What are the legal trends affecting board governance of public companies? This question was explored at the February 11th meeting of the National Association of Corporate Directors/New England.
The biggest story by far: in M&A transactions exceeding $100,000,000 in value, based upon the last available statistics (2012), litigation occurred 93% of the time and the average number of cases filed was about five. Almost all these cases settled, generally based upon increased disclosure and payment of legal fees, and generally without increased dollar remuneration to the shareholders. There is a serious question as to whether this practice is in fact value added, or simply a money machine for plaintiff law firms.
One defensive approach is for corporations to require that shareholder suits and derivative suits be brought in a single court, generally designating Delaware Chancery. The Delaware courts have upheld the enforceability of these provisions. Many companies going public now include such a provision in bylaws. If the Delaware Chancery is without jurisdiction, litigants must use another appropriate Delaware court or the Federal court sitting in Delaware. Placing all litigation in one court facilitates settlements; Delaware also is thought to be increasingly unfriendly to this kind of litigation.
There was a discussion of board confidentiality. This generally is reflected in: establishing insider trading prohibitions; enforcement of SEC Regulation FD, requiring simultaneous disclosure of material corporate facts to all, rather than selectively. However there is growing focus on more sensitive kinds of information: the texture of board discussions, especially what positions were taken by specific directors.
The question of director positioning also arose in the context of directors who are designated to represent particular investor constituencies. Although there is a general rule of confidentiality at the board level, a designated director is expected in fact to report back to the shareholders designating that director. Many companies have adopted a practice of seeking confidentiality agreements with designated directors, restricting the kinds of information that may be disclosed, and sometimes requiring the sponsoring shareholders to sign similar confidentiality agreements. There are difficult issues of enforcement in the case of violation.
Lastly, it was noted that the New York Stock Exchange, has abandoned its 50% quorum requirement, now simply requiring that a “significant level” of shareholder participation (at least one-third) is required.