Daily Archives: Monday, January 30, 2017

Former SEC Chair White Speaks at Securities Regulation Institute

Mary Jo White is former Chair of the U.S. Securities and Exchange Commission. This post is based on her recent keynote address at Northwestern University Pritzker School of Law’s 44th Annual Securities Regulation Institute. The complete publication, including footnotes, is featured on Practical Law.

It is an honor to speak with you again in honor of Alan B. Levenson, not only a legendary Director of the SEC’s Division of Corporation Finance and distinguished private practitioner, but also a founder of both this Institute and the annual “SEC Speaks” conference. It is a special honor today that Alan’s daughter Julie Levenson is with us to share her wonderful memories of her father. In these days of politics and partisanship, Alan Levenson stands out as the model public servant, reminding us all of what government service is about. Each day I was at the Commission, I witnessed the dedication and sacrifice that true commitment to public service requires. I am pleased to report that the SEC today remains a strong, independent agency doing a critical job in the finest tradition of Alan Levenson.

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Corporate Governance Update: Prioritizing Board Diversity

David A. Katz is a partner and Laura A. McIntosh is a consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh.

In what has been called a “breakout year” for gender diversity on U.S. public company boards, corporate America showed increasing enthusiasm for diversity-promoting measures during 2016. Recent studies have demonstrated the greater profitability of companies whose boards are meaningfully diverse. In many cases, companies have collaborated with investors to increase the number of women on their boards, and a number of prominent corporate leaders have publicly encouraged companies to prioritize diversity. The Business Roundtable, a highly influential group of corporate executives, recently released a statement that explicitly links board diversity with board performance in the two key areas of oversight and value creation. Likewise, a group of corporate leaders—including Warren Buffett, Jamie Dimon, Jeff Immelt, and Larry Fink, among others—published their own “Commonsense Principles of Corporate Governance,” (discussed on the Forum here) an open letter highlighting diversity as a key element of board composition.

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Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital

Sean J. Griffith is T.J. Maloney Chair and Professor of Law, Fordham Law School; and Natalia Reisel is Professor of Finance and Business Economics, Gabelli School of Business, Fordham University. This post is based on a paper by Professor Griffith and Professor Reisel. 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); and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

Dead Hand Proxy Puts are a contractual innovation in corporate debt agreements that change the nature of proxy fights. The term triggers default and immediate repayment of corporate indebtedness in the event that a dissident slate wins a majority of the seats on the target company’s board. Unlike the “Change-of-Control” provisions that have become standard in corporate debt agreements, the Dead Hand Proxy Put strips incumbent management of the power to “approve” the dissident slate, thereby threatening a debt default that management is powerless to prevent. As a result, the feature has attracted attention as a defense against hedge fund activists, whose central weapon, the proxy fight, is blunted by the provision. Dead Hand Proxy Puts give shareholders powerful incentives to vote against activist slates in order to avoid triggering default.

In our paper, Dead Hand Proxy Puts, Hedge Fund Activism, and the Cost of Capital, we empirically investigate the effect of the Dead Hand Proxy Put on corporate debt. We first demonstrate that the incidence of Dead Hand Proxy Puts has increased sharply in the era of hedge fund activism, especially for companies that are likely targets of hedge fund activists. We then show that Dead Hand Proxy Puts reduce the cost of debt. In addition, we find evidence that bondholders react positively to the presence of Dead Hand Proxy Puts in loan contracts, suggesting that bondholders free-ride on the protection that the provision offers to bank lenders. These findings suggest that the provision provides a significant firm-level benefit by reducing the cost of capital.

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