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The Informed Board Winter 2022 What it means to be an independent director isn’t always obvious. As we explain in this issue of The Informed Board, outside directors need to be alert to circumstances and relationships that could be used to challenge their ability to exercise independent judgment. In a second article, we offer a quick guide to 16 crucial issues boards are likely to encounter in 2022, including: new disclosure requirements; changes to the shareholder voting process; antitrust and tax changes that could force companies to adjust their approach to deals; and new strategies on the part of activists. In an interview, Skadden partner Brian Breheny discusses in more detail one of those changes, which would require fuller, prompter disclosures by activists and other investors that acquire substantial stakes. 01 What Exactly Is an Independent Director? (Hint: It’s More Complicated Than You Think) 07 2022: What You Need To Know … 17 Interview: SEC Changes Would Let You Know More About Your Shareholders
The Informed Board / Winter 2022
What Exactly Is an Independent Director?
(Hint: It’s More Complicated Than You Think)
−− Independence is neither a Independence is not as simple as Who Sets the Rules?
fixed condition nor a universal it sounds. As a director, you may
There are several sources of standards
status for all purposes. be considered independent for one
governing director independence:
Events and relationships purpose but not another, and the fact
stock exchange listing requirements,
can disqualify an otherwise that you qualified as independent in
Securities and Exchange Commission
independent director from the past does not mean you will in
(SEC) regulations, proxy advisories and
participating in decisions. all future situations. It is essential to
the laws of the state of incorporation.
understand the rules governing direc-
−− No matter how pure a tor independence and to be sensitive The SEC regulations and stock
director’s motives, if they are to the circumstances that can trip up exchange rules are relevant mainly
not alert to independence boards and directors. when directors are appointed and
issues, plaintiffs may portray named to key committees. However,
them as compromised, which The most important thing to bear in
once on a board, the issue of whether
could jeopardize board actions. mind is that independence is not a
a director is independent comes up
once-and-for-all test, something to
primarily in litigation, when board
−− Courts are sensitive to personal consider when you are appointed and
actions are challenged by share-
and business relationships they then treat as settled. Circumstances
holders claiming that directors had
fear could make directors too change for both individual directors
ulterior motives, divided loyalties
deferential to management or and companies, and independence
or conflicts of interest. Most often,
controlling shareholders. is situational: It must be reassessed
these cases are heard in the courts
as events unfold, particularly where
of Delaware, where more than
a company enters negotiations or
two-thirds of Fortune 500 companies
transactions or makes decisions
are incorporated.
about management.
1 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
What Exactly Is an Independent Director?
(Hint: It’s More Complicated Than You Think)
tests than the stock exchanges.
A proxy advisor may not consider
One decision referred to a controlling shareholder a director nominee independent and
“as the 800-pound gorilla whose urgent hunger may recommend that shareholders
for the rest of the bananas is likely to frighten less not vote for that nominee, even if the
powerful primates like putatively independent person is deemed independent under
the stock exchange standards.
directors who might well have been hand-picked
by the gorilla (and who at the very least owed Delaware law. Delaware law is
their seats on the board to his support).” much more situation-specific and has
focused on ensuring directors remain
free of conflicts during particular
board actions.
Stock exchange rules. Both the
New York Stock Exchange and Much of the relevant Delaware law
Nasdaq require that listed company governing director independence
boards have a majority of independent has evolved through litigation over
directors, and each exchange sets transactions involving an insider
criteria. The focus is on independence or controlling shareholder, where
from management so directors can approval by independent outside
exercise autonomous judgment. To directors is required. These situations
qualify as independent for this purpose, can place directors’ conduct under
directors cannot hold management a microscope. And, no matter how
positions at the company, its parents pure a director’s motives and how
or subsidiaries, and former executives dedicated they are to doing the
are not considered independent for right thing, if not alert to established
three years after their departures. guidelines on independence and not
Other rules are meant to ensure that considering them on an ongoing basis,
independent directors are not overly they may set themselves up to be
reliant on the company financially. attacked by plaintiffs as compromised
For example, a director does not and conflicted. They could also face
qualify as independent if they or personal liability for their role in board
their families received more than actions if they are ultimately found to
$120,000 in compensation from the have breached their fiduciary duties.
company in any 12-month period in
the prior three years. These standards
Situations That Can
make sense, since their purpose is to
Cast Doubt on Directors’
ensure that board members act at an
Independence
arm’s length from management and
controlling influences. Few shareholder lawsuits go all
the way through a trial. As a conse-
Directors also need to keep in mind quence, much of the law governing
that proxy advisory firms sometimes director conduct stems from rulings
apply more stringent independence made in the early stages of litigation,
2 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
What Exactly Is an Independent Director?
