It is now clear that, for Delaware companies, a charter or by-law forum selection clause (FSC) is a valid and promising response to the problems posed by multi-jurisdictional disputes involving claims based upon internal corporate affairs (such as M&A litigation and derivative actions). Three recent rulings by “foreign” courts—courts located outside of the forum selected in the charter or by-law (which is usually Delaware). In each case, the “foreign” court granted motions to dismiss based upon an FSC that selected Delaware as the exclusive forum. Still, as we have previously advocated,  the better course would be to include with an FSC a consent to jurisdiction and service provision for stockholders who commence the foreign litigation that would permit the defendants in the foreign case to enforce the forum selection clause in Delaware. 
Posts Tagged ‘Cleary Gottlieb’
The 2008 financial crisis and the slow recovery that has followed has brought further evidence tending to support the view that the structure of our corporate sector needs adjustment, and that its faults affect the competitiveness of our economy. The crisis has resulted, as would be expected, in a raft of new rules and regulations, which as usual have been implemented before there emerged any consensus about the nature of the problems. There has also been a vigorous competition of ideas over causes and remedies.
Over the past year, boards of directors continued to face increasing scrutiny from shareholders and regulators, and the consequences of failures became more serious in terms of regulatory enforcement, shareholder litigation and market reaction. We expect these trends to continue in 2014, and proactive board oversight and involvement will remain crucial in this challenging environment.
During 2013, activist investors publicly pressured all types of companies—large and small, high-flyers and laggards—to pursue strategies focused on short-term returns, even if inconsistent with directors’ preferred, sustainable long-term strategies. In addition, activists increasingly focused on governance issues, resulting in heightened shareholder scrutiny and attempts at participation in areas that historically have been management and board prerogatives. We expect increased activism in the coming year. We also expect boards to continue to have to grapple with oversight of complex issues related to executive compensation, shareholder litigation over significant transactions, risk management, tax strategies, proposed changes to audit rules, messaging to shareholders and the market, and board decision-making processes. And, as evidenced in recent headlines, in 2014 the issue of cybersecurity will demand the attention of many boards.
On November 22, 2013, Federal Reserve Board Governor Daniel Tarullo delivered a speech at the Americans for Financial Reform and Economic Policy Institute outlining a potential regulatory initiative to limit short-term wholesale funding risks.  This proposal could increase capital requirements for and apply additional prudential standards to firms dependent on short-term funding, with a focus on securities financing transactions (“SFTs”)—repos, reverse repos, securities borrowing/lending and securities margin lending.
On November 26, 2013, the Nasdaq Stock Market filed a proposal to amend its listing rules implementing Rule 10C-1 of the Securities Exchange Act of 1934, governing the independence of compensation committee members.  Currently, Nasdaq Listing Rule 5605(d)(2)(A) and IM-5605-6 employ a bright line test for independence that prohibits compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fees from the company or any subsidiary. The requirement is subject to exceptions for fees received for serving on the board of directors (or any of its committees) or fixed amounts of compensation under a retirement plan for prior service with the company provided that such compensation is not contingent on continued service.
The multiplicity of cases brought on behalf of the same stockholder group (or as derivative actions) against the same defendants, based on the same conduct and asserting the same fiduciary duty claims is now well documented. The benefits of consolidating such litigation in a single forum have also been well established.
Most such litigation takes place in state courts, particularly where the litigation concerns transformative corporate events like mergers. Within the federal system, there is a specialized tribunal—the Judicial Panel on Multidistrict Litigation—charged with allocating business among the different federal district courts when the same or similar cases are pending in several such courts. There is nothing similar, however, in the state court systems that can allocate cases among courts of different states.
On July 2, 2013, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued a final capital rule that overhauls its existing capital adequacy rules and implements both the Basel III Capital Framework issued by the Basel Committee on Banking Supervision (the “Basel Committee”) in 2010 and certain requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). While the Final Rule consolidates and largely adopts unchanged the three proposals issued by the federal banking agencies (the “agencies”) last June, the rule contains several significant burden-reducing modifications adopted in response to comments from community banking organizations. By contrast, the rule provides little relief for the approximately 18 banking organizations subject to the advanced approaches capital rules (“advanced approaches banking organizations”), and increases the burden on these organizations in certain significant respects—most notably by expanding the application of the Collins Amendment Floor to the capital conservation and countercyclical capital buffers.
