recommendations to support - association of … anti-takeover measures that the former parent has...

AFTER THE SPIN-OFF —

17 Recommendations

to SupportBoard Performance

By Bruce N. Hawthorne and Anastasia Kelly

Huntington Ingalls Industries (“HII”) was spun-off from Northrop Grumman Corporation on March 31, 2011. Since shortly before the spin-off, Anastasia Kelly has served as chair of HII’s Governance and Policy Committee, and Bruce Hawthorne has served as its corporate vice president, general counsel and secretary. The authors reflect on their experiences in shaping HII’s corporate governance to provide recommendations for spin-off and other newly-formed public companies.

30-SeCond SummArY

a public company being created in a spin-off or carve-out transaction faces many of the issues that any newly public company must address, as well as some unique corporate governance challenges. the general counsel, corporate secretary and other officers supporting the board of directors can be proactive in shaping the company’s governance practices, to improve performance and to ensure that its stakeholders will view the new company favorably. recommendations include: assist board leaders in developing the company’s governance profile; review the company’s anti-takeover measures; confirm that the company is ready for public reporting; and support the board of directors in scheduling, recruitment and committee formation.

ACC DOCKET deCeMBer 2012 61

A public company being created in a spin-off or carve-out transac-tion faces many of the issues that any newly public company must address, as well as some corporate governance challenges that are unique to these types of transactions. The general counsel, corporate secretary and other officers supporting the board of directors of the new company — collaborating closely with appropriate board leaders — should be proactive in shaping the company’s governance practices, to improve the company’s performance and to ensure that the new company will be viewed favor-ably by its stockholders, employees and other stakeholders.

It is difficult to develop a list of rec-ommendations that will be applicable to all companies being spun-off or carved-out, or to suggest which mat-ters should be addressed on a priority basis. Each new public company will have its own background and face its own challenges, and those responsible for its governance will need to set priorities as the company becomes independent. Our experience suggests that the following undertakings will be important for a company becoming an independent public company in a spin-off or carve-out transaction.

help the new board understand the new company1. Conduct “deep dives” into the

company’s business. Typically, the board of the new company will be composed of some directors who have been officers or directors of the former parent, but most of the directors will be new to the company. It will be important for the officers who will be supporting the new board to arrange for appropriate “deep dives” into the business, strategy, risk profile and management of the new company, so that all directors become familiar with key aspects of the business. The

new company may hold informal meetings with the persons who will become its directors, even before they are formally elected to the board. Orientation sessions for the new board will ensure that both the directors joining from the previous parent and those who are new to the company will be working from the same information, and will also enable the directors and senior management to develop a shared vocabulary.

2. Review and refine corporate governance documents. A company being spun-off or carved-out from another public company may often “inherit” the former parent’s corporate governance documents (e.g., its committee charters and corporate governance guidelines). It will be critical for the general counsel of the new company to review these documents thoroughly to achieve several different objectives. First, the general counsel will need to review the new company’s corporate governance documents to confirm that they comply with all applicable requirements.

State corporate laws, regulations of the Securities and Exchange Commission and stock exchange listing requirements all mandate that certain provisions be included in a company’s governance documents. Going beyond this “compliance check,” the general counsel should consider whether these documents reflect current best practices. Finally, through a comprehensive review of the new company’s governance documents, the general counsel may consider how these documents might need to be adopted to the circumstances of the new company. The new company may be undertaking different strategies and may face different business and operational challenges, requiring appropriate changes in its governance documents.

3. Assist board leaders in developing the company’s governance profile. As senior officers responsible for corporate governance begin working with the new board, it will be important for the officers to have discussions with other senior

Bruce N. Hawthorne is corporate vice president, general counsel and secretary of Huntington

Ingalls Industries (HII). He is also the company’s chief legal officer, with overall leadership

responsibility for its law department and outside counsel. Prior to joining HII, he served as

partner and practice development chairman for the law firm of Arnall Golden Gregory (AGG) LLP.

Hawthorne holds a BBA from the University of Michigan, an MBA. (Beta Gamma Sigma) from the

University of Detroit and a JD (Order of the Coif) from Vanderbilt University.