(Hint: It’s More Complicated Than You Think)
where judges are not evaluating both outside directors and interested
sides’ evidence but must accept the parties — typically management
plaintiffs’ allegations as true. That is, or large shareholders.
the court is only considering whether
the facts the plaintiffs allege would Delaware courts have repeatedly
be sufficient to undermine the direc- focused on ongoing business and
tors’ independence if proven at trial. personal ties that could make it hard
in practice for nominally independent
Even if the matter is ultimately resolved directors to exercise truly independent
favorably for the directors, being judgment in the company’s inter-
named as a defendant in a shareholder est. Plaintiff’s lawyers are adept at
suit is not ideal. Using news reports mustering details to make it appear
and corporate records demands, that outside directors are so cozy with
plaintiffs can — and regularly do — management or a controlling share-
frame detailed allegations that portray holder that they are not independent.
board decisions as compromised due
to conflicts of interest or divided loyal- Several leading cases involve a CEO,
ties. You do not want to provide anyone board chair or controlling shareholder
ammunition by doing something that alleged to be on both sides of a
could be misconstrued as conflicted. transaction — where the director’s
company acquired a company in which
Self-interest. Cases involving conflict the insider had a sizeable stake, for
due to self-interest are relatively example. Other cases are styled as
straightforward. For example, in one shareholder derivative suits, where
case, directors refused at the last the plaintiffs, suing in the company’s
minute to execute a restructuring name, argue that the board should
agreement for their company unless it have sued management for some
included a broad release and indemnity action or failing. Relationships between
for the directors and majority share- directors and management typically are
holder. When a shareholder sued the front and center in such litigation.
directors for breach of fiduciary loyalty,
a court refused to dismiss the case For veterans of the business and
on the pleadings. (A possible solution: financial world, some of the ties
Leave the decision about the releases courts have cited as undermining
to newly-appointed independent independence may seem routine and
directors who were not involved in the harmless. For example, the indepen-
actions that gave rise to the claims and dence of venture investors on public
who are not defendants.) company boards has been challenged
because their ties to management
Relationships with interested are valuable in their own businesses.
parties. Less obvious examples
of potential conflicts involve multi- –– In one case, an outside director
dimensional relationships between was a partner in a venture capital
firm that invested in a sector
3 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
What Exactly Is an Independent Director?
(Hint: It’s More Complicated Than You Think)
–– where the company regularly made mated, while common sharehold-
acquisitions, and the director also ers would only benefit from a
served on the board and was an sound, well-priced acquisition.
investor in another business that
was dependent on the company for –– Similarly, where members of a
an important approval. A court said special committee evaluated the
the director might be reluctant to acquisition of a business controlled
disagree with management for fear by their company’s chair, a court
of losing his board seat. noted that one outside director
had served on the boards of four
–– In another case, a court said that companies controlled by the chair
outside directors might not be over two decades. Two other
independent of the founder and members of the special committee
controlling shareholder where their had also served as directors of other
venture capital firm invested in the companies the chair controlled.
company early on and held shared
investments with the founder. –– A recent law review article noted
Venture capitalists “compete to that a group of 15 directors had
fund the best entrepreneurs,” served on 252 boards of bankrupt
the court noted, adding that, while companies which were represented
“[t]here is nothing wrong with that, disproportionately by two law firms.
these relationships can give rise The authors argued that such repeat
to human motivations compromis- players suffer from “structural bias,”
ing the participants’ ability to act favoring the release of claims.
impartially toward each other ... .” Directors should be mindful that
Where directors have been named to serving on the board of a company
several boards by the same inter- with a long-time board chair, founder
ested party or shareholder, that has or controlling shareholder may give
raised red flags for some courts and rise to scrutiny of transactions involv-
other observers: ing that person. Delaware judges
have been attuned to the personal
–– In a 2021 case involving a special dynamics at such companies. Several
purpose acquisition company decisions have cited newspaper
(SPAC), the court noted that most of and magazine articles portraying
the outside directors had served on larger-than-life personalities. Reports
at least five other SPACs formed by that CEOs or chairs have a history
the same sponsor, which the court of retribution against directors who
said could suggest the directors opposed them have also been cited.
might expect future board appoint- For example:
ments. In addition, the sponsor
had granted the directors founders’ –– Where for five consecutive years,
stock, the value of which would rise shareholders had voted against a
no matter what deal was consum- compensation committee’s recom-
4 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
What Exactly Is an Independent Director?
(Hint: It’s More Complicated Than You Think)
–– mendations for executive pay, and istrative position at the school.
a majority of noninterested share- The chair also arranged a private
Courts have holders repeatedly withheld their museum tour in London for the
allowed suits to votes for the committee members wife and daughter of one of the
go forward where who approved the pay packages, a directors while the special commit-
Delaware court concluded that “the tee was evaluating the transaction
plaintiffs alleged only reason these directors have with him.
directors were not been forced to resign is [the
not independent CEO’s] continuing support.” That –– An outside director who, with
because they: support could suggest the commit- her husband, owned a small
tee members were beholden to the private plane with the company’s
CEO, the court said. controlling shareholder and former
were named to other CEO, whose actions the board had
unrelated corporate
–– In particularly colorful language, approved, was likely too close to
boards by the CEO, chair,
one decision referred to a the CEO to be considered inde-
controlling shareholder
or financial sponsor. controlling shareholder “as the pendent, the Delaware Supreme
800-pound gorilla whose urgent Court held. “Co-ownership of a
served on the board of hunger for the rest of the bananas private plane involves a partnership
a college alongside the is likely to frighten less powerful in a personal asset that is not
interested party, who primates like putatively indepen- only very expensive, but that also
was a major donor to dent directors who might well requires close cooperation in use,
the school. have been hand-picked by the which is suggestive of detailed
gorilla (and who at the very least planning indicative of a continuing,
were partners in a owed their seats on the board to close personal friendship …” the
venture capital firm his support).” court said, “the type of very close
that invested in sectors
personal relationship that, like
where the company Finally, personal interactions that family ties, one would expect to
makes acquisitions. might seem innocent and routine to heavily influence a human’s ability
successful business people, such to exercise impartial judgment.”
