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Timestamp: 2019-04-20 22:38:03+00:00

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In the past decade, many companies have enacted forum selection provisions mandating where certain corporate law claims may be litigated. The Delaware Court of Chancery's recent decision in Sciabucucchi v. Salzberg (Del. Ch. Dec. 19, 2018) has further delineated the contours of corporate power to mandate where entity-related claims are pursued, invalidated such provisions purporting to control the locale of federal securities law claims and foreshadowed future disputes over other types of forum-related provisions.
Salzberg arose from the 2017 IPOs of three Delaware corporations: Blue Apron Holdings, Inc., Roku, Inc. and Stitch Fix, Inc. Each of these companies adopted a federal forum provision in its certificate of incorporation that would require any claim under the Securities Act of 1933 to be filed in federal court. They presumably did so aware that the United States Supreme Court was considering whether (i) state courts had concurrent jurisdiction over 1933 Act claims and (ii) defendants could remove such actions from state to federal court.
In adopting the federal forum provisions, these companies extended the reach of nowubiquitous forum selection charter or bylaw provisions. As the Salzberg Court explained, roughly a decade ago forum selection provisions were suggested as a response to an "epidemic of stockholder litigation," in which "meritless cases imposed costs on corporations and society without concomitant benefit." Such provisions aimed to limit multi-forum litigation by requiring that intra-entity disputes (e.g., derivative suits in the company's name or claims for breach of fiduciary duty) be brought in a particular forum-- often, the Delaware Court of Chancery. By August 2014, 746 public companies had adopted a charter or bylaw provision along these lines.
In 2013, in the midst of their rapid adoption, the Delaware Court of Chancery was asked to determine the validity of forum selection bylaws governing intra-entity disputes in Boilermakers Local 154 Ret. Fund v. Chevron Corp., 73 A.3d 934 (Del. Ch. 2013). In Boilermakers, then-Chancellor Leo Strine (now, Chief Justice of the Delaware Supreme Court) held that the challenged bylaws were valid pursuant to Section 109(b) of the Delaware General Corporation Law (DGCL), which then permitted corporate bylaws that related "to the business of the corporation, the conduct of its affairs, and its rights or powers or the rights or powers of its stockholders, directors, officers or employees." This was because "the subject matter of the actions the bylaws govern relate quintessentially to `the corporation's business, the conduct of its affairs, and the rights of its stockholders [qua stockholders]'" (brackets in original). In so holding, however, the Court contrasted these permissible provisions regulating internal claims from external claims outside the scope of Section 109(b). The Court explained that external claims are those untethered from the stockholder's capacity qua stockholder, like one brought by "a plaintiff, even a stockholder plaintiff, who sought to bring a tort claim against the company based on a personal injury she suffered that occurred on the company's premises or a contract claim based on a commercial contract with the corporation."
1Charlotte K. Newell is a senior associate in Sidley's New York office who focuses her practice on stockholder class and derivative actions, M&A litigation and investment fund matters. The views expressed in this article are those of the author and do not necessarily reflect the views of the firm or its other lawyers.
exclusively in any or all of the courts in this State." Consistent with the Boilermakers analysis, Section 115 defines "internal corporate claims" to include those "in the right of the corporation, (i) that are based upon a violation of a duty by a current or former director or officer or stockholder in such capacity, or (ii) as to which this title confers jurisdiction upon the Court of Chancery."
In Salzberg, the Court of Chancery primarily applied the principles underlying Boilermakers to the federal forum provisions at issue. By this time, the question was particularly pertinent because the United States Supreme Court had held that state courts "have concurrent jurisdiction over [1933 Act claims]...and defendants cannot remove actions filed in state court to federal court." Salzberg, citing Cyan, Inc. v. Beaver Cty. Empls. Ret. Fund, 138 S. Ct. 1061 (2018).
