Monthly Archives: October 2015

Exceptions to Rule 14a-8 Shareholder Proposals Exclusion

David A. Katz is a partner specializing in the areas of mergers and acquisitions and complex securities transactions at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz and Sabastian V. Niles. Mr. Niles is counsel at Wachtell Lipton specializing in rapid response shareholder activism and preparedness, takeover defense, corporate governance, and M&A.

Yesterday [October 22, 2015], the Staff of the Securities and Exchange Commission’s Division of Corporation Finance issued Staff Legal Bulletin No. 14H. SLB14H formally narrows the long-standing approach to interpreting Rule 14a-8(i)(9), which permits a company to exclude a shareholder proposal that otherwise complies with Rule 14a-8 from its proxy statement “[i]f the proposal directly conflicts with one of the company’s own proposals to be submitted to shareholders at the same meeting.”

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ISS Global Policy Survey 2015-2016

Stuart H. Gelfond is a partner in the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Gelfond, Amy L. Blackman, Donald P. Carleen, and Jared Heady.

Recently, Institutional Shareholder Services Inc. (“ISS”) released the results of its global policy survey for 2015-2016 (the “Survey”). [1] The Survey reflects the results of 421 responses from a combination of institutional investors, corporate issuers, asset managers, pension funds, mutual funds, endowments and others. Each year, ISS typically considers the results of its annual global policy surveys when formulating proposed amendments to its Proxy Voting Guidelines. Below, we discuss some of the highlights of the Survey which may be a prelude to changes to be made by ISS to its Proxy Voting Guidelines in its next update.

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Big Data and Analytics in the Audit Process

Ruby Sharma is a principal at the EY Center for Board Matters. The following post is based on a report from the EY Center for Board Matters, available here.

In today’s business environment characterized by constant disruption, slow growth and uncertainty, boards face more challenges than ever in creating a risk-aware corporate culture and establishing sound risk governance and controls.

In just the last few years, the terms “big data” and “analytics” have become hot topics in company boardrooms around the world.

For many, embracing big data and analytics is crucial to keeping their organization nimble, competitive and profitable. Board members need to understand the complexities and have a grasp of the issues surrounding these technology trends. Equally important, they should be prepared to ask the right questions of the executives in charge of big data and analytics initiatives.
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The Long Arm of Governance Activism

Adam O. Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz focusing primarily on mergers and acquisitions and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Emmerich and Sabastian V. Niles. Mr. Niles is counsel at Wachtell Lipton specializing in rapid response shareholder activism and preparedness, takeover defense, corporate governance, and M&A.

As U.S. public pension funds—longstanding proponents of corporate governance and shareholder proposal-style activism in the U.S.—and other U.S. investors allocate capital throughout the world, they are increasingly considering whether and how to apply their strategies and tactics for increasing shareholder power, changing governance norms, influencing boards and management teams and driving the adoption of their preferred best practices across the full global footprint of their investments. This phenomenon is illustrated by the ambitious plans of CalPERs, America’s biggest public pension fund, to extend their U.S. “focus list” of targeted companies globally and drive changes worldwide in investor rights, board membership and diversity, executive compensation and corporate reporting of business strategy, capital deployment and environmental, social, and governance practices. CalPERs’ Investment Committee and Global Governance Policy Ad Hoc Subcommittee formally consider these matters later this week.

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Building Effective Relationships with Regulators

Norm Champ is a lecturer at Harvard Law School and the former Director of the Division of Investment Management at the U.S. Securities & Exchange Commission. This post is based on a Keynote Address by Mr. Champ at the CFO Compliance & Regulation Summit.

Today [September 10, 2015] I will try to bring together my experience at the SEC in the Division of Investment Management and the Office of Compliance Inspections and Examinations to talk about how you can build effective relationships with regulators. Each business, no matter what the industry, must decide what strategy it is going to pursue with regulators. As a former CCO of an investment management business and a former regulator, I propose that you follow a strategy of constructive engagement with the regulator in your industry. I know there are those who disagree with that strategy and advocate a posture of avoidance of your regulator and even those who advocate a strategy of opposition to your regulator. I have dealt with that advice in my ten years in a regulated financial services business and seen it in action in five years as a regulator. I’m going to argue that the strategies of avoidance and opposition are misguided and that constructive engagement is the only viable choice for a business seeking an effective relationship with its regulator.

