A Capitalist’s Solution to the Problem of Excessive Buybacks

Nell Minow is Vice Chair of ValueEdge Advisors. Related research from the Program on Corporate Governance includes Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here).

We may not need a government solution to the issue of excessive corporate stock buybacks. We most certainly do not need the solution proposed by Senators Chuck Schumer and Bernie Sanders, requiring companies to adopt minimum wage requirements for hourly workers before buying back stock. What we need is a capitalist solution, removing misaligned incentives, moral hazards, and diversion of assets to make sure the market’s buyback decision is the right one.

The conventional thinking about stock buybacks is that when corporate managers and directors believe the stock is undervalued and do not have a better use for excess capital they should return it to shareholders. No one can argue with that; it is vastly preferable to the usual alternative, overpaying for acquisitions that are not core to the company’s business. That’s a whole different discussion of misaligned incentives.

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Go-Shops Revisited

Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School and Annie Zhao is a Fellow in the Program for Research on Markets and Organizations at Harvard Business School. This post is based on their recent paper.

Until approximately 2005, the traditional sale process for U.S. public companies involved a broad market canvass and a merger agreement with the winning bidder, followed by a “no shop” obligation for the seller between the signing and the closing of the merger. In the mid-2000s, however, the introduction of the “go-shop” technology turned this standard deal template on its head. In its purest form, a go-shop process involves an exclusive (or nearly exclusive) negotiation with a single buyer, followed by an extensive post-signing “go shop” process to see if a higher bidder could be found.

The first go-shop transaction appeared in Welsh, Carson, Anderson & Stowe’s buyout of U.S. Oncology in March 2004. Go-shops proliferated quickly after that, particularly in private equity (PE) buyouts of public companies. Many commentators at the time were skeptical of go-shops. The conventional wisdom held that go-shops amounted to nothing more than a fig leaf to provide cover for management to seal the deal with its preferred bidder, while insulating the board against claims that it failed to satisfy its obligation to maximize value for the shareholders in the sale of the company.

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Weekly Roundup: February 15-21, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of February 15-21, 2019.

Books and Records Access for Terminated Directors


Board Diversity by U.S. Region


Practical Lessons in Boardroom Leadership



Corporate Bankruptcy and Restructuring 2018-2019


Text Messages and Personal Emails in Corporate Litigation



Institutional Investors as Short Sellers?




Bank Boards: What Has Changed Since the Financial Crisis?


Investor Engagement and Activist Shareholder Strategies


The Ashland-Cruiser Proxy Contest—A Case Study




REIT M&A: Use and Overuse of Special Committees



The Creation and Evolution of Entrepreneurial Public Markets

The Creation and Evolution of Entrepreneurial Public Markets

Shai Bernstein is Assistant Professor of Finance at Stanford Graduate School of Business; Abhishek Dev is a Researcher at Harvard Business School; and Josh Lerner is Jacob H. Schiff Professor of Investment Banking at Harvard Business School. This post is based on their recent paper.

One important channel through which financial development enables economic growth is through the funding of innovative and entrepreneurial projects—activities that have been long recognized as particularly hard to finance with outside capital. Well-developed public equity markets have been shown to be instrumental in filling this financing gap, allowing young and fast-growing companies to fund R&D activities. Recognizing the importance of entrepreneurial finance, a major focus of financial policymakers around the world has been on the creation of new stock exchanges for young and small-capitalization companies, often characterized by less restrictive listing requirements. Such exchanges, termed second-tier exchanges, have been heralded in many places as a way to promote the creation, financing, and retention of job-creating new ventures. Anecdotally, while there have been some highly visible successes (such as NASDAQ in New York, London’s Alternative Investment Market, and the Shenzhen-based ChiNext market), there have been many more failures (such as EASDAQ).

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Social Responsibility and Enlightened Shareholder Primacy: Views from the Courtroom and Boardroom

Peter AtkinsMarc Gerber and Edward Micheletti are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

There is an ongoing debate about the role that publicly traded for-profit business corporations should play in addressing a broad range of problems confronting our world today. Many issues fall under the ESG label—meaning they are environmental, social and/or governance-related in nature. Investors, as well as interest groups with varying agendas, have joined in this debate.

Although the motivations of ESG proponents may vary, many ESG proponents are investors and asset managers that believe appropriate company consideration of ESG matters, and the attendant board oversight, improve the long-term performance of the companies in which they are invested and reduce the risk in those investments.

