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Company Drops Plans to Issue No-Vote Share Class

In the midst of the controversy over Snap’s issued no-vote shares, and Blue Apron’s authorized but not issued no-vote shares, one company has discarded its efforts to form a class of stock without any voting rights.

In November 2016, IAC/Interactive Corp. announced a plan to adjust its capital structure through a charter amendment to enable a new class of non-voting capital stock, Class C.
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Activist Files Suit Over Board Disqualification Bylaw

Activist Stilwell Funds has sought to invalidate and enjoin the enforcement of HopFed Bancorp’s bylaws on director qualifications, filing suit in the Delaware Court of Chancery. The activist owns 9.5% of the company’s shares.

Stilwell Funds had previously nominated Robert Bolton, who was elected to the company’s board at the 2013 meeting. In the complaint, the activist alleged that Bolton was excluded from committee service, and also barred him from major board deliberations by contending that he was affiliated with Stilwell.
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Board Trends at the S&P 1500 Companies

ISS Board Practices show the continuing strength of key governance trends and the differences in practices between large- and mid-cap companies. Directors elected annually and by majority vote has become the norm at about 90% of large-caps, compared to around 60% of mid-caps. The adoption of both practices continues to rise each year.

Large-caps tend to be much less inclined to separate CEO and chair roles, however, especially as more investors accept lead directors with robust responsibilities as demonstrating appropriate independent leadership.
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BlackRock Issues Engagement Priorities for the Coming Year

BlackRock’s Investment Stewardship team of over 30 specialists globally is responsible for engagement with portfolio companies, viewing engagement as an important way to provide feedback and note concerns about factors that affect company performance. The investor emphasizes that they intend to engage “in a constructive manner” by asking questions, not telling companies what to do. If they have concerns, they will explain them and provide companies with time to respond.
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State Street Targets Companies for Lack of Board Gender Diversity and Provides a Gender Diversity Framework to Promote Increased Representation

Wall Street, Meet Fearless Girl. See the picture and watch the video.

That’s the tagline used by State Street in announcing, on the eve of International Women’s Day, that it has placed a temporary statute right near Wall Street of a girl with her arms crossed facing the Wall Street bull, to represent the future.
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Study Examines Boardroom Refreshment Practices Over Nearly 10 Years

In 145 pages, IRRC Institute and ISS teamed up on a study of board refreshment trends at S&P 1500 companies from 2008 to 2016.

Boardroom Demographics.  The study examines the composition of boards in terms of tenure, age, diversity and experience as board members. 

  • Director Tenure.  Average boardroom tenure rose from 8.4 years in 2008 to nine years in 2013 before leveling at 8.7 years.

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Major Institutional Investors Adopt Corporate Governance Framework

A group of major investors has endorsed a corporate governance framework to go into effect on January 1, 2018. The Investor Stewardship Group (ISG) currently comprises BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada (Asset Management), State Street Global Advisors, TIAA Investments, T.
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CII Advocates for Consequential Majority Voting, a Departure from Common Practice

The Council of Institutional Investors has published an FAQ on majority voting for directors in which it advocates for “consequential majority voting,” a form of majority voting in director elections that essentially removes board discretion if a director receives less than majority support.

90% of S&P 500 companies have a traditional form of majority voting, compared to only 29% of Russell 3000 companies.
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Fee-Shifting Bylaw Found Invalid by Delaware Court

The Delaware Court of Chancery recently ruled that a form of fee-shifting bylaw linked to exclusive forum provisions is invalid.

Six months after Delaware adopted DGCL Section 109(b) to restrict fee-shifting bylaws, by providing that the bylaws of Delaware corporations may not contain any provision that would impose liability on a stockholder for the attorneys’ fees or expenses of the corporation or any other party in connection with an internal corporate claim, Paylocity Holding Corporation adopted two new bylaws.
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Board Composition at the S&P 500 Companies

The composition of boards continues to be a focus for investors, and companies are responding by paying increased attention both to who sits on their boards and to enhancing their disclosure and engagement with investors. The data reported in the 2016 Spencer Stuart Board Index  on S&P 500 boards highlights emerging practices, compiled from proxy disclosure and a related survey.
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Commonsense Corporate Governance Principles Issued

A group of twelve CEOs, including JPM, Berkshire Hathaway, GE, GM, Verizon and those from major institutional investors such as Capital Group, BlackRock, Vanguard, StateStreet, T. Rowe Price and ValueAct, have developed a set of “Commonsense Corporate Governance Principles.”  Their open letter states that the purpose of the group was to try to reach consensus on what “good corporate governance” means in the real world. 
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Court Denies Proxy Contest After Board Determines Dissident Candidates Failed to Complete Questionnaire

A recent case interprets and demonstrates the importance of the requirements in advance notice bylaws.

