On Friday, March 15, 2024, the Council of the European Union reached an agreement on a final version of the Corporate Sustainability Due Diligence Directive (“CS3D”). The vote on an earlier version of the CS3D had been postponed several times after some Member States announced that they were going to abstain from voting. After further changes and compromises, the now agreed version obtain the required majority amongst Member States. The last step for the directive to enter into force now is for it to be approved by the European Parliament. The CS3D seeks to integrate human rights and environmental concerns into business operations and to promote sustainable and responsible business behavior along the supply chain and require the remaining Member States to implement the due diligence requirements it sets out into law.

Continue Reading Update on the Corporate Sustainability Due Diligence Directive

In a February 28, 2024 opinion, the Delaware Court of Chancery confirmed an arbitrator’s award resulting in a seller of a $40 million company unexpectedly having to pay a buyer over twice that amount – $87 million – in a customary post-closing purchase price adjustment. The adjustment seems to have resulted from an ambiguity in the purchase agreement involving a drafting technicality in the definition of “Closing Date Indebtedness” and seller and buyer taking a different view of the pre- and post-closing accounting treatment of indebtedness of a joint venture in which the target company held a one-third interest due to an internal reorganization conducted at buyer’s request. Despite the court’s view that the award was economically divorced from the intended goals of the purchase agreement, it awarded summary judgement for the buyer, concluding that the arbitrator acted within the scope of his authority. The case illustrates the importance of understanding the accounting implications of legal drafting in the customary purchase price adjustment sections of a purchase agreement, as well as the choice of what type of dispute resolution mechanism is selected by the parties for purchase price adjustment disputes.

Continue Reading Raw Deal: Seller Ordered to Pay Buyer Over Twice the Purchase Price in Post-Closing Purchase Price Adjustment Dispute

With a stroke of the pen, the Delaware Court of Chancery invalidated commonplace provisions in scores of stockholder agreements relating to public corporations and likely many more relating to private corporations.  In West Palm Beach Firefighters’ Pension Fund v. Moelis & Company (“Moelis”)[1], Vice Chancellor J. Travis Laster, struck down an entire package of stockholder veto rights and held that provisions in a stockholder agreement purporting to restrict the size of the board of directors, requiring the board to recommend in favor of a stockholder nominee, requiring the board to fill any vacancy on the board with a stockholder nominee or to include a stockholder nominated director on committees of the board, are all facially invalid as a matter of Delaware law.  Vice Chancellor Laster noted that many of these provisions would have been valid if set out in the corporation’s certificate of incorporation, rather than in the stockholder agreement.

Continue Reading Delaware Court of Chancery Invalidates Common Provisions in Stockholder Agreements

The Financial Reporting Council (FRC) has published an updated UK Corporate Governance Code (the Code), most of which will take effect from 1 January 2025. These revisions will replace the current version of the Code published in 2018. 

Continue Reading FRC publishes updated UK Corporate Governance Code and Guidance

On January 30, 2024, the Delaware Court of Chancery struck down Tesla CEO Elon Musk’s $55 billion performance-based stock option package, ruling that Tesla’s directors did not satisfy the stringent “entire fairness” standard in approving his compensation. This case comes on the heels of a $735 million settlement in which Tesla directors disgorged previously-received compensation following shareholder claims of unjust enrichment and breach of fiduciary duty.[1] The court applied the entire fairness standard because of Musk’s enormous control over the transaction, referring to him as a “Superstar CEO”[2] who wielded maximum possible influence over the board. While the compensation package was approved by a majority of disinterested shareholders, the court concluded proxy disclosure was deficient and therefore shareholders were not fully informed.[3] Ultimately, the Tesla board was not able to prove the benefit received from Musk’s leadership was worth the $55 billion Tesla paid for it.

Continue Reading It’s Not DE, It’s You: 55 Billion Reasons Tesla is Not ‘Your Company’

As 2024 gets off to a busy start, companies, boards and management teams are facing a host of new and developing business issues and a large array of regulatory developments, from new and growing risks and opportunities from the adoption of artificial intelligence, to ever-changing ESG issues and backlash, as well as enhanced focus on government enforcement and review. As has become a tradition, we have asked our colleagues from around our firm to boil down those issues in their fields that boards of directors and senior management of public companies will be facing in the coming year, yielding focused updates in eighteen topics that will surely feature at the top of board agendas throughout the year.

Continue Reading Selected Issues for Boards of Directors in 2024

Cleary Gottlieb partner Francesca Odell was interviewed by the Rock Center for Corporate Governance at Stanford University about the board of directors’ role in corporate DEI initiatives in light of recent Supreme Court decisions on affirmative action.

To view the interview, click here or in the window below.

Over thirteen years after the Dodd–Frank Wall Street Reform and Consumer Protection Act added Section 10D to the Securities Exchange Act of 1934 (the “Exchange Act”), the Securities and Exchange Commission’s (“SEC”) clawback rules[1] became effective on October 2, 2023 (the “Clawback Rules”). Companies listed on national exchanges such as the New York Stock Exchange (“NYSE”) and the Nasdaq Stock Market (“Nasdaq”) will be required to adopt clawback policies by December 1, 2023 and comply with their respective listing standards.[2] Companies, executives and advisors have understandably been grappling with how to ensure compliance with these new Clawback Rules. Below, we address some common questions that we have received.

Continue Reading ClawFAQs: Common Clawback Questions

Delaware law provides parties with significant flexibility to restrict or eliminate fiduciary duties in LLC agreements.  Sophisticated parties regularly take advantage of this flexibility by eliminating fiduciary duties of members and directors of LLCs.  These same parties, however, often choose not to extend these waivers to officers of the LLCs, often stemming from a desire to ensure that officers still have a fiduciary duty to be loyal to the LLC.  A new ruling from the Delaware Court of Chancery highlights the unintended consequences of excluding officers from the scope of the fiduciary duty waiver.

Continue Reading New Delaware Ruling Highlights Unintended Consequences of Excluding Officers from Fiduciary Duty Waivers

Much has been written lately about a circuit split on the question whether a company’s forum selection bylaw mandating shareholder derivative lawsuits be brought in Delaware state court trumps a federal lawsuit asserting a derivative claim under Section 14(a) of the Securities Exchange Act of 1934 (which can only be asserted – if at all – in federal court).  The Seventh Circuit answered this question “no”[1] while the Ninth Circuit sitting en banc answered “yes,”[2] in both cases over vigorous dissents.  Many have speculated that the U.S. Supreme Court may weigh in to resolve this clear circuit split.

Continue Reading Bringing an End to “Derivative” Section 14(a) Claims – Without Waiting for the Supreme Court to Weigh In