A perfectly legal, but on its face very predatory, practice is increasingly hitting major public companies and likely confusing and taking advantage of their small individual investors: the “mini” tender offer. Thus far, the practice has hit Silicon Valley household names, particularly in the past year, such as Gilead (2011), Intel (2013), PayPal (2015), Yahoo! (2015) and AT&T (2015), all of which issued press releases recommending against these dubious tenders. READ MORE
Delaware Governor Jack Markell has signed into law Senate Bill No. 75, which prohibits fee-shifting (or “loser pays”) bylaws for stock corporations. Much to the chagrin of the US Chamber of Commerce, the legislation sped through the Delaware legislature on its way to killing the purported opening created when the Delaware Supreme Court permitted fee-shifting for non-stock corporations in ATP Tour, Inc. v. Deutscher Tennis Bund, 91 A.3d 554 (Del. 2014).
• The ban does not apply to non-stock corporations, although the intellectual reasoning for not extending it to non-stock corporations is unclear – it is convenient, however, that by carving out non-stock corporations, the Delaware legislature and executive are not put in the position of having to overturn the holding of ATP which thus continues to permit fee-shifting for non-stock corporations.
• The ban is precisely that – an outright ban. Despite a few lonely cries from a couple of Delaware practitioners, there does not appear to be any impetus to explore more pragmatic compromise positions, such as limiting loser pays liability at a reasonable pre-set amount (perhaps US$250,000 or US$500,000 or the like).
• The ban is to be accompanied by a ban on adopting exclusive forum bylaws that put exclusivity in a state other than Delaware – hence, a Delaware corporation may only centralize its litigation in Delaware, but not elsewhere.
• There has been no outwardly observable chatter regarding the inherent and glaring contradiction in this situation: why many a Delaware jurist will often emphasize the sacrosanct nature of contract on one hand, but conversely, plaintiff lawyers could not rely on the private markets (as opposed to government regulation) to regulate risks arising from filing lawsuits. Presumably an insurance market, or pooling of risks by plaintiffs in broader collaborative groupings, could have mitigated the worst fears propagated by the plaintiffs’ bar. READ MORE
The campaign of New York City Comptroller Scott Springer, on behalf of New York City’s pension funds, to introduce proxy access proposals at 75 different large public companies is well under way, and preliminary indications are that the approval rate of such proposals is resoundingly high.
According to Proxy Monitor, a project of The Manhattan Institute, 15 of 19 proxy access proposals (whether from Mr. Springer or otherwise) introduced at public company annual meetings in May passed. Of the 4 that failed to win, 2 received 49 percent support, 1 46 percent and 1 40 percent. This nearly 80 percent pass rate eclipses the approximately 60 percent pass rate for the 10 proposals introduced in the period between January 1 and April 30, which may be because many earlier proposals originated in part from perennial corporate gadflies rather than the more august office of the New York State Comptroller.
The proxy access proposal passed by wide margins at each of eBay (in May) and Netflix (in June), the two large technology companies that were part of Mr. Springer’s list of 75 targets for the 2015 proxy season and that have held their annual meetings. The annual meeting for Electronic Arts, the third and final technology company on the target list, is set for August. READ MORE
Years of regulatory snarls and courtroom battles have left a complex, intertwined state and federal regulatory patchwork for proxy statements that has resulted in split approaches for stockholder proposals on one hand and stockholder nominations for directors on the other.
Large pension funds are increasingly focused on encouraging companies to amend bylaws to allow for stockholder nomination of a percentage of director candidates. Adoption of these proposals is rapidly gaining momentum, and the dynamic may significantly change corporate board elections in the US.
The proxy statement
The annual ritual of a company’s annual meeting is soliciting votes in advance through the proxy statement. Proxies are used for routine meetings, as well as special meetings for transactions such as acquisitions. For a routine meeting, a company will solicit votes for a slate of company-nominated directors, ask for ratification of its independent public accounting firm, comply with Dodd-Frank’s requirement for an advisory vote on executive compensation and tackle other business, generally equity plan share reserve increases or the like.
The proposal is among several 2015 legislative changes to the DGCL proposed by the Council of the Corporation Law Section of the Delaware State Bar Association, which is the working-level body that, historically through consensus, creates changes to the DGCL. READ MORE
The NYSE Corporate Governance Guide, published in early 2015, includes my Chapter 32 on legal issues related to corporate governance and cyber-security.
The full guide is available at: https://www.nyse.com/cgguide
And a pdf of Chapter 32 is posted under the Resources section of the blog.
