A Second Bite at the Apple? Shareholder Activists and Tardy Director Nominations

Steve Wolosky, Andrew Freedman, and Ron Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan publication by Mr. Wolosky, Mr. Freedman, and Mr. Berenblat.

Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Now that we are midway into the 2018 proxy season, most deadlines for shareholder submissions of director nominations for upcoming annual meetings have come and gone. Nevertheless, shareholder activists who have missed a nomination deadline for whatever reason should be aware that in certain circumstances they may have a second bite at the apple. Where a company experiences a material change in circumstances set in motion by its board of directors after the passing of the nomination deadline, the shareholder may have grounds to compel the company to reopen the nomination window if the shareholder can demonstrate that the change in circumstances would have been material to its decision whether or not to nominate directors had it been known at such time. There is already case law in Delaware holding that it is inequitable for directors to refuse to grant a waiver of an advance notice deadline under such circumstances.

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Recent Trends in Securities Class Action Litigation: 2017 Full-Year Review

Stefan Boettrich and Svetlana Starykh are Senior Consultants at NERA Economic Consulting. This post is based on a NERA Economic Consulting publication by Mr. Boettrich and Ms. Starykh.

In the 25th anniversary edition of NERA’s annual study, Recent Trends in Securities Class Action Litigation, we examine trends in securities class action filings and resolutions in 2017. New findings discussed in this year’s report include an increase in filings, again led by a doubling of merger-objection filings.

Highlights of the 2017 report include:

  • A record 432 federal securities class actions filed in 2017, the third straight year of growth, and a 44% increase over 2016.
  • Federal merger-objection filings more than doubled for the second consecutive year to 197 in 2017.
  • A total of 353 securities class actions were resolved in 2017—a post-PSLRA high. Of those, 148 cases settled, coming close to the 2007 record of 150.
  • The average settlement in 2017 fell to less than $25 million, a drop of roughly two-thirds compared to 2016.
  • Aggregate NERA-defined Investor Losses were $334 billion in 2017, a 50% increase over the five-year average.
  • Aggregate plaintiffs’ attorneys’ fees and expenses were $467 million, a drop of roughly 65% to a level not seen since 2004.

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Board Classification and Diversity in Recent IPOs

James Cheap is a Research Analyst at Equilar, Inc. This post is based on an Equilar publication by Mr. Cheap. Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian Bebchuk.

Recent tech IPOs such as Snap, Square Inc., Blue Apron, Stitch Fix Inc. and, most recently, Spotify, have all made headlines. In terms of corporate governance, board classification and gender composition are typically a major focal point in these initial offerings. While they don’t have to immediately meet the same criteria as long-time public companies, companies that IPO must eventually comply with standard rules and regulations, and their shareholders expect them to align with best practices.

In that vein, a recent Equilar study analyzed differences between recent IPO companies and more established ones regarding board classification and gender composition. Using the companies in the Equilar 500 as a baseline for established companies, the data show stark dissimilarities in board classification and gender make-up.

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How to Be a Good Board Chair

Stanislav Shekshnia is Senior Affiliate Professor of Entrepreneurship and Family Enterprise at INSEAD. This post is based on his recent article in the Harvard Business Review.

What do good board chairs do in and outside the board room? To explore this questions, INSEAD Corporate Governance Centre launched a research project that included a survey of 200 board chairs from 31 countries, 80 interviews with chairs, and 60 interviews with board members, shareholders and CEOs.

An effective chair, the people in our study largely concurred, provides leadership not to the company but to the board, enabling it to function as the highest decision-making body in the organization. As one survey respondent put it: “The chair is responsible for and represents the board, while the CEO is responsible for and is the public face of the company.” That crucial distinction makes the chair’s job very different from the CEO’s, and it calls for specific skills and practices. Here are some of them.

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Elon Musk and the Control of Tesla

Scott A. Barshay is a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Barshay, Matthew Abbott, Ross Fieldston, and Stephen Lamb, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Recently in In re Tesla Motors, Inc. Stockholder Litigation, the Delaware Court of Chancery (in an opinion by Vice Chancellor Slights) declined to grant defendants’ motion to dismiss because the court found it reasonably conceivable that Elon Musk, a 22.1% stockholder of Tesla Motors, Inc., was a controlling stockholder and therefore Tesla’s 2016 acquisition of SolarCity Corporation (of which Musk was the largest stockholder and founder) would be subject to a stringent entire fairness review. In this regard, it is rare for Delaware courts to find that a stockholder with such “relatively low” ownership levels is a controller. They have done so only, as was the case here, where there is other evidence that the stockholder exercised “actual domination and control over … [the] directors” and wielded more power than may be evidenced by the stockholder’s minority holdings. The court’s conclusion that Musk was a controller meant that stockholder approval of the acquisition did not ratify the transaction and invoke business judgment review because Corwin v. KKR Financial Holdings LLC does not apply to controller transactions.

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Threat of Falling High Status and Corporate Bribery: South Korean Evidence

Yujin Jeong is Assistant Professor of International Business at American University Kogod School of Business; and Jordan I. Siegel is Associate Professor (Strategy Area) and Michael R. and Mary Kay Hallman Fellow at University of Michigan Ross School of Business. This post is based on their recent article, forthcoming in Strategic Management Journal.

