Update on the current board issues: May 2014

Issues in brief


Delaware court upholds bylaw that shifts fees to unsuccessful plaintiffs

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On May 8 the Delaware Supreme Court upheld an ATP Tour Inc. bylaw that calls for a shareholder plaintiff to pay the company’s legal fees when the plaintiff is unsuccessful in court against the company.

In the case, ATP Tour Inc., a global men’s tennis tournament organization, was sued by two of its members, Deutscher Tennis Bund and Qatar Tennis Federation, for federal antitrust violations and Delaware fiduciary duty claims over moving their tournaments.

When the US District Court for Delaware ruled in favor of ATP, the organization invoked its bylaw to recover its litigation costs from the complainant. However, the district court denied ATP’s motion to collect the fees stating that “federal law preempts the enforcement of fee-shifting agreements when antitrust claims are involved.”

Some in the legal community believe the Delaware Supreme Court decision may lead directors on Delaware-incorporated companies to adopt similar fee-shifting provisions in their bylaws as a way of decreasing the number of frivolous lawsuits. “This opinion may embolden directors to make this fee-shifting provision a common feature of corporate bylaws of Delaware companies,” wrote Francis G.X. Pileggi in Lexis-Nexis’ Corporate Law Blog. He also wrote that it might discourage “less meritorious” intra-corporate litigation.

In a May 9 client memo, law firm Paul Weiss wrote: “The opinion addresses a bylaw put in place in the context of a non-stock corporation, but the holding may be read to apply to all Delaware corporations. Whether such a bylaw is appropriate for a particular corporation, will, however, depend on a number of factors specific to such corporation and care should be taken in connection with an adoption of such a bylaw. Because this is the first case addressing fee-shifting bylaws, the reaction of proxy advisory firms and other interested parties in the corporate governance arena is yet to be known.”


Some multinationals disclosing impact of new Venezuelan foreign currency exchange regime

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The uncertainty over Venezuela’s new foreign currency regime has caused some large US-based multinationals to include disclosure about the situation and its business impact.

On March 24, the Venezuelan government followed through on its plan to launch a new version of the foreign currency regime known as the Complementary System of Currency Administration (SICAD II). Under this new regime, authorized foreign exchange operators, such as regulated banks and capital markets brokers, can act as intermediaries in the sale and acquisition of foreign currency.

In recent SEC filings, some multinationals have disclosed how the devaluation of that country’s currency is affecting their financial statements. For example, one company included the following language: “There is currently considerable uncertainty with respect to Venezuelan foreign currency policy. Due to this uncertainty, beginning with the third quarter of fiscal 2014, we are excluding the impact of balance sheet remeasurements related to our Venezuelan subsidiary from certain non-GAAP financial measures used in Management's Discussion and Analysis of Financial Condition and Results of Operations.”

Another wrote: “…the operating environment in Venezuela is challenging, with economic uncertainty fueled by currency devaluations and high inflation and governmental restrictions in the form of import authorization controls, currency exchange and payment controls, price and profit controls and the possibility of expropriation of property or other resources.”


Update on 2014 proxy season shareholder proposals

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About midway through the spring 2014 proxy season, many of the same type of shareholder proposals that were prevalent in 2013 are popular again this year.

According to the first 2014 edition of ProxyPulse, a joint publication from PwC’s Center for Board Governance and Broadridge Financial Solutions Inc., as of May 3 over 700 shareholder proposals have been submitted to US public companies for 2014. Board declassification leads the way among governance-related issues, followed by proposals for independent board chairs and political spending disclosure. The Shareholder Rights Project (SRP), a program at Harvard Law School conducted in coordination with public pension funds and charitable organizations, filed 31 board declassification proposals at S&P 500 and Fortune 500 companies this year.

As of May 25, of the nearly 400 shareholder proposals filed for the Fortune 250 companies 70 are corporate governance-related, 123 are social policy issues and 19 are related to voting rules, according to Among the corporate governance proposals, there were 28 that asked for an independent chair. Of the social policy proposals, environmental, lobbying, and political spending disclosure were the most frequently filed with 45, 33, and 28 filed, respectively. As for voting rules, there were 11 majority voting proposals. So far none of these proposals have received a majority vote.