Monthly Archives: April 2016

Inefficiencies and Externalities from Opportunistic Acquirers

Lucian Taylor is Assistant Professor of Finance at the University of Pennsylvania. This post is based on an article authored by Professor Taylor; Di Li, Assistant Professor of Finance at Georgia State University; and Wenyu Wang, Assistant Professor of Finance at Indiana University.

The main goal of our paper, Inefficiencies and Externalities from Opportunistic Acquirers, which was recently made publicly available on SSRN, is to quantify a potential inefficiency in the mergers and acquisitions (M&A) market. If a firm believes its shares are overvalued, then it has an incentive to acquire other companies and pay using its overvalued shares rather than cash. This behavior creates an inefficiency: Overvalued, opportunistic acquirers may crowd out other acquirers that have higher synergies. The inefficiency, in other words, is a lost synergy. Researchers have raised concerns about this inefficiency, but it remains unclear whether the inefficiency is large or small. Our main contribution is to show that the aggregate inefficiency from opportunistic acquirers is actually quite modest, meaning the M&A market usually allocates resources efficiently. We do find, however, that the inefficiency is large for certain deals and during times when misvaluation is more likely. We also show that misvaluation results in a large wealth transfer from undervalued to overvalued acquirers, and it makes access to cash valuable for synergistic acquirers.


The Role of the Federal Reserve: Lessons from Financial Crises

William C. Dudley is President and Chief Executive Officer of the Federal Reserve Bank of New York. This post is based on Mr. Dudley’s recent remarks at the Annual Meeting of the Virginia Association of Economists; the complete speech, including footnotes, is available here. The views expressed in this post are those of Mr. Dudley and do not necessarily reflect those of the Federal Open Market Committee or the Federal Reserve System.

It is a great pleasure to have the opportunity to speak here today [March 31, 2016] as part of the Virginia Association of Economists annual meeting at Virginia Military Institute and Washington and Lee University. This is an appropriate setting for the topic I will be addressing—the role of the Federal Reserve as the central bank of the United States. When the Federal Reserve Act was enacted in 1913, H. Parker Willis, who had been a professor at Washington and Lee University, played a critical role. He worked closely with Representative Carter Glass of Virginia in crafting the legislative proposal that established the Federal Reserve, and Willis became the first Secretary of the Federal Reserve Board in 1914.

Of course, I’m tackling this subject today not just because H. Parker Willis was a professor here in Lexington. Instead, I’m addressing this issue because of the ongoing debate about the role of the Federal Reserve and its structure and governance. My purpose is to demystify the nation’s central bank and to respond to some of the critiques that we continue to face. I see this as necessary because there is a risk that the Federal Reserve could be changed in ways that might impair our ability to achieve our primary objectives—namely, full employment and price stability. As always, what I have to say today reflects my own views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System.


SEC Interpretation Proposal: Descriptions on Proxy Cards

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

On March 22, 2016, the Division of Corporation Finance of the Securities and Exchange Commission (“SEC”) issued a Compliance and Disclosure Interpretation (“C&DI”) regarding the form of proxy requirements outlined in Rule 14a-4 under the Securities Exchange Act of 1934, as amended. [1] In particular, the C&DI relates to the requirement in Rule 14a-4(a)(3) that the form of proxy “identify clearly and impartially each separate matter intended to be acted upon, whether or not related to or conditioned on the approval of other matters, and whether proposed by the registrant or by security holders.”


Say On Pay: Do Shareholders Care?

Carsten Gerner-Beuerle is an Associate Professor of Law at the London School of Economics and Political Science. This post is based on an article authored by Professor Gerner-Beuerle and Tom Kirchmaier, Researcher at the London School of Economics and Political Science.

In our paper, Say on Pay: Do Shareholders Care?, which was recently made publicly available on SSRN, we examine the impact of enhanced executive remuneration disclosure rules on the voting pattern of shareholders under UK regulations. The key findings are that shareholders guide their vote by top line salary only, and appear to disregard the remaining—substantial—body of information provided to them.

Our paper can be seen against a backdrop of numerous policy initiatives that seek to reform executive remuneration in response to the continued attention and controversy that compensation packages of directors of listed companies generate. In the United Kingdom, executive pay has been regulated increasingly stringently since the early 2000s. The first steps were taken in 2002 with the introduction of the requirement that directors of quoted companies prepare a directors’ remuneration report for each financial year and lay the report before the general meeting for shareholder approval. [1] The shareholder vote was designed as an advisory vote and produced a number of high-profile shareholder revolts, but it was generally seen as largely ineffective because votes rejecting the remuneration report remained rare and the regulations failed to halt the exponential rise in executive pay. [2] In 2013, the British government therefore amplified the regulatory regime, which now requires the remuneration report to consist of two parts, the “annual report on remuneration,” which sets out the payments and benefits received by the directors in the relevant financial year, and the “directors’ remuneration policy,” which describes the operation of the individual components of the directors’ remuneration package for future years.


Proxy Advisors’ Impact on Executive Pay Decisions by Directors

Joseph E. Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on a column by Mr. Bachelder which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this column. The complete publication, including footnotes, is available here.

