Freedom to Contract?
January 26, 2006
How much freedom does a party have to tell its service provider not to use a given employee to provide the services? Although the freedom to contract (or not contract) might suggest that this liberty is unfettered, a recent decision by the Second District Appellate Court of Illinois suggests that the answer is not so clear.
Of Mice and Men: The Business Judgment Rule After The <i>Disney </i>Decision
January 26, 2006
Last month, we discussed the Delaware Court of Chancery decision in <i>In re The Walt Disney Co. Derivative Litigation</i>, 2005 WL 2056651 (Del. Ch. Aug. 9, 2005), a case that had drawn intense media attention (The case currently is on appeal to the Delaware Supreme Court.) We noted that the severance package given Disney president Michael Ovitz amounted to approximately $140 million in cash and vested stock options, which was paid to Ovitz upon the termination of his employment under a "no-fault" termination provision in his employment agreement. The court found that no Disney board member was liable for violating his or her fiduciary duties with respect to the hiring, and then the firing after a little more than 1 year, of Michael Ovitz. Now the question is: What has been learned? We continue the article with a discussion of fiduciary conduct.
How Does Your Company Compare?
January 26, 2006
Since the Sarbanes-Oxley Act (SOX) was signed into law in 2002 and the revised NYSE and Nasdaq listing standards were implemented, certain trends have developed among the corporate governance practices of the 100 largest publicly listed U.S. companies as ranked by revenue in FORTUNE magazine's FORTUNE 500' list (the "Top 100"). For the past 3 years, Shearman & Sterling has analyzed the corporate governance practices of the Top 100. What follows is a summary of our most significant findings with respect to director independence, board leadership, director time commitments and compensation, and shareholder proposals.
Looking Ahead to The 2006 Proxy Season
January 26, 2006
As the 2006 proxy season gets underway, shareholder activism shows no signs of slowing. Over the last few years, high-profile corporate scandals and news stories about executive excess and corporate waste have compelled many investors to seek -- or demand -- a more active role in corporate governance matters of the companies they own. Now that most companies have implemented the changes required by the Sarbanes-Oxley Act of 2002 (SOX) and the stock exchanges, the agenda of the shareholder activist is changing.
Drafting a Practical and Useful Code of Ethics
January 18, 2006
Pursuant to Section 406(c) of the Sarbanes-Oxley Act (SOX), the Securities and Exchange Commission adopted Regulation S-K 406, which requires reporting companies to disclose whether the company has adopted a code of ethics that applies to its principal executive officer, principal financial officer, principal accounting officer or controller, or persons performing similar functions. In addition, New York Stock Exchange Rule 303A.10, American Stock Exchange Section 807 and Nasdaq Rule 4350(n) require listed companies to adopt and disclose a code of conduct for directors, officers and employees. In response to these requirements, public companies have adopted codes of conduct varying in length and complexity. Few precedents were available prior to the deadlines for adopting codes, and many companies adopted codes of conduct that stated code provisions as simple and strict commandments or merely paraphrased the text of the regulations. For example, some codes include a requirement to "at all times obey all applicable federal, state and local laws and regulations" or "not engage in any transaction involving a conflict of interest."
Confidential Client Communications? Maybe Not
January 18, 2006
Former SEC Chairman William H. Donaldson noted in a March 5, 2004 speech that SOX was needed to deal with "a general erosion of standards of <i>integrity and ethics</i> in the corporate and financial world ... The acquiescence by the gatekeepers, like accountants, who turned their backs or actually condoned such accounting manipulation, combined with stock option incentives to management, fueled the short-term focus." (emphasis added).) Ironically, the SEC and the Department of Justice, which enforce SOX's criminal provisions, appear ready to burden the traditional ethical obligations of corporate legal counselors to keep client communications confidential in an effort to police the integrity and ethics of other corporate gatekeepers. To that end, the SEC imposes certain reporting requirements on corporate counselors, attempts to preempt state ethics rules, and DOJ prosecutors routinely pressure "target" corporations to waive the attorney-client privilege to obtain "cooperation" points. Corporate counselors must be aware of those initiatives to properly balance their competing obligations.
Compliance and Ethics Programs: Passivity Is Pass'
January 18, 2006
Corporate compliance and ethics programs have matured significantly from their humble beginnings. Since they appeared in the 70s in response to government investigations of overseas bribery in the aerospace, defense and armaments industries, leading to enactment of the Foreign Corrupt Practices Act, compliance programs have spread into most, if not all, other industries. Moreover, compliance programs have received official "endorsement" by the government through the Sentencing Guidelines for Organizational Defendants (Sentencing Guidelines), which appeared in their original form in 1991 as Chapter 8 of the Federal Sentencing Guideline Manual.
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