Yearly Archives: 2015

Prices and Informed Trading

Posted by Vyacheslav Fos, Boston College, on

Wednesday, August 5, 2015

Adverse selection, Disclosure, Information asymmetries, Information environment, Inside information, Liquidity, Market reaction, Market timing, Rule 13d-1, Schedule 13D, Securities Act, Shareholder activism, Signaling, Stock performance
More from: Pierre Collin-Dufresne, Vyacheslav Fos

Vyacheslav Fos is Assistant Professor of Finance at Boston College. This post is based on an article by Professor Fos and Pierre Collin-Dufresne, Professor of Finance at the Swiss Finance Institute. Related research from the Program on Corporate Governance includes Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang; and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

In our paper, Do Prices Reveal the Presence of Informed Trading?, forthcoming in the Journal of Finance, we study how empirical measures of stock illiquidity and of adverse selection respond to informed trading by activist shareholders.

An extensive body of theory suggests that stock illiquidity, as measured by the bid-ask spread and by the price impact of trades, should be increasing in the information asymmetry between market participants. An extensive empirical literature employing these illiquidity measures thus assumes that they capture information asymmetry. But, do these empirical measures of adverse selection actually increase with information asymmetry? To test this question one would ideally separate informed from uninformed trades ex-ante and measure their relative impact on price changes. However, since we generally do not know the traders’ information sets, this is hard to do in practice.

New Guidance on Advance Notice By-Laws

Posted by Alexander M. Kaye, Milbank, Tweed, Hadley & McCloy LLP, on

Tuesday, August 4, 2015

Advanced notice, Board communication, Boards of Directors, Charter & bylaws, Delaware cases, Delaware law, Proxy materials, Proxy season, Shareholder communications, Shareholder proposals, Shareholder suits
More from: Alexander Kaye, Dean Sattler, Monica Arduini, Milbank

Alexander M. Kaye is the Practice Group Leader of the Global Corporate Group of Milbank, Tweed, Hadley & McCloy LLP and is a partner resident in the New York office. This post is based on a Milbank client alert by Mr. Kaye, Dean W. Sattler, and Monica Arduini. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Hill International, Inc. (“Hill”), a publicly traded company, and one of its stockholders, Opportunity Partners L.P. (“Opportunity”), recently engaged in a dispute regarding whether Opportunity had timely submitted two proposals for items of business for consideration and two director nominations for election at Hill’s 2015 annual meeting. On appeal from the Delaware Chancery Court, the Delaware Supreme Court was called on to analyze the interpretation and application of Hill’s advance notice by-law.

On July 2, 2015, in Hill International, Inc. v. Opportunity Partners L.P., [1] the Delaware Supreme Court affirmed the Court of Chancery’s holding that: (i) Hill’s board of directors only set the date of its annual meeting of stockholders when it announced the actual date of its annual meeting in its 2015 proxy statement, rather than a range of possible dates provided in Hill’s proxy statement from the preceding year, and (ii) Opportunity’s proposals were timely submitted in compliance with Hill’s advance notice by-law.

Independent Chair Proposals

Posted by Avrohom J. Kess, Simpson Thacher & Bartlett LLP, on

Tuesday, August 4, 2015

Board independence, Boards of Directors, Glass Lewis, Institutional Investors, ISS, No-action letters, Proxy advisors, Proxy voting, Rule 14a-8, SEC, Securities regulation, Shareholder activism, Shareholder proposals, Shareholder voting
More from: Avrohom Kess, Karen Hsu Kelley, Yafit Cohn, Simpson Thacher

Avrohom J. Kess is partner and head of the Public Company Advisory Practice at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Kess, Karen Hsu Kelley, and Yafit Cohn.

During the 2015 proxy season, 64 independent chair proposals were submitted to Russell 3000 companies, 62 of which reached a shareholder vote. This statistic is generally consistent with the number of proposals brought to a vote in 2014 and 2013, respectively. Issuers that received an independent chair proposal this year, however, may have found it more challenging to assess their chances of defeating the proposal, given that, for annual meetings occurring on or after February 1, 2015, Institutional Shareholder Services Inc. (“ISS”) changed its voting policy with regard to independent chair proposals. ISS previously applied a more objective six-factor test, which gave issuers some measure of predictability and allowed them to conform their governance features to ISS’s guidelines in an attempt to obtain an “against” recommendation. This year, however, ISS replaced this policy with a balancing test that takes a more “holistic” approach, which appears to have resulted in an increase in ISS recommendations in favor of independent chair proposals. Interestingly, ISS’s increasing support of independent chair proposals has not had a material impact on the overall outcome of the voting results: only 3.2% of independent chair proposals passed this year, as compared to 5% and 8% in 2014 and 2013, respectively.