Proxy advisors have been giving advice to their shareholder clients for many years. This includes advice regarding, among other things, proposals put before annual shareholders’ meetings by management and by shareholders themselves. Beginning with the 2011 proxy season (as a result of the Dodd-Frank legislation in 2010) proxy advisors added say-on-pay votes to their portfolio of advice to shareholders. Shareholders (primarily institutional shareholders), for a fee, can receive a proxy advisor’s recommendation on whether to vote “for” or “against” a say-on-pay resolution (among other resolutions, as just noted), together with a report that includes explanation of the bases for the proxy advisor’s recommendations. The two largest proxy advisors are Institutional Shareholders Services, Inc. (ISS) (founded in 1985) and Glass, Lewis & Co., LLC (Glass Lewis) (founded in 2003). Together, these two proxy advisors represent over 90 percent of the proxy advisory business in the United States.


Wolves at the Door: A Closer Look at Hedge Fund Activism

Forester Wong is a PhD Candidate in Accounting at Columbia University. This post is based on a recent article authored by Mr. Wong. 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.

Some commentators attribute the success of certain hedge fund activism events to “wolf pack” activism, the theory that the primary activist is successful because of the support offered by other investors (i.e., the wolf pack). Commentators usually assume that activist hedge funds orchestrate the formation of wolf packs. According to this line of thinking, the lead activist—the 13D filer—recruits other investors to join the campaign before the 13D filing becomes public because the public announcement of the activist’s campaign typically leads to a positive stock return. In effect, the activist uses the expected jump in stock price to compensate the other investors for their support. This arrangement may be viewed as a way to circumvent securities regulations and takeover defenses triggered by holdings thresholds. The SEC, for example, requires activists to file a Schedule 13D within 10 days after crossing a 5% ownership threshold. By inducing other investors to acquire shares of the target, the lead activist may be able to accumulate a larger percentage of de facto ownership before triggering regulation thresholds, thereby increasing the chances of a successful campaign (Coffee and Palia, 2015). I label this as the Coordinated Effort Hypothesis. However, an alternative mechanism is that wolf packs arise spontaneously because investors monitor and target the same firms around the same time. Brav, Dasgupta, and Mathews (2015), for example, analytically show that, under certain conditions, a pack can form around an activist campaign without any explicit coordination by the activist. I label this as the Spontaneous Formation Hypothesis.


Forum-Selection Bylaws—Another Brick in the Wall

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, David E. Shapiro, and Anitha Reddy. The memorandum discusses the continued judicial acceptance of exclusive forum bylaws, which were put forward by Wachtell Lipton partner Theodore N. Mirvis and discussed by him on the Forum here, here and here.

The Superior Court of California for the County of Los Angeles has added to a growing judicial consensus that forum-selection bylaws adopted in conjunction with public-company mergers will be enforced to direct transaction-related litigation to a single board-designated forum. RealD Inc. is a Delaware-chartered, California-headquartered corporation. When the company’s board of directors approved a merger agreement with Rizvi Traverse Management LLC, a California-based private equity firm, it also adopted a bylaw requiring that any fiduciary-duty litigation involving the company be brought in the courts of Delaware.

Do You Have to Disclose a Government Investigation?

Deborah S. Birnbach is a partner in the Litigation & White Collar Defense Group at Goodwin Procter LLP. This post is based on a Goodwin Procter publication by Ms. Birnbach and Michael T. Jones.

After receiving an inquiry from a government agency, such as a subpoena, a Civil Investigative Demand (“CID”), or an informal request for information, public companies ask whether they must disclose publicly that they may be under investigation. A corollary question to public disclosure is how broadly to disclose internally, to lenders, or to D&O insurers.

The standards for disclosing government investigations are not straightforward, due in part to an absence of cases and SEC interpretive guidance providing meaningful direction on this topic under the securities laws. As a result, disclosure practices vary. Companies sometimes disclose investigations upon receipt of a subpoena or CID, some wait until an intermediate stage after the investigation progresses, and some wait until the SEC advises the company that it tentatively decided to recommend an enforcement action by sending the company a “Wells” notice [1] or until the investigation is otherwise nearing conclusion. However, a few recent cases out of federal courts in the Southern District of New York and the Court of Appeals for the Ninth Circuit in California provide some additional guidance for companies navigating this issue.


Institutional Investors and Trends in Board Refreshment

Cam C. Hoang is a Partner at Dorsey & Whitney LLP. This article is based on a Dorsey & Whitney memo by Ms. Hoang, Gary Tygesson, and Ime Ibok.

As many institutional investors have concluded, prevailing governance policies and practices have not produced desired board refreshment, which these investors would support in order to strengthen expertise, promote diversity and provide fresh perspectives in the board room. At the same time, companies and investors alike appreciate that term and age limits, as they have been typically applied, may not be the solutions, because they force the arbitrary retirement of valuable directors.


Takings Claims in the Aftermath of the Financial Crisis

Julia D. Mahoney is the John S. Battle Professor of Law at the University of Virginia School of Law. This post is based on Professor Mahoney’s recent article, Takings, Legitimacy, and Emergency Action: Lessons from the Financial Crisis of 2008, published in the George Mason Law Review.

In times of crisis, governments do things that fall outside—sometimes far outside—the norm and reduce or destroy the value of resources held by firms and individuals. Aggrieved owners may then sue the government, arguing that they are entitled to relief because the public action complained of amounts to a taking of their property. The financial crisis of 2008 and its aftermath have generated a cascade of such lawsuits, including highly publicized ones involving equity holders of Fannie Mae, Freddie Mac and American International Group, Inc.


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