Corporate Governance

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“Where was the board?”  It’s a question we hear whenever something – anything – goes wrong at a public company.  The question has been asked in all sorts of circumstances, ranging from failing jet systems, to networks being hacked, to harassment allegations, and so on.

Don’t get me wrong – there are most assuredly cases in which the question needs to be asked. Without naming names, there have been numerous instances where it seems apparent (and in some cases has been proven) that the board elected not to see or hear evil and thus hadn’t a clue that there was a problem, and other cases where the board created or fostered a rotten culture that seemed to beg for problems.  However, what concerns me is that society at large seems to think that the board is or should be responsible for every sin of commission or omission by the company.  And that just seems wrong.

Boards are charged with oversight.  And while the definition of that word can be difficult to pin down, it seems clear that the board was never supposed to be a guarantor.  Yet that’s precisely where we are headed – or perhaps where we’ve arrived.  You even see it in articles and treatises by governance nerds who should know better: “The board should ensure that…”.  Boards cannot “ensure” anything.  They are part-time consultants, and even the best boards cannot possibly know everything that a company does.

As a result, we’ve seen an upswing in suggestions as to how to help boards, including the following:…
Continue Reading The board is dead! Long live the [to be provided]!

There probably aren’t too many subjects nerdier than corporate minutes.  Lawyers (among others) tend to focus on exciting (dare I say sexy?) matters like M&A, activism, and bet-the-company litigation. Those and other topics are surely exciting, but failing to pay attention to minutes can cost big time. Like it or not, minutes are among the few pieces of evidence – sometimes the only evidence – that boards and committees have properly executed their fiduciary duties.  Did the board give a matter due consideration? Did the directors ask the right questions?  Any questions? Did they consider the risks as well as the benefits of an action or of inaction?  If these and other questions are not answered by reading the minutes, they may not be answerable at all.

Failing to have good minutes can have serious adverse consequences.  Aside from the potential liability and reputational damage associated with a failure to fulfill fiduciary obligations, transactions can be voided, and so on. And in one recent case, the Delaware Supreme Court found that in the absence of minutes, plaintiffs making a “books and records” demand on a company would be able to see emails between directors, among other things.  (You can find my prior posting on that case here.)  If that doesn’t put butterflies in your stomach, nothing will.…
Continue Reading Goldilocks and the three sets of minutes

In case you think that corporate minutes and other corporate formalities are for sissies, think again.  And read the opinion in the case of KT4 Partners vs. Palantir, decided by the Delaware Supreme Court in January 2019.

KT4 had submitted a demand under Section 220 of the Delaware General Corporation Law, seeking to inspect Palantir’s books and records.  Because such an inspection must be for a “proper purpose,” KT4 noted that, among other things, Palantir had failed to hold stockholder meetings and to give proper notice under stockholder agreements.

The demand ended up in the Delaware Court of Chancery, which granted some of KT4’s demands but rejected demands for emails exchanged among directors and officers relating to an investor rights agreement.  KT4 appealed to the Delaware Supreme Court, which reversed that rejection.

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Continue Reading Minutes count (as do other formalities)

Photo by Jan Kaláb

Step away from the phone!  That’s the message Elon Musk, the now former Chairman of Tesla and habitual Twitter user, should have heeded in August before he sent one of his latest ill-advised tweets.  Unfortunately, Musk let his critics (this time the short sellers of Tesla’s stock) get the better of him, and now Tesla and Musk are paying a high price for what amounts to an off the cuff remark.

The background, as you may recall, is that back in August, Musk tweeted that he was contemplating taking Tesla private at $420 per share and that he had “funding secured.”  Of course, as it was later discovered the $420 per share price was only loosely based on a financial model or expected financial performance of Tesla.  Rather, the SEC claims the price had more to do with impressing his girlfriend.  And the “funding secured” part had very little basis in reality either.

As a general matter, I would recommend against launching a going private transaction via tweet.  The SEC seems to agree.  On September 29, 2018, Musk and Tesla quickly settled an SEC lawsuit by Musk agreeing to step down as Chairman of Tesla for at least three years, each of Musk and Tesla paying a $20 million fine (to be distributed to harmed stockholders), Tesla agreeing to add two new independent directors to its Board, and Tesla agreeing to put in place new controls to review all social media communications of Tesla’s senior management, including company pre-approval of all Musk social media postings that may contain material nonpublic information.  The penalty is fairly harsh, but it is actually more mild than was originally intended – the SEC’ s lawsuit sought a bar from Musk serving as a director or an officer of a public company.

Given that Musk and Tesla settled the lawsuit two days after it was filed, Musk and Tesla must have believed that the SEC would not go away quietly or quickly.  The SEC clearly used a lawsuit against an outspoken …
Continue Reading Musk tweet helps Tesla go up in smoke

A while back – March 2017, to be exact – I posted a piece entitled “Beware when the legislature is in session”, citing a 19th Century New York Surrogate’s statement that “no man’s life, liberty or property are safe while the legislature is in session.”

It may be time to amend that statement, for Washington seems to be at it regardless of whether the legislature is in session.  A very rough count suggests that there are more than 20 pending bills dealing with securities laws, our capital markets, corporate governance and related matters.  And that does not include other initiatives, such as the President’s August 17 tweet that he had directed the SEC to study whether public companies should report their results on a semi-annual, rather than a quarterly, basis.

