Header graphic for print
Federal Securities Law Blog Information on federal securities laws, news and developments

Category Archives: Corporate Governance

Subscribe to Corporate Governance RSS Feed

Substantial risk of forfeiture guidance clarifies when Section 16 short-swing profit liability can defer taxation of equity compensation awards

Posted in Compensation Matters, Corporate Governance

Legend had it at my law school that one day, a lost student walked into a torts class and asked the professor if this class was wills, trusts, and estates. The torts professor replied, “We haven’t gotten that far yet.” A dry sense of humor on the professor’s part? Perhaps. His point, however, was that the law can be a seamless web, with one area of law often having an impact on another. This point often is true with respect to the tax and securities laws.

We blogged previously that the IRS and Treasury issued final regulations under Code Section 83 to “clarify” the definition of “substantial risk of forfeiture” with respect to restricted stock (and other property) grants. One of the clarifications was that transfer restrictions, in and of themselves, do not constitute a substantial risk of forfeiture. For taxation to be deferred on restricted stock grants, the stock must be both non-transferrable and subject to a substantial risk of forfeiture. An example might help illustrate this point. Suppose that a company grants its CEO restricted stock that vests on the fifth anniversary of the date of grant, provided that the CEO has been continuously employed through that date. Also suppose that the CEO satisfies this vesting condition, but on the vesting date, the company’s insider trading policy prohibits the CEO from selling the shares for several months. The CEO would be taxed on the value of the shares on the vesting date, despite the fact that the CEO …

Continue Reading →

Corporate law must reads — excerpts from the Federal Securities Law Blog

Posted in Corporate Governance, Proxy Issues, SEC News, Whistleblower Issues

In the ever-changing world of corporate law, it’s important to have trusted resources that can keep an eye out for how the relentless evolution of regulation and legislation can affect business operations, governance, strategy and growth. Our goal is for the Federal Securities Law Blog, and the Porter Wright attorneys who contribute to it, to be one of those resources. We invite you to read our most recent e-book, which provides updates about recent federal rules changes that can have an impact on your business. Download the Corporate Must Reads e-book.…

Continue Reading →

Recent Delaware case reminds of importance of litigation expense advancement provisions in organizational documents

Posted in Corporate Governance, Delaware News

Much to the chagrin of corporate lawyers, there are still some companies that do not have provisions in their articles of incorporation, bylaws or operating agreements that provide for advancement of litigation expenses to directors and officers. The recent case of White v. Kern, No. 7872-VCG (Del. Ch. Jan. 24, 2014) (Transcript) illustrates that courts may prohibit the advancement of expenses to defendant directors and officers in the absence of these provisions.…

Continue Reading →

Appraisal actions in M&A transactions are increasing in frequency

Posted in Corporate Governance

Stephen M. Davidoff wrote an interesting article in the New York Times that notes the ten-fold increase in the value of appraisal rights actions over the last 10 years and describes the new trend of hedge funds purchasing shares in target companies following the announcement of an M&A transaction for the sole purpose of exercising appraisal rights with respect to the purchased shares.

The increase in frequency of appraisal rights actions and the presence of aggressive hedge funds as players in the appraisal process should serve as a reminder to both buyers and publicly traded target companies in M&A transactions that your transaction process and price are being watched carefully not only by your own shareholders, but also by other opportunistic investors looking to capitalize on a weak transaction process or price. This reinforces the importance for buyers and target companies to conduct a careful and conflict-free transaction process to deter the initiation of appraisal actions and to defend against any appraisal actions that may be brought by shareholders.…

Continue Reading →

FTC Revises HSR and Interlocking Directorate Thresholds

Posted in Corporate Governance, General Business News

HSR Revisions

The Federal Trade Commission (FTC) recently announced the annual changes to the notification thresholds for filings under the Hart-Scott-Rodino Antitrust Improvements Act (HSR) as well as certain other values under the HSR rules.

