Delaware Supreme Court Ruling on Advance Notice Bylaws

Posted by Neil Whoriskey, Dean Sattler, and Scott Golenbock, Milbank LLP, on
Thursday, September 19, 2024
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Neil Whoriskey, Dean Sattler, and Scott Golenbock are Partners at Milbank LLP. This post is based on a Milbank memorandum by Mr. Whoriskey, Mr. Sattler, Mr. Golenbock, and Iliana Ongun, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court in Kellner v. Aim Immunotech [1] recently ruled on the enforceability of a “modern” set of advance notice bylaws. Advance notice bylaws are the key tool corporations have to regulate the director nomination process and ensure full and fair disclosure to stockholders in a proxy fight. Critically, advance notice bylaws also allow the board to gather information necessary to guide its recommendation for or against a nominated candidate. While the headline may be that the court found all the challenged bylaws to be unenforceable, looking at each bylaw individually reveals a much less discouraging picture for corporations. [2]

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Have CEOs Changed?

Posted by Yann Decressin (University of Chicago), Steven N. Kaplan (University of Chicago), and Morten Sorensen (Dartmouth University), on
Thursday, September 19, 2024
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Yann Decressin is a PhD student at the University of Chicago, Steven N. Kaplan is the Neubauer Family Distinguished Service Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business, and Morten Sorensen is an Associate Professor of Finance at Dartmouth College Tuck School of Business. This post is based on their working paper.

CEOs hired in recent years are similar in terms of their overall ability and interpersonal orientation to CEOs hired earlier. The same four factors revealed by earlier research still explain roughly half of the variation in CEOs’ characteristics: overall ability and whether they are more execution-oriented and less interpersonal, more analytical and less charismatic, or more creative and less detail-oriented.

There is a sense in the media and among some academics that CEOs and top executives today should focus more on softer and interpersonal skills. In prior research, Steven N. Kaplan and Morten Sorensen use CEO personality assessments to show that CEO candidates with greater interpersonal skills are more likely to be hired. Additionally, they have shown that subsequent performance depends mainly on general ability and execution skills rather than interpersonal skills.  In our recent study, Have CEOs changed?, we expand on this earlier work and examine whether the characteristics and objectives of CEOs and top executives have changed over time.

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2024 Proxy Season Review: Compensation-Related Matters

Posted by June M. Hu, Brittney G. Kidwell, and Rebecca M. Rabinowitz, Sullivan & Cromwell LLP, on
Thursday, September 19, 2024
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June M. Hu is a Special Counsel, and Brittney G. Kidwell and Rebecca M. Rabinowitz are Associates at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Hu, Ms. Kidwell, Ms. Rabinowitz, Jeannette E. Bander, Heather L. Coleman, and Marc Treviño.

Support for management say-on-pay proposals remained high

  • The number of failed say-on-pay votes reached a ten-year low across both the S&P 500 and the Russell 3000
  • Overall shareholder support averaged 90% among the S&P 500 and 91% among the Russell 3000 in H1 2024 (vs. 88% and 90% in H1 2023)

ISS recommendations meaningfully impacted shareholder votes on say-on-pay proposals

  • Compared to proposals ISS supported, proposals with negative recommendations received 27% and 23% lower support on average, respectively, at S&P 500 and Russell 3000 companies
  • Alignment of CEO pay with relative total shareholder return remained the most important quantitative factor underlying ISS negative recommendations
  • Although use of above-target payouts became the most often cited qualitative factor underlying ISS negative recommendations, ISS appeared to place greater emphasis on other qualitative factors when making such recommendations, including the use of limited, opaque or undisclosed performance goals

Companies received six proposals requesting binding shareholder approval of director compensation

  • These proposals were all excluded through the SEC no-action process on the basis of “violation of law”

Shareholder support for equity compensation plans was consistent with H1 2023

  • Average support was 92% among the S&P 500 and 88% among the Russell 3000 in H1 2024 (vs. 91% and 87% in H1 2023)
  • All plans passed among the S&P 500 and five failed among the Russell 3000 (same as H1 2023)

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Litigation Targeting Large Company DEI Programs on the Rise

Posted by Mike Delikat and Ernan Kiselica, Orrick, Herrington & Sutcliffe LLP, on
Wednesday, September 18, 2024
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Mike Delikat is a Partner and Ernan Kiselica is an Associate at Orrick, Herrington & Sutcliffe LLP. This post is based on their Orrick memorandum.