The U.S. District Court in the Northern District of Texas granted a preliminary injunction to Ashford Hospitality Prime that invalidated Sessa Capital’s slate of candidates for Ashford’s annual meeting. Sessa owns more than 8% of Ashford’s stock and notified the company that it intended to nominate five candidates to Ashford’s seven-member board.
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Davis Polk Covers Recent Developments on the Activist Landscape

Our client memorandum on the civil action brought against ValueAct by the Department of Justice for failing to comply with antitrust waiting period examines the implications for other investors that engage with companies across a range of issues.

On April 21, we are hosting a webcast on the global trends and strategies for responding to shareholder activism, including trends in Hong Kong, the U.K.
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IPO Governance Gains Investor Attention

CII issued a recent policy statement focused on newly public companies, prompted by concerns about high-profile IPOs using dual-class shares.  In 2015, dual-class IPOs raised twice as much capital compared to the prior year.

Companies going public are urged to avoid the following structures, either at the outset or by changing them over a period of time through the use of a “sunset” mechanism:

  • Multi-class equity structure with unequal voting rights;
  • Plurality vote requirement for uncontested director elections;
  • Lack of independent board leadership, whether the chair or lead director;
  • Classified board structure; and
  • Super-majority vote requirements for bylaw amendments and other proposals.

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Focus on Director Tenure Begins to Target Specific Lengths of Service

Investors have expressed concerns about the length of director tenure for several years, pushing companies to focus on board succession planning and board refreshment processes.  There has been, however, a reluctance to draw a hard line in the sand as to how many years of service is too long, until now.

Legal & General Investment Management (LGIM), a European institutional asset manager, developed a new policy that targets specific years of service. 
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Report Shows Activists Don’t Nominate Women, as Congress Pressures the SEC to Require More Board Diversity Disclosure for Public Companies

According to an analysis by Bloomberg, since 2011, 5 of the biggest U.S. activist funds have nominated women just 7 times in seeking 174 board seats.  Bloomberg examined Elliot Management, Icahn Associates, Pershing Square, Third Point and Value Act.

Not one of Icahn Associates’ 42 nominees to fill 94 board seats in the past five years was a woman. 
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State Street Urges Companies to Focus on Independent Board Leadership and Provides Detailed Guidelines on Structure and Responsibilities

Strong independent leadership will be a key focus of State Street’s 2016 corporate governance engagement program, according to a letter that the investor sent to board members.

All companies do not need to divide the CEO and Chair roles to obtain independent board leadership, State Street noted, since separating the positions does not always guarantee independence but rather, “[a]s is often the case with simple solutions, it may make some investors feel better.”
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SEC Chair’s Remarks on Recent Governance Topics of Interest

Chair White covered a wide array of topics recently at a securities regulation conference, though the press immediately focused on her comments about the possibility of new rules for disclosing board diversity. Her comments on that and other governance issues follow.

Additional board diversity disclosures being studied. Chair White believes that diversity adds value to boards and makes them function better, and is troubled by the dearth of diversity on boards currently.
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BlackRock Focuses on Companies’ Long-Term Strategic Frameworks

When companies engage with BlackRock’s corporate governance team, they may be asked about the company’s “strategic framework for long-term value creation,” according to the letter sent to 500 CEOs from Larry Fink, co-founder and CEO of BlackRock. The framework should focus on the future and provide perspective on how a company is navigating competition and innovation, adapting to technology and geopolitical events, and where it is investing and developing talents.
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Facebook Settles Lawsuit Regarding Non-Employee Director Compensation

Facebook has announced its settlement of a lawsuit filed in June 2014, alleging that its board of directors breached their fiduciary duties and unjustly enriched themselves and wasted corporate assets through the compensation paid to the non-employee directors. To date, we have discussed this case here, here and here.

As a refresher of the background facts, in 2013, Facebook’s Compensation & Governance Committee recommended that the board approve non-employee director compensation that the plaintiff alleged in the complaint was higher than that of its peers.
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GAO Studies Lack of Women on Boards

The U.S. Government Accountability Office (GAO) estimated in a recent report that even if equal proportions of women and men joined boards each year beginning in 2015, it could take more than 40 years for the representation of women directors to equal that of men. The report is in response to a request from Carolyn Maloney, the ranking member of the Subcommittee on Capital Markets and Government Sponsored Enterprises Committee on Financial Services in the House of Representatives.
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SEC Charges Officers and Outside Directors with Fraud

In charging senior leaders of a failed bank with fraud, the SEC also held two outside directors responsible.

Eleven executives and board members of the bank were charged by the SEC, which claimed that they improperly extended, renewed and rolled over bad loans in order to avoid impairment charges and reporting increased losses for loans and leases in its financial accounting.
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