The Court first determined that the Section 109(b) bylaw authorization discussed in Boilermakers was roughly equivalent to the Section 102(b) description of permissible charter provisions. Having determined as much, the question was whether the federal forum provisions regulated claims that were within the scope of Section 102(b)--i.e., whether, pursuant to the Boilermakers analysis, the federal forum provisions purported to regulate internal claims (which would be permissible) or external claims (which would not be). The Court held that 1933 Act claims are external claims not brought in a stockholder's capacity as a stockholder, and that therefore the federal forum provisions were invalid and unenforceable. The Court pointed to a number of factors indicating 1933 Act claims were "external," including that (i) 1933 Act claims may be brought in connection with the purchase of any "security," a broad definition that captures myriad investments beyond shares of stock in a Delaware corporation (e.g., notes, bonds); and (ii) one need not continue to hold the security to pursue a 1933 Act claim (meaning one could litigate a claim while not being a stockholder at all).
The Court then turned to a second, related question: whether the same result would derive from "first principles" (rather than the Boilermakers rationale). This was necessary because the corporate defendants argued that Boilermakers had not analyzed federal forum provisions, and therefore the question was alternatively a matter of first impression requiring an independent analysis. The answer, however, remained the same. This conclusion flowed from the genesis of the corporation's power and authority. The corporation is "a body corporate created through the sovereign power of the state." This origin necessarily means that Delaware, through the DGCL "defines what powers the corporation can exercise," and when "a corporation purports to take an action that it lacks the capacity or power to accomplish, that action is ultra vires and void." But the sovereign's ability to regulate has constraints. "The state of incorporation cannot use corporate law to regulate the corporation's external relationships." This reality is borne out in daily practice; as the Court noted, Delaware corporations are regularly subject to the laws of other jurisdictions where they also operate (e.g., unfair competition law, employment law, and health and welfare standards) and these matters extend beyond Delaware's power to "regulate the internal affairs of its corporate creations." These limitations, in turn, inform the power that the DGCL can grant to those "corporate creations." The Court therefore concluded that Delaware's power to manage its "corporate creations" is limited to internal matters, and thus DGCL Section 102(b) can likewise only authorize corporations to regulate internal, rather than external claims--a separate and independent basis for invaliding the federal forum provisions.
appeal, Salzberg presents a number of litigable questions on its contours. Key among these are likely battles over Salzberg's deceptively straightforward "internal" versus "external" claims distinction. One could imagine claims whose "internal" or "external" nature may not be so apparent at first blush and could well be the subject of future litigation (e.g., derivatively pled federal securities claims).
Salzberg has also already impacted the next round of theorized forum-constraining provisions. The SEC has been considering whether public companies could mandate that securities law claims (like 1933 Act claims) be arbitrated. It is not difficult to conclude that the Salzberg rationale would likely invalidate these for-now theoretical arbitration provisions pursuant to Delaware law, because they would be seeking to regulate external securities law claims (which Salzberg holds to be outside the corporation's power). At least one related authority has already concluded as much. Johnson & Johnson, a New Jersey corporation, recently received a shareholder proposal requesting that the company enact a mandatory arbitration provision. The company filed a no-action letter with the SEC regarding its intention to omit the proposal from its proxy materials because it believed adopting the arbitration provision would cause the company to violate state and federal law. On February 11, 2019, the Staff of the SEC's Division of Corporation Finance announced it would not recommend an enforcement action were the proposal omitted because the Attorney General of the State of New Jersey concluded that implementing the proposal would cause the company "to violate New Jersey state law," a conclusion reached partly with reference to Salzberg. Johnson & Johnson, SEC No-Action Letter (Feb. 11, 2019). While the SEC has not yet opined on the propriety of such provisions under federal law, the tension between the SEC's consideration of such provisions and Salzberg's holding that they are invalid pursuant to Delaware law may be another future source of litigation or regulatory action.
Two recent Delaware decisions suggest that, at least in certain situations, companies will be required to turn over informal board communications, including personal e-mails and text messages, in response to "books and records" demands under Section 220 of the DGCL.
In KT4 Partners LLC v. Palantir Techs. Inc. (Del. Jan. 29, 2019), the Delaware Supreme Court reversed the Court of Chancery's holding that the company was not required to produce e-mails involving the directors and management in response to a books and records demand from a stockholder. At one level, the result was a consequence of the company's failure to maintain formal board materials, which caused the Court to observe that "if a company...decides to conduct formal corporate business largely through informal electronic communications, it cannot use its own choice of medium to keep shareholders in the dark about the substantive information to which 220 entitles them." Nevertheless, the Court provided guidance on whether and under what circumstances electronic communications must be produced in response to Section 220 demands, chastising the parties for placing too much emphasis on the "form" of the documents rather than the substance. The relevant question, according to the Court, "is what documents were necessary to fulfill [the stockholder's] legitimate purpose."
