Dave and Mark Borges just wrapped up – and we have just posted the Winter 2009 issue of our quarterly “Proxy Disclosure Updates” Newsletter, which is free for all those that try a no-risk trial to Lynn, Romanek and Borges’ “The Executive Compensation Disclosure Treatise & Reporting Guide.”
This critical issue provides analysis, practice pointers – and model disclosures – regarding executive pay risks, a new type of disclosure that all companies will need to address in the wake of EESA and other regulatory responses to the crisis. The issue also provides new analysis regarding disclosures of pledged and hedged shares.
Try No-Risk Trial Now: Order now so we can rush a non-blurred copy of this first issue to you today – as well as a copy of the 1000-page Treatise; note there is a reduced rate if you are ’09 member of CompensationStandards.com. If at any time you are not completely satisfied with the Treatise, simply return it and we will refund the entire cost.
When you order the Treatise, not only do you get a hard copy mailed to you, you also get access to an e-version on CompensationDisclosure.com. And you also get access to the quarterly Updates newsletters that make up the “Lynn, Romanek & Borges’ Executive Compensation Annual Service.”
SEC Chair Chris Cox is History
Apparently, SEC Chair Chris Cox resigned on Inauguration Day, even though it didn’t make news until later yesterday – and the SEC still hasn’t issued a press release! Which is pretty ironic given how Cox was fascinated with media coverage during his tenure. Elisse Walter will serve as Acting Chair until the Senate votes on Schapiro’s nomination…
From FEI’s “Financial Reporting” Blog: Here is the White House memo, in which White House Chief of Staff Rahm Emanuel expressed the Obama Administration’s desire to review all new and pending regulations. Among the points in the memo are that: with certain exceptions, no proposed or final regulations should be sent for publication in the Federal Register unless reviewed by a department or agency head appointed or designated by President Obama, and agencies are instructed to consider extending the effective date of pending regulations by 60 days.
The SEC Issues “21st Century Disclosure Initiative” Blueprint
Meeting the timeframe promised, the SEC unveiled its “Report of the 21st Century Disclosure Initiative” last week. As set forth in earlier draft plans, the Report is a high-level blueprint for a new disclosure framework that would result in companies no longer filing lengthy disclosure documents. Instead, companies would maintain an online ‘company file’ with interchangeable parts.
In calmer times, this might be an exciting development (as I’ve blogged about before). These days, it seems like a misdirected focus. The SEC is under heavy attack – and in some cases, for good reason. Time to hone in on substance, not form. Please save our markets.
We just posted the “Winter ’09 Issue” of InvestorRelationships.com (we are maintaining this publication as complimentary thru ’09 as a “Thank You” to our loyal members in a down economy). The “Winter ’09” issue includes articles on:
– Online Annual Reports and Proxy Statements: What’s Wrong and How to Fix It
– The Birth of “Video Annual Reports:” A Substitute for the Written Word?
– Disclosure of Committee Membership When Members Have Changed
– A Practical Approach to Updating Committee Charters
If you’re not yet a member of InvestorRelationships.com, simply provide your contact information in this sign-up form and gain free and immediate access to the issue. If you signed up last year, your ID/password will continue to work – if you forgot what those are, go here to get a reminder.
In addition, Broadridge has built a “Shareholder Education” website, which they intend to make available from their proxy voting pages (eg. ProxyVote.com). This supplements an online tool that companies can use to create their own beneficial notice online. That tool will soon be enhanced to enable companies to create their proxy cards. Tune in on February 5th for our webcast – “How to Implement E-Proxy in Year Two” – featuring Lyell Dampeer of Broadridge, Carl Hagberg, two proxy solicitors (Tom Ball and Paul Schulman) and Keir Gumbs.
The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!
Don’t forget to tune in today for the CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!,” featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. This is the first of a two-webcast series, with the second one taking place the following Wednesday, January 28th.
Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.
