ION CLOCKS

Figure caption

 

By Nils Huntemann

Today’s most advanced atomic clocks keep time thanks to an optical reference transition of either a trapped single ion or an ensemble of neutral atoms in an optical lattice. With an exceptional precision of a few parts in 10exp18, one of the most important remaining sources of uncertainty for ion-based clocks is the thermal motion of the ion. Although the ions move at only a minute fraction of the speed of light, this motion, through the relativistic effect of time dilation, induces a shift on the frequency of the transition that is significant at these precision levels. Jwo-Sy Chen at the National Institute for Standards and Technology (NIST) in Boulder, Colorado, and co-workers have developed a new cooling approach that reduces the uncertainty associated with thermal motion by a factor of 50 compared to previous clocks based on the same ion ( 27Al+) . The new method, which adds an extra step to current cooling techniques, might soon lead to record-breaking accuracies in ion-clock precision.

In an ion-based atomic clock, an ultrastable laser reads out the frequency of the reference transition of the trapped ion. Specifically, the transition is interrogated by measuring the probability of exciting it as a function of the laser frequency, and the process is repeated over many cycles. Accurate frequency readings require that the amplitude of the ion’s motion be significantly smaller than the wavelength of the probing laser. This in turn requires very low ion temperatures, which researchers typically accomplish using a laser-based method called Doppler cooling, a technique that brings the ion temperature into the low millikelvin range. For most ion clocks, Doppler cooling is sufficient to reach the so-called Lamb-Dicke regime, in which motional sidebands are well resolved with respect to the reference transition. Such sidebands arise because of the quantized motion of the ion in the trap (Fig. 1), and they are separated from the main transition by frequencies corresponding to quanta of vibrational motion. In the Lamb-Dicke regime, the narrow reference transition can be distinguished from the smaller motional sidebands and can thus be coherently interrogated, unaffected by the sidebands.

Doppler cooling has allowed 101accuracy levels for 27Alclocks. However, to push the accuracy of these clocks further, researchers have to tackle the motion-induced frequency shift that arises from time dilation. Two types of residual motion during the interrogation of the reference transition are important.

The first is the ion’s “micromotion”—a motion that arises when the ion’s position shifts with respect to the minimum of the trapping potential. Ions are typically confined using radio frequency (rf) traps. In an ideal rf trap, the ion is located at the minimum of a harmonic potential. However, several effects, connected to imperfections of the trap’s rf field or to external static electric fields, may shift the ion’s placement, causing it to oscillate at the drive frequency of the trap. Various methods of minimizing and correcting for the micromotion with high precision are available, enabling relative frequency shift uncertainties below 10exp19.

But the second cause of relativistic time dilation is harder to tackle. This comes from the residual quantized oscillations of the ion in its harmonic-potential trap. Due to thermal excitation, several quanta of vibration at the normal modes of the trap may be excited. This motion is often referred to as “secular motion.” The magnitude of this secular motion is determined by the ion’s temperature after laser cooling and the heat the ion absorbs during the interrogation by the clock’s laser. The resulting frequency shift is a key factor limiting the total uncertainty for many ion clocks. In principle, by characterizing such motion, its effect on the reference transition can be corrected. But measuring it with sufficient accuracy is experimentally difficult. A much better approach is to decrease this kind of motion to a very low level.

That’s precisely what the NIST group accomplished, and they did so by finding a way to equip ion clocks with so-called resolved-sideband techniques that can break the Doppler cooling limit. Researchers demonstrated these cooling techniques 30 years ago, using them to cool a single ion to near its zero-point energy of motion. Nowadays, such cooling techniques are routinely used in various trapped ion experiments for quantum simulation and quantum information processing. Their implementation in ion-based clocks, however, has been unhelpful so far because of the strong heating of the ion during the interrogation time and the difficulty of characterizing the resulting motional state distribution. Now, the NIST group has successfully extended the advantages of resolved sideband cooling techniques to ion clocks.

The authors demonstrated their new cooling approach on a 27Alion clock. This clock is based on the transition between the 1S0 and 3P0 states of the 27Al+ ion. In fact, this ion lacks an adequate transition for Doppler cooling. Instead, accurate clocks have been enabled by a special trick known as quantum logic spectroscopy. In such schemes, the motion of the 27Al+ ion is coupled to a simultaneously trapped “logic ion,” such as 25Mg+, through the Coulomb interaction. Doppler cooling of the 25Mg+ ion then sympathetically cools the 27Al+ ion. In addition, the coherent motion of the two coupled ions means that the logic ion can be used to read out the internal quantum state of the 27Alion.

Within the last few years, ion traps for various ion species have been developed that reduce the trap-induced frequency shifts and feature smaller heating rates. Using such measures, Chen et al. have reduced the motional heating rate in their new ion trap by 2 orders of magnitude compared to those achieved in earlier 27Alion clocks. With such a low heating rate, the uncertainty in the reference frequency can be significantly reduced by cooling the coupled ions to their respective three-dimensional motional ground states (Fig.) and by analyzing the motional heating process during the interrogation. Chen et al. compared data on the residual motion of the crystal with a rate-equation simulation and optimized the cooling sequence. Finally, they estimated an upper limit for the residual motion and validated their findings by comparing simulated and experimentally observed excitation probabilities on the motional sidebands and the main resonant frequency. In this way, they reduced the fractional uncertainty of the clock due to secular motion to 10exp19.

.It is worth noting that the authors reach this level of uncertainty for a tough test case: the 27Alion is relatively light—its residual motion is larger than the heavier ions used in other ion clocks, like 171Yb+—and the Mg+ Al+ two-ion system is complex. This bodes well for applying similar techniques to all other ion-based clocks. With the relativistic time-dilation shift of the ion inside the clock now controlled at the quantum limit, the whole 27Al+ device could become a highly sensitive sensor for other relativistic effects, such as relativistic changes induced by gravity. With clock uncertainties of 10exp19, the difference in Earth’s gravitational potential over a height of only about 1 millimeter would become measurable between two clocks. This ability would allow geodetic measurements whose precision would surpass that of all presently available techniques. We can also expect largely improved tests of fundamental principles such as searches for violations of Einstein’s equivalence principle and other key assumptions of the standard model of particle physics.

POWER OF TRUST IN ANGLO-AMERICAN BUSINESS HISTORY

By John D. Morley

Just about every big business we can think of is organized as a corporation or something similar. But, what, exactly does the corporate form accomplish? What does it do that other forms of organization cannot, and what did its development in early modern England contribute to the making of the modern world?

I offer new answers by suggesting that if the corporate form mattered at all in Anglo-American legal history, it was not for the reasons we have long supposed. Based on a new examination of historical legal sources from the late Middle Ages to the middle of the twentieth century, I show that the basic powers of the corporate form were also available throughout most of modern history through an underappreciated but enormously important legal device known as the common law trust. The trust’s success at mimicking the corporate form meant that the corporate form was almost never the exclusive source of the legal features that have long been considered its key contribution to modern life.

Throughout modern history, the common law trust frequently allowed businesses to obtain the same legal advantages as then-existing versions of the corporate form, including limited liability, entity-shielding, capital lock-in, tradable shares, legal personhood in litigation, and a sensible scheme of fiduciary powers. And the trust offered these features in a format that was cheaper and easier to access than the corporation. Unlike a corporation, a trust required no act of legislation or royal charter—a trust could be formed freely as the birthright of every English citizen and American subject. The trust was never a completely perfect substitute for the corporate form, and it was occasionally burdened by legislative acts that made it illegal or otherwise less appealing than the corporate form. Nevertheless, as a matter of judicial doctrine, the trust was remarkably effective in offering the key features of the corporate form.

Because it was so effective as a substitute for the corporate form, the trust was widely used in England and the United States to hold the property of large, unincorporated partnerships and associations both long before and long after the corporate form became freely available through statutes of general incorporation in the mid-nineteenth century. Indeed, at the time general incorporation statutes first appeared, many large businesses actually preferred the trust. When the United Kingdom passed its first general incorporation statute in 1844, trusts outnumbered corporations in the United Kingdom by a ratio of more than five to one. And of the 880 large business trusts then in existence, only four chose to incorporate when the general incorporation statute made the corporate form freely available. The other 776 companies all apparently preferred to remain as trusts. English case reports from judicial opinions in the first half of the nineteenth century thus show trustees holding the property of docks, theaters, spas and pleasure grounds, fraternal organizations, railroads, shippers, ferries, breweries, land developers, mines, insurance companies, banks, and companies in many other industries.

