In Case You Missed It - Interesting Items for Corporate Counsel - August 2017

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  1. A review of 2017 proxy season activity, including the trend toward adoptions of proxy access bylaws, is here. A suggestion that the big news of the 2017 proxy season was climate change proposals and the shift in Blackrock, Vanguard and Fidelity voting policies to generally support them, is here (although if you’re not an oil company, you might not have much to worry about – yet).
  2. 2017 proxy results also suggest that things may get rougher for public company directors and public companies:
    • Investors seem more willing to express disappointment with directors, see here.
    • Shareholder activism is becoming the “new normal,” according to a JP Morgan report here (summary here). (But see here for a suggestion that the SEC may try to stanch the flow of shareholder proposals.)
    • Evidence that some passive investors rely solely on ISS voting recommendations, making ISS’s often opaque considerations even more frustrating, is here.
  3. Although it seems like proxy season just ended (and it did), it’s never too early to start thinking about next year. Apparently. We are here to help. ISS opened its 2018 Governance Principles Survey, here. The survey solicits views on:
    • dual class structures,
    • director gender diversity,
    • share repurchases for cross-market companies (where the home jurisdiction requires a shareholder vote),
    • virtual shareholder meetings, and
    • issuer views on how pay-ratio data should be analyzed and used by shareholders.
    For good or ill, ISS strives to remain relevant and it really can only do that if it changes things up once in a while, even though presumably “good” corporate governance principles haven’t changed in centuries. To the extent there are tea leaves to read, the ISS survey may set the stage for changes to its voting policies or governance ratings scores in the areas listed above.
  4. “Proxy access” will likely remain a trend in shareholder proposals. The Council for Institutional Investors released, here, its updated views on proxy access best practices, including a chart that shows where its recommendations differ from what has seemingly become “the norm”: 3% of a company’s outstanding shares held by no more than 20 shareholders for three years may nominate up to 20% of the directors. In 2017, activists proposed to “fix” proxy access bylaw provisions, and the SEC said that a company could not exclude some of the fixes on the basis that they were “substantially implemented.” See here and here. Keep in mind, of course, that although proxy access remains a focus of shareholder activists, most of these hair-splitting proxy access “fix it” proposals fail.
  5. As an example of the growing disdain for dual class stock (see Item 1 above, if you believe in tea leaves), S&P and FTSE Russell announced they would exclude new dual class stock companies from their indices. See here. (How does that make you feel if you’re an index fund investor and the policy removes the hot stock from your portfolio?) Some commentators are lauding the holding in CalPERS v. IAC, discussed here, in which Delaware’s Chancery Court held that IAC directors had breached their fiduciary duties by approving the creation and issuance of new non-voting stock to preserve the IAC Chairman’s control of the company (a la Google, sort of, here).
  6. Recall that beginning in September public registrants must hyperlink to each exhibit listed in the exhibit index, including each exhibit incorporated by reference. The update to the SEC’s EDGAR manual is here.
  7. The Center for Audit Quality asks, here, that its members focus on the adequacy of management’s disclosures about the potential effects of accounting principle changes.
  8. Finally, a brief foray into M&A, sort of:
    • Delaware reminds us in The Mrs. Fields Brand v. Interbake Foods, here, that “material adverse effect” means the same thing in a commercial contract that it means in the M&A context, developed most significantly in IBP, Inc. Shareholders Litigation, i.e. for a change to be material and adverse it must (a) be unexpected, (b) substantially threaten the earnings potential of the target, and (c) last a long time (but maybe not as long as in an M&A context). Perhaps even more significantly, the case introduced us to the concept of “cookie confusion,” which certainly sounds like a problem with potential widespread effect.
    • In DFC Global v. Muirfield Value Partners, here, Delaware Chief Justice Strine opined that, although he was not willing to accept a presumption that the deal price is the fair value of shares, if the sales process was robust a judge better have a darn good reason for deviating from that value. The lack of such a presumption may not be all bad for acquirers – the Delaware Chancery Court also recently ruled that a company’s fair value was less than half of the acquisition value, here.
    • In Chicago Bridge v. Westinghouse, here, the Delaware Supreme Court (Strine again!) held that a purchase price adjustment provision, in the context of the entire purchase agreement and based on the language of the provision, only allowed a plaintiff to recover for changes to a seller’s business between signing and closing, and the fact that components of the seller’s working capital calculation did not comply with GAAP was not a separate basis for a claim. At issue in the case was a potential $2.5 billion swing in the purchase price. Yikes.
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