Act Now: As all memberships are on a calendar-year basis, you will not be able to access these webcasts if you haven’t renewed for ’09 – so please renew today. If you aren’t a member, try a no-risk trial for ’09.
Yesterday, the US Senate held a 90-minute confirmation hearing for Mary Schapiro to determine if she will be the next SEC Chair. Here are articles from Washington Post, NY Times and WSJ (and here is the WSJ Blog’s play-by-play of the hearing). Among other things, Mary said she may:
– Increase power of large shareholders to nominate directors and shape governance practices
– Pursue legislation to increase auditor oversight
– Consider changing IFRS transition timetable
– Act more aggresively against fraud
– Study short-selling impact
– Continue plan to register hedge funds
– Revamp how securitie are rated
Nasdaq Increases Compliance Period for “Market Capitalization Requirement”
On Wednesday, Nasdaq filed an immediately effective rule change with the SEC, which extends the compliance period which a listed company gets when it fails to comply with the market value of listed securities requirement – what they used to call the “market capitalization requirement” – from 30 to 90 days, making it consistent with the compliance period allowed for companies that fail the “market value of publicly-held shares” requirement. While this likely was done partially in response to market conditions, the old 30-day compliance period was too short in any market environment.
The Latest Cross-Border Deal Developments
With the dealmaking environment facing unforeseeable challenges – and the SEC making the biggest batch of changes to its cross-border in years, practitioners are grappling with how these deals will now change. Learn from these experts how cross-border deal practices are evolving and how they differ from the past in Thursday’s DealLawyers.com webcast, “Implementing the New Cross-Border Rules“:
– Christina Chalk, Senior Special Counsel, Division of Corporation Finance’s Office of Mergers & Acquisitions
– Frank Aquila, Partner, Sullivan & Cromwell LLP
– Peter King, Partner, Weil, Gotshal & Manges LLP
– Alan Klein, Partner, Simpson Thacher & Bartlett LLP
– Greg Wolski, Partner, Ernst & Young LLP
Renew Now: As all memberships are on a calendar-year basis, you need to renew now to access this webcast. If you’re not a member, try a no-risk trial for 2009.
GAO Report: Laying Down Ground Rules for Financial System Reform Debate
With Treasury’s financial system overhaul proposal already on the table (in addition to remarks by other government officials, e.g., Ben Bernanke), the GAO issued a report last week detailing a framework that can be used for evaluating these and future proposals to modernize the financial regulatory system.
In the report, the GAO reviews various market developments over the last century and how they have revealed gaps and limitations in the existing regulatory system, and then sets out nine characteristics (the framework) that should be reflected in any new regulatory system. The GAO hopes that by applying the framework to a proposed financial system reform, the benefits and trade-offs involved will become apparent.
According to the report, any regulatory system that Congress would implement should:
1. Have clearly defined and relevant regulatory goals.
2. Have comprehensive regulation of activities that pose risks to consumer protection and financial stability, while recognizing that not all activities will require the same level of regulation.
3. Have a mechanism for identifying, monitoring and managing risks to the financial system.
4. Be adaptable and forward-looking to respond to market innovations/changes and include a mechanism for evaluating potential new risks to the system.
5. Provide efficient oversight of financial services by eliminating overlapping federal regulatory missions while effectively achieving the goals of regulation.
6. Include consumer and investor protection as part of the regulatory mission.
7. Provide regulators with independence, prominence, authority and accountability.
8. Ensure that similar institutions, products, risks and services are subject to consistent regulation, oversight and transparency.
9. Have adequate safeguards that allow financial institution failures to occur while limiting taxpayers’ exposure to financial risk.
Next up is Treasury’s (EESA-required) recommendations on “the current state of the financial markets and the regulatory system,” due April 30, 2009. Keep up-to-date with these happening in our “Credit Crunch” Practice Area.
Tune in on Wednesday for the CompensationStandards.com webcast – “The Latest Developments: Your Upcoming Proxy Disclosures—What You Need to Do Now!,” featuring Mark Borges, Alan Dye, Dave Lynn and Ron Mueller. This is the first of a two-webcast series, with the second one taking place the following Wednesday, January 28th.
