Update on the current board issues: July 2013

Issues in brief


Delaware court decision upholds exclusive forum bylaws

On June 25, 2013, the Delaware Court of Chancery, in an opinion by Chancellor Leo E. Strine Jr., upheld the statutory and contractual validity of forum selection bylaws adopted by Chevron’s and FedEx’s boards. Although it is expected the plaintiffs in the shareholder lawsuits ─ Boilermakers Local 154 Retirement Fund and Iclub Investment Partnership, respectively ─ will appeal the decision, one law firm anticipates that will not stop more boards from adopting similar bylaws. [See Cleary Gottlieb Steen & Hamilton LLP client memo.]

Exclusive forum bylaws allow companies to designate the state of incorporation (frequently Delaware) as the venue where lawsuits can be filed as a way to control costs and the risk of inconsistent rulings arising from the same claim in multiple jurisdictions. In the last three years, more than 250 public companies have adopted such bylaws. [See a Society of Corporate Secretaries and Governance Professionals Governance Minutes June 26 webcast for more details about the decision.]

In his decision Chancellor Strine agreed that the Chevron and FedEx boards’ exclusive forum selection bylaws are “facially valid.” He deemed them valid on statutory grounds, because they addressed a proper subject matter regulating the internal affairs of the company, and on contractual grounds, because the boards had the right to adopt such bylaws unilaterally and investors knew that when they purchased the stock.

It is expected that more companies will adopt exclusive forum selection bylaws following this decision. When evaluating the adoption of exclusive forum selection bylaws, directors may want to consider the company’s investor profile and the views of the proxy advisory firms. “Directors, of course, should act in what they believe is good faith in the best interests of the company,” the Cleary Gottlieb memo stated. “But it is not surprising that in doing so, directors often take into account known or perceived views of significant numbers of their stockholders and the possible distraction that could result from significant stockholder criticisms or a stockholder proposal to repeal a board-adopted forum provision.”

For an FAQ on the impact of Chancellor Strine’s decision, directors may want to read a blog post by Davis Polk & Wardwell LLP.


Federal court vacates SEC resource extraction rule

On July 2, 2013, the US District Court for the District of Columbia vacated the Dodd Frank mandated SEC rule that would have required certain companies to disclose payments made to governments in connection with the commercial development of oil, natural gas, or minerals. This decision was rendered in the American Petroleum Institute, et al. v. SEC and Oxfam America, Inc. lawsuit. The court vacated the SEC resource extraction payments disclosure rule because it found that the SEC made two substantial errors. According to the court:

  • The SEC misread the Dodd-Frank Act as mandating public disclosure of the resource extraction payments reports, and
  • the SEC's decision to deny any exemption was, given the limited explanation provided, arbitrary and capricious.

The court remanded the rulemaking to the SEC for further proceedings. The commission has not stated what it intends to do, if anything, regarding the ruling. [For a synopsis of the court decision, please read briefs by Mayer Brown and DLA Piper.]


Conflict minerals: Court rules and what PwC survey reveals

On July 23, the US District Court for the District of Columbia upheld the conflict minerals rule.

In the 63-page ruling, Judge Robert Wilkins wrote that claims by the plaintiffs (the National Association of Manufacturers, the US Chamber of Commerce, and the Business Roundtable) “lack merit.”

Specifically, Judge Wilkins wrote in his opinion that he found “no problems with the SEC’s rulemaking” and he disagreed that the conflict minerals disclosure “ran afoul of the First Amendment,” as the plaintiffs alleged. As for the plaintiffs’ charge that the SEC failed to do the proper cost/benefit analysis of the rule and failed to determine that it would provide the intended benefits, the judge ruled that “to suggest that the SEC conduct some sort of broader, wide-ranging benefit analysis simply reads too much into this statutory language.”

The conflict minerals rule, mandated by the Dodd-Frank Act, requires public companies to disclose whether they use conflict minerals (tantalum, tin, tungsten, and gold) and whether the minerals originated in the Democratic Republic of the Congo (DRC) or adjoining countries. [For more information on the conflict minerals rule, read BoardroomDirect June 2013 (Issues in brief: FAQ further clarifies SEC conflict minerals rule)].

In spring 2013 PwC surveyed companies regarding the conflict minerals rule and their progress towards compliance. It issued a report that summarizes the views of nearly 900 individual respondents and sheds light on some of the more significant hurdles companies are encountering or are expecting to encounter. It also gives insight into which industries seem to be furthest ahead with their compliance efforts.

The survey focused on general questions on the rule and its impact, supply chain/reasonable country of origin inquiry, reporting and audit, and governance and stakeholder concerns.

Some of the major findings include:

  • Almost half are still in the initial stages of their compliance efforts,
  • More than half view their conflict minerals efforts as a compliance exercise, and
  • The single most challenging task is getting accurate information from suppliers.

Survey responses came from 16 different countries, with slightly more than 30% from two industries – technology and industrial products and manufacturing. Financial services and retail & consumer industries each accounted for about 9% of the respondents.