Harvard Law School Forum on Corporate Governance Publishes Article on Effective Deregulation in Advisory Agreements

Harvard Law School Forum on Corporate Governance, the top online resource for discourse on corporate governance, recently published an article authored by Shareholder Activism partner Ron Berenblat and Litigation partners Adrienne Ward and Thomas Fleming, “Effective Deregulation in Advisory Agreements.” The article discusses the ramifications of the recent court case Packer ex rel 1-800-Flowers.com v. Raging Capital Management, LLC, 2020 WL 6844063, __ F.3d __ (2d Cir. Nov. 23, 2020), in which the U.S. Court of Appeals for the Second Circuit held that Raging Capital Master Fund, Ltd., which had effectively delegated all voting and investment power to its advisor, was exempt from Section16(b) liability. “The Second Circuit answered the question in the affirmative, and its decision contains important guidance for hedge funds whose securities are managed by a registered investment advisor formed solely to service a fund or family of funds.” They continue, “First, it is vital that the advisor be retained through an investment management agreement that (1) delegates all voting and dispositive power over the fund’s portfolio to the advisor and (2) cannot be terminated by the fund on less than 61 days’ notice. Second, the hedge fund that retains the advisor must have a board that is not subject to the control of the advisor, namely, one with a majority of independent directors.” In trying to expand the contours of Section 16(b) liability in the aforementioned case, the case law developed by plaintiff’s bar was cautiously approached under appellate review due to the strict liability imposed by Section 16(b). The authors conclude, “While perhaps it was inevitable that the Section 16(b) plaintiff’s bar would bring a test case against a fund family, the Second Circuit opinion makes clear that the delegation stated in advisory agreements should be credited absent unusual facts to support piercing the corporate veil.”

Read the article in its entirety here.