Given the heightened importance of executive pay right now – and the high likelihood that Congress will pass “say-on-pay” legislation, this year’s compensation disclosures will receive unprecedented scruntiny by investors, employees, customers and the media.
Act Now: As all memberships are on a calendar-year basis, you will not be able to access these webcasts if you haven’t renewed for ’09 – so please renew today. If you aren’t a member, try a no-risk trial for ’09.
Ed Durkin on CD&A Reviews
Recently, I caught up with Ed Durkin, Director of Corporate Affairs at the United Brotherhood of Carpenters Pension, to conduct this podcast on CompensationStandards.com. In the podcast, Ed explains how the Carpenters Union reviews CD&As (here is a sample evaluation form that will help you understand the Union’s analysis process), including:
– How many CD&As does the Carpenters Union look at?
– What does the Union look for in a CD&A?
– How does the Carpenters engage with companies on their CD&A?
Forecast for 2009 Proxy Season: Wild and Woolly
We have posted the transcript from Pat McGurn’s popular webcast: “Forecast for 2009 Proxy Season: Wild and Woolly.” As all memberships are on a calendar-year basis, renew today if you haven’t so far…
Wow! Blessed to Have So Many New LinkedIn Friends!
Well, I threw down the LinkedIn gauntlet yesterday and thanks to the “oh so many” of you that are now connected with me – and even more thanks to the very kind words that folks inserted into their invites. I was geniunely touched (sitting in my pajamas all day over here – and not much in the way of face-to-face – can get lonely). I’m happy to report the power of blogging translated into over 100 new connections! Keep ’em coming by inviting me.
As promised, here are the first ten folks that responded to my “invite” request:
Recently, General Electric launched a new blog – GEReports.com – that is creating quite a stir. As part of this effort, a companion YouTube channel was launched.
Launched by GE’s Communications team, GE intends for the blog to be a way of providing investors with additional information, not to replace other modes of disclosure. I really applaud GE’s efforts – and in talking to my in-house colleagues, it seems to have done the trick in opening other company’s eyes to the potential of blogging. Between this new blog and Dell’s IR blog – which is now over a year old – IROs and communications officers can get a good idea about the types of topics that are fodder for blogging.
The only thing I get worried about is that GE seems like it’s using its blog to respond to rumors. For example, GE has used the blog to say it’s not seeking equity investments from sovereign wealth funds and that it will not cut the dividend through the end of ’09.
Most companies have a policy against responding to rumors to avoid any duty to update – and because if you do respond to rumors and then say “no comment” to one, folks will assume the rumor is true because otherwise you would have denied it! However, with rumors being used by short-sellers to drive down stock prices these days, it may be time for companies to rethink those “don’t respond to rumor” policies.
I can’t help but note the insipid quote from a Professor in this Reuters article that wonders if the information in GE’s blog will be valid or whether the blog is part of an “agenda.”
The purpose of blogging is to build trust, so it would be silly for GE to post inaccurate information (not to mention the basis for potential litigation). And yes, GE has an “agenda” – to inform shareholders, which in turn will build trust and support the stock price.
A Special LinkedIn Request
To help me fulfill one of my New Years’ resolutions, if you’re on LinkedIn, please become one of my “networking friends.” To do so, just email me and I’ll invite you – or just “invite me” thru my LinkedIn profile. The first ten to invite me today get their names in the blog tomorrow if they want (if you don’t want that, no big deal – I’ll label you as an anonymous donor). And if you’re a SEC alumni, feel free to join this new group, “SEC Staff Alumni.”
If you’re not on LinkedIn but curious about what it is, you can email me and I’ll explain. But the gist is that it’s not like Facebook (which is more of a social site with plenty of inane chatter) – rather, LinkedIn is filled with professionals. So far, there is not much activity on LinkedIn other than folks asking each other to be “connected.” But that typically is the groundwork for some serious networking that may take place later. I really can’t see any harm in placing yourself up there, even if you don’t intend to ever use it (because someday you may change your mind and you’ll already have gathered some networking contacts through the site). The key is LinkedIn will not require you to spend time maintaining your page, etc.
