Category: Corporate law
SEC charges director with proxy violation for failing to disclose personal relationship bearing on independence
Last week, the SEC announced settled charges against James R. Craigie, a former CEO, Chair and board member of Church & Dwight Co. Inc., an NYSE-listed “manufacturer of consumer-packaged goods,” for “violating proxy disclosure rules by standing for election as an independent director” without advising the board that maybe he really wasn’t quite so independent after all. This omission, the SEC alleged, caused the company’s proxy statements “to contain materially misleading statements.” Maybe you guessed that we’re not talking here about any of the NYSE-enumerated relationships that vitiate independence? No, we’re talking about something closer to the concept of “social independence”—something more amorphous than conventional, stock-exchange-defined independence—that some suggest can be even more compromising at times than the conventional variety. Craigie was alleged to have a “close personal friendship with a high-ranking Church & Dwight executive,” including paying more than $100,000 for the executive and his spouse to join Craigie and his spouse on “six trips that spanned eight countries on five continents.” Because Craigie never disclosed the relationship to the board and encouraged the executive to do the same, the SEC charged, the board was not aware of the relationship and the company’s proxy statements characterized Craigie incorrectly as an independent director. According to the Associate Director of the SEC’s Division of Enforcement, “[s]hareholders expect independent directors to exercise autonomous judgment in their decision making, free from undisclosed conflicts….By concealing his relationship with a company executive, Mr. Craigie undermined the board’s director independence process and compromised the company’s disclosures.” Craigie agreed to a five-year officer-and-director bar and to pay a civil penalty of $175,000. The case raises the thorny question of where to draw the line on personal relationships. Is an occasional dinner acceptable? If so, what about a weekend trip? A vacation trip? How many trips is too many? Just how thick do the personal connections have to be to taint independence? Caution seems to be the prescription here.
New Cooley Alert: Texas Court Blocks FTC’s Noncompete Ban
In April, the Federal Trade Commission voted, three to two, to prohibit post-employment noncompete agreements with workers (discussed in this April 2024 Cooley Alert). With some exceptions, the prohibition would have banned virtually all post-employment noncompete agreements in the U.S. beginning on September 4, 2024. But, as discussed in this timely new Cooley Alert, Texas Court Blocks FTC’s Noncompete Ban, from our Labor and Employment group, on August 20, 2024, the Northern District of Texas in Ryan LLC v. Federal Trade Commission issued an order blocking the FTC rule banning all post-employment noncompete agreements from taking effect. As a result, the Alert concludes, “for the time being, employers using noncompetes may continue to utilize them, subject to applicable state laws.”
Delaware Supreme Court considers advance notice bylaws
In this recent case, Kellner v. AIM ImmunoTech, the Delaware Supreme Court articulated a two-part framework for judicial consideration of advance notice bylaws in the event of a challenge to their adoption, amendment or enforcement. If the bylaws are contested, they must be “twice-tested—first for legal authorization, and second by equity”: first, a court must evaluate “whether the advance notice bylaws are valid as consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter”; second, a court must evaluate “whether the board’s adoption, amendment, or application of the advance notice bylaws were equitable under the circumstances of the case.” Also, it’s a good idea to make the bylaws “intelligible.” In this case, the Court held that “(1) one ‘unintelligible’ bylaw is invalid; (2) the remaining amended advance notice bylaws subject to this appeal are valid because they are consistent with the certificate of incorporation, not prohibited by law, and address a proper subject matter; and (3) the AIM board acted inequitably when it adopted the amended bylaws for the primary purpose of interfering with, and ultimately rejecting, Kellner’s nominations. Thus, the remaining bylaws challenged on appeal are unenforceable.” Nevertheless, Kellner’s deceptive conduct meant that his nominations notice would not stand.