The Supreme Court’s 2023 decision in Students for Fair Admissions, Inc. v. President and Fellows of Harvard College (SFFA) has been a game changer not just in college admissions but in employment as well. While the decision did not apply directly to private employers, its strong language criticizing affirmative action has reverberated through the corporate world. In concurrence, Justice Neil Gorsuch highlighted the parallels of Title VI and Title VII, noting both statutes “codify a categorical rule of individual equality, without regard to race.”

Conservative groups have seized on that language, and corporations such as Harley-Davidson and Jack Daniels have dropped DEI initiatives. Another large Midwest based manufacturing company says it will no longer sponsor “social or cultural awareness” events. Ford and Lowe’s have backed away from DEI-oriented programs and stopped participating in the Human Rights Campaign’s Corporate Equality Index. Other companies are reevaluating, rebranding, cutting back or eliminating DEI programs.

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California lawmakers fail to delay compliance deadlines in landmark climate-related disclosure laws

Posted by Loyti Cheng, Michael Comstock and David A. Zilberberg, Davis Polk & Wardwell LLP, on
Wednesday, September 18, 2024
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David A. Zilberberg, Loyti Cheng, and Michael Comstock are Counsels at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

Proposals to delay compliance deadlines in California’s three landmark climate-related disclosure laws failed to pass during the recently concluded legislative session, while a modest set of changes to S.B. 253 and 261 were approved and will be sent to Governor Newsom for signature. As a result, in-scope companies will be required to report under S.B. 253 and 261 as early as 2026 (unless pending legal challenges succeed) and existing disclosure requirements under A.B. 1305 will remain in place.

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Securities Regulation and Big Business

Posted by James Park (UCLA), on
Wednesday, September 18, 2024
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James Park is Professor of Law at UCLA School of Law. This post is based on his recent working paper.

Towards the start of the twentieth century, big businesses were primarily created through mergers engineered by Wall Street financiers. The federal government enacted antitrust statutes to check the power of trusts that put numerous competitors under the control of one entity to stifle competition. Corporate bigness has never been precisely defined, and for a period was judged by a variety of metrics such as a corporation’s assets or the number of its employees. A century later, the size of a corporation is now mainly measured by its market valuation. Even a company with billions of dollars in assets will have a low market value if it does not persuade investors that it will continue to generate profits. Without the ability to access capital, a corporation will not have the economic power that characterizes a big business. Because it regulates the disclosure of information that is the basis for a company’s stock price, federal securities law is now an essential part of the legal framework governing the conduct of big business.

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Board Oversight of AI

Posted by Tara K. Giunta (Paul Hastings LLP) and Lex Suvanto (Edelman Smithfield), on
Tuesday, September 17, 2024
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Tara K. Giunta is a Partner in the Litigation Practice at Paul Hastings LLP and Lex Suvanto is CEO at Edelman Smithfield.

AI is rightly seen as a transformative tool with the potential to change every aspect of our lives: how we live, how we work, how we create, how we communicate, how we learn. The potential applications are dizzying in their scope, and companies are scrambling to determine how they can participate in the AI revolution, including by adopting AI tools to enable more efficient operations and greater innovation and performance.

While transformative, AI also creates new areas of legal, regulatory, and financial risk, as illustrated by a growing list of alarming real-world examples. For instance, a New York City chatbot provided illegal advice to small businesses suggesting it was legal to fire workers for complaining about sexual harassment. In another case, a healthcare prediction algorithm used by hospitals and insurance companies across the U.S. to identify patients in need of “high-risk care management” programs was discovered to be far less likely to identify Black patients. In yet another case, an online real estate marketplace was forced to write off over $300 million and slash its workforce due to an algorithmic home-buying error driven by AI. Notably, a recent survey of annual reports of Fortune 500 companies showed that 281 companies now flag AI as a possible risk factor, a 473.5% increase from the prior year.[1]

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Disclosing and cooling-off: An analysis of insider trading rules

Posted by Liyan Yang (University of Toronto), on
Tuesday, September 17, 2024
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Liyan Yang is a Professor of Finance at the Rotman School of Management, University of Toronto. This post is based on an article in the Journal of Financial Economics by Professor Yang, Professor Jun Deng, Professor Huifeng Pan, and Professor Hongjun Yan.

