Yearly Archives: 2012

Shareholder Proposals: Trends from Recent Proxy Seasons

Posted by Matteo Tonello, The Conference Board, on
Saturday, March 3, 2012
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Matteo Tonello is Managing Director of Corporate Leadership at The Conference Board, Inc. This post is based on a Conference Board working paper from Mr. Tonello and Melissa Aguilar, Research Associate at The Conference Board, which is available here.

In our paper, which was recently made publicly available on SSRN, we examine shareholder proposals submitted to business corporations registered with the U.S. Securities and Exchange Commission (SEC) that held their annual general shareholder meetings (AGMs) between January 1, 2011 and August 3, 2011 and, at the time of their AGM, were in the Russell 3000 Index. The total sample includes 2,511 companies.

Data reviewed includes proposal volume, topics, and sponsorship. The discussion of voting results is integrated with information on non-voted shareholder proposals—due to their withdrawal by sponsors, the decision by management to omit them from the voting ballot or other, undisclosed reasons.

Aggregate data on shareholder proposals is examined and segmented based on business industry and company size (as measured in terms of market capitalization). For the purpose of the industry analysis, the study aggregates companies within 20 industry groups, using the applicable Standard Industrial Classification (SIC) codes. In addition, to highlight differences between small and large companies, findings in the Russell 3000 sample are compared with those regarding companies that, at the time of their AGMs, were in the S&P 500.

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Securities Class Action Filings in 2011

Posted by John Gould, Cornerstone Research, on
Friday, March 2, 2012
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John Gould is Senior Vice President at Cornerstone Research. This post is based on the introduction of a Cornerstone Research report titled Securities Class Action Filings: 2011 Year in Review. For more information, contact Mr. Gould or Alexander Aganin. An updated version of the report is available here.

Federal securities fraud class action filing activity increased in 2011. For the full year of 2011, there were 188 filings compared with 176 in 2010. The number of class actions filed was 3.1 percent below the annual average of 194 filings observed between 1997 and 2010 (Figure 1). Filing activity in the second half of the year equaled the activity in the first half. A total of 94 federal securities fraud class actions (filings, class actions, or cases) were filed in both the first and second halves of 2011. Building on a trend first seen last year, 43 of the filings in 2011 were associated with merger and acquisition (M&A) transactions.

Litigation against Chinese issuers listed on U.S. exchanges through reverse mergers represented a major component of filings activity during 2011, although evidence indicates that this type of litigation is subsiding. In 2011, 33 such class actions were filed, constituting 17.6 percent of all federal securities class actions. This activity occurred predominantly in the first half of the year when 24 of these actions were filed; only nine were brought in the last six months, including five filed in the last three months of the year. In 2010, there were nine such class actions filed. The report illustrates the differences in allegations between Chinese reverse merger filings since 2010 and other Classic Filings, and indicates that complaints relating to Chinese reverse mergers statistically are more likely to allege violations of generally accepted accounting principles (GAAP) and financial restatements and are less likely to allege insider trading.

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The Role of Accounting in the Financial Crisis

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, March 2, 2012
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The following post comes to us from S.P. Kothari and Rebecca Lester, both of the Department of Economics, Finance, and Accounting at MIT.

In our paper, The Role of Accounting in the Financial Crisis: Lessons for the Future, which was recently made publicly available on SSRN, we discuss the causes of the financial crisis, with particular focus on the debated role of the relevant U.S. accounting standards, and summarize implications for accountants and accounting regulators based on the effect of these existing rules.

The Great Recession that started in 2008 has had significant effects on the US and global economy; estimates of the amount of US wealth lost are approximately $14 trillion (Luhby 2009). Various causes of the financial crisis have been cited, including lax regulation over mortgage lending, a growing housing bubble, the rise of derivatives instruments such as collateralized debt obligations, and questionable banking practices. In addition to these and many other reasons, we explain two factors that partially contributed to the crisis: certain management incentives and fair value accounting standards.

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Protecting Directors When Firms Fail Post-Merger

Posted by Scott J. Davis, Mayer Brown LLP, on
Thursday, March 1, 2012
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Scott Davis is the head of the US Mergers and Acquisitions group at Mayer Brown LLP. This post is based on an article by Mr. Davis and William R. Kucera that first appeared in Insights: The Corporate & Securities Law Advisor.