What leads firms to engage in large-scale bribery of politicians? High-level politicians make decisions that shape the competitive landscape in the private sector, and recent years have witnessed a global surge in cases of blatant corruption involving prominent companies and senior politicians. But theory and evidence are scant about the firm-level determinants of corporate corruption involving large-scale bribes of top government officials. This study draws on sociology, behavioral economics, and criminology to examine what we call “threat of falling high status”—the condition in which a firm with longstanding high social status is threatened with an impending loss of status due to mediocre current economic performance relative to that of its industry peers. We examine whether this unexplored socioeconomic predictor can explain variability in large-scale corporate bribery of high-level government officials. Our article uses a novel data set from South Korea, where the internal accounting records of two presidents in the 1987–1992 era have been exposed to after-the-fact legal and public scrutiny.

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Corporate Governance Deviance

Ruth V. Aguilera is Distinguished Professor of International Business and Strategy at Northeastern University and Visiting Professor at ESADE Business School; William Q. Judge is E.V. Williams Chair of Strategic Leadership & Professor of Strategic Management at Old Dominion University; and Siri Terjesen is Dean’s Faculty Fellow in Entrepreneurship and Director of the AU Center for Innovation at American University and Adjunct Professor at Norwegian School of Economics. This post is based on their recent article, forthcoming in Academy of Management Review.

Societies throughout the world utilize a wide range of corporate governance mechanisms to govern their corporations. Normally, most societies use rules and norms to get corporations to conform to traditional corporate governance practices; and most corporations do conform to this national governance logic. However, some corporations do not conform to the logic in which they are embedded. When this deviation happens, we note that corporate governance deviance has occurred. The purpose of our article was to explain what corporate governance deviance is, and why, when, and how firms engage in governance deviance.

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Is There a Gender Gap in CEO Compensation?

Vishal Gupta is associate professor of Management; Sandra Mortal is associate professor of Economics, Finance, & Legal Studies; and Xiaohu Guo is a PhD candidate at the University of Alabama Culverhouse College of Commerce. This post is based on their recent article, forthcoming in Strategic Management Journal.

Our research examines whether there is a gender pay gap in CEO compensation. Issues surrounding the gender pay gap have attracted considerable academic and media attention over the past few decades (Blau & Kahn, 2017). The growing presence of women in CEO roles has spurred interest in understanding how gender may affect the treatment of those who, against significant odds, manage to reach the top of the organizational hierarchy. Compensation captures the monetary value an organization subscribes to the contributions and importance of its individual employees, including the chief executive. The remuneration given to a manager for his or her job has “many consequences for that manager, the top management team, the organization, and stakeholders in the organization”, so that executive compensation is of compelling interest to researchers and practitioners (Finkelstein, Hambrick, & Cannella, 2009). It is therefore not surprising that a large and vibrant body of research exists on the topic of CEO compensation, though much less consideration has been given to the possible influence of gender on CEO compensation (perhaps, because of the relative scarcity of women CEOs in the past).

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Lazard’s 1Q 2018 Activism Review

Jim Rossman is head of Shareholder Advisory at Lazard. This post is based on a Lazard publication by Mr. Rossman. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here);  Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Key Observations on the Activist Environment in 1Q 2018

Source: Activist Insight, FactSet and public filings as of 3/31/2018.
Note: All data is for campaigns conducted globally by U.S. and European activists at companies with market capitalizations greater than $500 million at time of campaign announcement.

1. Activist activity reached new heights in 1Q 2018 both in terms of capital deployed and campaigns initiated

  •  ~$25bn of capital was deployed in new campaigns in 1Q 2018—the most in any quarter on record
    • 1Q 2018 saw major campaigns by emerging activists such as SailingStone, Jericho Capital and Vulcan Value, while some traditional activists such as Corvex, Pershing Square and Trian were relatively inactive
  • 73 new campaigns were initiated in 1Q 2018—the highest quarterly activity on record
  • 65 Board seats were won in 1Q 2018—well ahead of 2016 YTD and 2017 YTD—while an additional 78 seats are “in play”
    • Starboard Value was the leading activist in forcing Board turnover, with 41 seats targeted in 1Q 2018

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Corporate Culture Risk and the Board

Carey Oven is National Managing Partner at Deloitte & Touche LLP and Bob Lamm is Independent Senior Advisor at the Center for Board Effectiveness at Deloitte LLP. This post is based on their Deloitte publication.

Introduction: “Where was the board?”

Recent corporate scandals linked to problematic company cultures have resulted in questions such as “where was the board?” and “shouldn’t the board have known?” In some cases, board members themselves may have wondered why they were not informed of cultural problems and asked, “should we have conducted more due diligence?”

These and similar questions, and the responsibility to protect both their companies’ and their own reputations, are leading directors to look for ways to better monitor corporate culture and to understand potential cultural risks and address problems before they get out of control.

The purposes of this post are to help define “culture” and why it matters, and to provide practical suggestions for overseeing culture risk.

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