[email protected]

Anastasia Kelly joined the law firm of DLA Piper in 2010 as a partner. She was previously an

executive officer of American International Group, Inc. (AIG) from 2006 to 2010, serving as

executive vice president and general counsel from 2006 to January 2009, and as vice chairman

until December 2009, specifically dealing with legal, regulatory, corporate governance and risk

management issues. Kelly received her bachelor’s degree, cum laude, from Trinity University and

her law degree, magna cum laude, from The George Washington University Law School.

[email protected]

Jeffrey M. Stein, partner at King & Spalding, has served as primary outside governance counsel

for HII and contributed to this article.

62 ASSoCiATion oF CorPorATe CoUnSel

AFTer The SPin-oFF — 17 reCoMMendATionS To SUPPorT BoArd PerForMAnCe

officers (and board leaders) in order to understand the corporate governance profile that the company will seek to achieve. Some companies will prefer to “play it safe” by following more conventional approaches to governance matters, while other companies will seek to develop a profile as a leader in corporate governance and take new approaches to governance issues. The fact that the former parent has taken a certain approach to governance should not itself limit the approaches that the new company may adopt. Having a shared vision of the corporate governance profile will inform decisions on a broad range of issues, from seemingly mundane matters, such as the lay-out of the proxy statement or style of quarterly earnings releases, to critical matters, such as how board leaders will communicate with key stakeholders and plan for the recruiting and development of new directors.

4. Become familiar with key corporate policies and procedures. In addition to reviewing the new company’s documents that specifically address corporate governance (e.g., the articles, bylaws and committee charters), the general counsel should assist directors in becoming familiar with the company’s key corporate policies and procedures. Examples of these documents include the company’s code of business conduct, the charter of the internal audit department and standing resolutions that specify matters that require board approval, as well as “whistleblower” policies that are required to be in place. Familiarity with these documents facilitates the board’s oversight of

management and gives the board a better understanding of how the company approaches key business and operational matters.

5. Confirm that the company is ready for public reporting. While financial reporting, investor relations and public relations officers will take primary responsibility for creating the company’s public reporting program, the company’s attorneys must ensure that both the board and securities counsel will have appropriate inputs into the company’s public disclosures and SEC filings. Attorneys will need to ensure that the persons preparing company communications are aware of applicable regulations (e.g., Regulation FD and Regulation G). The attorneys must be comfortable that they are “in the loop,” so that they become aware of events that might trigger SEC filings (e.g., a Current Report on Form 8-K) or that might need to be reflected in these filings (e.g., trends or uncertainties that should be reflected in the quarterly and annual MD&A). Finally, defining the role of a disclosure committee and establishing procedures for certifications by officers and employees will support the work of both senior officers and the board.

6. Review the company’s anti-takeover measures. It will be important for the board of the new company to understand any anti-takeover measures that the former parent has put in place for the new company. In some instances, a package modeled after what was in effect for the former parent may leave the new company vulnerable to threats. Being a smaller, independent public company

may amplify such threats, since the new company will have a smaller capitalization held largely by stockholders who do not have a track record with the company. After shares of the new company have been trading for some period of time, it will be beneficial for the company to implement processes to monitor changes in its shareholder base.

Assist the board and its committees in doing their work7. Consider whether the board

has the right committees. Soon after the spin-off, it will be useful for the general counsel and appropriate board leaders to consider whether the board has the right committees to effectively do its work, or whether the board might benefit from the creation of an additional committee or multiple committees. Even if the board will not add any new committee, it may be appropriate to move certain responsibilities from one committee to another, or to add to the responsibilities of any of the committees. In many instances, it is only after the committees have been working for some period of time that the directors may realize innovative ways for committees to improve board performance.

8. Confirm that board committees can draw on appropriate resources. While the board and its

The fact that the former parent has taken a certain approach to governance should not itself limit the approaches that the new company may adopt.



committees will be supported by the senior management team, they will also need to be able to draw on appropriate resources outside the company. Increasingly, boards are seeking to develop ongoing relationships with consultants and advisors, rather than merely hiring them for one-off assignments. For example, the board may benefit from having periodic discussions with investment bankers about industry trends and strategies, while the nominating and governance committee may want to establish an ongoing relationship with executive search or board development firms. The general counsel should confer with board leaders to ensure that the board and its committees are receiving the support they need.