Is Proxy Access Inevitable?

Posted by Holly J. Gregory, Sidley Austin LLP, on

Monday, August 3, 2015

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland. The complete publication, including footnotes, is available here. Related research from the Program on Corporate Governance about proxy access include Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and The Myth of the Shareholder Franchise (discussed on the Forum here), and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Efforts by shareholders to directly influence corporate decision-making are intensifying, as demonstrated by the significant increase over the past three years in financially focused shareholder activism and the more recent efforts by large institutional investors to encourage directors to “engage” with shareholders more directly.

Through the collective efforts of large institutional investors, including public and private pension funds, shareholders at a significant number of companies are likely within the next several years to gain the power to nominate a portion of the board without undertaking the expense of a proxy solicitation. By obtaining proxy access (the ability to include shareholder nominees in the company’s own proxy materials) activists and other shareholders will have an additional weapon in their arsenal to influence board decisions.
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Mutual Fund Flows When Managers Have Foreign-Sounding Names

Posted by Oliver Spalt, Tilburg University, on

Monday, August 3, 2015

Behavioral finance, Capital allocation, Diversity, Fund managers, Institutional Investors, Mutual funds, Public perception
More from: Alexandra Niessen-Ruenzi, Alok Kumar, Oliver Spalt

Oliver Spalt is Professor of Behavioral Finance at Tilburg University. This post is based on an article authored by Professor Spalt; Alok Kumar, Professor of Finance at the University of Miami; and Alexandra Niessen-Ruenzi.

In our paper What’s in a Name? Mutual Fund Flows When Managers Have Foreign-Sounding Names, forthcoming in the Review of Financial Studies, we show that name-induced stereotypes affect the investment choices of U.S. mutual fund investors. Managers with foreign-sounding names have about 10% lower annual fund flows, and this effect is stronger among funds with investor clienteles that are more likely to be suspicious of foreigners ex ante.

Our results are based on a novel, hand-collected dataset that contains measures of foreignness of a large sample of mutual fund managers. Specifically, we conduct an online survey in which we present US residents with almost 4,000 actual fund manager names for actively managed US equity funds that appear in the CRSP database from 1993 to 2011. We then ask survey participants to rate for each name, whether or not it sounds foreign to them. Using their responses, we obtain for each fund a measure of whether the name of its manager sounds foreign to an investor when heard, read in a fund prospectus, or when it is found on a mutual fund web site. We hypothesize that the perceived foreignness of a name might trigger social biases such as discrimination and stereotyping and, thus, influence the investment decisions of mutual fund investors. We match our new dataset with the universe of actively managed US equity funds in the CRSP database to test this hypothesis.

DC Circuit Vacates SEC’s Application of Dodd-Frank Provision

Posted by Darrell S. Cafasso, Sullivan & Cromwell LLP, on

Sunday, August 2, 2015

CFPB, Consumer protection, Dodd-Frank Act, Exchange Act, Investment advisers, Misconduct, SEC, SEC enforcement, Securities enforcement, Securities litigation, Securities regulation, U.S. federal courts
More from: Darrell Cafasso, Jennifer Sutton, Stephen Meyer, Sullivan & Cromwell

Darrell S. Cafasso is a partner in the Litigation Group at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Cafasso, Stephen H. Meyer, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

On July 14, 2015, the U.S. Court of Appeals for the District of Columbia Circuit (the “DC Circuit”) held that the Securities and Exchange Commission (the “SEC” or “Commission”) could not employ certain remedial provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank” or the “Act”) to retroactively punish an investment adviser for conduct that occurred prior to enactment of the Act. The court’s decision not only casts doubt on numerous similar punishments previously levied by the SEC based on pre-enactment misconduct, but could provide a basis for institutions to object to certain sanctions sought by the Consumer Financial Protection Bureau (the “CFPB”).

Fed’s Proposed Amendments to Capital Plan & Stress Test Rules

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on

Saturday, August 1, 2015

Banks, Capital requirements, Dodd-Frank Act, Federal Reserve, Financial institutions, Financial regulation, Leverage, Stress tests, Systemic risk, Volcker Rule
More from: Adam Gilbert, Armen Meyer, Dan Ryan, Mike Alix, PricewaterhouseCoopers

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

On July 17th, the Federal Reserve Board (“Fed”) issued a proposed rule that provides some relief from capital stress testing requirements. [1] Most notably, it eliminates advanced approaches risk-weighted assets and tier 1 common capital (“T1C”) calculations from stress testing, and provides a one year delay in the application of the supplementary leverage ratio (“SLR”) to stress testing. The proposal also does not incorporate the G-SIB surcharge into stress testing at this stage—see PwC’s First take: Key points from the Fed’s final G-SIB surcharge rule (July 22, 2015)—and makes clear that no additional changes will be applied to next year’s stress testing cycle.