2The following Sidley lawyers contributed to the research and writing of the pieces in this section: Sara M. Carian, Jim Ducayet, Jennifer F. Fitchen, Claire H. Holland, John K. Hughes, Daniel A. McLaughlin, Ashley C. Pfeiffer and Matthew J. Saldaa.
demand, the company must produce those communications.
response to a Section 220 demand, this time from a director and former CEO. Like Palantir, the Papa John's opinion noted that "[t]he reality of today's world is that people communicate in many more ways than ever before." Thus, despite the technical complexities involved in collecting and producing electronic communications such as text messages, the Court reasoned that "the utility of Section 220 as a means of investigating mismanagement would be undermined if the court categorically were to rule out the need to produce communications in these formats." The Court therefore held that to the extent directors and officers communicated by e-mail or text message regarding matters within the scope of the proper purposes of the demand (in that case, measured by the more lenient standards that apply to a demand by a director rather than a demand by a stockholder), the company must produce those communications.
Given their focus on the "continually evolv[ing]" nature of corporate communications against the requirements of Section 220, Palantir and Papa John's show that Delaware will, under certain circumstances, take a broader and more flexible view of "books and records" to encompass electronic communications including personal e-mails and text messages. As always, directors should take great care when communicating with fellow board members and management outside of formal board and committee meetings and recognize that, under certain circumstances, informal communications may be treated as corporate "books and records" and produced to stockholders or fellow directors.
On April 15, 2019, the United States Supreme Court will hear arguments in Emulex Corp. v. Varjabedian. The primary issue before the Court is whether shareholder plaintiffs asserting claims under Section 14(e) of the Securities Exchange Act of 1934--the antifraud provision applicable to tender offers--must establish that defendants acted with scienter (intentional wrongdoing) or mere negligence. As discussed in our Spring 2018 issue of Sidley Perspectives, in April 2018 the Ninth Circuit determined that such claims could be based on the lower standard: mere negligence. That ruling was in conflict with the rulings of five other Circuit Courts that have determined that scienter is the applicable standard for a Section 14(e) claim. The Ninth Circuit had pointed to similarities between the language of Section 14(e) and the language of other provisions of the securities laws that do not require scienter. The Supreme Court granted certiorari in January 2019 given the split in rulings among the Circuit Courts. If the Court were to uphold the Ninth Circuit's ruling, the lower liability standard could increase the frequency of litigation against directors in deals where tender offers are used. It could also chill the use of the tender offer structure as a deal mechanism, and/or lead to the need for increased disclosure in tender offer documents.
Appellants and those who have filed amicus briefs in Emulex are also asking the Court to reconsider the basis for allowing a private cause of action under Section 14(e) at all given the evolution of the Court's jurisprudence regarding the availability of private rights of action since 1964. It is unclear, however, if the Court will reach this latter issue as it was not part of the ruling below. In sum, the appellants and amici are arguing that, at a minimum, the Court should limit any Section 14(e) cause of action to the scienter-based cause of action as recognized by other Circuit Courts that have reviewed the legal issue previously, and at the extreme they are arguing that the Court should also decline to recognize that private rights of action are available under Section 14(e).
In December 2018, the Sixth Appellate District of the Court of Appeal of the State of California affirmed the trial court's conclusion that a forum selection bylaw adopted by a Delaware corporation without shareholder consent is enforceable. Drulias v. 1st Century Bancshares, Inc. (Cal. Ct. App. 6th Dist. Dec. 21, 2018). At the same time it approved 1st Century Bancshares, Inc.'s merger with Midland Financial Co., the board of directors of 1st Century unilaterally amended the corporation's bylaws, as authorized by the corporation's certificate of incorporation, to include a forum selection bylaw. In May 2016, a California resident and 1st Century shareholder filed a putative class action on behalf of all holders of 1st Century's common stock against the corporation and its directors alleging breach of fiduciary duty. The parties settled the matter, but after the trial court declined to approve the parties' settlement, 1st Century filed a motion to dismiss plaintiff's amended complaint arguing that the forum selection bylaw required plaintiff's claims to be litigated in Delaware.