shared investments or
as shared charitable interests and
assets such as a private
personal favors, may be fodder in liti-
plane with the CEO,
gation where director independence
Conclusion
chair or controlling
shareholder. is at issue: The takeaway is that outside direc-
tors need to closely monitor their
–– The independence of two outside independence and understand that
received token benefits
from an interested directors on a special committee the term can mean different things
party, such as a was called into question where for different purposes.
private museum tour the company chair was a longtime
for relatives, while a member of the board at his alma A director who qualifies as indepen-
transaction was mater alongside two of his compa- dent to sit on an audit or compensation
under consideration. ny’s directors, and he had donated committee may not be deemed so
tens of millions of dollars to the when it comes to approving a trans-
college, including large sums while action with an insider or assessing a
one director held a senior admin- shareholder demand to bring litigation
5 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates
What Exactly Is an Independent Director?
(Hint: It’s More Complicated Than You Think)
claims against management. In the or losing there, be sensitive to both
latter cases, courts will retroactively personal conflicts of interest and rela-
assess the possibility of subtle biases tionships and actions, whether recent
and conflicts stemming from personal or long-term, that could appear to
or business relations — a more create divided loyalties.
refined and less predictable standard
of independence.
Authors
To ensure your ability to exercise Shana A. Elberg, Joseph O. Larkin,
Lisa Laukitis, Maxim Mayer-Cesiano,
independent judgment and reduce
Caroline S. Kim
the chances of ending up in court,
6 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesThe Informed Board / Winter 2022
2022: What You Need To Know …
Contents
08 Regulation, Enforcement Merger Clearance Thresholds Are No This year, we expect to see new
and Disclosures Longer Clear-Cut Around The World disclosure requirements; rule
The SEC Plans a Slew of CFIUS-Like National Security changes at the Securities and
New Disclosure Requirements Reviews Spread Globally
Exchange Commission that will
Some Rules and Enforcement Policies Revamped Tax Rules Could
Could Affect Directors Personally Complicate Spin-Offs affect directors; activists adopting
Pressure Grows for More
new tactics; changes to shareholder
Disclosures About Political Spending 14 Supply Chains and voting processes; tax and antitrust
Cross-Border Trade developments that could alter the
Prosecutors Are Taking a Harder
Line in Corporate Plea Negotiations Biden Administration Plans way companies execute deals; and
Broad Protections for Critical US
New Disclosures May Give Rise
Supply Chains
revised trade rules that will have an
to More Securities Litigation impact on many businesses.
US May Renew Exemptions
10 Activists and Shareholder Voting From Tariffs on Chinese Imports
Below is a quick guide to critical
Activists Are Morphing Into ESG Restrictions on Imports From Xinjiang
Could Have a Large Impact on Some developments that may affect your
Advocates and Buyers, and Could
Target SPACs Products decisions as a director, drawing on
Voting Changes Could Strengthen Multinationals Need To Comply With the insights of Skadden lawyers
the Hand of Large Investors and New Chinese Data Protection Laws across practices and offices. We
Dissidents flag key issues that directors will
15 Tax and Cryptocurrency
want to be alert to this year.
12 New Factors Affecting Authorities Try To Come to Grips With
Dealmaking Cryptocurrency Tax Conundrums
US Merger Reviews Are Likely To
Take Longer and Be Less Predictable
7 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
Regulation, Enforcement if the company is forced to restate (Listen to Skadden partner Brian
and Disclosures financials. The commission has indi- Breheny discuss the proposed amend-
cated it is contemplating rules broader ments: “Interview: SEC Changes
than those originally floated in 2015. Would Let You Know More About
The SEC Plans a Slew of New For instance, the rules could apply to Your Shareholders.”)
Disclosure Requirements additional types of restatements, even
correcting errors that were not mate- Finally, in defining investor “groups”
Boards will need to monitor actions rial to the prior financial statements. that are working together, and whose
at the Securities and Exchange Companies could also be required to holdings must therefore be aggre-
Commission (SEC), whose ambitious reveal not only how much they have gated for purposes of disclosure, the
agenda includes a wide array of new recovered from executives, but how proposed rule would drop the require-
and amended regulations it hopes to they calculated the amount. ment that there be “an agreement”
put in place by the end of 2022. among the investors. In some circum-
Disclosures by 5% shareholders. stances, this could force activists to
ESG. The SEC increasingly is focused On February 10, 2022, the SEC reveal their holdings and intentions
on disclosures related to environ- proposed changes to the rules sooner than under the current rules.
mental, social and governance (ESG) requiring disclosure of equity stakes
issues, including climate change, board of more than 5%, which would give Share repurchase plans. Additionally,
diversity, human capital management companies fuller, prompter informa- the commission has proposed amend-
and cybersecurity risk governance. tion about shifts in their shareholder ments to modernize share repurchase
Currently, disclosure of ESG matters bases, including attempts to achieve rules, including a requirement that
is required only if they are considered a change of control. repurchases by the company be
material, and the commission has not disclosed by the end of the first
issued guidance on climate-related First, the changes would mandate business day after they are executed.
disclosures since 2010. more timely disclosures. When an
investor passes the 5% threshold,
Climate change will be a particular Authors
it would have to disclose its stake
priority, as evidenced by detailed Brian V. Breheny, Raquel Fox,
and intentions within five calendar Shalom D. Huber, Andrew M. Lawrence,
comment letters from the staff on days instead the current 10 days. Daniel Michael, Joseph M. Penko
climate-related disclosures in SEC And, once over 5%, whenever its
filings. The commission is expected position changes, the investor would
to propose mandatory ESG-related be required to update its filing within Some Rules and Enforcement
disclosure rules in 2022, but even one business day. Policies Could Affect Directors
without specific requirements, any Personally
ESG-related material impacts should Second, the disclosure requirements
Several of the SEC’s initiatives will
be disclosed under existing SEC rules. would now extend to some cash-
apply directly to board members.
settled equity derivatives that can
Executive compensation clawbacks. give the holder voting power. Under Predetermined stock sale plans.