The trust’s role in history matters, because it pushes us to reassess a central narrative in the historical development of business law. Generations of scholars have devoted their attention to studying the rise of the corporate form, because they have believed that the corporate form was the key legal development in the making of modern business. They have understood the corporation to be the exclusive historical source of important legal technologies such as limited liability and legal personhood, and they have seen the invention and spread of the corporate form as an essential step in the political and technological progress that brought us to the present.

The history of the trust suggests that we need a new account of the corporate form. By showing that the corporation was not, in fact, the exclusive source of the legal technologies we have long associated with it, the history of the trust casts doubt on the corporate form’s importance or at least forces us to ask whether the corporate form might have been important for different reasons than the ones we have long supposed. If the corporate form’s main innovation was not to invent a new set of legal technologies, then we must find its significance elsewhere. My essay does not take on the massive task of saying just what exactly the corporate form’s historical importance actually was. But it nevertheless does the difficult historiographical labor that forces us to pose the question.

CORPORATE GOVERNANCE LITIGATION AND REGULATION

Jason M. Halper 

By Jason M. Halper

2016 saw many notable developments in corporate governance litigation and related regulatory developments. In this article, we discuss significant judicial and regulatory developments in the following areas:

  • Mergers and Acquisitions (“M&A”): 2016 was a particularly significant year in M&A litigation. In Delaware, courts issued important decisions that impose enhanced scrutiny on disclosure-only M&A settlements; confirm the application of the business judgment rule to mergers approved by a fully informed, disinterested, non-coerced shareholder vote; inform the proper composition of special litigation committees; define financial advisors’ liability for breaches of fiduciary duty by their clients; and offer additional guidance for calculating fair value in appraisal proceedings.
  • Controlling Shareholders: Delaware courts issued important decisions clarifying when a person with less than majority stock ownership qualifies as a controller, when a shareholder may bring a quasi-appraisal action in a controlling shareholder going-private merger, and when the business judgment rule applies to controlling shareholder transactions. In New York, the Court of Appeals followed Delaware’s guidance as to when the business judgment rule applies to a controlling shareholder squeeze-out merger.
  • Indemnification and Jurisdiction: Delaware courts issued decisions clarifying which employees qualify as officers for the purpose of indemnification and articulating an updated standard for exercising jurisdiction in Delaware over actions based on conduct undertaken by foreign corporations outside of the state.
  • Shareholder Activism and Proxy Access: Shareholder activists remained busy in 2016, including mounting successful campaigns to replace CEOs and board members at Chipotle and Hertz. Additionally, the SEC’s new interpretation of Rule 14a-8 has limited the ability of management to exclude a shareholder proposal from a proxy statement on the grounds that it conflicts with a management proposal. Also, some companies have adopted “proxy rights” bylaws, which codify a shareholder’s right to directly nominate board members.

I. M&A

A. Enhanced Scrutiny of Disclosure-Only Settlements

In January 2016, the Delaware Court of Chancery issued an important decision, In re Trulia, Inc. Stockholder Litigation, making clear the court’s renewed scrutiny of—and skepticism towards—so-called disclosure-only settlements of shareholder class actions. In Trulia, shareholders sought to block the merger of real estate websites Zillow and Trulia. After litigation was commenced, the parties agreed to a settlement in which Trulia would make additional disclosures in proxy materials seeking shareholder approval of the transaction in exchange for a broad release of present and future claims by the class and fees for plaintiffs’ counsel.

Chancellor Bouchard rejected the proposed settlement and criticized disclosure-only settlements as generally unfair to shareholders. Chancellor Bouchard noted that the Court of Chancery had previously expressed concerns regarding the incentives of plaintiff counsel to settle class action claims in which broad releases were granted in exchange “for a peppercorn and a fee”—i.e., for fees and immaterial disclosures that provided little benefit to shareholders. According to the Court, “these settlements rarely yield genuine benefits for stockholders and threaten the loss of potentially valuable claims that have not been investigated with vigor.”

In connection with its assessment of the reasonableness of the “give” and the “get” of such settlements, the Court announced a new materiality standard, holding that supplemental disclosures must address a “plainly material” misrepresentation or omission. Chancellor Bouchard explained that “plainly material” meant “that it should not be a close call” that the supplemental disclosures would be viewed as significantly altering the total mix of information made available to shareholders. The Court cautioned that where supplemental disclosures do not contain “plainly material” information, the Court may appoint an amicus curiae to evaluate the alleged benefits of the disclosures, with the associated costs potentially “taxed to the parties.” Moreover, the Court held that even if the supplemental disclosures are “plainly material,” the settlement will only be approved if the proposed releases are “narrowly circumscribed” to “encompass nothing more than disclosure claims and fiduciary duty claims concerning the sale process, if the record shows that such claims have been investigated sufficiently.” Chancellor Bouchard also expressed a preference that disclosure claims be resolved through stipulated dismissals based on mootness (not wide-ranging releases), which would preserve claims for the shareholder class.

Trulia shaped subsequent discussion about disclosure-only settlements in 2016, both in Delaware and elsewhere. In the wake of Trulia, Delaware courts have routinely declined to approve class-wide releases in disclosure-only settlements and have instead approved narrower applications for attorney’s fees based on mootness. The case has also informed the evaluation of disclosure-only settlements in other jurisdictions. Most notably, Judge Posner embraced the Trulia standard in the Seventh Circuit. Overturning the approval of a disclosure-only settlement agreement based on Walgreen Co.’s acquisition of Swiss pharmaceutical company Alliance Boots Gmb, Judge Posner warned that (as in Trulia) “the misrepresentation or omission that the supplemental disclosures correct must be ‘plainly material’” to be considered sufficient consideration for the shareholder class. To discourage forum shopping, we expect federal and state courts around the country to follow Delaware’s and the Seventh Circuit’s lead. North Carolina, for example, has acknowledged the Trulia framework in evaluating disclosure-only settlements.

Trulia and its progeny have perhaps been responsible, at least in part, for the sharp drop in M&A filings in 2016. In the first six months of 2016, 64% of M&A deals valued over $100 million were litigated, compared with 84% in 2015. Also, the average number of lawsuits per deal declined to 2.9 in the first two quarters of 2016, from 4.1 in 2015. Those shareholders who did file suit often opted against filing in Delaware. In the first half of 2016, the percent of suits filed in Delaware where the acquired company was incorporated in Delaware fell to 36% from 74% in 2015.

B. Business Judgment Rule Applies to Merger After a Fully Informed, Uncoerced, Disinterested Shareholder Vote

In its 2015 decision Corwin v. KKR Financial Holdings LLC, the Delaware Supreme Court held that, where the entire fairness standard does not apply because there is no controlling shareholder, a fully informed, disinterested and uncoerced shareholder vote to approve a transaction will make the business judgment rule the “presumptively correct” standard for review. In Corwin, KKR & Co. L.P. acquired KKR Financial Holdings LLC in a stock-for-stock merger. The LLC’s shareholders filed suit alleging breach of fiduciary duty by its directors. The merger had been approved by both the independent board and an uncoerced, informed vote of the shareholders. On that basis, the Court held that the proper standard of review was the business judgment rule, not Revlon, and affirmed the lower court’s dismissal of the suit. Chief Justice Strine emphasized that “the long-standing policy of our law has been to avoid the uncertainties and costs of judicial second-guessing when the disinterested shareholders have had the free and informed chance to decide on the economic merits of a transaction for themselves.”

In 2016, Delaware courts applied the new standard set forth in Corwin to dismiss several shareholder suits. First, in Singh v. Attenborough, the Delaware Supreme Court reiterated that, where there is an informed, uncoerced vote of the disinterested shareholders, the business judgment rule applies and is irrebuttable absent allegations of waste. Singh affirmed the Court of Chancery’s dismissal of claims against Merrill Lynch, an advisor to Zale Corporation in its merger with Signet Jewelers Limited. Significantly, the Court explained that, when there is a fully informed, non-coerced vote, “dismissal is typically the result.” That is because the only remaining claims are for waste, a concept that has “little real-world relevance” since “stockholders would be unlikely to approve a transaction that is wasteful.”