Twitter, Yammer? What Does This Mean For Me?
More and more is being written about Twitter. Called a “microblog,” Twitter allows one to send a message up to 140 characters (roughly a short sentence) to all those that “follow” the person sending the message. So far, it’s mainly being used in the business world by journalists to get leads on potential stories – so corporate communications clearly should be using this tool.
But it’s starting to be used elsewhere in the business world. For example, a GE spokesperson used Twitter to respond to a question about its promise to not cut its dividend (scroll down here to find this reply)- so it’s importance for investor relations officers is growing. And the SEC has been using Twitter as a way to push out its press releases, etc. for some time.
Now, I’ve had my own Twitter Feed for well over a year (my personal one is much older than this business one) – but I only recently began to use it on a daily basis. So far, I haven’t seen a dramatic change in my life, but I will let you know. For those of you on Twitter, please follow me to get all the latest.
In his “Delaware Litigation” Blog, Francis Pileggi recently explained why business litigation lawyers might consider Twitter. And in his “Securities Docket,” Bruce Carton provides a running list of Twitter Feeds for securities counsel.
And if the pace of change doesn’t frustrate you enough already, consider that a new service – Yammer – is already being touted as the “new Twitter.”
FINRA Proposes Rule on Rumor Circulation
A few weeks ago, FINSA proposed a rule relating to the circulation of rumors. The proposed rule is based on FINRA Rule 6140 and NYSE Rule 435(5). We have posted memos on this proposal in our “Securities Enforcement” Practice Area.
As expected, Rep. Barney Frank introduced HR 384 – the “TARP Reform and Accountability Act” – and scheduled a hearing for today. On CompensationStandards.com, Mark Borges blogged his analysis of the executive pay provisions – and here is analysis from Mike Melbinger.
Meanwhile, EESA’s Congressional Oversight Panel issued its 2nd report. We continue to post memos on TARP developments as they happen in our “Credit Crunch” Practice Area.
New SEC Relief for Companies That May Lose WKSI Status
Given the down market, I’ve blogged about companies potentially losing their WKSI status recently. Richard Sandler of Davis Polk reports that the SEC Staff has taken a position that may provide relief for some companies in this situation:
Due to continuing equity market turmoil, many companies are at risk of losing the ability to issue securities off of an automatic shelf registration statement. When a company files its annual report on Form 10-K or Form 20-F, a new determination date for well-known seasoned issuer (WKSI) status is triggered. To remain eligible to use an existing automatic shelf, the company’s worldwide equity float must equal or exceed $700 million, excluding shares held by affiliates, at a point during the preceding 60 days.
After discussions with the SEC Staff, the staff provided us with guidance on the following steps that such a company can take in order to preserve its ability to access the U.S. public capital markets (provided it remains eligible to use a non-automatic shelf registration statement):
1. Prior to filing its annual report, the company must file a post-effective amendment to its automatic shelf (which will become automatically effective), which conforms the automatic shelf in all respects to the requirements of a non-automatic shelf registration statement filed by a seasoned issuer that is not a WKSI.
2. Promptly after filing its annual report, the company must file either: a new non-automatic shelf registration statement on Form S-3 or Form F-3, or a second post-effective amendment to its existing shelf. Either filing would be subject to SEC review before being declared effective, and would presumably be largely the same as the post-effective amendment referred to in step 1.
According to the SEC Staff, a company that complies with these steps may continue to sell securities under its automatic shelf registration statement, until the new shelf registration statement (or second post-effective amendment) is declared effective. We expect the SEC Staff to confirm this guidance in writing.
My colleague, Julie Hoffman, recently caught up with Dave Johnson, Executive Compensation Practice Leader at Ernst & Young, in this CompensationStandards.com podcast to discuss putting IFRS’ impact on compensation on HR and Finance’s radars, including:
– How might IFRS impact executive compensation arrangements?