The SEC revived discussion of a the current rules, only conventional In response to concern that exec-
long-delayed proposal that would shareholdings count toward the utives and directors are possibly
require companies to implement poli- threshold, although derivatives are gaming the system, the SEC
cies to recoup incentive compensation frequently used where the investor’s proposed several amendments to
from current and former executives goal is a change of control. the rules governing predetermined
8 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
trading plans (so-called 10b5-1 plans). But the events at the Capitol on Janu- 2021, up from 332 in 2020. Along with
The proposed changes would include ary 6, 2021, also led many companies that, there is a trend toward increased
mandatory cooling-off periods after to reevaluate their political spending, board oversight of political activity and
adoption of a plan before trades are and now companies are being asked memorializing guidelines for corporate
permitted, director and officer certifi- about their positions on changes to political spending.
cations, limits on multiple/overlapping state voting laws.
plans, and new public disclosure and
reporting obligations regarding adop- Shareholders press for transparency. Authors
tion of plans. Legislation that would During the 2021 proxy season, a record Ki P. Hong, Melissa L. Miles,
40% of shareholder proposals request- Karina Bakhshi-Azar
require further amendments to the
rules has passed in the House and ing disclosure of corporate political
spending were adopted, according to
is pending in the Senate. Prosecutors Are Taking a
Bloomberg Law, double the already
Harder Line in Corporate
Executive perks. The SEC’s significant 20% rate in 2020. Many of
Plea Negotiations
Enforcement Division is using risk- these proposals called for disclosure
based analytics to uncover potential not only of the amounts and recipients, As the Department of Justice (DOJ)
violations of various rules, including but also of the policies for making adopts a tougher stance toward
undisclosed perks for company offi- contributions and the identities of the criminal enforcement involving corpo-
cials. Alleged violations cited in recent decision-makers. (SEC officials have rations, companies need to review
enforcement actions involved benefits signaled that some aspects of political their compliance programs to ensure
such as the personal use of corporate giving could be encompassed by new they are well positioned to detect and
aircraft, automobiles and credit cards; ESG disclosure rules.) prevent misconduct, particularly if the
car, club and concierge services; and company has entered into nonpros-
covered housing and travel costs. Some proposals would restrict ecution or deferred prosecution
activities. An increasing number of agreements (NPAs or DPAs) with the
proposals have also included substan- DOJ in the past.
Authors tive restrictions, such as prohibitions
Brian V. Breheny, Raquel Fox, on contributing to candidates who Overseas bribery/kickbacks. To build
Andrew M. Lawrence, Daniel Michael cases under the Foreign Corrupt
voted for certain anti-ESG bills,
or asking the company to provide Practices Act, a senior DOJ official
metrics on how it weighs ESG issues said in 2021 that the department is
Pressure Grows for More
when making contributions or work- now relying more on innovative data
Disclosures About Political
ing with trade associations. mining, the use of law enforcement
Spending
sources and close partnerships with
Corporations need to prepare for Wider disclosure and oversight. foreign governments, and less on
increased pressure from shareholders The impact of the political disclosure self-reporting by companies.
and other stakeholders to disclose and movement extends beyond compa-
justify their contributions to candi- nies that have faced shareholder Evidence of individual wrongdoing.
dates and political action committees, proposals. According to a recent study Newly enacted DOJ policy requires
as well as dues payments to trade by the Center for Political Accountabil- that, to obtain cooperation credit,
associations. The recipients’ positions ity, 370 S&P 500 companies disclosed companies must disclose all nonpriv-
on ESG issues, such as diversity and some or all of their political spending, ileged information about individual
climate change, are a particular focus. or banned at least one type of it, in wrongdoing. That is a more burden-
some than previous DOJ policies,
9 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
which only called for information While the DOJ has not issued new Based on court rulings to date in
concerning individuals the company policies concerning corporate recid- securities cases involving corpo-
viewed as “substantially involved” in ivists, this case suggests that the rations’ statements about their
the misconduct. The change shifts to department may insist on guilty pleas climate-related policies, even general
the DOJ the responsibility to assess in such cases, as opposed to NPAs statements regarding a company’s
the level of involvement and culpabil- or DPAs. commitment to net-zero emissions
ity of corporate employees. or other climate goals may be
Monitors. The department’s guidance deemed “material” to shareholders
Past misconduct. Since 2008, in to prosecutors has been revised to — at least at the pleading stage of
deciding whether to bring criminal eliminate sections that indicated moni- litigation. Statements that could be
charges against a company, prosecu- torships were disfavored or reserved used in a complaint might be found
tors have been told to consider the only for exceptional circumstances. in sustainability reports, brochures,
company’s history of conduct similar websites and other materials issued
to that under investigation. Now, by companies, not just SEC filings.