Plaintiff argued that the forum selection bylaw was not enforceable in California because it conflicts with section 2116 of the California Corporations Code, which, he argued, confers a right of California shareholders to sue directors of a foreign corporation in California. The Court of Appeal disagreed, holding that the portion of section 2116 relied on by plaintiff does not create substantive rights and instead "codifies the modern view of the internal affairs doctrine under which courts will not decline to exercise jurisdiction over cases merely because they involve the internal affairs of a foreign corporation."
The Court of Appeal further held that (i) the forum selection bylaw was reasonable and that plaintiff should have reasonably expected that 1st Century's board might adopt a forum selection bylaw designating Delaware as the exclusive forum for intra-corporate disputes and (ii) plaintiff did not show that enforcement of the forum selection bylaw would be unduly oppressive or unconscionable. The Court of Appeal concluded that it was not unreasonable to enforce a forum selection bylaw adopted after the alleged wrongdoing reasoning that valid reasons exist for a board to adopt a forum selection bylaw in conjunction with approving a merger given the volume of lawsuits accompanying the announcement of any acquisition of a public company. The Court of Appeal also rejected plaintiff's argument that 1st Century's single motion seeking approval of the settlement made enforcement of the forum selection clause unreasonable.
A fter steadily increasing since 2010 and peaking at 47 in 2016, the number of mergers for which stockholders filed appraisal actions in Delaware dropped to 34 in 2017 and 22 in 2018.
T he parties involved in Delaware appraisal actions are highly concentrated. The top 10 petitioners were responsible for 59% (254 of 433) of the appraisal petitions filed between 2006 and 2018. Between 2006 and 2018, the top 10 petitioner law firms were involved in 98% of all petitions and the top 10 respondent law firms were involved in 77% of all petitions.
The report notes significant variability in the appraisal awards granted by Delaware courts for the 34 appraisal cases that went to trial between 2006 and 2018. Nearly half the time fair value was pegged above the deal price (16 of 34) versus at or below the deal price (18 of 34). Awards ranged from 158% above deal price to 57% below deal price, with the average being an 18% premium to the deal price. Not surprisingly, the report notes that a robust sale process (e.g., arm's length with an auction or go-shop) generally resulted in significantly lower premiums to deal price awarded.
To determine fair value, between 2006 and 2017, Delaware courts relied heavily upon a discounted cash flow (DCF) analysis (59% of the time) and deal price (38% of the time). For the first time in 2018, the Delaware Court of Chancery concluded that a company's unaffected market price (which was 30% below the deal price) was the best determinant of fair value. That Aruba Networks decision is discussed in our Spring 2018 issue of Sidley Perspectives.
Bipartisan Bill to Restrict Rule 10b5-1 Trading Plans Sails Through U.S. House In January 2019, the U.S. House of Representatives passed, by a vote of 413-3, a bipartisan bill that seeks to address reported incidents of corporate executives manipulating Rule 10b5-1 trading plans to avoid insider trading charges. Exchange Act Rule 10b5-1 defines when a purchase or sale constitutes trading "on the basis of" material nonpublic information for insider trading cases brought under Section 10(b) of the Exchange Act. The rule provides an affirmative defense to charges of illegal insider trading where, before becoming aware of material nonpublic information, a person entered into a written plan, binding contract or instruction to purchase or sell shares using a predetermined amount, price and transaction date. Executives often adopt written plans to buy or sell their company's securities, referred to as Rule 10b5-1 trading plans. The Promoting Transparent Standards for Corporate Insiders Act would require the SEC to conduct a study of, and report within one year to Congress on, possible amendments to Rule 10b5-1, as well as analysis of the impact of potential amendments on issuers, capital formation and investor protection. Once the study is completed, the SEC would be required to revise Rule 10b5-1 consistent with the study's findings, subject to notice and comment. The proposed legislation calls for a study of whether Rule 10b5-1 should be amended to place several restrictions on the ability of issuers and their insiders to adopt, modify or cancel trading plans. For example, the SEC's study would explore whether to limit the ability to adopt a trading plan to a time during issuer-adopted trading windows, limit the ability to adopt multiple trading plans and limit how often a plan may be modified or cancelled. Another contemplated amendment would impose a mandatory delay between the adoption of a trading plan and execution of the first planned trade. The bill also considers amendments to Rule 10b5-1 that would impose additional filing requirements and oversight obligations on issuers and their boards of directors. Specifically, the SEC would study whether to require issuers and insiders to file with the SEC trading plan adoptions, amendments, terminations and transactions. Where an issuer's board has adopted a trading plan, the SEC's study would investigate whether to require such boards to "(i) adopt policies covering trading plan practices; (ii) periodically monitor trading plan transactions; and (iii) ensure that issuer policies discuss trading plan use in the context of guidelines or requirements on equity hedging, holding, and ownership." Our Sidley Update, available here, provides more details about the bill and an estimated timeline for action by the SEC if the bill is enacted.
