LEGAL
Companies should evaluate and impose meaningful limits on the amount of compensation that can be awarded to nonemployee directors and adhere to corporate governance best practices when approving director compensation in light of the recent settlement of a derivative action against the board of Facebook Inc. in the Delaware Court of Chancery.
Espinoza v. Zuckerberg was a derivative action against Facebook’s board alleging breach of fiduciary duty, waste, and unjust enrichment related to the board’s 2013 approval of cash and equity compensation for nonemployee directors, including an annual $300,000 grant of restricted stock units and a set annual cash retainer. Under a January 2016 stipulation of settlement, Facebook must institute corporate governance reforms for five years, including:
Zuckerberg highlights the self-interested nature of decisions made by nonemployee directors about their compensation. Therefore, companies should:
For resources to assist a company in developing a director compensation program, see the Director Compensation Toolkit.
Companies should reassess procedures for transatlantic transfers of personal data and expect more stringent data protection obligations given the European Commission’s (EC’s) announcement that it reached a political agreement with the US on a new legal framework, the EU-US Privacy Shield, for transatlantic data transfers. The EC intends for the EU-US Privacy Shield to replace the previously invalidated Safe Harbor Framework.
While awaiting details and formal adoption of the EU-US Privacy Shield by the EC, which is not expected to occur until mid-April 2016, companies cannot continue to rely on the Safe Harbor Framework for transatlantic data transfers and should consider interim steps, including:
For more information on the EU-US Privacy Shield, see Legal Update, EU-US Reach Political Agreement on New Data Transfer Agreement.
A recent Seventh Circuit decision highlights the importance of proper investigation into suspicious circumstances that may put a lender on inquiry notice. The decision also provided guidance on the standard required for equitable subordination of a non-insider creditor’s claim.
In In re Sentinel Management Group, Inc., Sentinel, an investment management firm, had an in-house trading account that financed its investments using money borrowed from Bank of New York Mellon Corp. and Bank of New York (together, BNYM). After reviewing a collateral report from Sentinel, a BNYM managing director inquired about whether Sentinel really had as much collateral as indicated on the report and suggested that the collateral may be owned by a third party. BNYM did not follow up on the inquiry. In fact, Sentinel had moved funds from customer accounts into its in-house account to collateralize the BNYM loan.
Subsequently, Sentinel filed for Chapter 11. After discovering that Sentinel fraudulently used customer assets to collateralize the BNYM loan, the trustee brought suit to:
The Seventh Circuit ruled that BNYM was precluded from using good faith to defend against the fraudulent transfer claim because BNYM was on inquiry notice of Sentinel’s wrongful conduct. The Seventh Circuit also held that BNYM’s claim should not be subject to equitable subordination, ruling that mere negligence is not enough to warrant equitable subordination.
Following this decision:
For more information on fraudulent transfers, see Practice Note, Fraudulent Conveyances in Bankruptcy: Overview.
For more information on equitable subordination, see Practice Note, Lenders Beware: The Risk of Equitable Subordination in Bankruptcy.
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