For many decades, independent directors in most public companies generally avoided face-to-face interaction with stockholders. At most, large stockholders would receive a visit from management on a swing through New York, or occasionally a couple of other East Coast cities with a high concentration of the investing community. And the odd gadfly stockholder could sometimes intercede with a question at an annual meeting where directors may make an appearance. In many respects, board members remained insulated from direct pressure, save for the occasional hostile attempt in an M&A situation or the like.
This suited companies for a number of reasons. Independent board members often have other responsibilities, and thus may not want to devote the additional time to stockholder interaction. These directors also may prefer that management act as a filter on communications – of course, management may prefer the same as well. READ MORE
The Delaware state senator responsible for introducing a proposed ban on fee-shifting bylaws has instead sponsored a resolution – unanimously passed in the Delaware state senate – to delay any vote on the proposed ban until 2015.
The delay, introduced on June 18, came amid intense lobbying against the proposed legislative ban by the U.S. Chamber of Commerce and reportedly at least one large Delaware-headquartered corporation. The proposed ban also enjoyed support from the governor of Delaware, and perhaps not coincidentally, a key Delaware shareholders’ trial lawyer and reported fundraiser for the governor.
What now? A principle reason that companies incorporate in Delaware is the certainty underlying Delaware corporate jurisprudence. While a fight over the ban has been put off for at least six months, public company boards of directors are left with a quandary. The Delaware Supreme Court’s decision in ATP Tours Inc v Deutscher Tennis Bund opened the door for fee shifting bylaws as being ”facially valid,” at least for non-stock corporations – and thus presumably regular stock-issuing corporations as well – subject to adoption by a board after due deliberation for a “valid corporate purpose.” READ MORE
It has been a dizzying couple of weeks for the Delaware Bar. Previously, the disaffected German tennis federation of the professional ATP tennis tour had sour grapes over the downgrading of the Hamburg tennis tournament and the tournament’s concurrent move from spring to summer. (One cannot invent such colorful facts.) The German federation sued but lost in court, prompting the ATP tour to request reimbursement of its legal fees and other costs and expenses (“of every kind and description”) in accordance with the bylaws of the ATP tour. The federal District Court of Delaware held that the enforceability of such a provision was an open question under Delaware law and sent limited related questions over to the Delaware state courts for a decision.
On May 8, Delaware’s Supreme Court released an opinion in ATP Tours, Inc. v. Deutscher Tennis Bund in which fee shifting bylaws were upheld for a non-stock corporation. But in a “dude, not so fast” moment, after wrangling behind closed doors, on May 22, the Corporation Law Section of the Delaware State Bar Association served notice that a special meeting would be held on May 29.
This is high drama in the buttoned-down halls and quiet streets of Wilmington. The purpose of the meeting will be to halt the forecasted consequences of ATP by voting on recommending to the Delaware Legislature a statutory amendment that would quash such bylaw provisions – essentially making a legislative end-run around the Supreme Court’s decision.
Fee shifting bylaws, also known as loser-pays bylaws, have been the new-age favorite child of many in the corporate defense bar. These are simply provisions by which a losing party in litigation must pay the fees and costs of the prevailing party. In an era where at least 80 percent of mergers result in lawsuits against the company’s board of directors for various breaches of disclosure duties or purported conflicts of interest, such provisions would likely make plaintiffs’ firm reflect long and hard before filing suit. While in the past, plaintiffs’ firms needed only invest a relatively small amount of their own capital in bringing an action to get past a motion to dismiss and into discovery, the advent of loser-pay bylaws would have introduced the specter of paying a potentially unlimited (or perhaps limited only by a vague “reasonableness” standard) amount to the other side’s pricey AmLaw 100 lawyers and e-discovery experts, plus, assumedly, in-house expenses as well, in the event the plaintiffs were to lose.
Proponents of such loser-pays bylaws argue that such bylaws would deter frivolous suits, but that truly legitimate suits would still be brought, since plaintiffs would be doubly sure before filing that they believe their case would prevail. Detractors argue that such provisions are an over-correction and the mere chance, no matter how small, of losing even a strong case would scare off plaintiffs and stamp out otherwise meritorious claims before they were even filed in court.
Following the ATP decision, many law firms immediately (and justifiably) inferred the analysis used in the arcane realm of a non-stock corporation could be easily applied to the much more common domain of the stock-issued corporation. This sent the Delaware plaintiffs’ bar into a frenzy. A cynic could argue that an entrenched Delaware plaintiffs’ bar (and, even more cynically, perhaps secretly one or two litigators from the Delaware defense bar) sensed the end of the lucrative gravy train of legal fishing expeditions that often result in settlements with modest substantive results as well as individually relatively modest, but in the aggregate stunningly large, amounts of attorneys’ fees.