As background, the HSR Act requires that acquisitions of voting securities or assets that exceed certain thresholds be disclosed to U.S. antitrust authorities for review before they can be completed. The “size-of-transaction threshold” requires that the transaction exceeds a certain value. Under certain circumstances, the parties involved also have to exceed “size-of-person thresholds.” This year’s values, which are adjusted annually based on changes in the GNP, take effect in mid-to-late February 2014. The FTC also adjusted the safe harbor thresholds that govern interlocking directorates in competing companies.

The most important change is that the minimum size-of-transaction threshold will increase from the current $70.9 million to $75.9 million. The size-of-person thresholds will also increase as follows.

  • For transactions valued between $75.9 million and $303.4 million, one party to the transaction must have $15.2 million in sales or assets and the other party must have $151.7 million in sales or assets, as reported on the last regularly prepared balance sheet or income statement.
  • For transactions valued at greater than $303.4 million, no size-of-person threshold must be met to require an HSR filing.

The filing fee thresholds have similarly increased as follows.

Interlocking Directorates

Section 8 of the Clayton Act generally prohibits one person from serving as a director or officer of two competing corporations if two thresholds …

Continue Reading →

ISS 2014 U.S. Proxy Voting Guidelines

Posted in Corporate Governance

Yesterday, proxy advisory firm ISS released its 2014 proxy voting guidelines, effective for shareholder meetings held on or after Feb. 1, 2014. ISS positions on some topics continue to evolve. Below are some notable differences from the 2013 Guidelines:

When determining votes on director nominees, four fundamental principles continue to apply: (1) accountability; (2) responsiveness; (3) independence; and (4) composition (last year “composition” was referred to as “competence”). The description of “independence” is more robust than last year, including a statement that “the chair of the board should ideally be an independent director,” which is not surprising given that ISS has previously supported shareholder proposals requiring an independent chair.

In 2013, ISS recommended withholding votes for directors if the board failed to act on a shareholder proposal that received the support of a majority of the shares outstanding the previous year. For 2014, ISS will recommend voting case-by-case in that scenario and will consider various factors including the subject matter of the proposal and the rationale provided in the proxy statement for the level of implementation.

Finally, ISS has expanded on the factors it will consider in determining how to vote on proposals to recoup incentive cash or stock compensation made to senior executives when the calculations turn out to be based on erroneous figures. Such factors include consideration of the rigor of the policy and how and under what circumstances compensation is subject to the clawback.…

Continue Reading →

An Academic Perspective on Shareholder Activism as a Corrective Mechanism

Posted in Corporate Governance

The editors at the Corporate Governance & Social Responsibility blog brought our attention to a recent academic paper from The Ohio State University Moritz College of Law titled “Shareholder Activism as a Corrective Mechanism in Corporate Governance.” In the paper’s abstract, authors Paul Rose and Bernard Sharfman write:

Under an Arrowian framework, centralized authority and management provides for optimal decision making in large organizations. However, Arrow also recognized that other elements within the organization, outside the central authority, occasionally may have superior information or decision making skills. In such cases, such elements may act as a corrective mechanism within the organization. In the context of public companies, this article finds that such a corrective mechanism comes in the form of hedge fund activism, or more accurately, offensive shareholder activism.

Offensive shareholder activism exists in the market for corporate influence, not control. Consistent with a theoretical framework where the value of centralized authority must be protected and a legal framework in which fiduciary responsibility rests with the board, authority is not shifted to influential but unaccountable shareholders. Governance entrepreneurs in the market for corporate influence must first identify those instances in which authority-sharing may result in value-enhancing policy decisions, and then persuade the board and/or other shareholders of the wisdom of their policies so that they will be permitted to share the authority necessary for the policies to be implemented. Thus, boards often reward offensive shareholder activists that prove to have superior information and/or strategies by at least temporarily sharing authority …

Continue Reading →

Shareholder Approval of Equity Incentive Plan; Has It Been Five Years?

Posted in Compensation Matters, Corporate Governance

Most equity incentive plans have a number of different shareholder-approved business criteria for setting performance goals and allow the compensation committee to select the criteria each year. This practice generally requires re-approval of the goals by the shareholders under Internal Revenue Code Section 162(m) whenever the committee makes a material change to the criteria. If the committee has not made any material changes to the performance criteria but retains discretion to select the performance targets from year-to-year, shareholders generally will need to reapprove the criteria every five years under Code Section 162(m).