Regulating insider trading has long been a controversial issue, balancing the need for fairness and market integrity in financial markets against insiders’ practical needs to trade for non-informational purposes such as rebalancing and liquidity needs. Central to this debate is the U.S. Securities and Exchange Commission’s (SEC) Rule 10b5-1, which provides a legal safe harbor for corporate insiders to trade their company’s stocks under predetermined trading plans before possessing material nonpublic information (MNPI).

Recent controversies, such as the sales by executives of COVID-19 vaccine developers shortly after announcing breakthroughs, have once again highlighted concerns about the potential misuse of Rule 10b5-1 (see the recent Wall Street Journal article “Pfizer CEO Joins Host of Executives at Covid-19 Vaccine Makers in Big Stock Sale”). As a response, researchers and regulators have been exploring ways to improve Rule 10b5-1. In February 2022, for example, the SEC has released a report discussing various amendments to regulate Rule 10b5-1 plans, some of which have been adopted in December 2022 (see the press release by the SEC). Two major rule changes stand out: mandate disclosure and cooling-off periods for insider trading under Rule 10b5-1. This post explores the implications of these rule amendments, drawing on insights from the recent article “Disclosing and Cooling-Off: An Analysis of Insider Trading Rules,” by Deng, Pan, Yan, and Yang (2024) published in the Journal of Financial Economics.

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Delaware Court of Chancery Finds Buyer Failed to Use Commercially Reasonable Efforts in Pharma Milestone Payment Case

Posted by James Jian Hu, John Kupiec and Rishi Zutshi, Cleary Gottlieb Steen & Hamilton LLP, on
Tuesday, September 17, 2024
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James Jian Hu, John Kupiec and Rishi Zutshi are Partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Hu, Mr. Kupiec, Mr. Zutshi, Kimberly Spoerri, Benet O’Reilly, and Lucy Silver and is part of the Delaware law series; links to other posts in the series are available here.

Earnout provisions in acquisition agreements can be a useful tool in bridging the valuation gap by deferring portions of the purchase price until certain post-closing milestones are achieved, and they are particularly common in developmental-stage pharmaceutical transactions. Practitioners should take note of the September 5, 2024 opinion in Shareholder Representative Services LLC v. Alexion Pharmaceuticals, Inc., in which the Delaware Court of Chancery held a buyer, Alexion, liable for breach of contract both for its failure to use commercially reasonable efforts to achieve milestones for which future earnout payments may have become due and for its failure to pay an earned milestone payment to selling securityholders of Syntimmune, Inc. [1]

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Rewriting the Proxy Playbook: Trian Partners vs. Disney Case Study

Posted by Patrick J. McHugh and Bruce H. Goldfarb, Okapi Partners, on
Monday, September 16, 2024
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Patrick J. McHugh is Co-Founder and Senior Managing Director and Bruce H. Goldfarb is the President and Chief Executive Officer at Okapi Partners. This post is based on a Okapi memorandum by Mr. McHugh, Mr. Goldfarb, and Lila Caminiti.

Trian Partners’ campaign to wrest two board seats from The Walt Disney Company already stands as a proxy contest for the ages and will rewrite the playbook for many contested meetings in the years to come. In addition to the significant outreach to the institutional investors (“usual institutional suspects,”) the campaign required substantially increased retail engagement due to Disney’s massive retail holder base. The process effectively involved two simultaneous campaigns: one campaign to sway hundreds of financial institutions, and another to energize the retail base of several million shareholders, which typically remains apathetic toward proxy voting. Examining the retail and institutional campaigns as two pieces of one whole provides important insights into this game-changer of a campaign, and teaches practitioners some valuable lessons.

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