Frequently, such so-called “disclosure only” settlements result merely in changing often subtle language in a merger SEC disclosure document. At the end of the day, let’s not kid ourselves into believing that stockholders actually read the fine print of such tombs in any event. Because of the fees (and timing problems) with fighting such suits, it often makes sense for a company to simply tinker with some requested legalese, pay the legal fees of the plaintiffs’ firm and move on, rather than litigate the issue and rack up expensive outside counsel fees – from both their primary corporate law firm and often a second Delaware litigation firm – which would not be reimbursed even if the company were to win the case. However, with fee shifting bylaws provisions, suddenly those costs transform from eternally sunk to potentially recoverable, such that increasing numbers of companies may choose to fight lawsuits rather than rolling over and reluctantly but quickly resigning themselves to settling.
Changes to the Delaware General Corporation Law (DGCL) are normally a rather rubber-stamp affair – the Delaware State Bar Association recommends a change and the Delaware legislature dutifully tends to follow the advice of its experts, lest it monkey around with a pristine legal framework that generates millions of fees each year for the state. These statutory changes generally occur on an annual cycle in which new changes take effect on August 1, as with routine changes for 2014 on contractual statutes of limitations and other matters.
It will be interesting to gauge over the course of the coming weeks whether the recommendation of the Corporate Law Section in this instance is first embraced by the wider bar and then enacted by the legislature. Both these outcomes seem highly probable – but less so than with prior changes. In addition, one wonders whether Chief Justice Strine – whose ascendancy was widely heralded and whose wit and writing style are prone to bold rhetorical flourish and have been equally admired – will quietly acquiesce. Instead, he may pluckily note that he only interprets law but does not make it. Given his history, he seems unlikely to merely quietly note that the ATP decision technically only applied to non-stock rather than stock corporations. But such a point would be, while a bit hyper-technical, both convenient and face saving.
The irony is that Delaware is considered the most corporation-friendly jurisdiction among the favorite organizational homes of companies, and thus the least likely to witness a homegrown insurgency against fee shifting bylaws. Pretenders to the Delaware throne, such as Nevada and North Dakota, are universally perceived as more stockholder/founder friendly. Accordingly, it seems almost certain that this issue will remain isolated to Delaware. It will not likely spread elsewhere.
In the interim, rather than rushing to have their boards adopt fee shifting bylaws provisions, corporations will do well to step back and coolly observe as the gladiators of the Delaware Bar fight it out among themselves.
Reducing startup/subsidiary brain damage: Delaware moves to further streamline corporate processes for emerging companies
Proposed amendments to the Delaware General Corporations Law (DGCL) for 2014 aim to significantly streamline routine questions that often prove vexing for emerging growth companies and newly formed subsidiaries of larger companies.
It is a fact of life that people leave jobs. They move to other cities, whether for family or lifestyle. They quit for perceived greener pastures. They retire. Or they are hit by the proverbial bus. Forming a company under Delaware law historically has had a pitfall: a “sole incorporator” (often a paralegal) forms the initial company, one assumes promptly appoints one or more directors and then, one further assumes, immediately resigns.
But sometimes that paperwork is lost, overlooked (particularly if creating a new subsidiary for a larger company) or forgotten in the midst of workloads, or a company founder without the benefit of legal counsel did the incorporation and neglected to resign. An existential crisis involving numerous lawyers scratching their heads can ensue if the resignation paperwork does not exist and the original sole incorporator cannot be located or refuses to cooperate.
The new DGCL provision (Section 108(d)) will allow any person on whose behalf the sole incorporator acted, as either an employee or agent, to take actions that the sole incorporator was authorized to take, such as appointing the initial board and resigning. Consequently, if your favorite sole incorporator decides to quit to travel the world and cannot be contacted while climbing Mount Everest, or your least favorite sole incorporator quit or was involuntarily transitioned out (and it is in just such scenarios where problems most commonly arise), then the DGCL amendment will allow for the company to merely step in, clean up and ratify past actions. Junior associates across the country may now sigh in relief.
Other DGCL amendments that further promise to reduce startup company brain damage are:
A future director, whether or not yet formally appointed by the sole incorporator, can now sign documents in advance, such as the routine first UWC authorizing the company to have bank accounts, so long as the signature was revocable and entered into effect within 60 days of the signature. This means startup founders can execute formation documents in advance – as many have done customarily in the past irrespective of the technicalities of Delaware law.
Stockholder votes will no longer be required for name changes in the certification of incorporation or for cleaning up items related to the initial incorporator, historical stock-split language or the initial formation clauses. All of this allows routine corporate maintenance and cleanup to be performed without the expense and time allocation of a non-substantive stockholder vote.