If shareholder approval last occurred in 2009, then it is time to prepare for re-approval in 2014. This is also a good time to consider if an amendment is needed to increase the authorized share pool.…

Continue Reading →

Lessons From In re Trados: Delaware Courts Skeptical of Independence of Directors of Portfolio Companies

Posted in Corporate Governance

In our previous posts about In re Trados available here and here, we provided some background about the facts, outcome and usefulness of the Trados case, as well as a discussion of the conflicting interests of the preferred stockholders and common stockholders. In this installment, we will discuss the issue of director independence and conflicts of interest of the Trados directors, and the related analysis conducted by the Delaware Court of Chancery.

In determining whether directors have met their fiduciary duties, the standard of review used by the court is critical to the inquiry. The entire fairness standard, Delaware’s most onerous standard, applies when the directors have actual conflicts of interest.1 To obtain review under the entire fairness standard, a plaintiff must prove that a majority of the directors making the challenged decision were not independent and disinterested.2 In Trados, the plaintiff successfully proved that six of the seven Trados directors were not disinterested and independent, making entire fairness the operative standard of review.3

A thorough discussion of the court’s director by director analysis in Trados illustrates the Delaware courts’ willingness to find that directors of venture capital and private equity portfolio companies are conflicted, thereby triggering an entire fairness review.…

Continue Reading →

So Where to Next for Corporate Governance?

Posted in Corporate Governance

This post appeared originally on the Corporate Governance & Social Responsibility blog. The Federal Securities Law Blog thanks the author for allowing us to share it with you.

It was a pretty normal day until Marc Smith called me for a chat on Skype. Marc is a sociologist of computer-mediated collective action at Connected Action and director at Social Media Research Foundation, Belmont, CA, and in 90 minutes he just confirmed everything I thought about the development and future of the Internet and social networks. We discussed Twitter networks predominantly, but the model transfers to any networked entity where one named thing interacts with (talks to) another. Stay with me on this…

Social networks are, after all and as I figured, extrapolated scaled models of our intrinsic human social permutations and permeations, perhaps even our psyche (doffing my hat to Freud and Jung). They even start from archetypes (Jung, again), they develop organically, and they form structures that reflect our ‘collective’ [Jung would have said 'collective unconscious', probably]. Bizarrely, that thin veneer of perceived protection from recourse for our actions afforded by thinking “well, its only a tweet” might even strip away some of the social airs and graces we might have in our fleshy lives, leaving a more immediate expression of our underlying thoughts, maybe, in some cases, perhaps.…

Continue Reading →

Lessons from In re Trados: Conflicting Interests of Preferred and Common Stockholders

Posted in Corporate Governance, Delaware News

In our previous post about In re Trados, we provided some background on the facts, outcome and usefulness of the Trados case. In this installment, we will discuss the conflict of interest between the preferred stockholders and the common stockholders of Trados and the related analysis conducted by the Delaware Court of Chancery.

Divergence in Interests of Preferred and Common Stockholders

Due to the liquidation preference of preferred stock, preferred stockholders and common stockholders can have diverging interests in exit transactions. “Because of the preferred shareholders’ liquidation preferences, they sometimes gain less from increases in firm value than they lose from decreases in firm value. This effect may cause a board dominated by preferred shareholders to choose lower-risk, lower-value investment strategies over higher-risk, higher-value investment strategies.1

Continue Reading →

Fiduciary Duties in M&A Exit Transactions: Lessons from In re Trados

Posted in Corporate Governance, Delaware News

On Aug. 16, 2013, the Delaware Court of Chancery issued an opinion1 finding that the directors of TRADOS Inc. (Trados) did not breach their fiduciary duties in deciding to sell Trados despite the common stockholders receiving no sale consideration; (ii) a majority of the directors approving the transaction having a conflict of interest; (iii) the court’s review under the entire fairness standard; and (iv) the directors’ failure to follow a fair process, because the common stockholders received a fair price (i.e. the value of the common stock immediately prior to the merger was zero and the common stockholders received zero in the merger).