The Court of Chancery also has applied Corwin in dismissing merger challenges. In Miami v. Comstock, shareholders brought a post-closing challenge to the merger of C&J Energy Services, Inc. and a subsidiary of Nabors Industries Ltd. The Court found that the transaction had been approved by 97.6% of the voting shares in a fully informed, disinterested and non-coerced vote and granted defendant’s motion to dismiss. The Court of Chancery also extended Corwin to tender offers pursuant to a Section 251(h) merger. In In re Volcano Corp. Stockholder Litigation, shareholders challenged a two-step merger where the majority of shares in Volcano Corp. were tendered in response to an offer by Philips Holding USA Inc. In dismissing the suit, the Court held that acceptance of a tender offer by a majority of the fully informed, disinterested and non-coerced shareholders had the same cleansing effect as a similar shareholder vote because “the first-step tender offer essentially replicates a statutorily required stockholder vote in favor of a merger in that both require approval.” The Court of Chancery reached the same result in Larkin v. Shah, dismissing a shareholder challenge to the acquisition of Auspex Pharmaceuticals, Inc. by Teva, Inc. because 70% of the fully informed, disinterested and non-coerced shares had accepted Teva’s tender offer. In In re Solera Holdings, Inc. Stockholder Litigation, Chancellor Bouchard dismissed a shareholder suit based on the 2015 merger of Solera Holdings, Inc., which sells risk asset management software, with a subsidiary of Vista Equity Partners. The transaction had been approved by the majority of disinterested Solera shareholders in a fully informed, non-coerced vote. Citing Corwin, Chancellor Bouchard concluded that plaintiff’s six alleged disclosure defects were not adequate to sustain a claim of waste, and thus dismissed the complaint. These decisions confirm that the fully informed, disinterested and non-coerced shareholder vote defense set forth in Corwin should remain a powerful defense to M&A litigation for the foreseeable future.

C. Delaware Supreme Court Clarifies Financial Advisor Duties in Sales Process

In RBC Capital Markets, LLC v. Jervis, the Delaware Supreme Court firmly established that to financial advisors need to disclose potential conflicts of interest when accepting an advisory role during the sale of a corporation. The Court affirmed the Court of Chancery’s finding that that financial advisor aided and abetted breaches of fiduciary duty by former directors of Rural/Metro Corporation in connection with the sale of Rural/Metro to Warburg Pincus LLC, a private equity firm. The Court explained that the financial advisor knew it had a conflict of interest which it intentionally failed to disclose to Rural, and that it knew that Rural took actions during the sale process without adequate and full information. The Court insisted, however, that its decision was “narrow” and that the financial advisor had been found liable because it knew the board was breaching their duty of care and participated in the breach by “misleading the board or creating [an] informational vacuum.”

The Court of Chancery recognized the limits of RBC Capital in In re Volcano Corporation Stockholder Litigation. Goldman Sachs had advised the board of directors of Volcano Corporation during its merger with Phillips Holding USA, Inc. Shortly after the merger closed, Volcano shareholders filed suit alleging that the board breached its fiduciary duties by acting in an uninformed manner when approving the merger and that Goldman Sachs, allegedly “highly conflicted” because it supposedly profited from certain financial transactions at Volcano’s expense upon consummation of the merger, aided and abetted those breaches by providing “flawed advice” to the board. Plaintiffs further alleged that “Goldman hid its conflicts from the Board and Volcano’s stockholders.” The Court granted Goldman Sachs’s motion to dismiss, holding that, contrary to Plaintiffs’ assertions, it did disclose its “conflicts” to the board—including its financial interest in the transaction—which was sufficient to render shareholders fully informed when they approved the merger. In that regard, Goldman Sachs had made a presentation to Volcano’s merger committee regarding its financial interest in the transaction. In light of these decisions, financial advisors should act with caution when taking on advisory assignments for clients with whom they have potential conflicts of interest and should fully disclose any potential conflicts to their clients before moving forward with an advisory assignment.

D. Court of Chancery Provides Guidance on Appraisal Calculations

In 2016, the Court of Chancery issued several decisions clarifying the weight ascribed to deal price in calculating fair value in an appraisal action under DGCL § 262(h).

In In re Appraisal of Dell Inc., Vice Chancellor Laster concluded that the fair value of Dell Inc. was 28% higher than the deal price. The Court so held even though the offer from Michael Dell and Silver Lake Partners was approved by a majority of the unaffiliated shares after a lengthy, public and well-run arm’s-length sale process. The Court observed that the transaction was a management buyout (“MBO”), which rendered the deal price resulting from the public auction less relevant, given that “[t]he limitations on efficient pricing in the market for corporate control ‘are especially pronounced in the context of MBOs.’” According to Vice Chancellor Laster, the deal price also undervalued Dell because there was a significant “valuation gap” between the long-term value of Dell and the market’s short-term focus, and the agreed-upon price was the product of competition among like-minded financial bidders who were price-constrained by targeted internal rates of return in LBO pricing models.

In In re Appraisal of DFC Global Corp., Chancellor Bouchard determined that the price Lone Star Fund VIII, LP paid to acquire DFC Global Partners should not be given full weight in assessing fair value. The Court held that the transaction was negotiated during a period of regulatory uncertainty that depressed the trading price of the company’s shares. Giving equal weight to the deal price, the plaintiff’s discounted cash flow model (with some inputs changed), and the respondents’ expert analysis, Chancellor Bouchard determined a fair value of $10.21, a 7.5% premium over the acquisition price. The Chancellor’s decision is currently on appeal before the Delaware Supreme Court.

In Dunmire v. Farmers and Merchants Bancorp of Western Pennsylvania Inc., Chancellor Bouchard again declined to rely exclusively on the deal price. F & M’s stock-for-stock transaction to acquire community bank NexTier, Inc. was suspect, according to the Court, because of significant procedural shortcomings in the sales process. For example, there was no public participation in the sale, either in the form of an auction or the existence of outside bidders. Most troubling to the Court, there were controlling shareholders on both sides of the transaction who set the stock exchange ratio. Chancellor Bouchard relied on a discounted net income analysis (which derived value based on a single year of net earnings to project an earnings stream using a constant long-term growth rate) to set a fair value of $91.90, a nearly 11% premium over the deal price of $83.

These decisions reflected a trend of calculating fair value at premiums over the deal price in transactions with flawed sales processes. In December 2016, however, Vice Chancellor Laster decided Merion Capital LP et al. v. Lender Processing Services Inc., which accorded full weight to the deal price arrived at through a properly run, public sale. In that case, Fidelity Capital acquired Lender Processing Services, Inc. (LPS) in exchange for cash and stock, and the transaction had been approved by the LPS board and an overwhelming majority of the voting shares. Vice Chancellor Laster emphasized that if a “merger giving rise to appraisal rights resulted from an arm’s-length process between two independent parties, and if no structural impediments existed that might materially distort the crucible of objective market reality, then a reviewing court should give substantial evidentiary weight to the merger price as an indicator of fair value.”

E. Limited Liability Company Improperly Appointed Non-Director/Non-Manager as Special Committee

In Obeid v. Hogan, the Court of Chancery rejected an attempt to appoint a single non-director and non-manager to serve as the special litigation committee evaluating derivative suits against directors in two related entities, Gemini Equity Partners LLC (“Equity LLC”) and Gemini Real Estate Advisors LLC (“Real Estate LLC”), which manage hotels and commercial properties. Equity LLC was governed by an LLC agreement that established a governance structure parallel to that of a corporation, with power vested in a board of directors. Real Estate LLC was governed by an LLC agreement that vested power in its managers, Messrs. Obeid, La Mack, and Massaro. After a dispute among the managers resulted in several lawsuits, the companies hired a law firm that suggested that a retired federal judge “should be hired to function as a special litigation committee for each entity to investigate, analyze and make a recommendation whether to pursue the derivative claims on behalf of [the entities],” including the claims asserted against La Mack and Massaro. La Mack and Massaro entered into an agreement with a retired judge, Judge Hogan, that appointed him a member of both entities and sole member of each entity’s special litigation committee. Judge Hogan was neither a manager nor a director of either entity. Obeid filed suit in the Court of Chancery challenging the appointment.

The Court of Chancery granted Obeid’s motion for summary judgment, holding that Judge Hogan could not be a special litigation committee member of either entity. The Court reasoned that, although Equity LLC had the word “Partners” in its name, it had adopted a governance structure parallel to that of a corporation, and thus evidenced the members’ desire to be governed by corporate law. According to the Court, Judge Hogan could not serve as the sole member of a special litigation committee for that entity because, under Delaware Supreme Court precedent, only directors of Delaware corporations have managerial discretion to initiate litigation. The Court also held that, under Real Estate LLC’s LLC agreement, managers could only delegate core governance functions to other managers. Accordingly, Judge Hogan could not be the sole member of a special litigation committee for that entity because he was not a manager of the company. In so holding, the Court noted that LLCs are “creatures of contract” and that “[v]irtually any management structure may be implemented through the [LLC’s] governing instrument.”