Problems with the Approach

I’m not saying that all of the ideas being floated are awful, or even bad.  (One good thing is that our legislators seem to have decided that trying to give every statute a name that can serve as a nifty acronym isn’t worth the effort.)  In fact, some of the ideas merit consideration.  However (you knew there would be a “however”), I have problems with the way in which these bills deal with the topics in question.  (I have problems with some of the ideas, as well, but more on that later.)

  • First, in my experience, far too many legislators do not understand what our securities laws are all about, and some do not want to understand or do not care. I will not cite particular instances of this, but I’ve been surprised several times with the level of ignorance or worse (i.e., cynicism) demonstrated by legislators and their staffs about the matters their proposals address.  At the risk of hearing you say “duh”, this does not lead to good legislation.
  • Second, these bills represent a slapdash approach when what is needed is a comprehensive, holistic one. Even the best of the pending bills and proposals is a band-aid that will create another complication in an already overcrowded field of increasingly counterintuitive and/or contradictory regulations, interpretations, and court decisions.

Problems with the Proposals

As promised (threatened), I also have concerns about a number of the proposals being bruited about, but for the moment I’ll focus on two of them – eliminating quarterly reporting and Senator Warren’s “Accountable Capitalism Act”.…
Continue Reading Dear Washington: How can we miss you if you don’t go away?

No, this is not a riff on Hamlet’s soliloquy.  It’s about the current kerfuffle (one of my favorite words) about stock buybacks.  In case you’ve not heard, some (but not all) of the concerns about stock buybacks are as follows:

  • Plowing all that cash into buying back stock means that it’s not going into plant and equipment, R&D or other things that facilitate longer-term growth and job creation.
  • Companies are using the windfall from the 2017 tax act to buy shares back rather than to make investments that will create jobs and longer-term growth.
  • Stock buybacks artificially inflate stock prices and earnings per share, which contributes to or results in additional (i.e., excessive) executive compensation.
  • By reducing the number of shares outstanding, buybacks mask the dilutive effects of equity grants to senior management.

And now there’s another concern.  Specifically, in a recent speech, new SEC Commissioner Jackson announced that stock buybacks are being used by executives to dispose of the shares they receive in the equity grants referred to above.  And one of his proposed solutions is that compensation committees engage in more active oversight – or, rather, that compensation committees should be required to engage in more active oversight – of insider trades “linked” to buybacks.

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Continue Reading To buy or not to buy

A few weeks ago, I attended the “spring” meeting of the Council of Institutional Investors in Washington (the quotation marks signifying that it didn’t feel like spring – in fact, it snowed one evening).  These meetings are always interesting, in part because over the 15+ years that I’ve been attending CII meetings, their tone has changed from general hostility towards the issuer community to a more selective approach and a general appreciation of engagement.

So what’s on the mind of our institutional owners?  First, an overriding concern with capital structures that limit or eliminate voting rights of “common” shareholders.  CII’s official position is that such structures should be subject to mandatory sunset provisions; that position strikes me as reasonable (particularly as opposed to seeking their outright ban), but it’s too soon to tell whether it will gain traction.

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Continue Reading News from the front

For the first time since 2015, the SEC has its full complement of five commissioners.  That’s a good thing.  And at least one new Commissioner – Robert Jackson – seems to have hit the ground running.  For example, he made a speech in San Francisco just the other day in which he expressed his disfavor of dual-class stock, suggesting that it would create “corporate royalty”. Specifically, because shareholders in at least some dual-class companies have no voting rights, leadership of the company could be passed down through the generations in perpetuity.

Commissioner Jackson is a smart man – I’ve seen him speak at a number of programs, and he’s demonstrated his intelligence as well as his telegenic appearance.  His use of the “corporate royalty” meme also shows that he’s witty, though don’t think we need to worry too much about CEO titles becoming hereditary.

What I do think we may need to worry about is where he goes with his concerns.  Specifically, the point of his speech is to suggest that exchanges adopt mandatory sunset provisions so that their dual-class structures would fade away over time.

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Continue Reading Dual-class shares: marching toward merit regulation?

When governance nerds hear the term “public employee pension fund”, they may think of CalPERS or CalSTRS, the California giants. However, Florida has its very own State Board of Administration, which manages not only our public employee funds, but also our Hurricane Catastrophe Fund. I’m a big fan of the governance team at the Florida State Board; I don’t always agree with their views, but they are smart and fun and a pleasure to talk to.

The Florida State Board has just published an interesting – and mercifully brief – report on over-boarded directors – i.e., men and women (OK, usually men) who serve on too many boards. The report, entitled Time is Money, is subtitled “The Link Between Over-Boarded Directors and Portfolio Value”, and the following are among its key points:…
Continue Reading Over-boarding: multitasking by another name (and with predictable results?)

It may be nice to be your own boss, but setting your own compensation – and, at least arguably, giving yourself excessive pay – may get you in trouble.  A number of boards of directors have found that out, as courts have given them judicial whacks upside the head for paying themselves too much.  Not surprisingly, shareholders have gotten on the bandwagon as well.

Executive compensation – at least for public companies – has to be scrutinized and blessed by independent directors and, since the advent of Say on Pay, approved by shareholders (albeit on a non-binding basis).  In contrast, directors have long set their own pay, with little or no scrutiny and no requirement for independent review, much less approval.  (Director plans generally must get shareholder approval if they provide for equity grants, but neither the overall director compensation program nor specific awards have to be approved.)…
Continue Reading Pigs and hogs — a note on director compensation