Where Women Are On Board: Perspectives from Gender Diverse Boardrooms

Posted by Diane Lerner and Christine Oberholzer Skizas, Pay Governance LLC, on

Friday, July 31, 2015

Board composition, Board leadership, Boards of Directors, Corporate culture, Diversity, International governance, Management, Surveys
More from: Christine Skizas, Diane Lerner, Pay Governance

Diane Lerner is a Managing Partner and Christine Oberholzer Skizas is a Partner at Pay Governance LLC. This post is based on a Pay Governance memorandum.

Interest in, and momentum toward, greater diversity in the boardrooms of U.S. publicly traded companies is increasing. We believe this is due to a combination of international developments, workplace trends and investor sentiment.

Although all aspects of diversity are meaningful topics, this post is solely focused on gender diversity. Currently, females represent approximately 15% of outside board member seats in the S&P 1500 and about 18% of the S&P 500 seats. This equates to a median of 1-2 female board members in a group of 9-11 board members.

While the overall statistics for U.S. companies are regularly reported, relatively little has been written about those U.S. public company boards that have moved farther down the path of gender diversity. For the purpose of our review, we define “gender diverse” at 30% female directors or more, using a standard typical in countries who have enacted legislation. Assuming more companies will want to reach a 30%+ level of gender diversity over the next decade, we wanted to study companies that have already achieved this level. We wanted to identify any specific similar characteristics that can be found at these companies and to learn more through selected interviews about the paths to a gender diverse board.

2015 Proxy Season Review

Posted by Janet T. Geldzahler and Marc Trevino, Sullivan & Cromwell LLP, on

Thursday, July 30, 2015

Boards of Directors, ISS, Proxy access, Proxy advisors, Proxy season, Proxy voting, Rule 14a-8, Shareholder activism, Shareholder proposals, Shareholder voting
More from: Janet Geldzahler, Marc Treviño, Sullivan & Cromwell

Janet T. Geldzahler is of counsel and Marc Trevino is a partner at Sullivan & Cromwell LLP. This post is based on the Summary of a Sullivan & Cromwell publication; the complete publication is available here.

Our 2015 Proxy Season Review summarizes significant developments relating to shareholder proposals to date during the 2015 proxy season. Although shareholder activists pursuing strategic or management changes continue to dominate the headlines, they do not choose to wage those campaigns through shareholder proposals made under Rule 14a-8, which are addressed by the complete publication, choosing instead private or public pressure, and often a threatened or actual proxy contest. Nonetheless, the widespread governance changes brought about through successful 14a-8 proposals have played no small part in the continued growth and success of shareholder activism.

During the 2015 proxy season, proxy access has been the most significant development. Far more proposals have been made and support has been substantially stronger. There have been 82 proxy access proposals to date in 2015, as opposed to 17 in all of 2014. In 2015, shareholders have approved 48 proposals to date (as opposed to five for all of 2014), and the average votes cast in favor have risen to 55% from 33% in 2014. Perhaps most significantly, modestly more restrictive management-enacted proxy access provisions apparently did not deter shareholders from proposing, and, in many cases, winning on the now standard shareholder proposal format of 3%/3-year/25% of board.

Dodd Frank Turns 5

Posted by Gabriel D. Rosenberg, Davis Polk & Wardwell LLP, on

Thursday, July 30, 2015

Dodd-Frank Act, Financial regulation, Securities regulation
More from: Gabriel Rosenberg, Davis Polk

Gabriel D. Rosenberg is an associate in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication.

July 21, 2015 marked the 5^th anniversary of President Obama signing the Dodd-Frank Act into law. Even though the Act is more than 800 pages in length, it is the Act’s 390 rulemaking requirements and the 307 proposed and final rules issued by Federal agencies to date that make up the vast bulk of new law and regulation affecting the U.S. financial system. The 22,296 pages of rulemakings and 631 regulatory releases touch on nearly every aspect of the U.S. economy, from requiring revisions to mortgage disclosures to providing transparency in the derivatives markets.

To highlight the 5^th anniversary, we have developed a stats-driven infographic looking at the implementation of the Dodd-Frank Act, to date, and have updated our quarterly Dodd-Frank Progress report.

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