II. Controlling Shareholders

A. 26% Stock Ownership May Be Sufficient for Controlling Shareholder Status

The Delaware Court of Chancery denied a motion to dismiss in Calesa Associates, L.P. v. American Capital, Ltd., holding that American Capital, a shareholder owning 26% of the outstanding common stock of Halt Medical, Inc., qualified as a controlling shareholder, and therefore owed fiduciary duties to shareholders. The Court again emphasized that stock ownership is not the only criterion for determining control. Under Kahn v. Lynch Communication Sys. Inc., “a shareholder owes a fiduciary duty only if it owns a majority interest in or exercises control over the business affairs of the corporation.” In addition to its stock ownership, American Capital had the right to select two members of the five-member board of directors and held significant debt in the form of direct loans to the company such that, according to the Court, it exercised sufficient influence over the board to constitute “actual control.” Therefore, plaintiff’s breach of fiduciary duty claims against American Capital arising out of an issuance of equity that diluted the plaintiffs’ interest in Halt survived dismissal.

B. Audit Committee Approval Not Sufficient in Controlling Shareholder Transaction

In In re EZCORP Inc. Consulting Agreement Derivative Litigation, the Court of Chancery (Laster, V.C.) applied the entire fairness standard in evaluating a motion to dismiss a derivative suit challenging a series of transactions made pursuant to service agreements between EZCORP and Madison Park, LLC. EZCORP’s controlling shareholder, Phillip Ean Cohen, also controlled Madison Park, LLC, and strongly opposed attempts to terminate the lucrative service agreements between the two companies. Even though the transactions at issue had been approved by the EZCORP board’s audit committee, the Court determined that the involvement of a controlling shareholder on both sides of the transaction was akin to a squeeze-out merger, and accordingly applied the MFW standard: “When a transaction involving self-dealing by a controlling shareholder is challenged, unless the corporation deploys both an independent committee and a majority-of-the-minority vote, then the most that the use of the committee can achieve is a shift in the burden of proof.” The defendants’ motion to dismiss the derivative challenge to the fairness of the service agreements was therefore denied.

C. Quasi-Appraisal Denied in Challenge to Controlling Shareholder Going‑Private Merger

The Delaware Court of Chancery rejected a minority shareholder’s request for a quasi-appraisal remedy in In re United Capital Corp. Stockholders Litigation, involving a going private transaction by United Capital Corp.’s Chairman, CEO, and 94% controlling shareholder. A special committee negotiated and agreed to a final deal price of $32 per share, $7 per share below the trading price on the day the merger was announced. Minority shareholders filed suit, alleging inadequate disclosures and seeking a quasi-appraisal remedy.

Generally, a minority shareholder is only entitled to a remedy of appraisal in a short-form merger (i.e., a merger conducted by a controlling shareholder with over 90% of the company’s shares), which does not require shareholder approval under DGCL § 253. Delaware courts, however, have developed an exception to this rule: when “the material facts are not disclosed, the controlling stockholder forfeits the benefit of that limited review and exclusive remedy, and the minority shareholders become entitled to participate in a ‘quasi-appraisal’ class action.” Quasi-appraisal allows minority shareholders to opt in to an appraisal after the deal closes. Class members recover the difference between the company’s fair value and the deal price, but there is no concomitant obligation to disgorge payment if the appraised price ends up being lower than the deal price.

Vice Chancellor Montgomery-Reeves cited the eighty-page disclosure notice United Capital provided to the minority shareholders, and concluded that “none of Plaintiff’s alleged omissions are material to the decision of whether to seek appraisal in light of the abundant disclosures already provided.” The Court dismissed the action because plaintiffs failed to plead that the disclosures were inadequate, and they were therefore not entitled to a quasi-appraisal.

D. New York Court of Appeals Adopts Delaware’s Approach to Controlling Shareholder Squeeze-Out Mergers

The New York Court of Appeals adopted Delaware’s formulation for evaluating controlling shareholder squeeze-out mergers in In re Kenneth Cole Productions, Inc. Kenneth Cole, the company’s founder and owner of 89% of voting shares, attempted to re-acquire full ownership of Kenneth Cole Productions in 2012. The board established a special committee to evaluate the transaction, with two representatives elected by “Class A” shares (of which Cole held 46%) and two from “Class B” (of which Cole held 100%), and later held a vote where a majority of the minority shareholders voted to approve the transaction. The New York Court of Appeals upheld the deal under the business judgment rule, incorporating Delaware’s MFW standard. Adopted by the Delaware Supreme Court in Kahn v. M&F Worldwide for squeeze-out mergers, MFW applies the business judgment rule where certain independence criteria are present, including the establishment at the outset of the transaction that it is contingent on approval by both an independent special committee and a majority vote of minority shareholders. In particular, under the MFW standard:

[I]n controller buyouts, the business judgment standard of review will be applied if and only if: (i) the controller conditions the procession of the transaction on the approval of both a Special Committee and a majority of the minority shareholders; (ii) the Special Committee is independent; (iii) the Special Committee is empowered to freely select its own advisors and to say no definitively; (iv) the Special Committee meets its duty of care in negotiating a fair price; (v) the vote of the minority is informed; and (vi) there is no coercion of the minority.

This standard now applies in New York.

III. Indemnification and Jurisdiction

A. Court of Chancery Provides Guidance on Who May Receive Indemnification as a Corporate “Officer”

In Aleynikov v. The Goldman Sachs Group, Inc., the Delaware Court of Chancery found that the plaintiff, Sergey Aleynikov, a former Vice President of a Goldman Sachs subsidiary, was not entitled to indemnification and advancement of his legal fees from Goldman Sachs. Aleynikov concerned a provision in Goldman Sachs’s bylaws, which stated that Goldman Sachs would provide indemnification and advancement to any “officer” of Goldman Sachs’s subsidiaries. Under the bylaws, “when used with respect to a Subsidiary [of Goldman Sachs] or other enterprise that is not a corporation . . . , the term ‘officer’ shall include in addition to any officer of such entity, any person serving in a similar capacity or as the manager of such entity.” From 2007 to 2009, Aleynikov worked as a computer programmer at a Goldman Sachs subsidiary. Although he did not have any managerial or supervisory responsibilities, he held the title of Vice President. Between 2009 and 2012, Aleynikov was involved in a number of lawsuits arising from his employment at Goldman Sachs, including a criminal indictment for theft of trade secrets. Following his acquittal in that action, Aleynikov filed suit against Goldman Sachs in federal court in New Jersey seeking indemnification for his successful defense of the criminal proceeding as well as advancement of fees incurred to defend another criminal proceeding in state court. Aleynikov argued that he was entitled to indemnification and advancement because he qualified as an “officer” under the definition contained in Goldman Sachs’s bylaws. The district court agreed, but the Third Circuit reversed, finding that (1) the definition of “officer” in the bylaws is ambiguous and (2) the doctrine of contra proferentem, which provides that any ambiguities in a contract should be construed against the drafting party, should not be used to construe the bylaws against Goldman Sachs.

Following the Third Circuit’s decision, Aleynikov filed a separate proceeding in the Delaware Court of Chancery to seek advancement of fees incurred to defend against Goldman Sachs’s counterclaims in the federal suit. Delaware courts have generally favored indemnification and advancement of fees for corporate officers. However, Vice Chancellor Laster held that Aleynikov was not entitled to such payments. Analyzing issue preclusion under New Jersey law, Vice Chancellor Laster determined that the Third Circuit’s holding that the definition of officer is ambiguous and the doctrine of contra proferentem did not apply had preclusive effect. Thus, looking only at extrinsic evidence, course of dealings, and industry practice, the Court determined that Aleynikov failed to establish that someone who held the title of Vice President but otherwise had the responsibilities of an employee qualified as an officer under the bylaws. Vice Chancellor Laster, however, explained in dicta that he disagreed with the Third Circuit’s decision and believed that contra proferentem should have applied in this case. Thus, although Vice Chancellor Laster denied Aleynikov indemnification, his decision is a broad warning that indemnification by-laws should be drafted carefully and unambiguously, or else employees such as Aleynikov (who hold officer titles but do not perform traditional officer duties) may be entitled to indemnification.