Author
prosecutors are directed to factor Hence, companies need to ensure
David Meister
in not only similar misconduct, but the accuracy of all their statements
the entire domestic or foreign crim- about climate matters, regardless of
inal, civil and regulatory record of a New Disclosures May where they appear.
company, when shaping a resolution. Give Rise to More
Securities Litigation
Recidivism, NPAs and DPAs. The Author
resolution of a recent investigation If the SEC adopts new rules mandating Virginia Milstead
and comments by Deputy Attorney more detailed disclosures regarding
General Lisa Monaco make clear that climate-related risks and opportunities,
the department is actively considering a new wave of federal securities Activists and
how to deal with corporate recidivists, suits stemming from climate change Shareholder Voting
raising the question of whether they disclosures may follow. Such lawsuits
should be eligible for NPAs or DPAs, by private investors could be either
and how to ensure that companies event-driven (e.g., a drop in the Activists Are Morphing Into
subject to such agreements comply stock price triggered by an adverse ESG Advocates and Buyers,
with their obligations. climate-connected event affecting and Could Target SPACs
the company) or part of campaigns
In a case involving allegedly manip- ESG and Exxon Mobil. The activist
to bring about corporate change
ulative trading practices at NatWest campaign against ExxonMobil during
through litigation.
Markets, the government stressed the 2021 proxy season demonstrated
the fact that the company had settled Any new reporting rules will likely the growing importance of ESG
two earlier cases involving similar require more specificity as to the issues for large investors. The activist
behavior with NPAs. The DOJ claimed effects of climate change on business fund Engine No. 1 secured three
trading at issue in the recent investi- operations and results, which could board seats at Exxon Mobil, arguing
gation violated those agreements. To make it more difficult for companies to that the company was not doing
resolve the latest charges, NatWest argue in litigation that such statements enough to address climate change.
pled guilty to mail and securities fraud are merely aspirational or inaction- Though Engine No. 1 held only a
in December 2021 and agreed to able “puffery.” When characterizing 0.02% stake in the company,
the appointment of an independent climate-related information positively, it prevailed with the support of
compliance monitor. companies will need to consider passive institutional investors as well
disclosing contrary facts as well. as major proxy advisory firms.
10 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
One lesson: In the coming proxy opening for activist investors to buy pay.” If other large index fund manag-
season, companies should be SPAC shares below their IPO price ers follow suit, the result would be a
wary of so-called “Trojan horse” and exercise redemption rights, forc- shift in voting power from index fund
campaigns, where activists combine ing a return of the IPO proceeds held managers to their larger investors,
ESG initiatives with traditional activ- in trust at the original IPO price. likely making it harder to forecast the
ism campaigns, such as proposing a outcome of votes on shareholder
breakup or sale of a company, or the Activists pivot to buyouts. Activists proposals and in contested elections.
nomination of a slate of directors. By continue to blur the lines of traditional It also could become more difficult
pressing both sets of issues, an activ- M&A-related campaigns, sometimes for companies to influence the voting
ist can appeal to the growing focus on launching full-fledged hostile takeovers decision-makers.
ESG factors by institutional investors after pursuing more conventional
while also garnering support with strategies. For example, Carl Icahn’s Universal proxy cards. Traditionally,
more traditional, non-ESG proposals. campaign against Southwest Gas’ in contested elections, shareholders
proposed acquisition of Questar not voting in person had to choose
“SPACtivism”: Nearly 200 Pipeline evolved into a contentious between the company’s and the
“de-SPACs” — mergers of operat- proxy contest to replace Southwest’s challenger’s proxy cards, with their
ing companies into special purpose entire board, coupled with a tender competing slates of directors. But
acquisition companies (SPACs) — offer for all shares of the company. new SEC rules for contested elections
were completed in 2021, according More recently, Acacia Research, an require most public companies to
to Deal Point Data. Many are likely to entity controlled by the activist fund include all board nominees — both
see a dramatic turnover in their share- Starboard Value, submitted an unsolic- company and dissident nominees —
holder bases as lockups for sponsors ited bid for Kohl’s, which was followed on a single universal proxy card for
expire (typically after 12 months) and by another activist fund, Macellum shareholder meetings after August 31,
insiders sell off a portion or all of Capital Management, nominating 10 2022. This new “a la carte” procedure
their shares. Some of that stock may new directors to facilitate a sale of may make it easier for dissident share-
be acquired by activists. Given the the company. holders to obtain board representation
number of de-SPACed companies by allowing shareholders to support
in the market, inevitably some will some dissident nominees without
Authors
underperform, potentially becoming having to reject all company nomi-
Richard J. Grossman, Neil P. Stronski,
activist targets. Alexander J. Vargas nees. Together with the possibility
of “split decisions” by proxy advisers,
“SPACtivism” is not limited to that could make election outcomes
de-SPACs. As of December 31, 2021, Voting Changes Could more difficult to predict.
over 500 SPACs were collectively Strengthen the Hand of Large
holding in trust more than $138 billion Investors and Dissidents
in initial public offering (IPO) proceeds Authors
Index fund voting policies. Black- Richard J. Grossman, Neil P. Stronski,
— “dry powder” — and were seek-
Rock announced that it will soon Alexander J. Vargas
ing M&A targets. In addition, as of
give its largest investors (e.g., pension
September 2021, over 90% of active
funds and endowments) the ability
SPACs were trading below their IPO
to cast votes tied to their fund invest-
price, according to Goldman Sachs.