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Executive Overconfidence and Compensation Structure

Ling Lisic is Associate Professor of Accounting at George Mason University. This post is based on an article authored by Professor Lisic; Mark Humphery-Jenner, Senior Lecturer at UNSW Business School; Vikram Nanda, Professor of Finance and Managerial Economics at University of Texas at Dallas; and Sabatino Silveri, Assistant Professor of Finance at the University of Memphis. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here).

In our paper “Executive Overconfidence and Compensation Structure,” forthcoming in the Journal of Financial Economics, we investigate whether overconfidence affects the compensation structure of CEOs and other senior executives. There is a burgeoning literature on the impact of CEO overconfidence on corporate policies. Overconfident CEOs are prone to overestimate returns to investments and to underestimate risks. Little is known, however, about the nature of incentive contracts offered to overconfident managers or even whether firms “fine-tune” compensation contracts to match a manager’s personality traits. We help fill this gap.

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Taking REITs Private

Adam O. Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz, focusing primarily on mergers and acquisitions, corporate governance and securities law matters. Robin Panovka is a partner at Wachtell Lipton and co-heads the Real Estate and REIT M&A Groups. This post is based on a Wachtell Lipton publication authored by Messrs. Emmerich and Panovka, Jodi J. Schwartz, Michael J. Segal, William Savitt, and Matthew R. MacDonald

With many REITs now trading at meaningful discounts to their net asset value, we are already seeing signs of an increase in REIT buyouts. Many of the drivers of the $100 billion-plus of public-to-private REIT M&A transactions that preceded the financial crisis are apparent again, including higher valuations in the private real estate markets than in the public REIT markets, highly liquid private markets that facilitate wholesale-to-retail executions, debt that is still both cheap and plentiful for certain transactions, large pools of low-cost private equity seeking deals (and willing to accept low cap rates), and a sizeable pipeline of REITs and REIT executives who are seeking a graceful exit. More recent trends such as the increasing interest of sovereign wealth funds and other sources of international capital in the U.S. real estate sector may also drive future REIT privatizations.

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Shareholder Activism and Voluntary Disclosure

Jordan Schoenfeld is Assistant Professor of Accounting at the University of Utah. This post is based on an article authored by Professor Schoenfeld and Thomas Bourveau, Assistant Professor of Accounting at the Hong Kong University of Science and Technology. 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), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Information is the foundation on which traders form their beliefs about a company and ultimately their investment decisions. In empirical settings, information often arrives in the form of a company disclosure. Since managers have significant discretion over disclosure, researchers have extensively studied the relation between disclosure and trading via the price system. In our paper, Shareholder Activism and Voluntary Disclosure, which was recently made available on SSRN, we study the relation between disclosure and a specific class of traders, shareholder activists. The activism literature has only indirectly explored the link between company disclosures and activism. For example, several papers include financial statement variables as regressors in their empirical models of activist targeting (e.g., Brav, Jiang, Partnoy, and Thomas, 2008). We extend this literature by looking at disclosure explicitly.

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The Important Work of Boards of Directors

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s recent address at the 12th Annual Boardroom Summit and Peer Exchange. The full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

It’s a great honor to be back again speaking at an event sponsored by the New York Stock Exchange. It has been more than six years since, as a relatively new SEC Commissioner, I had the opportunity to ring the closing bell at the Exchange. Of course, a lot has changed since then.

At the time, the country was in the midst of the worst financial crisis since the Great Depression, and our capital markets were in turmoil. Some of our most storied financial institutions had suffered unparalleled economic damage. The money market fund industry was mired in a crisis of confidence, interbank lending had collapsed, and our short-term capital markets had seized up. To stem the bleeding, the federal government engaged in an unprecedented intervention in the financial sector to inject stability and confidence into the capital markets and to the greater economy.
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Regulatory Competition in Global Financial Markets

Wolf-Georg Ringe is Professor of International Commercial Law at Copenhagen Business School and at the University of Oxford. This post is based on an article authored by Professor Ringe.

The decades-long discussion on the merits of regulatory competition appears in a new light on the global financial market. There are a number of strategies that market participants use to avoid the reach of regulation, in particular by virtue of shifting trading abroad or else relocating activities or operations of financial institutions to other jurisdictions. Where this happens, such arbitrage can trigger regulatory competition between jurisdictions that may respond to the relocation of financial services (or threats to relocate) by moderating regulatory standards. Both arbitrage and regulatory competition are a reality in today’s global financial market, and the financial sector is different from their traditional fields of application: the ease of arbitrage, the fragility of banking and the risks involved are exceptional. Most importantly, regulatory arbitrage does not or only rarely occurs by actually relocating the financial institution itself abroad: rather, banking groups tend to shift trading to foreign affiliates.

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