Six years ago Dell Technologies financed its multi-billion dollar acquisition of EMC Technologies by issuing a special class of “V” shares. Two years later Dell, under the leadership of Michael Dell, recapped the V class and distributed to holders $14 billion in cash and about 150 million shares of Class C Common. Company and its founder and certain directors were sued by shareholders claiming that on the exchange the investors were short-changed to the tune of about $6 billion.
This high-stakes court battle has just been settled, subject to approval by the Delaware Chancery court, for $1 Billion dollars payable by defendants Dell and four directors who were allegedly coerced and/or were self-interested. Or perhaps not. Seems the deal is dependent on the entire tab being paid by either the company itself under indemnity agreements (isn’t that circular– shareholders were harmed and now shareholders are to pay their own damages to themselves) OR by the insurers of the company (presumably under D&O coverage).
Finally and also interesting, this is the second case I am posting about this week wherein founding and wealthy company CEOs are being implicated by allegation in mounting coercive tactics against sitting directors to achieve personal benefit. Assume you want to undertake a transaction involving your company that has benefit to yourself–how do you “vet” that deal? How do you avoid implicit coercion where independent directors are also of course selected by you? Independent committee review may be necessary but not dispositive. Investment banking opinions you pay the bankers to give? Is it practical to get a vote of shareholders (discounting interest shares)? How can you be sure that your disclosure in soliciting the vote will not be challenged as biased?
The impact of the class action plaintiffs’ bar is pretty scary these days. What’s a corporate mogul to do?
I seldom post two days in a row, let alone on the same subject, but I am intrigued by Elon Musk’s 10-year comp agreement at Tesla that can net him as much as $56 Billion dollars (see yesterday’s post).
In court yesterday we learned that the pay package was approved by an independent committee of the board. Having an independent comp committee is pretty standard and in fact actually mandatory, although yesterday I had suggested also the hiring of recognized consultants who could relate the comp to peers; perhaps this was not done as Elon, self-admittedly, has no peers nor does his company fall into a peer group….
From a lawyering standpoint, which I admit is less titillating but more useful a focus, we should consider that independent director action typically enjoys immunity from analysis under the business judgment rule, which keeps courts out of the practice of second-guessing directors in the use of their business discretion. However, such protection is not afforded to interested directors nor, as in this case, to allegedly coerced directors. Plaintiffs here suggest that Musk had such power that independence was compromised.
Another of the tid-bids as reported by Law360, a service sending prompt news items to attorneys: there is suggestion that Musk may be violating his acrimoniously reached settlement agreement with the SEC which among other matters required Musk to have his tweets first reviewed by company counsel (can one imagine how that requirement must rankle Musk to this day).
I promise to attempt to not post on this trial tomorrow; though I may not be able to resist.
Yesterday a trial in Delaware Chancery Court commenced, raising a shareholder complaint accusing directors (and in-house counsel) of breaching their duty by voting compensation to a company CEO that could equal $56 Billion over ten years.
Kudos to those readers who said to themselves, “Sounds like Elon Musk.” That would be a rational conclusion based on Musk’s contribution to his companies, their success and value, and the sheer weight of the numbers, and I hasten to add that I express no implied negative judgment here. The point of this post is: did this board violate its duty or bow to the weight of the CEO’s 22% ownership stake and, as a matter of corporate practice, what can be learned from this case?
Yes, it’s Elon and the car company (not the space company, not Twitter…). The deal was cut in 2018. Today, as I post, is the second day of a likely week-long trial, and if anyone can claim to be worth up to $5.6B a year it’s likely Musk. The deal is based on performance standards such as meeting operational milestones AND increasing market cap by $50Billion. And the number includes the value of the Tesla shares which are one form of compensation (raising the equity stake of the CEO to 28% which dilutes other shareholders but, it’s not company cash). I note that if the market cap increases by $50 Billion, shareholders are in fact diluted but the “pie” being divided will have increased enormously.
Nor can I tell from the reportage whether the board utilized independent outside comp consultants who expressed expert views as to the deal. Boards today are very well advised to get guidance in support of their judgment whenever any issue rises to the “B” level.