– As a result, who (besides the accounting/finance teams) needs to be conversant with IFRS at a company?
– What should companies be doing to prepare now for IFRS’ impact on compensation?
We have posted “Course Materials” for today’s webcast with Pat McGurn: “Forecast for 2009 Proxy Season: Wild and Woolly.” You’ll want to print those out before the program. As always, an archive of the webcast will be available right after the “live” program if you have a conflict in your schedule.
I’m also excited to announce our new “Proxy Season Blog,” where we will post practical guidance on a daily basis regarding latest developments regarding the proxy season as well as guidance on issues that commonly arise season after season. This members-only blog will include contributions from our own crack-team as well as those experts in our community (if you wish to contribute, please contact me.
Renew Today: Since all memberships are on a calendar-year basis, if you don’t renew today, you will be unable to access Pat McGurn’s webcast. Renew now for ’09! [Here is our “Renewal Center” to better enable you to renew all your expired memberships and subscriptions.]
Inauguration Day: Will Edgar..umm “IDEA”..Be Open?
A number of members have asked whether the SEC’s Edgar (which is now called “IDEA”) will be open for filings on Inauguration Day since it’s not considered a national holiday (per this list, it’s just a “holiday” for those working in DC). The short answer from SEC on this question is “yes,” per this press release.
However, the SEC’s press release doesn’t directly answer the question as to whether Inauguration Day is considered a normal “business day” for EDGAR filing date purposes (e.g. counting days towards due dates). On that, I believe that the answer will be like last time – that it is considered a “business day” Interestingly, the SEC directly answered that question in its press release related to the 2005 press release.
In comparison, Martin Luther King Day is a national holiday – and thus Edgar is closed and that day isn’t treated as a “business day.”
It promises to be bedlam down here in DC for Inauguration Day. If you are down here to take part in the festivities, I recommend taking the bus. Here is a bus schedule for that day.
Coming Soon: Mary Schapiro’s Confirmation
The US Senate has scheduled Mary Schapiro’s confirmation hearings for this Thursday, January 15th, ahead of President-elect Obama’s Inauguration. Some members have asked how can that be? [The WSJ reports that Mary may receive tough questioning (particularly about the lawsuits mentioned in today’s NY Times’ article) – that likely will be the case given the public’s interest in the markets these days, but I would be surprised if she wasn’t confirmed.]
It can be. In fact, Obama’s Cabinet confirmation hearings already started up last week. Once the Senate confirms that Obama was the winner by tallying all of the electoral votes, his selections can start being confirmed.
A more provocative question is when was the selection of a SEC Chair so important that confirmation hearings took place before a President was inaugurated? A look at the timeline for SEC Chair appointments reveals that this is a “first.” Often, there is a few months lag between Inauguration Day and the naming of a new SEC Chair – and it hasn’t been uncommon for the lag to stretch even longer…
In this past Sunday’s NY Times, an economist – Robert Frank – wrote an essay about whether Congress should limit executive pay. Although Frank makes some accurate observations, the piece is typical of most written by academics and others who are not familiar with the processes by which executive pay is set (Frank’s lack of knowledge is evident when he states that “salaries” drive job choices – not true since salaries are just a nominal part of CEO pay packages, at least at larger companies). Frank cites the two primary reasons for heightened pay over the past few decades is that market caps for companies have grown and that executives are more likely to change jobs these days.
Although I agree that those two factors have contributed to escalating pay, they are not the major factors. As I wrote several years ago in my “Open Letter to All Journalists,” you need to understand what is happening in the boardroom – particularly compensation committee meetings – to really understand why executive pay has risen. It’s these board processes (eg. peer group benchmarking; severance/COC arrangements because “everyone else is doing it”; annual option mega-grants) that continue to be broken and have inadvertently led to excessive pay. Fixing these processes is critical, including the very difficult task of unwinding past arrangements.