B. Delaware Registration Statute Does Not Provide a Basis for Asserting General Jurisdiction Over Foreign Corporations

In Genuine Parts Co. v. Cepec, the Delaware Supreme Court held that a DGCL provision which requires foreign businesses to appoint a registered agent to receive service of process in the state does not give Delaware courts general jurisdiction over non-resident corporations in connection with claims that have nothing to do with the company’s activities in the state. The plaintiff brought tort actions for wrongful asbestos exposure against several manufacturers, including Genuine Parts, a Georgia corporation headquartered in Atlanta. The plaintiff, Cepec, was a former employee at Genuine’s warehouse in Jacksonville, Florida. In ruling that Delaware courts lacked jurisdiction, the court overturned a 1988 precedent holding that the DGCL granted personal jurisdiction in such cases, in light of intervening U.S. Supreme Court precedent. In Goodyear Dunlop Tires Operations, S.A. v. Brown, the Supreme Court dismissed claims brought against foreign subsidiaries of Goodyear in North Carolina relating to a bus crash that occurred in France, because the sale of a small number of tires that reached North Carolina through the stream of commerce did not constitute sufficient contacts with the forum state to give rise to personal jurisdiction over claims unconnected to the forum. Similarly, in Daimler AG v. Bauman, the Supreme Court dismissed claims brought in the Northern District of California against a German corporation for alleged violations of two U.S. statutes, the Alien Tort Statute and the Torture Victims Protection Act, by its Argentinian subsidiary during the Argentinian “Dirty War.” The Court held that due process did not permit the exercise of personal jurisdiction over a corporation based on conduct that occurred outside the state unless its business activities are “continuous and systematic” so as to render them “at home” in the forum state. Considering these developments, the Delaware Supreme Court held that compliance with a registration statute was “not . . . a broad consent to personal jurisdiction in any cause of action, however unrelated to the foreign corporation’s activities in Delaware.”

IV. Shareholder Activism and Proxy Access

A. Developments in Shareholder Activism

2016 was another busy year for shareholder activists. In 2016, although efforts to force the sale of the company occurred less frequently, actions aimed at influencing or restructuring a company’s board of directors rose 5% from 2015. Investment in activist hedge funds has grown almost three-fold, from $50 billion five years ago to $142 billion at the end of 2015, and did not slow down in 2016 despite worries that “increased competition, higher interest rates and greater corporate preparedness” would slow down activist shareholder campaigns. A consulting report by Activist Insight and FTI Consulting found that the number of activist campaigns “for the first three quarters of 2016 has already surpassed the total number of such campaigns in 2015 by 20%.” Activist Insight also reported that the number companies subject to activist demands grew during the first half of 2016, climbing by 17% to 473 companies. Although some metrics suggest the industry is shrinking, activism continues to find favor with investors, and there are indications that activists may be keeping a lower profile and “targeting smaller companies” by pursuing activist actions without acquiring the 5% stake or more that would require them to file a Schedule 13D. Observers also expect to see activists go after “systematically important financial institutions,” such as large banks or financial firms in the coming years.

In 2016, some activist investors resorted to litigation to achieve their goals. For example, activist Lewis C. Pell disclosed a 7.12% stake in Cogentix Medical, Inc. and sought to nominate six people including himself for election to the Cogentix board. The board attempted to avoid a proxy contest by implementing a “board reduction plan.” Under the plan, the size of the board would temporarily be reduced by two seats prior to the next Cogentix annual meeting. Pell filed suit against the board of directors in the Delaware Court of Chancery seeking to enjoin the board reduction plan. The Court of Chancery granted Pell’s motion for a preliminary injunction because the Court deemed the plan to be preclusive to shareholders’ voting rights. The parties then entered into a settlement agreement in which Cogentix and its board agreed to support three of Mr. Pell’s board nominees. In another instance, shareholders of Omega Protein Corporation elected activist investor Wynnefield Capital Management LLC’s two candidates for the board. The vote came after Wynnefield, which reported a 7.9% stake in the company, obtained an order from a Nevada state court granting it access to the company’s list of non-objecting beneficial owners (commonly known as a “NOBO” list). Likewise, Hill International Inc. agreed to install Bulldog Investors LLC’s three nominees to the board as part of a settlement agreement resolving a lawsuit brought by Hill in the Delaware Court of Chancery that attempted to cancel the company’s annual meeting. And after shareholder Michael Tofias filed suit to force a sale of Surge Components, Inc., Surge agreed to tender shares to Mr. Tofias and make changes to the board of directors in the resulting settlement agreement.

Activist investors were also able to achieve substantial corporate governance changes without resorting to litigation or through settlement agreements. The below table lists several prominent examples from 2016.

Target Activist(s) and Stake Outcome
Hertz Corporation Carl Icahn (33.8%) Replacement of Hertz’s CEO in December and the resignation of three of Hertz’s longest-serving directors, effective January 2017.
Chipotle Mexican
Grill Inc.
Pershing Square Capital Management Inc. (9.9%) Resignation of incumbent CEO in December and selection of successor with investor input; Pershing Square had reported its stake in September and stated its plans to engage in discussions about Chipotle’s leadership.
Pico Holdings Central Square Management LLC Resignation of the Chairman of the Board in December, declassification of the board, announcement that the entire board would be up for re-election in 2017, and reduction of the board to five members.
Perceptron Inc. Moab Partners LP (8.9%) and Harbert Discovery Fund LP (5.4%) Replacement of CEO and CFO in November. The parties had previously entered into a settlement agreement in August which had resulted in the resignation of two incumbent directors and the expansion of the board.
Covisint Corporation Dialectic Capital Management LP (6.2%) In August, Covisint added three members put forth by Dialectic to its board of directors and two incumbents resigned as a result of a proxy contest announced in June.
The Brink’s Company Starboard Value LP (12.3%) Retirement of CEO and appointment of three new members to the board of directors in January 2016.
Sotheby’s Inc. Marcato Capital Management LP (9.5 % stake) Sotheby’s repurchased 2.05 million shares from Marcato, terminated its dividend program and increased share buybacks to maximize the return of capital to shareholders.

Activist shareholders were not uniformly successful in 2016. For example, Ashford Hospitality Prime, Inc. (“Ashford Prime”) successfully defended a proxy contest and related litigation launched by the New York-based hedge fund Sessa Capital. On January 15, 2016, Sessa notified Ashford Prime that it intended to nominate five candidates for election to Ashford Prime’s board. Ashford Prime’s bylaws include advance notice provisions that require those seeking nomination to the board to disclose all information required by the federal securities laws, including “any plans or proposals” that would result in a sale or transfer of material assets of the company or any other material change to the corporate structure. In nomination materials submitted to Ashford Prime, however, the Sessa candidates claimed that they did not have any plans for Ashford Prime should they gained control of the company and refused to provide substantive responses to Ashford Prime’s questions about their plans. After Ashford Prime rejected the candidates’ applications as incomplete, Sessa and Ashford Prime filed dueling motions for preliminary injunctions. The U.S. District Court for the Northern District of Texas sided with Ashford Prime, holding that Maryland’s business judgment rule protected the Ashford Prime board’s decision not to allow the Sessa candidates to stand for election. The Court held that the board had reasonably determined that the Sessa candidates were ineligible due to their non-compliance with the advance notice provisions, because the board could reasonably expect that the Sessa candidates had a plan that they refused to disclose in their nomination materials. The Fifth Circuit dismissed Sessa’s subsequent appeal of the court’s order as moot in December 2016 because the annual meeting had been held on June 10, 2016.

B. Proxy Access

In 2016, the SEC’s Rule 14a-8(i)(9) garnered attention due to a new SEC interpretation limiting the circumstances in which management may block shareholder proposals from the company’s proxy statement. Rule 14a-8 requires that when a shareholder submits a proposal, the company must include the proposal in its proxy materials unless it violates one of the Rule’s requirements or it falls within one of the Rule’s substantive bases for exclusion. Under the rule, a shareholder may seek to include a proposal in the company’s proxy statement if the shareholder has continuously held a relatively small amount of a company’s stock—at least $2,000 in market value or 1 % of securities entitled to vote—for one year prior to submitting a proposal.