ments on matters including board
With deadlines looming to arrange
seats, ESG proposals and “say on
business combinations, there is an
11 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
New Factors Affecting Prior approval required. In an of nascent competitors that could
Dealmaking increasing number of merger consent provide significant competition in the
orders, the FTC now includes a provi- future. Termed “killer acquisitions,”
sion requiring firms to obtain approval these are of particular concern in
US Merger Reviews Are before consummating future deals. dynamic sectors such as technology
Likely To Take Longer and and pharmaceuticals. In many cases,
Second requests. The FTC’s Bureau the target may have a promising
Be Less Predictable of Competition has modified require- technology but little or no revenue,
Wide-ranging procedural changes ments for second requests (in-depth so the deals do not meet traditional
at the Federal Trade Commission reviews), making the process lengthier. notification thresholds.
(FTC) have been implemented in an This gives the FTC more time and
attempt to expand its review powers leverage to challenge deals. Since early 2021, the European
— changes that can complicate and Commission (EC) has invited national
slow down merger clearances. The Other changes. The early termina- competition regulators to refer possible
commission shares jurisdiction over tion option, which allowed deals to “killer” transactions to it, even where
mergers with the DOJ, which also close before the end of the statutory they do not meet either national or
has a new leader who is talking tough waiting period if the FTC consents, European Union value thresholds
about ramping up merger enforcement. has been eliminated, and the FTC for investigation. Similarly, in the
now commonly sends letters to U.K., the Competition and Markets
Mergers. In support of its more merging parties warning them that Authority is increasingly construing
aggressive stance on vertical deals, it will continue to investigate and the criteria for review more broadly,
the FTC abandoned the Vertical reserves the right to challenge a taking jurisdiction over deals where
Merger Guidelines, which for years deal after it closes. targets appear to have limited (if any)
were based on the principle that most revenue or direct activity in the U.K.
vertical tie-ups are pro-competitive
Authors
and should not be challenged. The FTC Other jurisdictions, including Austria,
Tara L. Reinhart, David P. Wales
and DOJ have announced that they Germany and South Korea, have
are launching an effort to revise the adopted alternative transaction-value
Horizontal Merger Guidelines, as Merger Clearance thresholds, requiring notification of
well as potentially the Vertical Merger Thresholds Are No Longer acquisitions where the target has
Guidelines, later this year. These Clear-Cut Around the World significant activities in those coun-
revisions will undoubtedly aim to tries, even if a target generates no
It has become less clear when a
lower the bar in challenging all types revenue there.
merger will require a regulatory review
of mergers.
in jurisdictions around the world. Discretionary jurisdiction is
Labor markets. Under the Biden spreading. More than 50 countries
“Killer acquisitions” are altering
administration, a great deal of atten- now have the discretion to conduct
standards. In many countries,
tion is being paid to competition in competition reviews of mergers below
concerns have been raised that
the labor market. During merger mandatory notification thresholds,
traditional revenue thresholds for
reviews, questions about the impact and more are likely to follow. As a
merger reviews do not bring all
on labor markets are now common consequence, companies whose
anti-competitive mergers to the
at both the FTC and DOJ. merger might not have been subject to
attention of regulators — particu-
a review in the past now must prepare
larly acquisitions by incumbents
12 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
for the possibility that their deal may Strategic technologies. Many of are passive investors through funds.
draw the attention of regulators. In the new regimes reflect a desire to Therefore, private equity and other
drafting merger agreements, the maintain control over domestically investment partnerships must be
parties should address the risk of an developed technology. More govern- prepared to disclose information about
unexpected review and delays, and ments now recognize the significant their limited partners and partnership
the drop-dead (long-stop) termination role emerging technologies play in agreements during FDI reviews.
dates in merger agreements may national security and defense. With
need to be extended. recent supply chain disruptions in the Reviews will take more time.
semiconductor and other industries, Parties also need to plan for lengthier
technological sovereignty is seen as a reviews, and the possibility that they
Authors will have to modify their agreement
particularly important issue.
Bill Batchelor, Frederic Depoortere, to mitigate regulators’ concerns.
Giorgio Motta, Ingrid Vandenborre Virtually all the major FDI review
mechanisms focus on the defense
Authors
CFIUS-Like National Security and security sector, critical infra-
Michael E. Leiter, Brian J. Egan,
Reviews Spread Globally structure, raw materials and inputs John Adebiyi, Pascal Bine, Andrew L.
(energy products, minerals, food Foster, Matthias Horbach, Akira Kumaki
Companies investing or making security), advanced technologies,
acquisitions — or divesting assets — mass media and sensitive personal
abroad in sectors deemed “strategic” Revamped Tax Rules Could
data. Cross-border investments in
face new hurdles. In 2021, more than Complicate Spin-Offs
these categories are the most likely
a dozen countries enacted or signifi- to trigger FDI reviews. Tax law changes included in the
cantly changed their foreign direct
Biden administration’s Build Back
investment (FDI) review processes. Government-backed acquirers.