I continue to contend that Congress shouldn’t force boards to fix their processes – boards should be doing that themselves. But if boards don’t soon – and they sure have been slow to figure out their role in fixing the problems of executive pay – it seems inevitable that Congress will act.
And unfortunately, I believe any new Congressional action won’t solve our pay problems because boards (with the help – and even prodding – of errant advisors who forget their represent the company, not the top managers) always seem to find a way around artifical limits, thereby “creating” unintended consequences.
Boards must be accountable and need to take a leadership role here. I remain stunned as most boards still don’t seem to have figured this all out yet…as I’ve blogged before, the few companies taking responsible pay actions appear to have the CEO leading the charge rather than the directors.
“Say-on-Pay” in Action: 38% Vote “No” at Jackson-Hewitt’s Annual Meeting
To get a window on what may happen if say-on-pay legislation is enacted in the US, look no further to the results from the recent annual shareholder meeting for Jackson-Hewitt Tax Services. As noted in the company’s Form 10-Q filed last month, 37.5% of the votes cast were voted against the company’s pay package (see Proposal III) – the highest level of opposition so far for an advisory vote in the U.S. market. This is only the fifth company in the US to allow say-on-pay on the ballot – once more companies allow it, I imagine the levels of opposition will grow given the environment out there today.
Congrats to Dave for getting quoted in this front-page article recently in the Washington Post. The article is entitled “Executive Pay Limits May Prove Toothless.” And more importantly, the article mentions our new treatise! I find it hard to believe, but someone told me they heard Alex Bennett review the treatise during his Sirius radio show…
“Say on Pay” and Preliminary Proxy Statements
Brink Dickerson of Troutman Sanders reports that a preliminary filing of a proxy statement under Rule 14a-6(a) is required in connection with management say-on-pay proposals. While Rule 14a-6(a)(4) eliminates the filing requirement for the “approval or ratification of a [compensation] plan…or amendment to such plan,” Interpretation N.10 from the Manual of Publicly Available Telephone Interpretations makes it clear that this is a narrow exclusion and does not apply to after-the-fact approval of specific compensation (note that this set of interps may be updated any day now, per statements of Corp Fin Staff). In addition, the Corp Fin Staff confirmed for one of Brink’s colleagues that a management say-on-pay proposal would not fall within the Rule 14a-6(a)(4) exception.
A number of the companies with management say-on-pay proposals (egs. AFLAC, Littlefield and H&R Block) have filed preliminary proxy statements, but they had other proposals that would have triggered a preliminary filing in any event. Other companies appear to have overlooked this requirement.
Below is a response that I received from a member in response when this same blurb from Brink was posted a few days ago on “The Advisors’ Blog“: Whether right or wrong, I believe common practice is that companies do not file preliminary proxy statements even when awards to employees are made subject to the approval by shareholders of a new plan or an amendment to an existing plan. And don’t forget this additional important nuance from NYSE and Nasdaq FAQs on Equity Compensation Plans – here is NYSE FAQ F-2 (2/18/04):
If shareholder approval of a new equity compensation plan is required, may grants be made before the approval is obtained, so long as the grants are forfeited if the shareholder approval is not in fact obtained?
No shares may be issued until the approval is obtained. This is because the Exchange requires that a supplemental listing application (“SLAP”) be filed before the shares are issued, and the SLAP will not be accepted unless any required shareholder approval has already been obtained. Grants may be made before shareholder approval, provided that no shares can actually be issued pursuant to the grants until it is obtained. For example, a listed company could grant stock options that would not become exercisable until after shareholder approval is obtained. On the other hand, restricted stock could not be issued before shareholder approval, because restricted stock is issued upon grant. Note, however, that the company could promise to issue restricted stock at a future date after shareholder approval is obtained.
Catch Alan in his popular annual webcast “Alan Dye on the Latest Section 16 Developments” to hear all the latest developments you need to know. As all Section16.net memberships are on a calendar-year basis, renew for ’09 now.