9. Consider how the board wants to be briefed about and approve specific matters. The company’s corporate governance guidelines and committee charters will assign responsibility for numerous matters to the board and its committees. For example, the audit committee will be required to manage the engagement of the company’s independent auditors, and

the compensation committee will be required to set annual performance objectives for the CEO. In addition to the matters specifically addressed by these guidelines and charters, the board may want to adopt resolutions or a policy describing the types of matters on which the board would like to be briefed by management, as well as the categories of matters that will require board approval. The board may want to be briefed about any acquisitions or joint ventures that are under consideration, whereas board approval may be required to authorize acquisitions above a stated dollar threshold or that would take the company into a new line of business. Management will have authority to act with respect to matters that do not require board approval. The board should also understand how the CEO or other senior officers will delegate matters to other officers and employees, to be comfortable that appropriate controls are in place.

10. Create annual calendars for the board and its committees. It will be useful for the board to maintain two types of calendars — one covering the most critical “big picture” topics for the board, and another covering the numerous responsibilities mandated under the Company’s governing documents. The board should be certain that critical matters — such as strategic planning, oversight of risk management, management and board succession planning, internal controls and board development — receive regular attention. Having these topics on an annual calendar will also be useful in arranging for educational sessions and updates.

In addition to creating calendars for these major matters, it will be worthwhile to develop detailed calendars for the board and each of its committees. These calendars will ensure that the board will not overlook any of the matters that it is required to undertake, and will also provide a blueprint for the board and its committees to develop agendas for each of their meetings. There may be certain matters that are normally handled on an annual basis, but which must be addressed by the new company in the first-year “stub” period. It will be important for the board and its committees to have calendars for both the year in which the spin-off occurs and the first full year after the spin-off.

11. Establish ownership of the company’s compensation programs. Over time, the board will shape many key programs and functions of the new company, as it makes the transition from being a part of the former parent to being an independent public company. Properly shaping the compensation philosophy and programs of the new company will be important in motivating employees and assuring investors that the company has properly calibrated its pay programs. The officers supporting the compensation committee should ensure that the committee is able to draw on consultants and advisors who can help it develop appropriate compensation programs.

Focus on flows of information and reporting12. Establish agenda-setting/follow-

up mechanisms between the board and senior officers. The board and each of its committees will be supported by a group of

Increasingly, boards are seeking to develop ongoing relationships with consultants and advisors, rather than merely hiring them for one-off assignments. ... The general counsel should confer with board leaders to ensure that the board and its committees are receiving the support they need.



senior officers that will take the lead with respect to most of the matters that will come before the board. For example, the director of human resources will likely support the compensation committee, and the chief financial officer and chief accounting officer

will take the lead with respect to the audit committee. In other instances, a particular officer may be responsible for working with the board on a specific function (e.g., strategic planning or capital raising transactions). Each officer who will have a primary role in supporting a board committee or function should come to an understanding with the appropriate board leaders regarding how they will work together. The responsible officers may recommend matters for consideration by the board, prepare information for the directors to review in advance of meetings, make presentations at board meetings and follow up on matters from one meeting to the next.

13. Implement appropriate structures for reporting to the board. While many members of senior management will support the work of the board, certain members of management should have direct access to either the board or its committees. For example, the director of internal audit must report directly to the audit committee, and the board may want to establish direct lines of reporting by other senior officers (e.g., the chief compliance officer and general counsel). In addition to formal reporting, the board and its committees should consider how they will use executive sessions to discuss sensitive matters with senior officers. Certain “whistleblower” and other corporate compliance programs may also require direct involvement of the board or its committees.