Yesterday the SEC issued a massive release which, effective next July 1, substantially tightened reporting on how mutual funds and ETFs must disclose how they vote on proxy issues. Normally one might think this development is of interest only to lawyers who write fund disclosures for the SEC, but people who are investors ought to pay attention to these new rules as they affect understanding of how corporate votes occur at companies in which their money is ultimately invested.
New disclosure formatting rules will make it easier to understand exactly what votes were taken, but of most interest to investors is likely to be the focus on “say-on-pay” (a vote endorsing or not endorsing compensation for the top five executives). In the fund’s/EFT’s annual report, there now must be disclosure on how the proxies were voted, which can give a sense of the degree to which a given fund has tight focus on the relationship between company performance and company pay.
A second requirement appears technical but is important: since funds often “lend” shares to third parties, they cannot vote those shares unless they are “recalled.” If very many shares of a given company are not recalled, the fund has in effect surrendered its vote (and you the investors’ vote) on whether the executive cadre is being over-compensated.
Increased SEC regulation over many fronts, not just here, is driven by the activist Commission majority named by the President. As with very many SEC actions of late, the vote in favor of tighter regulation has been on a 3-2 basis, with the Democratic majority outvoting the Republican minority and heightening regulation. While it is dangerous for this blog to wander into politics, we must wonder if there are not ANY regulatory issues wherein the merits of a proposed action can be resolved not on lines that reflect political parties. Surely there should be some regulatory promulgations that end up with a 4-1 or 5-0 vote, yes?
The immediately prior post lists survey results of major risks perceived by corporate CEOs and directors for this year. Below is the survey list for the next entire decade:
- Keeping up with digital technology changes.
- Succession and lack of available talent.
- Rapid technology change disrupts business models.
- New products and services disrupt business models.
- Economics conditions.
- Ease of entry of competitors threatens market share.
- Regulatory changes in how products and services are produced and delivered.
- Resistance to change.
- Changes in organizational culture (hybrid work, evolving labor markets, changed nature of work)
- Inability to use advanced data analytics.
Points to ponder (aside from substantial overlap of risk identification in this list compared with the one-year list):
What about climate change? If projections are correct, climate change is sinking cities, imperiling energy supplies, impacting food supply, moving populations, creating expanding physical disasters. The SEC demands commentary on such matters as material– are our boards asleep, or do they consider this is mere social noise?
Is there no concern of political risk? World-wide or within the US or EU? Guess not….
Technology is driving business and profit but note the number of concerns that the inherent disruption of tech is creating: factors 1,3,4,6,8 and 10 above are related to destructive risks of advanced technology. And if investment capital continues to be attracted to innovative tech, there is going to be an awful lot to new technology in the marketplace.
Finally, the list overall seems to implicate the need for a high level of attention to technological factors. Common advice to boards today continues to maintain that boards generally do not need Technology Committees, as tech is a matter for the whole board. I never understood that argument; after all, finance is a matter for the whole board but we have F&A Committees for example. What is wrong with thinking about tech from a different angle; eg a Committee asking “from what direction will the tech bullets be coming in the next decade and where will they hit the bastions of our company.”
This is the first of two blogs tracking risk requiring attention of corporate boards. This post tracks immediate risk perception, per consulting company Provititi (as distributed by National Association of Corporate Directors).
In order of priority, here is what a survey of 1453 C-level executives and directors rates as greatest risks:
- Government health protocols impacting business
- Succession/ talent scarce
- Pandemic impact on market conditions
- Constant need to update and train for changes in digital technologies
- Economy capping growth potential
- Increased labor costs impacting profit
- Resistance to change limits adaptation
- Inability fully to use advanced data analytics limits market info
- Cyber threats
- Shifting expectations in DEI
Absent and to my mind interesting: climate risk, supply chains, the future of work (last year was #4).
Interestingly, see the next post for risks rated for the next decade and a substantial overlap of cited factors. My comments on this overlap are also in the next post, as I find that overlap surprising.
INFLATION. Then there’s inflation. Businesses are working out their hiring and staffing issues, supply chains are improving, M&A is flat but expected to revive. Lots of investment cash is on the sidelines looking for a place to rest (maximum yield not the main driver). There are unresolved issues about white-collar back-to-work (see below), but also there’s inflation….
So sayeth the Presidents of three very large, important local companies presenting this morning at the highly informative breakfast meeting at Sheraton Boston of the New England Chapter, National Association of Corporate Directors. (Disclosure: I am an active member on its Advisory Board.)