In February 2019, the Staff of the SEC's Division of Corporation Finance issued a no-action letter permitting Johnson & Johnson to exclude from its 2019 proxy materials a shareholder proposal relating to the mandatory arbitration of shareholder claims under the federal securities laws.
Exchange Act Rule 14a-8(i)(2) allows a company to exclude a shareholder proposal that would, if implemented, cause the company to violate any state, federal or foreign law. Johnson & Johnson argued that the proposal, if implemented, would cause the company to violate state and federal law. The Staff ruled in favor of the company on the basis of Exchange Act Rule 14a-8(i)(2). The Staff did not opine on the legality of the proposal but gave significant weight to an opinion from the New Jersey Attorney General agreeing that "the Proposal, if adopted, would cause Johnson & Johnson to violate New Jersey state law." The Staff declined to express a view as to whether implementation of the proposal would cause the company to violate federal law.
In light of the ongoing debate over the topic, SEC Chair Jay Clayton issued a statement commending the Staff's determination "to not recommend enforcement action in this complex matter of state law" and to "not address the legality of mandatory shareholder arbitration in the context of federal securities laws" given the "unsettled and complex nature of the issue, as well as its importance." He noted that the Staff's no-action responses under Rule 14a-8 merely reflect informal views of the staff and that a "court is a more appropriate venue to seek a binding determination of whether a shareholder proposal can be excluded." The proponent reportedly plans to appeal the Staff's decision to a federal court.
Chair Clayton also stated that any SEC policy decision regarding mandatory arbitration provisions (including if an IPO company were to try to include such a provision in its governing documents) "would not be appropriate for resolution at the staff level but would rather be best addressed in a measured and deliberative manner by the Commission."
In December 2018, the SEC announced an enforcement action against ADT Inc. for violations of Section 13(a) of the Exchange Act and Rule 13a-11 thereunder relating to insufficient disclosure of non-GAAP financial measures. Pursuant to Item 10(e)(1)(i)(A) of Regulation S-K, when including a non-GAAP financial measure in an SEC filing, an issuer must include a presentation, with equal or greater prominence, of the most directly comparable financial measure calculated and presented in accordance with GAAP. The SEC found that, when disclosing the non-GAAP financial measures of adjusted EBITDA, adjusted net income and free cash flow before special items in its earnings releases for Q4 2017 and Q1 2018, ADT did not afford equal or greater prominence to the comparable GAAP financial measures. Specifically, ADT presented its adjusted EBITDA in the headlines of the earnings releases without mentioning the comparable GAAP financial measure of net income or loss in the headlines. Furthermore, ADT discussed the non-GAAP financial measures of adjusted EBITDA, adjusted net income and adjusted net income per share in a bulleted list of highlights for Q1 2018 at the top of the first page of the relevant earnings release but did not include any comparable GAAP financial measures in the list of highlights (they appeared in the sixth and seventh paragraphs in the body of the earnings release). ADT was assessed a civil penalty of $100,000 for the violations.
In December 2018, the SEC adopted a rule that will require a public company to disclose whether it has adopted practices or policies regarding the ability of its employees (including officers) and directors to hedge the company's equity securities. The rule, which implements Section 955 of the Dodd-Frank Act, is intended to inform stockholders as to whether employees or directors are allowed to engage in transactions to mitigate or avoid the risks associated with long-term ownership of a company's stock. A company may disclose any hedging practices or policies in full or, alternatively, provide a "fair and accurate summary" of those practices and policies, including the categories of persons covered and any particular types of hedging transactions the company explicitly permits or prohibits.