Better Act (BBBA) would make it
Concerns about the intentions of
Some countries with relatively mature harder for companies to extract
state-backed investors from nonmarket
screening regimes — including value through a tax-free spin-off.
economies is another key factor driv-
Australia, Canada, China, France, While the full BBBA bill failed to gain
ing the new regulations. A November
Germany and Japan — strengthened Senate support, the administration
2021 European Commission report
or expanded them, while others imple- hopes to win approval for much of
noted a “clear change in investor
mented review schemes for the first its substance in smaller pieces, and
profiles and investment patterns,
time. In the U.K., a new FDI review the tax changes are likely to survive
i.e., increasingly non-OECD investors,
law took full effect in January 2022. in those bills because they would
occasionally with government back-
generate revenue to offset
The CFIUS review process (short for ing or direction, whose motivation
proposed expenditures.
Committee on Foreign Investment for a particular investment might not
in the United States) remains the always be exclusively commercial.” The current rules on spin-offs are
most challenging FDI hurdle, but well understood and applied routinely
Investors’ identities. Investor-related
companies investing outside their to allow parent companies to extract
due diligence is essential. A number of
home country now need to factor in value from the assets they relinquish
FDI regimes require filings for transac-
the possibility that their transactions without being taxed. Subject to
tions involving state-backed investors,
may be rigorously vetted in countries certain caps, the rules allow parents
sometimes even where those entities
where that was not true in the past. to transfer debt to the new entity
13 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
(Spinco) that will hold the assets and/ could provide opportunities to some and research. We expect to see
or to receive cash from the Spinco companies while complicating busi- targeted use of new and existing
without any tax liability. ness for others. incentive programs in other areas,
as well as use of trade remedies
The BBBA would amend the rules In June 2021, the Biden administra- that could result in higher tariffs
to eliminate the use of debt-for-debt tion published reports identifying for certain imports.
exchanges between Spinco and the supply chain vulnerabilities and
parent, which historically have been recommending policies to ensure
one of the main ways the parent can long-term availability of economically Authors
extract value in excess of the tax essential product categories such as Michael E. Leiter, Brian J. Egan,
Joseph L. Barloon, Brooks E. Allen
basis of the Spinco assets without semiconductors, electric vehicle and
paying tax. other high-capacity batteries, critical
minerals and other strategic materi- US May Renew Exemptions
There appear to be work-arounds that als, and pharmaceuticals and active
may allow parents to monetize value
From Tariffs on Chinese
pharmaceutical ingredients. Similar Imports
without tax to nearly the degree reports are to be finalized in early
possible under current rules, but the U.S. importers are lobbying for relief
2022 for broader economic sectors:
amendments will force companies to from Section 301 tariffs imposed on
defense, public health and biologi-
engage in more complex, multi-stage products from China beginning in
cal preparedness, information and
transactions in order to avoid paying 2018 to address findings of intellec-
communications technology, energy,
higher taxes. Some steps may need tual property theft and other unfair
transportation, and agricultural
to be completed ahead of the spin-off trade practices. The Biden adminis-
commodities and food products.
itself and, in some cases, the trans- tration has maintained that the tariffs,
action may have to be structured as A number of agencies have solic- which apply to most goods from
a reverse spin-off, where the assets ited industry and public input to China, remain necessary, and it has
in question remain in the existing strengthen supply chains and have been slow to restart the Section 301
parent and the bulk of the business been charged with devising policy tariff exclusion process established
is transferred to a Spinco. recommendations, both “positive” by the Trump administration that
(e.g., workforce development, financ- expired in 2020. In October 2021,
ing opportunities, stockpile creation) the U.S. trade representative (USTR)
Authors
and “negative” (e.g., addressing invited public comment on whether
Thomas F. Wood, William Alexander
surveillance and cyber risks). to reinstate certain tariff exclusions.
Several legislative and regulatory A number of lawmakers are urging
Supply Chains and actions and proposals to address the administration to make it easier
Cross-Border Commerce the challenges identified in these to seek exclusions, claiming that
reports are likely in 2022. In the certain tariffs have increased supply
immediate term, Congress likely chain difficulties. The USTR likely will
Biden Administration Plans will pass a compromise version of reinstate many of the tariff exclusions
Broad Protections for Critical the America COMPETES Act, which on which it invited comments and
US Supply Chains among other things would allocate initiate a process for applying for
Concerns about the supply chain more than $50 billion to support additional exclusions in 2022. Absent
are giving rise to new policies that domestic semiconductor production improvement in U.S.-China trade
14 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
relations, however, broader action Multinationals Need To Tax and Cryptocurrency
to reduce or eliminate Section 301 Comply With New Chinese
tariffs remains unlikely. Data Protection Laws
Two new Chinese laws came into Authorities Try To Come to
Authors force in late 2021 that are likely to Grips With Cryptocurrency
Michael E. Leiter, Brian J. Egan, have an impact on many multinational Tax Conundrums
Joseph L. Barloon, Brooks E. Allen companies with operations in or As digital assets proliferate, so do
touching the country. questions about their taxation. Many
tax rules designed over the last
Restrictions on Imports From The Data Security Law applies to
century to deal with financial and
Xinjiang Could Have a Large all data activities in China as well as
commercial assets — from deriva-
Impact on Some Products extraterritorially if they are deemed to
tives to intellectual property — are
The import of some Chinese prod- impair the country’s national security
ill-suited to digital assets. Companies
ucts has been complicated by U.S. and public interest. It sets up a frame-
that hold, trade or are otherwise
government findings that goods made work to classify data collected and
involved with cryptocurrencies or
in the Xinjiang Uyghur Autonomous stored in China based on its potential
other digital assets need to be alert
Region of China have been produced impact on Chinese national security
as tax authorities come to grips with
by forced labor, which has resulted and regulates its storage and transfer.