At Vertex, Wayfair and American Tower, there seem no global crises in business prospects according to their CEOs. Each has survived the pandemic: Vertex is in the biotech field (need one say more?), American Tower broadcasts our growing (and 5G) digital communications around the world, and Wayfair sells home goods into what has been a volatile but stabilizing electronic marketplace. None of these folks are on the ropes.
As to time in the office, each organization has its own culture and own needs, but seems that in the executive arena there is a clear sense of need for people to be in the office some of the time (3 days a week seems the number at this point) and lack of clarity if they need to be the same days, overlap, etc. Also, CEO Dr. Reshma Kewalramani of Vertex had kind words for dreaded Zoom, as you actually get to know people you would not necessarily deal with, learn something of them personally, and become more empathetic and kind. None of the CEOs seemed troubled by how return-to-office is sorting out, noting that some people never were “not coming in”– workers in labs, workers in warehouses shipping goods, etc.
All were concerned about inflation as a headwind for the general economy, with no specific identified breakdown being anticipated but a general sense that the Fed needs to keep tightening. Chairing the meeting was NACD-New England President Cathy Minehan, formerly with the Fed; according to Cathy, the Fed should have started raising rates sooner!
Previously reported in this space were a California statute requiring corporations to have specified numbers of female and minority directors, and a NASDAQ rule requiring covered companies to have at least one female and one minority board member or report the reason for not doing so. Recently a Federal Circuit Court struck down the California law, and now the Federal Fifth Circuit (a majority of which are Republican appointees) will shortly rule on whether the less restrictive NASDAQ articulation passes constitutional muster.
There is substantial “noise” in the marketplace on both sides of this question. Some major corporations are supportive of the NASDAQ rule (Comcast, Microsoft, Starbucks among others); many are opposed, including 12+ Republican State-Attorneys-General who claim unconstitutionality.
Core issue is: do such requirements for diversity themselves constitute discrimination. Same issue being raised generally about quotas in other contexts. The culture war, and reliance on originality as a legal doctrine, continues in multiple arenas.
The SEC has issued final rules requiring reporting companies to explain their executive pay regime to shareholders; there are two tiers of disclosure, with greater detail sought from larger registered companies.
Why does this not seem like “news”? Because twelve years ago Congress required the SEC to issue such rules, and seven years ago draft rules were promulgated that had substantial impact on how public companies in fact addressed comp disclosure.
The final version of the rules is substantially similar in general import to the interim version, seeking information on how pay is conceptualized based on corporate performance. Companies need to list performance factors they consider (but need not rank them in importance), including shareholder return, net income or any other criterion the company chooses. In a bow to ESG and emerging definitions of the role of corporations in society, criteria which are not economic are expressly solicited.
Finally, there is no escape from partisanship on the Commission; it is almost a knee-jerk. The approval vote was split 3-2 along party lines, with the Republican members complaining that the SEC should have updated its economic analysis supporting the rule rather than relying on a seven-year-old statement. While something can be said about this point, given the fact that we have been living with a very similar version of the final rule for seven years and given the fact that tweaks to the original promulgation were made in response to prior comment from the public, it is hard to conclude that the critique of the Commission’s action is of great substance.
It has been a couple of months since last post, during which time I enjoyed the summer, spent a month in Paris, and finally this week shipped my youngest off to college again. That final act is my cue to again attend to all my business, including these posts. This year I will continue to address key issues concerning business:
*developments at the SEC as affecting public companies and as trickling down to the private sector as guidance or best practices
*developments in practice, litigation and statutes affecting the duties of business officers and directors
*evolution of standards of performance by business as driven by emerging societal expectations.
As for a preview on the latter point: in catching up on summer reading I encountered an issue of The Economist magazine substantially dedicated to evaluation of ESG as an investment strategy. The details are granular but important and I direct you to the magazine itself if you subscribe and missed it. Key take-aways include a questioning of the efficacy of ESG in predicting market performance and a critique of the lack of a consistent definition of ESG among commentators so that it is impossible to identify the best market strategy. There is also a critique of the advisory community as using ESG as an ill-defined marketing tool.
If anyone has some insight on ESG and its impact on the market, feel free to respond by comment to this site (I will review and post worthy responses) or send me your thoughts at firstname.lastname@example.org