Notably, Rule 14a-8(i)(9) allows a company to exclude a proposal from its proxy materials “[i]f the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.” Traditionally, this provision was interpreted broadly, and the SEC had endorsed the view that a company may exclude a shareholder proposal if including it would “present alternative and conflicting decisions for shareholders, and where submitting both proposal could provide inconsistent and ambiguous results.” In October 2015, however, the SEC issued a Staff Legal Bulletin updating their interpretation of Rule 14a-8(i)(9). The revised guidance took a much narrower view, and determined that “any assessment of whether a proposal is excludable under this basis should focus on whether there is a direct conflict between the management and shareholder proposals” such that “a reasonable shareholder could not logically vote in favor of both proposals.”

Bulletin 14H’s interpretation may be credited, at least in part, with increasing proxy access for shareholders in 2016. As of December 29, 2016, the Division of Corporate Finance issued responses to 288 no-action requests sought under 14a-8 in 2016, down from 304 in 2015, which suggests that management sought to exclude fewer shareholder proposals despite increased interest in proxy participation.

C. Direct Board Nominations

In 2010, the SEC promulgated Rule 14a-11 requiring that a shareholder or group of up to 20 shareholders who collectively have owned 3% of a company’s stock for three years must be allowed to nominate up to 20% of the company’s board. The rule was stayed before it went into effect, and was later vacated. Shareholders, however, have taken the matter into their own hands by proposing bylaw amendments that provide proxy access for director nominations.

These nomination bylaws have been adopted widely. Institutional Shareholder Services, Inc. (ISS) reports that “[a]s of August 31, 2016, 39% of S&P 500 companies provide a proxy access right, and 264 U.S. companies in the Russell 3000 have adopted some form of proxy access” allowing director nominations, and projects that by summer 2017 “the majority of the companies in the S&P 500 may provide proxy access” allowing director nominations. In 2016, S&P 500 companies saw 46 shareholder proposals for bylaw amendments allowing such proxy access; 21 proposals (46.7%) passed, while 24 (53.3%) failed. In some cases, boards have acted proactively in adopting such access provisions.

Although Rule 14a-11 was never implemented, the SEC has supported the expansion of proxy access for director nominations through other means. For example, in 2016, the SEC refused to provide no-action letters to H&R Block and Microsoft when management sought to block proxy proposals which would expand the direct nomination rights of shareholders in those companies. In the case of H&R Block, the company already had an access bylaw, but shareholders introduced a proposal to loosen its requirements by allowing loaned votes to count for the ownership total and eliminating a provision that barred re-nomination of shareholder nominees. H&R Block argued to the SEC that it had “substantially implemented” the proposal through the existing access bylaw, and therefore could exclude the proposal under 14a-8(i)(10). The SEC disagreed, declining to provide a no-action letter. In September, the SEC rejected a similar no-action request from Microsoft on the same grounds.

2017 PROXY SEASON

By Tom Christopher and Tony Richmond

Many public companies have received shareholder proxy access proposals in connection with their upcoming 2017 annual meetings and additional companies are likely to receive proposals in the coming months. Proxy access is a mechanism that gives shareholders the right to nominate directors for inclusion in the company’s annual meeting proxy statement. Proxy access gained significant momentum in 2015 and 2016, with more than 200 proposals submitted to shareholders and approximately 58% of those proposals receiving shareholder approval. 

Accordingly, public companies may wish to consider proxy access and develop a plan for responding to a shareholder proxy access proposal. Based on lessons learned in recent years, this post summarizes:

  1. Actions a public company can take to prepare for receiving a proxy access proposal
  2. Whether a company should wait and react to a specific shareholder proxy access proposal or preemptively adopt its own proxy access regime
  3. Alternatives available to a company following receipt of a proxy access proposal

1. Preparatory Actions in Anticipation of the 2017 Proxy Season

Companies can take a number of actions now in advance of the 2017 proxy season, including:

  • Evaluating the company’s shareholder base and understanding shareholders’ voting policies and positions relating to proxy access.
  • Engaging constructively with shareholders on business and governance matters to build positive relationships and a mutual understanding of objectives, which may temper any perceived need for either the implementation of proxy access or amendments to a proxy access regime that has already been adopted and, at a minimum, establishes the groundwork for future resolution of any shareholder proposal.
  • Staying abreast of developing market practice for the specific terms of proxy access, particularly with respect to the size of nominating groups and caps on the number or percentage of shareholder-nominated candidates.
  • Ensuring the board and management are aligned with respect to appropriate responses to a shareholder proxy access proposal, as outlined below.

Proxy Access: What’s the Point?

Historically shareholders gained seats on a public company’s board through either a negotiated agreement with the company or successful proxy fight. Proxy access provides a third route for gaining board representation. The purpose of proxy access is to permit significant, otherwise passive shareholders meeting certain requirements to include their director nominees in the company’s proxy statement rather than requiring such shareholders to prepare and distribute their own proxy statement to shareholders. Proxy access is not intended as a new path to the boardroom for activists seeking to influence the company, and the prevailing proxy access construct specifically forecloses the ability of non-passive investors to use proxy access.

The real usefulness of proxy access to obtain board representation has yet to be determined. To date, the only shareholder to submit a proxy access nominee was deemed ineligible due to its past, very public, activist conduct with respect to the target company, and promptly withdrew its nominee. For shareholders that are more ambiguous or private about their intentions, eligibility for proxy access is uncertain, and will likely be determined on a case-by-case basis depending on the facts and circumstances. This scenario underscores the importance of the thoughtful consideration required for adoption and application of any proxy access regime, particularly while this area of corporate governance continues to evolve.

2. Taking a Wait-and-See Approach Versus Preemptively Adopting Proxy Access

As the 2017 proxy season draws closer, companies will again be confronted with the question of which approach to take with respect to proxy access. A company has at least two available alternatives:

Option A: Wait and see

  • Allows a shareholder to take the first step with respect to proxy access through a public pronouncement of its position on proxy access generally, in a private dialogue with the company or through submission of a proxy access proposal
  • Prevents a company from adopting or proposing a proxy access regime that is more liberal than shareholders might have proposed or one that is so restrictive it risks being rejected out of hand by shareholders
  • Provides time for the further development of market practice regarding the specific terms and implementation details of proxy access
  • Delays vulnerability to fix-it proposals seeking to modify and enhance the terms of an adopted proxy access regime that proponents perceive to be off-market or overly restrictive (see box, New in 2017: Shareholders Submit “Fix-It” Proposals)
  • Is consistent with market practice for all but the largest cap companies—only 12% of Russell 3000 companies have adopted proxy access 
  • Does not foreclose any of the company’s options if the company receives a proxy access proposal, as outlined below

Option B: Preemptively adopt proxy access

  • Does not bar fix-it shareholder proposals seeking to modify the terms of the adopted proxy access regime, requiring the board to revisit the bylaw
  • Will likely not permit a board to obtain no-action relief from the Securities and Exchange Commission (SEC) to exclude fix-it proposals from the company’s proxy materials on the ground that the proposal has already been substantially implemented,  unless the company amends its proxy access regime to adopt some of the proposal’s suggested amendments 

New in 2017: Shareholders Submit “Fix-It” Proposals

Traditionally, after a company adopts the crux of a shareholder proposal, the proponent of the proposal moves on to another company or to another governance issue. However, during the second half of 2016, proponents of proxy access proposals that were dissatisfied with certain proxy access terms adopted by companies declined to move on and opted instead to submit new shareholder proposals requesting that the company amend the offensive terms. These “fix-it” proposals, each of which typically suggests multiple, discrete changes, most frequently address and request:

  • Cap on Aggregating Shareholders—the removal of the cap on the number of shareholders that can aggregate their shares to meet the minimum ownership threshold.
  • Cap on Board Nominees—an increase in the number of shareholder-nominated candidates eligible to be included in the company’s proxy materials to 25% of the board (with a minimum of 2).
  • Re-nomination Restrictions—the elimination of restrictions on the re-nomination of directors in future years based on the percentage of votes received.
  • Post-Meeting Ownership Requirements—the elimination of the requirement for a nominating shareholder to hold its shares for a period of time following the annual meeting.
  • Loaned Shares as “Owned”—the inclusion of loaned shares among the shares counted to satisfy the percentage ownership threshold so long as the shares are recallable within a specified timeframe.

To date, very few of the fix-it proposals have received shareholder approval, particularly where the target company had implemented proxy access for shareholders with 3% stock ownership for three years, rather than at higher thresholds. As proxy season progresses, we will continue to monitor investor reaction to fix-it proposals.