these new forms of property.
in restrictions on their import. U.S. The law clarifies and expands data
Customs and Border Protection has localization and transfer requirements, The technical architecture of digital
already issued orders blocking entry and expands the scope of regulation assets makes it difficult to bring them
of products from China because of to cover both the initial collectors and within existing tax rules, even those
forced labor, including 10 directed downstream intermediaries. designed to deal more generally with
specifically at activity in Xinjiang. the digital marketplace. Questions
The Personal Information Protection
that businesses, crypto traders and
Legislation that effectively prohibits Law generally applies to all types of
tax authorities are wrestling with
imports of goods made in whole or data activities involving the personal
today include:
in part in Xinjiang was signed into information of subjects in China, as
law on December 23, 2021, and well as activities outside the coun- –– whether cryptocurrency is legal
will go into effect in June 2022. The try aimed at providing products or tender or some other form of asset;
legislation could have a significant services to individuals in China or
impact on the U.S. solar industry, analyzing their behavior. It imposes a –– whether stablecoins, tied to a fiat
because Xinjiang is a major center for range of obligations on data handlers, currency, should be treated differ-
polysilicon production. The legislation including obtaining consents localiz- ently than other cryptocurrencies
also could adversely affect imports of ing and deleting data, and conducting for tax purposes;
apparel, agricultural products such as regular self-audits to assess informa-
–– when income is recognized (e.g.,
tomatoes, and certain electronics. tion security risks.
when the cryptocurrency is mined,
when it is received in payment for
Authors Author another asset);
Michael E. Leiter, Brian J. Egan, Steve Kwok
Joseph L. Barloon, Brooks E. Allen
15 Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates2022: What You Need To Know …
–– which cryptocurrency transactions regulation and require more reporting Corporate participants in the digital
qualify for capital gains treatment; from crypto exchanges and other asset market need to manage tax risk
financial institutions. The Internal by ensuring their internal teams comply
–– where a cryptocurrency transac- Revenue Service, for example, is with any new tax or reporting require-
tion takes place; and currently drafting regulations to imple- ments, and closely tracking new legal
ment the cryptocurrency reporting developments as tax agencies attempt
–– which country will be the primary
framework recently enacted by the to reach cryptocurrency transactions
taxing authority.
U.S. Congress and has also subpoe- that have thus far remained outside
The U.S., U.K. and Australia have naed records of crypto exchanges established tax schemes.
started to offer guidance on some of to obtain information about their
these topics, but there is no interna- customers’ trading income. That could
Authors
tional consensus on many issues. cause some crypto activity to migrate
James Anderson, Christopher P. Bowers,
to different jurisdictions, posing new Nathan W. Giesselman, David Berke
Financial regulators and tax authorities challenges for tax authorities.
are seeking to tighten cryptocurrency
16 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesThe Informed Board / Winter 2022
Interview:
SEC Changes Would Let You Know
More About Your Shareholders
It has been more than 50 years since In addition, some cash-settled deriv-
Listen to the the Securities and Exchange Commis- atives that allow the holder to vote
interview sion (SEC) adopted its beneficial shares would now be encompassed
ownership reporting rules, which by the rule and count toward the
require investors who buy more than threshold — securities not covered
a 5% stake in a company to disclose by the current rules.
their holding and their intentions.
There have long been concerns that Finally, amendments would alter
the rules needed to be updated to the definition of when investors are
keep pace with current market prac- acting together for the purposes of
tices and real-time information flows. influencing or changing control, drop-
ping the current rule’s requirement
In February 2022, the commission that there be “an agreement.” The
announced several proposed amend- change could force some activists,
ments that attempt to address those for instance, to aggregate their hold-
perceived shortcomings. ings for purposes of the disclosure
thresholds, thus requiring them to
The time frames for disclosures would reveal their holdings and intentions.
be reduced, so that an investor who
passes the 5% threshold would be Do the proposed amendments go
required to disclose that fact within far enough to address information
five calendar days instead of the asymmetries in today’s market
current 10. Subsequent changes environment? How will market
to the holding would have to be participants react to the proposed
disclosed within one business day. amendments? Brian Breheny, head
17 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesInterview: SEC Changes Would Let You
Know More About Your Shareholders
of Skadden’s SEC Reporting and
Compliance practice and former Authors
“For the longest Brian V. Breheny, Ann Beth Stebbins
chief of the SEC’s Office of Mergers
time, … you needed and Acquisitions, discusses these
an agreement questions with Skadden M&A
among one or more partner Ann Beth Stebbins.
shareholders to act
together…. [The
SEC] is proposing View past editions / You can find all Informed Board articles here.
to remove the word This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP
and its affiliates for educational and informational purposes only and is not intended
‘agreement,’ and and should not be construed as legal advice. This memorandum is considered
they’ve changed it advertising under applicable state laws.
now to just say, ‘two One Manhattan West / New York, NY 10001 / 212.735.3000
or more persons
are acting together,’
which leaves open
what ultimately will
be needed to try to
prove that they’re
acting together.”
–– Skadden partner Brian Breheny
18 Skadden, Arps, Slate, Meagher & Flom LLP and AffiliatesYou can also read