Public companies are already required to disclose in the CD&A any policies on hedging by named executive officers, if material. In addition, Institutional Shareholder Services, Inc. (ISS) views any amount of hedging of company stock by directors or executive officers as a "failure of risk oversight" that may lead to voting recommendations against directors. Consequently, many public companies already have adopted anti-hedging policies and disclose these policies in their proxy statements.
Notably, the rule does not require companies to adopt hedging practices or policies or dictate the content of any such practices or policies. If a company has not adopted any hedging practices or policies, it must disclose that fact or state that hedging transactions are generally permitted.
Public companies must comply with the new disclosure requirement in proxy and information statements during fiscal years beginning on or after July 1, 2019 (or July 1, 2010 for smaller reporting companies and emerging growth companies). Although the new disclosure requirement will not be in effect for the 2019 proxy season, companies should take it into account when deciding whether to adopt or revise their hedging practices and policies and when drafting proxy statement disclosure regarding company hedging policies.
expressed his support for semiannual--rather than quarterly--reporting and requested that the SEC review the issue.
T he nature and timing of disclosures that public companies must provide in their quarterly Form 10-Q reports, including when the Form 10-Q disclosure requirements overlap with the disclosures such companies voluntarily provide to the public in earnings releases furnished on Form 8-K. In particular, the SEC is asking whether it should allow companies to use earnings releases to satisfy the core financial disclosure requirements of Form 10-Q.
How the SEC can promote efficiency in periodic reporting by reducing unnecessary duplication in the information that public companies disclose and how any such changes could affect capital formation, while enhancing, or at least maintaining, appropriate investor protection.
Whether SEC rules should allow all or certain categories of public companies flexibility as to the frequency of their periodic reporting. The SEC is also asking how a change in reporting frequency would impact other aspects of the SEC's integrated disclosure regime, such as keeping 1933 Act registration statements current to enable swift access to the capital markets.
H ow the current periodic reporting system, earnings releases and earnings guidance may affect corporate decision-making and strategic thinking--positively or negatively-- including whether they cause an undue focus on short-term results.
For more details, including a listing of the 46 specific requests set forth in the Request for Comment, see our Sidley Update, available here. The comment period will end on March 21, 2019. Interested parties may submit comments here.
In recent years, institutional investors, members of Congress, proxy advisory firms and others have been pressing public companies to improve their board diversity and related disclosures. In February 2019, the SEC's Division of Corporation Finance released two new Regulation S-K compliance and disclosure interpretations (CDIs) (identical Questions 116.11 and 113.13) relating to disclosure of certain self-identified diversity characteristics of directors and nominees. Under the new guidance, if the board or nominating committee considered "certain self-identified diversity characteristics" (e.g., race, gender, ethnicity, religion, nationality, disability, sexual orientation or cultural background) when determining an individual's specific experience, qualifications, attributes, or skills for board membership, then the SEC expects the company to disclose those characteristics and how they were considered in the nomination process. This disclosure would only be required if a director or nominee self-identified with a particular characteristic and consented to the company's disclosure of that characteristic. The guidance also requires a company to disclose how its diversity policy, if any, takes into account nominees' self-identified diversity attributes and any other qualifications (e.g., diverse work experiences, military service, or socio-economic or demographic characteristics).
The push for greater diversity disclosure continued with the recent introduction of a bill by Rep. Gregory Meeks in the House and Sen. Bob Menendez in the Senate. The Improving Corporate Governance Through Diversity Act of 2019 would require public companies to disclose in their proxy statements data on the race, ethnicity, gender and veteran status of their directors, director nominees and executive officers based on voluntary selfidentification. It would also require a company to disclose whether the board has adopted any policy, plan or strategy to promote racial, ethnic and gender diversity. Finally, the bill would direct the SEC's Office of Minority and Women Inclusion to publish a guide to diversity disclosure best practices at least once every three years. The Council of Institutional Investors, U.S. Chamber of Commerce, NAACP and Urban League have expressed their support for the bill.
While we do not expect the new SEC guidance or pending legislation to prompt significant changes to 2019 proxy statements, corporate counsel should notify their boards of these developments and consider whether any updates to board composition or related disclosure are required or advisable.