Delaware SB 313, controversial proposed corporate law amendments, heads to Governor for signature
What’s the latest on SB 313, the proposed amendments to the Delaware General Corporation Law largely designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company? That case invalidated portions of a stockholder agreement relinquishing to a founding stockholder control over certain corporate governance matters, a decision that many practitioners viewed as inconsistent with current market practice. The proposed amendments in SB 313 would add a new subsection (18) to Section 122 of the DGCL to allow corporations to enter into the types of stockholder contracts at issue in Moelis, even if the provisions are not set forth in a certificate of incorporation. As discussed in this PubCo post and this PubCo post, those proposed amendments have turned out to be highly contentious: a number of academics and jurists, including Delaware Chancellor Kathaleen McCormick in a seven-page letter to the Delaware State Bar Committee, raised objections to the haste and timing (prior to adjudication of an appeal by the Delaware Supreme Court) of the legislation. And Law360 reports that posts by Vice Chancellor Travis Laster (purportedly not acting as vice chancellor) questioned “S.B. 313’s terms” and contended that “[c]laims by critics that the Moelis decision put thousands of agreements at risk, the vice chancellor wrote, ‘smacks of hyperbole.’” Adding even more fuel to the fire was a letter submitted to the Delaware legislature, posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments, along with these separate posts by noted academics on the HLS Forum and on the CLS Blue Sky blog, with this lonely post in favor. But the bill then “sailed through” the Delaware Senate “without debate or an opposing vote,” on to the Delaware House. (See this PubCo post.) The bill has now passed the House and been forwarded to the Governor for signature—but not without some acrimony.
Controversial Delaware legislation breezes through Delaware Senate
Controversy notwithstanding, the proposed amendments to the Delaware General Corporation Law in Senate Bill 313 have reportedly “sailed through” the Delaware Senate and are scheduled to move to the Delaware House this week. (See, e.g., this article in Bloomberg.) The proposed amendments were largely designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, which invalidated portions of a stockholder agreement relinquishing to a founding stockholder control over certain corporate governance matters, a decision that many practitioners viewed as inconsistent with current market practice. But, as discussed in this PubCo post, those proposed amendments have turned out to be highly contentious: a number of academics and jurists, including Delaware Chancellor Kathaleen McCormick in a seven-page letter to the Delaware State Bar Committee, raised objections to the haste and timing (prior to adjudication of an appeal by the Delaware Supreme Court) of the legislation. Adding even more fuel to the fire was a letter submitted to the Delaware legislature, posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments, along with these separate posts by noted academics on the HLS Forum and on the CLS Blue Sky blog, with this lonely post in favor. (See this PubCo post.)
Chancellor McCormick, law professors weigh in on controversy over proposed DGCL amendments
Last month, this PubCo post discussed the recent controversy over proposed amendments to the Delaware General Corporation Law. As noted in the post, the Council of the Corporation Law Section of the Delaware State Bar Association proposes amendments annually, but some of the amendments proposed this year, submitted as Senate Bill 313 to the Delaware General Assembly, have elicited a substantial amount of pushback. The controversy has revolved largely around proposed amendments designed to address the outcome of the decision in West Palm Beach Firefighters’ Pension Fund v. Moelis & Company, which many practitioners viewed as inconsistent with current market practice. Then, a letter on this topic, dated April 12, surfaced (hat tip to Law 360) from Delaware Chancellor Kathaleen McCormick to the Delaware State Bar Committee. Adding even more fuel to the fire is a letter submitted to the Delaware legislature, just posted on the Harvard Law School Forum on Corporate Governance, by a group of over 50 law professors in opposition to the amendments.
Surprising pushback on Delaware proposed amendments
Recently, the Council of the Corporation Law Section of the Delaware State Bar Association proposed some amendments to the Delaware General Corporation Law, as they do with some regularity. (See this Alert from the Delaware firm, Morris Nichols Arsht & Tunnell.) As the Alert indicated, some of the proposed new amendments were designed to address the effects of recent Delaware cases highlighting “that the legal requirements identified in the cases were not necessarily in line with market practice. The Amendments are designed to bring existing law in line with such practice.” According to Law 360 (here and here), the proposed amendments have just been submitted as Senate Bill 313 to the Delaware General Assembly for its consideration and approval. There’s not usually much controversy surrounding these proposed amendments. Not so this time. This year, there has been a surprising amount of pushback on these proposed amendments—or at least on one of them.