3. Options After Receiving a Proxy Access Proposal

After receiving a shareholder proposal regarding proxy access, and assuming the proposal complies with the SEC’s procedural requirements, a company has at least three available alternatives:

Option A: Submit the shareholder proposal to shareholders without an alternative proposal from the company

  • Many institutional investors, including T. Rowe Price, BlackRock, TIAA-CREF, CalPERS and CalSTRS support proxy access for a shareholder or shareholder group owning 3% or more of the company’s common stock for at least three years.
  • However, retail shareholders continue to be less likely to support proxy access—in 2016 just 15% of retail shareholders voted their shares in favor of proxy access proposals, while 60% of institutional shareholders voted their shares in favor of such proposals. 
  • The identity of the proponent matters. Shareholders are less likely to vote in favor of proxy access proposals submitted by frequent shareholder proposal proponents John Chevedden, James McRitchie and William Steiner; shareholders approved less than 31% of their proposals, while shareholders approved more than 66% of proposals submitted by New York City Comptroller Scott Stringer and the New York City Pension Funds. 
  • Institutional Shareholder Services (ISS) generally will recommend a vote in favor of proxy access proposals requiring a maximum of 3% ownership for three years, as long as the proposals impose minimal or no limits on the number of shareholders whose shares can be aggregated to satisfy the 3% threshold and the shareholders can nominate a number of nominees who, if elected, would constitute not less than 25% of the board. Glass, Lewis & Co. reviews proposals on a case-by-case basis.
  • Note that combative responses to shareholder proposals made by credible proponents may result in stronger shareholder support for the proposal.

Option B: Implement the company’s own form of proxy access and seek to exclude the shareholder proposal

  • The company may be able to negotiate with the shareholder proponent to withdraw its proposal in exchange for the board’s adoption of a proxy access regime with certain modified terms, including the number of shareholders whose shares can be aggregated to attain the 3% level, the number or percentage of directors that can be nominated and limitations on the ability of a shareholder or shareholder group to nominate directors in successive years.
  • In lieu of a negotiated withdrawal, the company may be able to obtain SEC no-action relief allowing the company to exclude the shareholder proposal from the company’s proxy statement on the basis that the company has substantially implemented the proposal. 
  • During the 2016 proxy season, the SEC indicated that if a company adopts a proxy access regime with an ownership threshold matching that of the shareholder proposal (typically 3% for three years), then the SEC may be willing to permit exclusion of the shareholder proxy access proposal from the company’s proxy statement that otherwise proposes terms that vary slightly from the regime adopted by the company. 

Option C: Submit the shareholder proposal to shareholders along with an alternative proposal from the company

  • This option differs from Option B above because instead of actually adopting proxy access, the company merely puts forth an alternative, competing proposal for shareholders to consider.
  • In 2015 and 2016, 12 companies presented competing proposals. Six of the company proposals passed, five of the shareholder proposals passed, and in one case both proposals were voted down. In no case did shareholders approve both the shareholder proposal and the management proposal.
  • A company can ask the shareholder or shareholder group to voluntarily withdraw its proposal if the company puts forth its own proposal.
  • Excluding a shareholder proposal without an appropriate basis for doing so risks litigation and negative investor backlash. ISS will recommend a withhold vote on directors if a company omits a shareholder proposal without voluntary withdrawal, SEC no-action relief or a US district court ruling.

4. After Shareholders Approve a Proxy Access Proposal

If shareholders approve a proxy access proposal, the board may discuss whether, how and when to implement the provision. If the proposal was a non-binding precatory proposal, which is the case with most shareholder proposals, the board may consider, among other options, whether to implement the proposal exactly as proposed and approved by the shareholders or to deviate from the proposal in certain respects and potentially face future fix-it proposals. We expect shareholder opinion and market practice regarding the implementation of proxy access proposals to continue to evolve over the coming months and years, providing further clarity on the extent to which shareholders, as well as the SEC and proxy advisory firms, are willing to accept proxy access terms that a company implements which diverge from the terms that shareholders approved or requested.

Conclusion

Taking appropriate preparatory steps and understanding the alternatives available upon receipt of a proxy access proposal should provide a framework for companies to address the issue of proxy access in the upcoming 2017 proxy season.

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TIMING OF EATING

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What times someone eats during the day and how frequently may play a role in having a healthy weight and heart.

According to American Heart Association, eating breakfast, avoiding late-night eating and mindful meal-planning are associated with a lower risk of heart disease, blood vessel diseases and stroke.

However, current research doesn’t dictate the best approach.

“There’s conflicting evidence about meal frequency,” said Marie-Pierre St-Onge, writing group chair and associate professor of nutritional medicine at Columbia University in New York City. She said studies have shown the benefit of intermittent fasting and eating smaller, frequent meals throughout the day.

Fasting every other day helped people lose weight in the short-term, but its long-term effects haven’t been studied, according to the statement. And there’s no guarantee that such fasting can be sustained.

“I can see scenarios where intermittent fasting can backfire,” said Penny Kris-Etherton, a statement co-author and nutrition professor at Penn State University. For example, people who fast one day could eat more than twice as much the next day, she said. She also questioned what would happen if someone who fasted regularly for lengthy periods of time – weeks or even months – then started eating regularly every day.

Because there’s not a lot of information about how people could practice intermittent fasting, Kris-Etherton cautioned against using it as a weight loss or weight management strategy until further information is available.

Eating frequent meals has also been found to reduce the risk of cardiovascular disease risk factors, says St-Onge. One study of men showed that those who ate more than four times a day had a lower risk of obesity than those eating three or fewer times a day. But other studies have found the opposite, with a greater risk of weight gain over time in those reporting eating more frequently.

Frequent meals may also be impractical, said St-Onge.

“If you eat five to six meals, it’s hard to create a meal that’s so small that you aren’t overeating at each of the sessions,” she said.

Eating dinner or snacking late at night had a detrimental effect on weight and heart health, according to the statement.

This may be due to how late night eating affects the body’s internal clock, which responds to circadian rhythms when metabolizing food and absorbing nutrients, according to the statement. Circadian rhythms also guide sleep and wake cycles. Emerging evidence shows that the liver and other organs have their own clocks that also affect metabolism, which may also explain why late night snacks and meals are detrimental.

For example, animal studies suggest that eating during times usually spent sleeping led to weight gain, insulin resistance and inflammation, St-Onge said, but that hasn’t been shown in humans.

Several studies have shown the benefit of eating breakfast every morning: it may help reduce the amount people eat the rest of the day, and lower the risk of high cholesterol and blood pressure. Some research reported that breakfast-skippers are more likely to be obese, have diabetes and not get recommended nutrients according to studies.

But breakfast studies also have recently come under fire when media reports showed Kellogg and General Mills, the two largest U.S. cereal manufacturers according to Hoovers, funded some of the research. This could have skewed positive results about the benefit of breakfast. Further research is needed to understand how breakfast could help people control their weight.

Proving definitive benefits of breakfast will require more direct head-to-head studies, as most of the research is based on weaker, observational studies, St-Onge said.

“It makes sense that eating more earlier during the day and less at night is more healthful, but the studies aren’t available,” she said.

Regardless of timing, statement authors continue to emphasize the benefit of a diet that includes fruits, vegetables, whole grains, low-fat dairy products, poultry and fish, and limits red meat, salt and sugary drinks and foods.

Having the right mindset about eating and planning ahead can also affect weight and heart health, said St-Onge. She recommends paying close attention to hunger cues.

“All or none” thinking can lead to binge eating excessive calories, she said. A research participant told St-Onge he could not eat one piece of pizza without consuming the entire pie.

“You don’t have to eat like there’s no tomorrow,” she said. “Have a little pleasure today…and tomorrow!”

Despite evidence about meal timing, the bottom line to healthy eating is calories, Kris-Etherton said.

You can’t eat excessive calories for breakfast, or eat five high-calorie meals a day and expect to lose weight, she said.

EVE WALKER’S STORY FROM THE HEART

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By American Heart Association News

Eve Walker was 12 when her 16-year-old sister Louise collapsed at a party and died on the dance floor.

Sixteen years later, in 2002, Walker had a heart attack.

She’d been having shortness of breath and dull chest pains for several days. But it wasn’t until she began having pain in her leg that traveled up her side and arm, and then into her face and jaw that she frantically called a neighbor for help.

