would have gotten the same deal regardless.  Meanwhile, the deal’s done; no way McCormick is going to unwind it.  (One case even held there can be no conversion claims post-merger because of the impossibility of unwinding, see Arnold v. Soc’y for Sav. Bancorp, Inc., 1995 WL 376919 (Del. Ch. June 19, 1995), though I am not sure that makes sense; conversion claims can be maintained when property is destroyed or transformed.). 

But, absent unwinding, the only remedy available to shareholders will be the fair value of their pre-merger shares.  And there are some precedents about determining fair value of a tradeable asset – giving the victim the benefit of the higher price when there are fluctuations in value after conversion – but here, the asset itself disappeared from the market after conversion.  Even if you looked to the pre-conversion price, Activision traded consistently below the deal price.  And if nothing else, I imagine that McCormick might conclude the fair value in this context should be calculated the same way it would be in an appraisal action, which probably means deal price.  Any way you slice it, I’m not sure what damages the shareholders can obtain, beyond nominal plus attorneys’ fees.  So it seems like an awful lot of running around for something that doesn’t really provide much benefit. 

And that, I think, was kind of the spirit of the grumblings about Delaware law I heard at the Delaware Developments panel at the Tulane Corporate Law Institute on Thursday.  (I missed the Activision discussion that I gather occurred in the prior panel; anyone know if they talked about remedies?)  Anyway, at Delaware Developments, mostly, corporate attorneys were complaining about new cases like Activision or Moelis that upset settled expectations and subjected corporations to unpredictable liabilities, but I think the spirit of the objection, and there’s some truth to this, is that it feels like formalities being enforced without a corresponding shareholder benefit.  There may be a systemic benefit from adhering to the technicalities – governance restrictions in the charter, not a shareholder agreement, and of course boards should have the details of a merger agreement when approving it – but it’s hard to see the benefit to shareholders by enforcing them ex post in individual cases.

But that’s the weakness of relying entirely on a system of private litigation.  Activision, for example, very much smacks of the kind of thing that should be handled with a regulatory fine and a stern warning to others.  But that’s not on the table.

Vice Chancellor Laster recently requested information from litigants in Seavitt v. N-able, Inc. with this letter.  According to the complaint:

Plaintiff brings this action because N-able is presently flouting this foundational principle of Delaware law through a contractual arrangement designed to entrench and perpetuate certain favored stockholders’ control over N-able’s business and affairs. Specifically, in violation of DGCL Section 141(a), N-able has provided certain favored stockholders—affiliates of the private equity firms Silver Lake Group, LLC (“Silver Lake”) and Thoma Bravo, LLC (“Thoma Bravo,” and together with Silver Lake, the “PE Investors”)—with a contractual power to control the most important decisions and functions properly entrusted to the Company’s Board under our corporate system.  

. . . 

Third, in violation of DGCL Section 141(k) and in further derogation of the stockholder franchise, N-able has adopted an invalid provision in its operative Amended and Restated Certificate of Incorporation (the “Certificate”), purporting to provide that as long as the PE Investors own in the aggregate 30% of the voting power of the Company’s outstanding shares, “directors may be removed with or without cause upon the affirmative vote of the [PE Investors]. . .” This provision violates DGCL Section 141(k), which governs the removal of directors and provides that directors may be removed only by a majority stockholder vote (or, in some cases, a higher vote pursuant to DGCL Section 102(b)(4)). N-able’s Certificate, by contrast, allows a favored minority of stockholders to remove duly-elected directors who continue to maintain the support of a stockholder majority

This may seem familiar to readers because Prof. Lipton recently blogged about a similar issue in Moelis.  This case has some different wrinkles because the court has to consider both shareholder agreement and corporate charter provisions.  The Moelis decision found that many of the shareholder agreement provisions would have been permissible if they had been included in a corporate charter.

This brings me to the letter.  It asks about a few issues:  (i) whether Delaware corporations can incorporate stockholder agreements by reference into their charters in order to give them the same effect as charter provisions; (ii) whether bylaws can incorporate stockholder agreements by reference and give them the same effect as bylaw provisions; and (iii) whether the charter and bylaws at issue adequately did the job here. The letter asked the parties to brief the issues and gave some specific questions.

Of particular interest to me is number 7 an “extremes case.” It asks whether a Delaware charter could include a provision saying that the corporation would be governed by Nevada law with the proviso that if there were “any conflict with a mandatory provision of the Delaware General Corporation Law, Delaware shall control.”  In non-mandatory cases, the charter would swap Delaware defaults for Nevada defaults.

I don’t expect corporations to actually do this.  It probably makes more sense to just reincorporate into Nevada if you want to be bound by Nevada law.  You’d probably save a lot of money that way.  Our local newspaper, the Review Journal, recently covered this issue.  It highlighted one recent mover’s cost calculation:

Laird Superfood, a plant-based food producer physically headquartered in Boulder, Colorado, reincorporated in Nevada on Dec. 31. In a filing with the U.S. Securities and Exchange Commission before the shareholder vote, it told investors that it expected to pay about $200,000 in Delaware taxes for that fiscal year. By contrast, Laird’s Nevada annual fees are expected to be about $700, according to the filing. Nevada doesn’t have corporate taxes.

It’ll be interesting to watch the briefs on this one as they come in.