In January 2019, Larry Fink, BlackRock's Chairman and CEO, released his annual letter to the CEOs of its portfolio companies asking how each company's purpose informs its long-term strategy and culture. The message was consistent with Fink's 2018 letter in which he wrote that, in order to foster long-term value, "every company must not only deliver financial performance, but also show how it makes a positive contribution to society."
Conducting an analysis (e.g., a gap analysis) to determine whether corporate culture and long-term strategy are aligned. If so, identify key drivers to perpetuate the current culture. If not, determine the desired culture and identify current practices that must change to attain it.
A dopting mechanisms to influence and monitor progress in maintaining the desired culture. SSGA listed as potential indicators employee turnover, employee satisfaction survey results, diversity and inclusion initiatives and pay differences among employees.
E stablishing communication channels to influence corporate culture effectively and consistently.
When engaging with BlackRock and SSGA in 2019, directors and management should be prepared to discuss corporate purpose and culture and explain their alignment with longterm strategy.
In January 2019, an affiliate of the Council of Institutional Investors (CII) issued a new guide on Board Evaluation Disclosure to encourage enhanced disclosure around board selfevaluation and endorse certain evaluation practices. The CII guide follows a 2014 CII report titled Best Disclosure: Board Evaluation that provided examples of "best in class" proxy statement disclosure relating to board evaluation mechanics and key takeaways from the evaluation process. Disclosure of evaluation processes has become more prevalent in the U.S. in recent years. According to an October 2018 EY report, 93% of proxy statements filed by Fortune 100 companies in 2018 provided substantive disclosure about their board evaluation processes.
According to the CII guide, boards should consider and communicate in their disclosure seven specific indicators of effective board evaluation.
Three-Tiered Review. Evaluation processes should assess not only board and committee performance, which is standard practice, but also the performance of individual directors.
Peer Review. Disclosure should indicate that the board at least considered having directors review their peers on an anonymous basis.
Timing and Format. Disclosure should address evaluation timing as well as the specific type of format that is used to gather feedback such as questionnaires, interviews, group discussions and other methods.
Follow-Through. Disclosure should include "examples of specific actions taken and changes made internally in direct response to previous evaluations" so that investors can have confidence that the evaluation feedback translates into action. This is among the more controversial of the recommendations for disclosure.
Board Succession Planning. Disclosure should show "ongoing attention" to board composition and "a willingness to change" to accommodate new skills or insights if needed.
Strong Independent Director Leadership. An independent board leader should play a prominent role in the evaluation process and disclosure should describe how that leader "filters information and insights across multiple levels and facilitates one-on-one discussions with individual directors."
Use of Third Parties and Technology. Disclosure should cover whether the board considered using independent third parties or technology platforms to enhance the evaluation process.
Boards and their advisors should consider these factors in designing evaluations and disclosing evaluation processes while maintaining flexibility to adopt processes that meet each board's unique needs and circumstances.
is pending) Practical guidance for companies considering whether and when to adopt proxy access The Sidley Update includes an appendix that highlights, on a company-by-company basis, the various detailed terms of proxy access provisions adopted by 565 companies since the beginning of 2015, and an appendix summarizing the amendments to proxy access bylaws requested in shareholder proposals submitted to date.
M&A Topics An article titled Consider #MeToo Before You Buy Your Next Business by Margaret Hope Allen and Tiffanie N. Limbrick, lawyers in our Dallas office, was published by Bloomberg Law Insights on January 23, 2019. The authors offer due diligence tips and highlight red flags to help head off problems that can surface during M&A negotiations.
Corporate Governance Topics An article titled Everything Old Is New Again: Reconsidering the Social Purpose of the Corporation by Holly J. Gregory, a partner in our New York office, was published in the Winter 2019 issue of Ethical Boardroom.
An article titled Looking Ahead: Key Trends in Corporate Governance by Holly J. Gregory was published in the December 2018/January 2019 edition of Practical Law's The Governance Counselor.
An article titled Del. Courts Must Grapple With Efforts to Impose Fiduciary Duties on Investors Exercising Contractual Rights by Andrew W. Stern, James Heyworth and Benjamin F. Burry, lawyers in our New York office, was published in Law.com's Delaware Business Court Insider on December 12, 2018. As discussed in the article, the Delaware Court of Chancery will continue to face novel theories of controlling stockholder liability based on contract rights, and Delaware's ability to impose clear limits on when an investor's contract rights render it a fiduciary to the company will have significant consequences for corporate finance and strategic investments under Delaware law going forward.