Though In re Trados is not groundbreaking in the sense that it does not present any novel legal issues, it nonetheless serves as an important illustration of common conflict of interest and fiduciary duty issues that arise in a typical exit transaction fact pattern, particularly for venture capital or private equity backed companies. Through the next several weeks, we will discuss in more detail some of the important takeaways from In re Trados in a series of blog posts.…

Continue Reading →

Are You Sure You’re S-3 Eligible? A Reminder to Disclose the Board’s Decision Regarding Frequency of Say-on-Pay Vote on Form 8-K

Posted in Compensation Matters, Corporate Governance, Say-on-Pay Issues

Though most reporting companies conducted their first say-on-pay vote in 2011 and disclosed the shareholder voting results on Form 8-K, some companies overlooked the additional requirement to disclose the board of directors’ decision (in light of the shareholders’ advisory vote) regarding the frequency that the company will conduct say-on-pay votes. A company’s failure to file this Form 8-K regarding the board’s decision on the say-on-pay vote frequency could result in the company being an untimely filer and ineligible to use Form S-3. Fortunately, the SEC staff indicated in its 2012 “SEC Speaks” conference that it will likely grant waivers to companies if:

  1. they file an amended Form 8-K indicating the board’s decision on the say-on-pay vote frequency; and
  2. the board’s decision on say-on-pay vote frequency followed the shareholder’s recommendation.

However, anecdotal conversations with the SEC staff have indicated that:

  • waivers are not always granted;
  • the board’s decision on say-on-pay vote frequency must match the board’s recommendation in addition to matching the shareholder’s recommendation for a waiver to be granted; and
  • the SEC does not intend to grant waivers forever.

Continue Reading →

Icahn Re: Apple: Shareholder Activism or Stock Manipulation?

Posted in Corporate Governance

At 2:21 p.m. and at 2:25 p.m., on August 13, 2013, Carl Icahn issued the following tweets:

carl icahn

Shortly after sending that tweet, Apple shares jumped on the news closing 4.8% higher for the day, increasing Apple’s market cap by almost $17.1 billion.

Mr. Icahn’s tweets have been viewed as shareholder activism. Not many individuals have the power to move markets in the same way that Mr. Icahn was able to do with Apple. Could these types of actions really be viewed as market manipulation rather than shareholder activism? Should the Securities and Exchange Commission put rules and restrictions on such communications for these type of high profile individuals? Fodder for an interesting debate.



Continue Reading →

District Court Vacates Resource Extraction Issuer Payment Disclosure Rules; May Foreshadow Ruling on Conflict Minerals Challenge

Posted in Corporate Governance, Dodd-Frank Act, SEC News

On July 2, 2013, the United States District Court for the District of Columbia (the “Court”) vacated Securities and Exchange Commission (“SEC”) Rule 13q-1 (the “Rule”), which required certain companies to disclose payments made to foreign governments in connection with the commercial development of oil, natural gas or minerals. The Court found that (i) the SEC erroneously read the statutory language as requiring public disclosure of these payments; and (ii) that the SEC’s decision to deny any exemption to the disclosure requirements, specifically in the case of countries that prohibit disclosure of these payments, was arbitrary and capricious.…

Continue Reading →

Government’s Vigorous Prosecution of FCPA Violators Continues When Jury Convicts Two Telecommunications Executives for Violations Relating to Haiti

Posted in Corporate Governance, Criminal Charges in Securities Cases, Foreign Corrupt Practices Act

On Friday, August 5, 2011, a Florida jury convicted Joel Esquenazi and Carlos Rodriguez, former executives of Terra Telecommunications Corporation, for their roles in a conspiracy to violate the FCPA and commit money laundering. U.S. v. Esquenazi, Case No. 09-cr-21010 (S.D. Fla. Filed Dec. 4, 2009), The convictions were the latest event in Government’s aggressive prosecution of FCPA violations for bribes paid to Telecommunications D’Haiti S.A.M. ("Haiti Teleco"), a state-owned telecommunications company in Haiti.…

Continue Reading →