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REIT M&A: Use and Overuse of Special Committees

Adam O. EmmerichRobin PanovkaWilliam Savitt, and Viktor Sapezhnikov are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

Special committees are often an indispensable tool in conflict transactions. In REIT management-buyout transactions, a well-functioning and well-advised committee can sometimes shield directors and managers from after-the-fact litigation exposure. But special committees are not one-size-fits-all, and can also be deployed to the detriment of a company and its shareholders. Forming a special committee when not required can needlessly hamper the operations of the company and its ability to transact, create rifts in the board and between the board and management, and burden the company with an inefficient decision-making structure that may be difficult to unwind. It is important, therefore, for REITs to carefully consider—when the specter of a real or potential conflict arises—whether a special committee is in fact the best approach, whether it is required at all, and whether recusal of conflicted directors or other safeguards are perhaps the better approach.

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The NYC Comptroller’s New Normal?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Post-shutdown, the SEC is starting to catch up on no-action requests to exclude shareholder proposals, posting several new entries at the end of last week. While most of the responses reflected withdrawals of requests in light of withdrawal of the subject proposal, one of the more interesting withdrawal letters relates to a decision to include a shareholder proposal. The proposal, submitted by the New York City Employees’ Retirement System and other pension funds overseen by NYC Comptroller Scott Stringer, sought to have TransDigm Group Incorporated, a manufacturer of aerospace components, adopt a policy related to climate change. After the company sought no-action relief from the SEC staff—and notably well before the government shutdown and before the SEC had even responded to the company’s request—the proponent pension funds filed suit in the SDNY seeking to enjoin the company from soliciting proxies without including the shareholder proposal and declaratory relief that the exclusion of the proposal violated Section 14(a) and Rule 14a-8. Will the Comptroller use the same tactic of circumventing the traditional SEC process and commencing litigation for any proposal the pension funds submit in the future? Will going straight to court be the new normal?

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Mandatory Securities Arbitration Under New Jersey Corporate Law

Jacob Hale Russell is Assistant Professor at Rutgers Law School. This post is based on a white paper authored by Professor Russell and signed by 25 law professors. The white paper and a full list of signatories are available here.

Under New Jersey corporate law, may a corporation adopt a mandatory arbitration provision in its bylaws that would require shareholders to bring federal securities law claims via separate individual arbitration? The issue is squarely raised by a recent shareholder proposal at Johnson & Johnson, a New Jersey corporation, that asks the board to adopt such a bylaw for “disputes between a stockholder and the Corporation and/or its directors, officers or controlling persons relating to claims under federal securities laws.”

This whitepaper explains why such a bylaw (hereafter called a “mandatory securities arbitration bylaw”) would violate the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 et seq. There are additional, compelling reasons why such a provision might be impermissible, including that it might violate the anti-waiver provisions of federal securities laws or be unenforceable under state contract law. Such arguments have been developed elsewhere and are outside the scope of this white paper.

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The Ashland-Cruiser Proxy Contest—A Case Study

James Woolery and Rob Leclerc are partners and Richard Fields is counsel at King & Spalding LLP. This post is based on a King & Spalding memorandum by Mr. Woolery, Mr. Leclerc, Mr. Fields, Timothy FesenmyerElizabeth Morgan, and Kevin Manz. 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).

Following a contentious two-year campaign, Ashland recently settled its proxy contest with Cruiser after reaching an agreement with Neuberger Berman, an active manager and 2.8% holder. Ashland agreed to refresh committee leadership, appoint a new lead independent director, and add two new directors with Neuberger’s input.

This was a highly unusual development, as active managers do not often publicly intercede to end a proxy contest.

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Investor Engagement and Activist Shareholder Strategies

Chris Ruggeri is National Managing Principal of Risk Intelligence at Deloitte Transactions and Business Analytics LLP. This post is based on her Deloitte memorandum. 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).

It’s not your imagination: shareholders and activists have asserted themselves more in recent years. For better or worse, activists are more numerous and more diverse than they were in the past, both in their agendas and their methods.

This reinforces the need for management, with the board’s oversight and guidance, to engage with shareholders proactively, to be prepared for friendly or confrontational activists, and to have a long-term plan for shareholder engagement. It’s also essential for the board to consciously craft its role in this tricky area, where it is expected to both represent shareholders and advise management.

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