The aftermath of the recent acquisition of Lyondell by Basell provides a striking example of the risk that directors face if they approve a cash merger financed in substantial part through borrowing and the target then fails. The deal was characterized as an “absolute home run” by Lyondell’s financial advisor. [1] But less than thirteen months after the closing of the merger in December 2007, Lyondell filed for bankruptcy. A litigation trust established by the bankruptcy court to marshal the debtor’s assets has sued Lyondell’s former directors, seeking damages on the theory that the merger, while beneficial to Lyondell’s shareholders, unlawfully mistreated Lyondell’s creditors by causing the company to become insolvent. [2] The case is pending. To add to the directors’ problems, the excess directors’ and officers’ insurance carrier has declined coverage on several grounds, among them that, because the litigation trust stands in Lyondell’s shoes, this is an “insured v. insured” matter not covered by the D&O policy. [3]

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Corporate Governance at Silicon Valley Companies

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 29, 2012
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The following post comes to us from David A. Bell, partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick publication titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies; the complete survey is available here.

As counsel to a wide range of public companies in the high technology and life science industries, primarily based in Silicon Valley and Seattle, Fenwick has collected information on the corporate governance practices of publicly traded companies in order to counsel our clients on best practices and industry norms in corporate governance. We have collected this data since 2003 and believe this unique body of information is useful for all Silicon Valley companies and publicly-traded technology and life science companies across the U.S. as well as public companies and their advisors generally.

Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the high technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1] In this report, we present statistical information for a subset of the data we have collected over the years. These include:

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Do Firms Manipulate Their Stock Prices? Causal Evidence from M&A

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, February 29, 2012
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Editor’s Note: The following post comes to us from Kenneth Ahern and Denis Sosyura, both of the Department of Finance at the University of Michigan.

In the paper, Who Writes the News? Corporate Press Releases During Merger Negotiations, which was recently made publicly available on SSRN, we show that firms manipulate their stock prices during merger negotiations in order to affect the terms of the transaction. We argue that this strategy is made possible by the loose regulation of corporate disclosure. In particular, U.S. federal laws generally do not require firms to publicly disclose all material corporate events when they occur. Instead, firms have significant flexibility with respect to the content and timing of their press releases. We show that firms strategically exploit the flexibility afforded by the law to influence their stock prices precisely when they benefit the most from short-term manipulation.

To identify firms with incentives to manage their stock prices, we focus on stock acquisitions, a setting where a short-term change in firms’ stock prices has a long-term effect on merger outcomes. If an acquirer in a stock acquisition can temporarily raise its stock price during a short time window when the stock exchange ratio is determined (usually several weeks), it can issue fewer of its shares for each target share and reduce the true cost of the takeover. To establish causal evidence of price manipulation, we exploit the difference in the time period when the terms of the merger are determined in fixed-exchange ratio vs. floating-exchange ratio stock acquisitions. These two groups of transactions are very similar along firm and deal characteristics, but have a clear dichotomy in the timing of media management incentives.

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Morrison’s Impact on Institutional Investors

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, February 28, 2012
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The following post comes to us from Jeffrey P. Mahoney, General Counsel at the Council of Institutional Investors, and is based on the executive summary of a CII white paper prepared by Christian J. Ward and J. Campbell Barker, available in full here.

American securities law is at an important crossroads, and the direction it takes will affect investors well into the future. For decades, federal securities law protected U.S. domiciled and citizen investors against fraud affecting the securities they purchased, even if purchased on foreign markets. Under the longstanding conduct and effects tests, the antifraud provisions of U.S. securities law covered all conduct that injured American investors. Fraudsters could not escape a private right of action for securities fraud by consummating a transaction abroad.

The U.S. Supreme Court’s June 2010 ruling in Morrison v. National Australia Bank [1] changed the landscape for U.S. investors. In Morrison—a dispute about the territorial reach of the antifraud provisions of U.S. securities law—the Supreme Court rejected four decades of federal court jurisprudence applying the conduct and effects tests and adopted a new rule that focuses narrowly on the location where securities were purchased and sold. Under prior law, if the fraud involved conduct in the United States or had an effect in the United States, victims had a private right to bring suit. Under Morrison’s new test, so long as the fraud relates to securities that trade only on foreign exchanges or other foreign platforms, no amount of harm to American investors triggers the antifraud protection of U.S. securities law, even if investors submitted their orders from the United States.