On July 9, the Federal Deposit Insurance Corporation (the “FDIC”) also voted to adopt the Final Rule, and was the first of the three agencies to issue an interagency notice of proposed rulemaking that would amend the Final Rule to significantly increase the supplementary leverage ratio requirement applicable to the eight U.S. banking organizations that have been identified as global systemically important banks (“G-SIBs”) by the Financial Stability Board (the “FSB”) (the “Supplementary Leverage Ratio Proposal”). Under the Supplementary Leverage Ratio Proposal, the eight U.S. G-SIBs would effectively be subject to a 5% supplementary leverage ratio minimum at the parent level and a 6% supplementary leverage ratio minimum at the level of each bank subsidiary—each of which represents a significant surcharge above the current Basel III 3% minimum leverage ratio applicable from January 1, 2018 to all advanced approaches banking organizations under the Final Rule.
Editor’s Note: Victor Lewkow is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lewkow, Ethan Klingsberg, and Neil Whoriskey, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
Chancellor Leo Strine’s opinion in In re MFW Shareholders Litigation (Del Ch. May 29, 2013) marks the culmination of an effort by the Chancellor, going back to his lengthy dicta in In re Cox Communications Shareholders Litigation (Del Ch. 2005), to arrive at a more unified standard for review of buy-outs of a company’s public float by a controlling stockholder. The headline conclusion is that, assuming this decision is not reversed by the Delaware Supreme Court on appeal, controlling stockholder buyouts structured as negotiated mergers may now join controlling stockholder buyouts that take the form of unilateral tender offers in having available a theoretical path that permits challenges to be dismissed on pre-trial motions.
About ten years ago, a series of Chancery Court opinions, the most prominent of which was then-Vice Chancellor Strine’s opinion in In re Pure Resources Shareholders Litigation (Del. Ch. 2002), laid out safeguards that would qualify a unilateral tender offer by a controlling stockholder as non-coercive and entitled to dismissal of challenges based on pleadings prior to a trial or an evidentiary hearing. The most important of these safeguards were the presence of both:
In a much anticipated decision, the Delaware Chancery Court upheld on June 25, 2013 the validity of the forum selection bylaws adopted by the boards of directors of FedEx Corporation (“FedEx”) and Chevron Corporation (“Chevron”). Such bylaws provide that stockholders bringing derivative claims or claims alleging breaches of fiduciary duties, arising from the Delaware General Corporate Law (the “DGCL”) or otherwise implicating the internal affairs of the corporation be brought exclusively in Delaware state or federal courts. In rendering his opinion, Chancellor Leo Strine found that specifying the forum for litigating such matters is well within the statutorily permitted scope of bylaw provisions under Section 109(b) of the DGCL. Further, the Court found that these unilateral board actions to adopt such bylaws without the consent of stockholders were nonetheless contractually binding on stockholders because Section 109(b) of the DGCL allows a corporation, through its certificate of incorporation, to grant directors the power to adopt and amend bylaws unilaterally (which was the case here). When FedEx and Chevron stockholders invested in the respective corporations, they were deemed under Delaware law to be put on notice that the board could amend the bylaws to include provisions such as the one at issue.
Golden leashes – compensation arrangements between activists and their nominees to target boards – have emerged as the latest advance (or atrocity, depending on your point of view) in the long running battle between activists and defenders of the long-term investor faith. Just exactly what are we worried about?
With average holding periods for U.S. equity investors having shriveled from five years in the 1980s to nine months or less today, the defenders of “long-termism” would seem to have lost the war, though perhaps not the argument. After all, if the average shareholder is only sticking around for nine months, and if directors owe their duties to their shareholders (average or otherwise), then at best a director on average will have nine months to maximize the value of those shares. Starting now. Or maybe starting nine months ago.
But this assumes that the directors of any particular company have a real idea of just how long their particular set of “average” shareholders will stick around, and it also assumes that the directors owe duties primarily to their average shareholders, and not to their Warren Buffett investors (on one hand) or their high speed traders (on the other). So, in the absence of any real information about how long any then-current set of shareholders will invest for on average, and in the absence of any rational analytical framework to decide which subset(s) of shareholders they should be acting for, what is a director to do?
Here is what I think directors do, in one form or fashion or another: