Monthly Archives: November 2016

Books-A-Million Demonstrates the Power of MFW

Steven Epstein is partner and Gail Weinstein is senior counsel at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Epstein, Ms. Weinstein, Warren S. de Wied, Scott B. Luftglass, Philip Richter, and Robert C. Schwenkel. This post is part of the Delaware law series; links to other posts in the series are available here.

In Books-A-Million, Inc. Stockholders Litigation (Oct. 10, 2016), the Delaware Court of Chancery dismissed at the pleading stage of litigation the plaintiffs’ post-closing claims for damages relating to a squeeze-out going-private merger with the company’s controlling family.

The merger was structured to comply with the Delaware Supreme Court’s 2014 seminal MFW decision. MFW established an important new regime for judicial review of controller transactions, providing for review under the deferential business judgment rule, rather than the more stringent “entire fairness” standard, if, ab initio, the transaction was conditioned on approval by both (i) an independent, adequately empowered special committee that fulfilled its duty of care and (ii) a majority of the minority stockholders in a fully informed, uncoerced vote. Under business judgment review in this context, the only claim that will be entertained by the court will be waste (which may be reasonably inferred from bad faith).


Do Delaware CEOs Get Fired?

Adam C. Pritchard is the Frances and George Skestos Professor of Law at University of Michigan Law School; Murali Jagannathan is a Professor in the School of Management at Binghamton University (SUNY). This post is based on a forthcoming article by Professor Pritchard and Professor Jagannathan. Related research from the Program on Corporate Governance includes Firms’ Decisions Where to Incorporate by Lucian Bebchuk and Alma Cohen.

Our article, Do Delaware CEOs Get Fired?, to be published in January 2017 in the Journal of Banking & Finance, explores the relation between state corporate law and corporate governance. We focus on corporate governance in Delaware, the overwhelming winner in the competition for corporate charters. Delaware draws a clear majority of the nation’s largest public companies to incorporate under its corporate code, despite its relatively small population and share of the national economy. In 2014, nearly 89% of companies doing initial public offerings (IPOs) in the United States were incorporated in Delaware. This competition for corporate charters is not just about state pride: Winning the competition for incorporations yields tangible benefits: Charter fees made up more than a quarter of Delaware’s tax revenues in 2014.


Actual Share Repurchases, Price Efficiency, and the Information Content of Stock Prices

Stefan Obernberger is Assistant Professor of Economics at Erasmus University Rotterdam. This post is based on an article by Professor Obernberger and Pascal Busch.

Share repurchases have become the dominant form of payout in the United States. Nowadays, open market share repurchases can even match the trading volumes of short sellers and institutional investors. The economic significance of share buybacks has raised credible concerns that managers use repurchases to manipulate the stock price in their favor (e.g., Bloomberg, 2009; Gersten, 2013; Economist, 2015). The concerns expressed in the business press have also alarmed U.S. politics. Senators Warren and Baldwin have recently called on the Securities and Exchange Commission (SEC) to investigate buybacks as a potential form of market manipulation. Hillary Clinton even made regulating share repurchases part of her core economic agenda (Brettel et al., 2015).


Examining the SEC’s Agenda, Operations, and FY 2018 Budget Request

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent testimony before the U.S. House Committee on Financial Services. The views expressed in this post are those of Ms. White and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you for inviting me to testify today [November 15, 2016] regarding the current work and initiatives of the U.S. Securities and Exchange Commission (SEC or Commission), and the SEC’s FY 2018 Preliminary Authorization Request. The SEC is a critical agency that serves as the bulwark safeguarding millions of investors and the most vibrant markets in the world. Thanks to the exceptional work and commitment of our superb staff, the Commission has in recent years strengthened its operations and programs across the agency and has aggressively enforced the securities laws to punish wrongdoers, adopted strong measures that protect investors and our markets, and invested in the people and technology required to ensure that our markets remain the strongest and safest in the world. These and other efforts across our extensive areas of responsibility are all in furtherance of our essential mission: to protect investors; to maintain fair, orderly, and efficient markets; and to facilitate capital formation.

The Commission’s actions and accomplishments since I became Chair in April of 2013 a little over three and half years ago, have been extensive. The last three and a half years have been marked by vigorous enforcement and examination programs, empowered with new tools and methods to detect and hold wrongdoers accountable and protect investors. Aided by enhanced technology to analyze suspicious activity and strengthened by initiatives like self-reporting, SEC staff has been able to identify and target the most significant risks for investors across the market. In fiscal year 2016 alone, the Commission brought over 850 enforcement actions, an unprecedented number; secured over $4 billion in orders directing the payment of penalties and disgorgement; performed approximately 2,400 exams, a seven-year high; and, even more importantly, continued to develop cutting-edge cases and smarter, more efficient exams.


The Spotlight on Boards 2017

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Sabastian V. Niles.