An article titled Considerations in Selecting Special Committee Members by Yvette Ostolaza and Paige Montgomery, partners in our Dallas office, was published in Texas Lawyer on November 30, 2018. As discussed in the article, whether facing a shareholder demand, considering a large transaction, or launching an internal investigation to uncover and remediate alleged wrongdoing, creating a special committee of the board of directors to direct the investigative process can be critical to a successful, independent resolution.
Regulatory; Other Topics In February 2019, the Federal Trade Commission (FTC) approved new thresholds for premerger notification under the HSR Act and for interlocking directorates under Section 8 of the Clayton Act. The FTC also announced the revised maximum per diem civil penalty for HSR violations. For details, see our recent Sidley Update titled FTC Revises HSR Premerger Notification and Clayton Act 8 Thresholds and Maximum Per Diem HSR Penalty.
Sidley lawyers authored the U.S. and EU chapters of the 15th edition of The International Comparative Legal Guide to: Merger Control 2019, a guide which provides corporate counsel and international practitioners with comprehensive legal analysis of the merger control laws and regulations in over 55 jurisdictions. Bill Blumenthal, a partner in our Washington, D.C. office, and Marc Raven, a senior counsel in our Chicago office, authored the U.S. chapter. Ken Daly and Steve Spinks, partners in our Brussels office, authored the EU chapter.
2019 Private Funds Program March 6 | New York, NY Sidley's 2019 Private Funds program will be held in New York on March 6. The program will feature an interactive roundtable discussion and various panel discussions providing a comprehensive overview of recent developments and hot topics affecting the private fund industry. For more information, please e-mail nyevents@sidley.com.
M&A Symposium Advanced Issues in Mergers & Acquisitions March 14 | Palo Alto, CA Sidley will host its second M&A Symposium at Sidley's Palo Alto office on March 14. The event will involve an afternoon of solution-oriented discussions addressing the most challenging problems facing in-house deal-makers. In addition to guidance from Sidley's M&A team on a range of advanced topics, attendees will explore these topics and other pressing M&A issues they face with their peers in guided discussion groups. In-house M&A lawyers interested in attending should e-mail paevents@sidley.com.
Women's Competition Network Event March 27 | Washington, D.C. Sidley's Washington, D.C. office will host a networking event for the Women's Competition Network (WCN), the international professional forum for senior competition law and policy professionals. The WCN was founded in 2008 by Kristina Nordlander, a partner in our Brussels office. For more information, please e-mail dcevents@sidley.com. Financial Women's Association's Annual Directors Reception April 3 | New York, NY Sidley's New York office will host the Annual Directors Reception of the Financial Women's Association in New York on April 4. Holly J. Gregory, a partner in our New York office, will moderate a panel on high-profile compliance failures and the ongoing adaption of board responsibilities to convert compliance management into a value-added tool to drive organizational strategy and decision making. Click here for more information. Chicago General Counsel Roundtable June 4 | Chicago, IL Sidley's Chicago office will host its 12th Annual General Counsel Roundtable in Chicago on June 4. General counsel and chief legal officers interested in attending should e-mail chevents@sidley.com.
SIDLEY SPEAKERS Antitrust Law Developments March 28 | Washington, D.C. The 67th Spring Meeting of the American Bar Association's Section of Antitrust Law will be held in Washington, D.C. on March 26-29. On March 28, Jim Lowe, a partner in our Washington, D.C. office, will participate in a panel titled Two-Sided Markets After Amex: The Unanswered Questions and Kristina Nordlander, a partner in our Brussels office, will participate in a panel titled Trade Association Antitrust Compliance: Safety in Numbers? Click here for more information. Preparing for Shareholder and Other Litigation April 11 | Chicago, IL Jim Ducayet, a partner in our Chicago office, will chair a panel titled Preparing for Shareholder and Other Litigation at the 38th annual Ray Garrett Jr. Corporate and Securities Law Institute at Northwestern Pritzker School of Law in Chicago on April 11. Click here for more information.
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