They rushed to a Detroit hospital, where Walker was diagnosed with a heart attack and ultimately hypertrophic cardiomyopathy, a condition she unknowingly shared with her sister. The condition, which is often inherited and causes the walls of the heart to thicken, is a common cause of sudden cardiac arrest in young people.

Her doctor recommended she get an implantable cardioverter defibrillator, or ICD, to shock her heart should a life-threatening rhythm ever occur. But being unwilling to fully accept what had happened, Walker chose not to receive the device and hoped medication and a change in diet and exercise would suffice.

“What’s super amazing to me is, I was a dancer most of my life, and there were times when I felt really slow or needed a second wind,” said Walker, now 43 and living in Los Angeles. “I didn’t feel like I had the stamina of everybody else, but I never ever put this together like something’s wrong.”

A year after her heart attack, Walker moved to California to work as a comedic actress. It was there she learned her sister had died from heart disease, something that her family had never discussed. Her cardiologist made the discovery after going over her family history and asking Walker to get a copy of her sister’s death certificate.

Fortunately, none of Walker’s children or other siblings have the condition, which affected her mother and maternal grandmother.

Fast forward to 2014. Having retired from the entertainment industry, Walker was about to turn 40 and wanted to do something big to celebrate. She decided it was time for a “mommy makeover.” She met with a Beverly Hills plastic surgeon who told her she would have to pass a stress test because of her heart condition.

“After a minute and 25 seconds on the treadmill I was about to faint. I was completely out of breath, completely exasperated,” Walker said.

Walker underwent a heart catheterization and doctors discovered a bent artery. That was her final wake-up call, and she had the ICD surgery within a week.

“Something remarkable happened to me,” Walker said. “I stopped having insomnia. For years, I lived in fear that I would die in my sleep. It actually gave me a sense of security.”

Walker’s son, Caleb, 20, said it was scary at times when his mom would be sick or hospitalized. Once, a doctor told him to say his goodbyes because she might not live.

“I think she did a remarkable job staying positive and maneuvering through that situation,” he said. “It’s very inspiring.”

She’s really living her life now, he said.

Walker’s scar on her chest reminds her she is a survivor.

For a long time, she didn’t want anyone to know she had heart disease. But that has changed, and she is sharing her story as a 2017 Go Red For Women national ambassador for the American Heart Association.

Eve Walker (top row, second from left) with other Go Red For Women national ambassadors.Eve Walker (top row, second from left) with other Go Red For Women national ambassadors.

“I wasn’t just saying yes for me. I was saying yes for all of those women who may have been experiencing symptoms and may not have known what is going on,” said Walker, who is a consultant at a large health plan organization and also a certified life coach.

“It’s been one of the most amazing things I’ve done with my life. I’ve turned my pain into purpose and I’m helping people every day live their best lives in spite of the circumstances.”

2FLY IS NOT SUPERFLY!

Image result for LAQUAN PARRISH

Preet Bharara, the United States Attorney for the Southern District of New York, announced that LAQUAN PARRISH, a/k/a “MadDog,” a/k/a “Quanzaa,” pled guilty today to racketeering and firearms charges in connection with his leadership of the “2Fly YGz” (“2Fly”) gang, a violent street gang that operated in and around the Eastchester Gardens public housing development (“ECG”) in the Bronx. As part of his guilty plea, PARRISH admitted his involvement in a shootout with rival gang members on August 7, 2012, during which three victims – including a 14-year-old girl caught in the crossfire – were shot in a Bronx park. PARRISH faces a maximum term of life in prison, and will be sentenced before United States District Judge Lewis A. Kaplan on May 10, 2017, at 3:00 p.m.

U.S. Attorney Preet Bharara said: “For far too long, Laquan Parrish and his cohorts with the 2Fly street gang terrorized the Bronx with violence, robberies, and drug dealing. Today’s guilty plea by one of 2Fly’s leaders, Laquan Parrish, to federal firearms and racketeering charges, including an admission to a shootout in which a 14-year old girl and two others were shot in a Bronx park, makes the community around Eastchester Gardens safer. That is why we bring these cases – to make our neighborhoods free from gang violence and drugs – and that is what today’s plea helped achieve.”

Prohibition is simply driving commerce underground, creating enormous black-market profits that attract the most ruthless criminal elements.  Illegal drugs constitute a trillion-euro-a-year global industry. Those vast revenues enable the cartels to bribe, intimidate, or kill their opponents at will. Prohibition strategies have never worked. People should consider relegalization, as a strategy to break the economic structure that allows gangs to generate huge profits in their trade, which feeds corruption and increases their areas of power. 

Approved in 1919, alcohol prohibition led to a steady rise in both alcohol usage and violent crime. Al Capone and myriad mafiosi showed up. The murder rate rose 50% between 1919 and 1933, peaking at 10 murders per 100,000 population in 1933, when the country finally decided enough was enough. Immediately after the repeal of alcohol prohibition, gangsterism went into a swift decline, with all of the major gangs disappearing within 18 months, and the murder rate dropping every single year for more than a decade.

Now, the drug prohibition is another tragedy. Millions of people are arrested each year, trillions of euros are spent each year, and drug gangsterism is at a level that dwarfs its alcohol equivalent and which has led to bloodbaths, not because of drugs, but because of drug laws. Over 40% of Westerners have used drugs.  Most people think marijuana should be legalized.

This tragedy is the result of kleptocrats’ refusal to allow people to engage in peaceful choices as to what they consume. Even if drug use were to rise upon a return to the tradition of tolerance, our streets would be safer, innocent people would not have their homes raided and pets killed by narcotics agents entering the wrong house, victims of asset forfeiture laws wouldn’t have their houses and other assets seized without due process, and resources would be freed to spend on improving peoples’ lives instead of destroying them. 

Marijuana is gaining ground the world over, having recently been legalized in numerous states in the United States. Even though it is described as one cure for many ailments, there are some subtle nuances that make it more like a multitude of cures.

Marijuana comes in two overarching varieties- sativa and indica. Under these two varieties are numerous strains, each of which produces different results to treat different ailments. Sativa produces a cerebral high that allows the user to have energy and mental clarity. Indica produces a calming and sedating body high, allowing for relaxation.

Different strains of sativa can be used to treat stress, pain, depression, and adhd. Hybrids of the two varieties can be used to treat stress, depression, pain, migraines, adhd, insomnia, lack of appetite, and headaches. Indica strains can be used to treat pain, stress, insomnia, lack of appetite, nausea, tension, and anxiety.

According to the Indictment and other documents filed in the case, as well as statements made during the plea proceedings:

PARRISH was a leader of 2Fly, a subset of the “Young Gunnaz,” or “YGz” street gang, which operates throughout New York City. 2Fly is based in the Bronx, within and around ECG and in an area called the “Valley” or the “V,” which is in the vicinity of Gun Hill Road. ECG is a rectangular complex of residential buildings bordered by Burke, Adee, Yates, and Bouck Avenues, in the middle of which is a playground. The gang war between 2Fly and rival street gangs has led to an enormous amount of fatal and non-fatal violence between 2007 and 2016 in the Northern Bronx, including shootings, stabbings, slashings, beatings, and robberies. Members and associates of 2Fly controlled the narcotics trade at ECG, which took place in the open air at the playground and in apartments at ECG. 2Fly primarily sold marijuana and crack cocaine, but also sold powder cocaine and prescription pills, such as oxycodone. 2Fly members and associates stored guns at the playground or in nearby apartments or cars in order to protect the narcotics business and for protection against rival gangs.

As part of his involvement in 2Fly, PARRISH participated with other 2Fly members in a shootout with rival gang members on August 7, 2012, in a public park in the Bronx. Three victims were shot, including a 14-year-old girl caught in the crossfire.

PARRISH was arrested in this case as a result of a multi-year investigation by the New York City Police Department’s Bronx Gang Squad (the “Bronx Gang Squad”), U.S. Immigration and Customs Enforcement’s Homeland Security Investigations Violent Gang Unit (“HSI”), the New York Field Division of the Drug Enforcement Administration (“DEA”), and the Joint Firearms Task Force of the Bureau of Alcohol, Tobacco, Firearms, and Explosives (“ATF”) into gang violence in the Northern Bronx. On April 27, 2016, the Indictment was unsealed, charging 57 members and associates of 2Fly with racketeering conspiracy, narcotics conspiracy, narcotics distribution, and/or firearms charges. To date, 42 of these defendants have pled guilty.