Study Finds Emergency Short-Selling Restrictions Had No Impact
Linda DeMelis notes: According to a recent study, the emergency restrictions on short selling imposed by the US, the UK and other European countries last fall had no significant impact on stock price behavior. Their research suggests that the restrictions were not effective in reducing the probability of large stock price drops, which was a principal reason the restrictions were imposed.
There has been scant research published on the impact of the hurriedly-imposed short-selling restrictions. Once the new Obama Administration gets going, I suspect we are going to see a lot of proposals to reform various regulations, including the short-sale rules, and studies like this are going to get more attention. We have posted the study in our “Short Sales” Practice Area.
How to Issue FDIC-Guaranteed Debt under the TLGP
We have posted the transcript from our popular webcast: “How to Issue FDIC-Guaranteed Debt under the TLGP.”
Delaware Chancellor Weighs in on Drafting LLC Agreements
Given the increasing popularity of limited liability companies and the ability of parties to define the scope of fiduciary duties in the governing agreements of these entities, the attached decision by Chancellor Chandler recently in Kahn v. Portnoy (C.A. No. 3515-CC) denying a motion to dismiss a breach of fiduciary action involving an LLC dispute warrants noting and review – particularly for people involved in the drafting of LLC agreements.
The plaintiff, a shareholder of TravelCenters of America, LLC, alleged that the director defendants of TA breached their fiduciary duties by approving a self-dealing transaction allegedly designed to benefit a TA director at the expense of the company. Given TA’s status as an LLC, the fiduciary duties of TA’s directors are interpreted by reference to the entity’s LLC agreement. As explained by the Chancellor, “[t]he well settled policy of the Delaware Limited Liability Company Act is to give maximum effect to the principle of freedom of contract” and “all fiduciary duties, except the implied contractual covenant of good faith and fair dealing, can be waived in an LLC Agreement.”
The terms of TA’s governing LLC agreement provided that the “‘authority, powers, functions and duties (including fiduciary duties)’ of the board of directors will be identical to those of a board of directors of a business corporation organized under the . . . DGCL, unless otherwise specifically provided for in the LLC Agreement.” Another section of the Agreement (Section 7.5(a)) dealt specifically with conflict of interest transactions and provided, among other things, that a challenger of board action “shall have the burden of overcoming [a presumption that the board acted properly and in accordance with its duties (including fiduciary duties)] by clear and convincing evidence.”
While the allegations in the complaint were sufficient to state a claim under general Delaware fiduciary duty case law, defendants argued that Section 7.5(a) of the Agreement altered the applicable pleading standard and mandated dismissal. The Court disagreed, finding that, at the pleading stage, the above language was arguably limited by preceding language in the Agreement suggesting that the clause “would only create a presumption for transactions in which there is a conflict between a shareholder and the board or a shareholder and the Company, but not where there is a conflict between a director and the company.” The Chancellor accordingly denied defendants’ motion to dismiss given that he only needed to “determine whether plaintiff would be entitled to relief under any reasonable interpretation of the facts alleged” and not by “apply[ing] a standard of proof” at the pleading stage.
Portnoy therefore illustrates the importance of clear language in contractual limitations of fiduciary duties in LLC agreements and provides insight into the manner in which courts analyze these provisions. Indeed, the founders (and directors) of TA most likely intended – and believed – that the above quoted language protected the directors in all conflict of interest transactions. The Court did not necessarily disagree; rather, it merely found that the above ambiguity gave way to more than one reasonable interpretation and thus precluded dismissal. As a result, the litigation will proceed to discovery before the defendants will again have the opportunity of attempting to reap the benefits of the above provision. The decision thus warrants careful review by practitioners drafting (or litigating) such provisions.
Also note that the opinion contains helpful primers on a multitude of other corporate fiduciary concepts, including succinct summaries on the meaning of “good faith” (See Op. at 18) and the concepts of “independence” and “disinterestedness” for purposes of demand futility (See Op. at 26).