14. Determine what information the board will receive and how it will receive it. The officers who will support the board should understand the directors’ preferences regarding the type of information that they will receive in advance of board meetings, how management will make presentations at board meetings, and how the directors will receive information and have access to officers between meetings. The company may be able to offer the board a comprehensive Internet portal that will include information about the company, board agendas and minutes, and other resources to support the work of the board. The general counsel should also confirm that the new company has appropriate record-retention and confidentiality policies for materials distributed to directors.

list of recommendations

Help the new board understand the new company.1. Conduct “deep dives” into the company’s business. 2. Review and refine corporate governance documents.3. Assist board leaders in developing the company’s governance profile.4. Become familiar with key corporate policies and procedures.5. Confirm that the company is ready for public reporting.6. Review the company’s anti-takeover measures.

Assist the board and its committees in doing their work.7. Consider whether the board has the right committees. 8. Confirm that board committees can draw on appropriate resources.9. Consider how the board wants to be briefed

about and approve specific matters. 10. Create annual calendars for the board and its committees. 11. Establish ownership of the company’s compensation programs.

Focus on flows of information and reporting.12. Establish agenda-setting/follow-up mechanisms

between the board and senior officers.13. Implement appropriate structures for reporting to the board.14. Determine what information the board will receive and how it will receive it.

Position the board for growth and development.15. Help the board develop the right self-evaluation process.16. Support the board in recruiting new members.17. Repeat as necessary.

The company may be able to offer the board a comprehensive Internet portal that will include information about the company, board agendas and minutes, and other resources to support the work of the board.



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position the board for growth and development15. Help the board develop the

right self-evaluation process. Perhaps because they are required on an annual basis, board self-evaluations may sometimes be thought of as routine “check the box” events. The board of the new company would typically conduct its first self-evaluation after the board has been in place for one year, and this process will be especially important for the board. This first self-evaluation

will provide an opportunity for the board to consider its first-year performance and set priorities going forward. It may be worthwhile to employ a more comprehensive process for this first evaluation, in order to set a baseline for future evaluations, with these future evaluations being more in the nature of updates. Those responsible for the process must determine what type of input will be used for the first evaluation (e.g., interviews or written questionnaires), and who will manage and support the process (e.g., a board leader or a third party). An effective self-evaluation process should provide the board with recommendations of actionable items that will be addressed by the board as it moves forward.

16. Support the board in recruiting new members. Though the board of the new company will have been formed only a short time ago, after spending time together and working through a series of matters, it will not be unusual for the board to determine that it may be able to improve its performance by adding a new member or members. The general counsel and corporate secretary can help the

board make important decisions regarding the recruiting process, and may also play an important role in convincing a prospective director that service on the board will be a rewarding experience and that the company has appropriate protections in place for its directors. The general counsel may also be responsible for developing an orientation program to bring new members onto the board.

17. Repeat as necessary. Regardless of their diligence and good work in shaping the corporate governance of a new company, it is unlikely that the general counsel, corporate secretary and other governance officers will have gotten everything exactly right at the outset. Over its first year as a public company, the company may experience significant changes in the way it conducts its business, the board may modify its approaches to important matters, and relationships with stockholders, customers, regulators and other stakeholder may also change significantly. Accordingly, during the first year as an independent company, it will be important for board leaders and the officers who support them to revisit the corporate governance processes put in place at the time of the spin-off, to ensure that they reflect the right practices for the company. ACC

ACC ExTRAS On… Corporate governance

ACC DocketFive Fundamentals for Taking Compliance Mangagement Seriously (Jan. 2011). www.acc.com/docket/ 5fund-cm_jan11

Quick Reference Adventures in Corporate Governance (July 2012). www.acc.com/quickref/corporate-governance_jul12

Leading Practices Profile Leading Practices in Providing In-house Legal Support for Corporate Governance Initiatives and Compliance and Ethics Programs (Sep. 2010). www.acc.com/lpp/support_corpgov_sep10

Presentation Care and Feeding of a Board: Solving Difficult Liability Issues (Oct. 2010). www.acc.com/ board-liability_oct10

ArticleHow to be an Effective Board Member and Still Sleep at Night (May 2012). www.acc.com/effective- board-member_may12

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The general counsel and corporate secretary can help the board make important decisions regarding the recruiting process, and may also play an important role in convincing a prospective director that service on the board will be a rewarding experience and that the company has appropriate protections in place for its directors.


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