This past year witnessed a number of new corporate governance initiatives. Among the most significant:

  • BlackRock, State Street and Vanguard each issued strong statements supporting long-term investment, criticizing the short-termism afflicting corporate behavior and the national economy and rejecting financial engineering to create short-term profits at the expense of sustainable value.
  • A group of large companies and investors, led by Jamie Dimon of JPMorgan Chase, issued Commonsense Principles of Corporate Governance.
  • The Business Roundtable issued an updated version of its Principles of Corporate Governance.
  • The International Business Council of the World Economic Forum issued The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth.


GAMCO’s First Use of Proxy Access and “Fix-It” Proposals

Lyuba Goltser and Ellen Odoner are partners in the Public Company Advisory Group of Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Goltser, Ms. Odoner, Megan Pendleton, and Niral Shah.

Over the last two proxy seasons, governance-oriented activists, pension funds and institutional investors led a charge to afford shareholders “proxy access”—the right to include their director nominees in a company’s proxy statement. Since January 1, 2015, 300 companies have adopted a proxy access bylaw following a shareholder proposal, negotiations with a proponent or proactively.
On November 10, 2016, in what appears to be the first use of a proxy access bylaw, GAMCO Investors, Inc. and its affiliated funds disclosed that they had nominated an individual for election to the board of directors of National Fuel Gas Company pursuant to the company’s recently adopted proxy access bylaw.


Anti-Activist Legislation: The Curious Case of the Brokaw Act

Alon Brav is Robert L. Dickens Professor of Finance at Duke University’s Fuqua School of Business. This post is based on a recent paper authored by Professor Brav; J.B. Heaton, Partner at Bartlit Beck Herman Palenchar & Scott LLP; and Jonathan Zandberg. 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) and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Most evidence to date supports the proposition that corporations benefit, on average, from the actions of hedge fund activists. Nevertheless, hedge fund activism is unpopular in many quarters, particularly among management and directors that become its targets, but also with similarly-minded opponents in academia and business. While hedge fund activism’s opponents generally acknowledge that activism is on average associated with stock price increases at target firms, they tend (notwithstanding evidence to the contrary) to characterize that average price increase as a short-run effect that merely reflects a higher probability of takeover or stock-popping restructuring events. In turn, they attribute little or no social or long-run value to hedge fund activism. Until recently, hedge fund activism’s opponents have done little to target legislation against hedge fund activists, focusing mainly on public debate and requests to the Securities and Exchange Commission—largely ignored to date—for changes in rules that would hinder activist investments. That may now be changing.


Cyber-Risk Disclosure: Who Cares?

Gilles Hilary is a Professor at Georgetown University McDonough School of Business. This post is based on a recent paper by Professor Hilary; Benjamin Segal, Associate Professor of Accounting and Taxation at Fordham University; and May H. Zhang, Assistant Professor of Accounting and Taxation at Fordham University.

Cyber-risk has become a burning issue for regulators, directors and executives. For example, in December 2015, U.S. Senators Jack Reed and Susan Collins introduced the bipartisan Cybersecurity Disclosure Act. The bill asks each publicly traded company to disclose information to investors on whether any member of the company’s Board of Directors is a cybersecurity expert, and if not, why having this expertise on the Board of Directors is not necessary because of other cybersecurity steps taken by the registrant.

Cyber-breaches have also made headlines in recent years with an increasing regularity. Consistent with this, we find in a recent study that the number of mentions of cyber-breaches in the popular press is high and still growing. Similarly, we find the number of Google queries regarding cyber-breaches is trending upward and regularly spikes after high profile cases play out in the media. In contrast, we find that public disclosure made by listed firms is limited and largely boiler plate. These results beg the question of whether this chasm is a market (or regulatory) failure or is it justified given an economic analysis of the phenomenon.


ISS Pay-for-Performance Methodology Updates

Sean Quinn is the Head of U.S. Research at Institutional Shareholder Services Inc. This post is based on an ISS publication.

Institutional Shareholder Services Inc. (ISS), a leading provider of governance and responsible investment solutions to the global financial community, today [November 8, 2016] announced changes to the methodology underlying its pay-for-performance models for companies in the U.S., Canada, and Europe to take effect Feb. 1, 2017.

Following feedback from institutional investors, companies, and other market constituents, in proxy voting reports issued on companies in the U.S. and Canadian markets, ISS will present relative evaluations of return on equity, return on assets, return on invested capital, revenue growth, EBITDA growth, and cash flow (from operations) growth. The additional financial measures will supplement ISS’ legacy (and continued) use of total shareholder return (TSR) as a key metric for assessing corporate performance in the context of evaluating executive compensation.


Bridging the GAAP/Non-GAAP Gap

Judy McLevey is Assistant Director at The Conference Board. This post is based on a Conference Board publication.

Another quarterly earnings cycle is just about to start with companies putting the final touches on their Q3 2016 earnings releases, analyst presentations and the messages they will share with investors. There is intense pressure on companies to meet quarterly analyst estimates and there is also extra attention from the Securities & Exchange Commission (SEC) on how companies report and present their financial information.


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