Strine highlights the importance of the “not-sexy” process of board minutes
In an article in the Fordham Journal of Corporate and Financial Law, “Minutes Are Worth the Minutes: Good Documentation Practices Improve Board Deliberations and Reduce Regulatory and Litigation Risk,” former Chief Justice of the Delaware Supreme Court, Leo Strine, discusses—convincingly—the importance of good “corporate minuting and documentation processes.” (See also this post presented on The Harvard Law School Forum on Corporate Governance.) Strine acknowledges upfront that the topic is “decidedly not sexy,” and “the favorite task of no one involved in the process.” Drafting minutes, he suggests, is the “equivalent of eating your least favorite vegetable, either you do it hastily, as infrequently as you can, or, if you can get away with it, not at all.” (Perhaps the leitmotif of this piece might be Strine’s evident hostility to vegetables. Later, he characterizes minutes as “the spinach that must be eaten.”) But, in his view, it is an “unquestionably essential, corporate governance task.” He contends that good quality minutes can reduce litigation risk. And he brings us the receipts, highlighting numerous Delaware cases “where the quality of these practices has determined the outcome of motions and cases,” underscoring the “importance of quality and timely documentation of board decision-making, the material benefits of doing things right, and the considerable downside of sloppy, tardy practices.” But that’s not all. He also invests the documentation process with a larger purpose: he contends that an effective process of crafting and reviewing minutes by the board, together with its counsel and advisors, can serve as an integral part of the board’s deliberative process in arriving at a sound decision based on its considered business judgment. With both of these benefits in mind, the article identifies several effective and efficient practices. Strine offers a lot of wise counsel that readers may want to heed.
Delaware Supreme Court applies MFW framework to other conflicted transactions
In In re Match Group, Inc. Derivative Litigation, the Delaware Supreme Court answered some important questions about the standard of review applicable to conflicted transactions under Delaware law. The first question relates to the application of the model used in Kahn v. M & F Worldwide Corp., commonly referred to as the “MFW framework.” In that 2014 case, the Delaware Supreme Court held that, instead of the more stringent “entire fairness” standard of review that would ordinarily apply in the context of mergers between a controlling stockholder and its corporate subsidiary, the business judgment standard of review should govern “where the merger is conditioned ab initio upon both the approval of an independent, adequately-empowered Special Committee that fulfills its duty of care; and the uncoerced, informed vote of a majority of the minority stockholders.” The question remained, however, whether, in the context of conflicted controlling stockholder transactions that do not involve freeze-out mergers, MFW may be applied to invoke the business judgment rule. And in a related question, can the business judgment rule be applied if the “defendant shows either approval by an independent special committee or approval by an uncoerced, fully informed, unaffiliated stockholder vote,” but not both? In addition, the Court addressed the question of whether all members of an “independent special committee” must be “independent” to satisfy the requirements of MFW.
Morris Nichols discusses proposed new amendments to the DGCL
You might be interested in this recent Alert from the Delaware firm, Morris Nichols Arsht & Tunnell (including a more expansive article), which addresses amendments to the Delaware General Corporation Law just proposed by the Council of the Corporation Law Section of the Delaware State Bar Association. It’s worth emphasizing that the proposed amendments have not yet been submitted to the Delaware General Assembly for its consideration and approval, so they are not yet effective. As the Alert indicates, the proposed new amendments are designed to address the effects of recent Delaware cases highlighting “that the legal requirements identified in the cases were not necessarily in line with market practice. The Amendments are designed to bring existing law in line with such practice.”
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