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Post-Crisis Trends in U.S. Executive Pay

Posted by Carol Bowie, Institutional Shareholder Services Inc., on
Monday, February 27, 2012
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Carol Bowie is an Executive Director of MSCI and head of compensation policy development at ISS. This post is based on an ISS white paper by Subodh Mishra, available in full here.

Though the global financial crisis of 2008 prompted a seismic shift in attitudes toward executive pay on the part of lawmakers, the public, investors, and other stakeholders, average compensation levels continue to rise or have returned to where they were before the crisis.

Mindful of the outcry over particular elements of pay packages, companies began scaling back bonus awards as well as payments related to “golden parachutes” and other forms of exit pay following the crisis.

Indeed, such components of executives’ total annual compensation declined in fiscal 2009 with some elements, including those dealing with exit pay, continuing to decline modestly into fiscal 2010.

But that has been more than offset through increases in other pay elements, most notably awards tied to company stock. The result is a 37 percent surge in total annual compensation paid to C-suite officers from fiscal 2008 to 2010 with stock awards now constituting more than half of the total pay pie.

As such, this post explores how the executive pay package mix and overall total annual compensation levels have changed since fiscal 2008 and the role played by stock-based awards in fueling the spike in total executive pay.

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Investing for the Long Run

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, February 27, 2012
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Editor’s Note: The following post comes to us from Andrew Ang, Ann F. Kaplan Professor of Business at Columbia Business School, and Knut Kjaer, former founding CEO of the Norwegian sovereign wealth fund.

Long-horizon investors have an edge. Sadly, they too often squander their advantages. That is often caused by shortcomings in their own governance structure and lack of alignment with their delegated managers. We discuss these issues in our paper, Investing for the Long Run, which was recently made publicly available on SSRN.

Long-horizon investors have the ability to reap risk premiums that are noisy in the short run and only manifest over the long run. They can acquire distressed assets when investors with over-stretched risk capacity have to sell. They can also pursue opportunities to invest in illiquid assets. The paper describes two pitfalls that hinder long-horizon investors in fully exploiting their advantage: procyclical investing and misalignment between asset owners and managers. These are intertwined. Counter-cyclical investing requires strong governance structures to withstand the temptations of selling in blind panics when asset prices drop. Agency conflicts contribute to procyclical investment behavior.

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Examining the Largest Golden Parachutes

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, February 26, 2012
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The following post comes to us from Paul Hodgson, Senior Research Associate at GovernanceMetrics International, and is based on a GMI report by Mr. Hodgson and Greg Ruel. The full report, including detailed information about the severance packages discussed below, is available here. Work from the Program on Corporate Governance about golden parachutes includes Golden Parachutes and the Wealth of Shareholders by Bebchuk, Cohen, and Wang.

After Jack Welch retired from General Electric it wasn’t until a divorce settlement forced the disclosure of his retirement benefits package that anyone took any notice. At that time, the scandal surrounding Mr. Welch was that his perquisites were valued at $2.5 million a year, and included luxuries such as the use of an $80,000-per-month Manhattan apartment owned by the company, court-side seats to the New York Knicks and U.S. Open, seating at Wimbledon, box seats at Red Sox and Yankees baseball games, country club fees, security services and restaurant bills. No one at the time of his departure had valued Mr. Welch’s full retirement package either, which – at almost $420 million – dwarfs the perks package that Mr. Welch ultimately relinquished.

Since then, multi-million dollar severance and other separation packages, commonly referred to as “walk-away” packages, have become so commonplace for CEOs that when HP fired Leo Apotheker with a $12 million guaranteed cash payment it barely registered. Accelerated equity awards along with substantial pensions and other deferred compensation all but guarantee significant payouts at many of America’s largest corporations in every termination situation except for a termination “for cause.” This report goes back to 2000 to examine the largest golden parachutes and other termination packages of the past decade, many of which have never been quantified before.

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