Monthly Archives: February 2017

Weekly Roundup: February 17, 2017–February 23, 2017


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This roundup contains a collection of the posts published on the Forum during the week of February 17, 2017–February 23, 2017.













A Broader Perspective on Corporate Governance in Litigation


Who Bleeds When the Wolves Bite?

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System, forthcoming in the Yale Law Journal. Related research from the Program on Corporate Governance includes Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law (discussed on the Forum here) and Securing Our Nation’s Economic Future (discussed on the Forum here), both by Chief Justice Strine, and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an essay that is forthcoming in the Yale Law Journal, which is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

This essay examines the effects of hedge fund activism and so-called wolf pack activity on the ordinary human beings—the human investors—who fund our capital markets but who, as indirect of owners of corporate equity, have only limited direct power to ensure that the capital they contribute is deployed to serve their welfare and in turn the broader social good.

Most human investors in fact depend much more on their labor than on their equity for their wealth and therefore care deeply about whether our corporate governance system creates incentives for corporations to create and sustain jobs for them. And because human investors are, for the most part, saving for college and retirement, they do not gain from stock price bubbles or unsustainable risk taking. They only gain if the companies in which their capital is invested create durable value through the sale of useful products and services.

But these human investors do not typically control the capital that is deployed on their behalf through investments in public companies. Instead, intermediaries such as actively traded mutual funds with much shorter-term perspectives and holding periods control the voting and buy and sell decisions. These are the intermediaries who referee the interplay between activist hedge funds and corporate managers, an interplay that involves a clash of various agents, each class of which has a shorter-term perspective than the human investors whose interests are ultimately in the balance.

Because of this, ordinary Americans are exposed to a corporate republic increasingly built on the law of unintended consequences, where they depend on a debate among short-term interests to provide the optimal long-term growth they need. This essay humanizes our corporate governance lens and emphasizes the living, breathing investors who ultimately fuel our capital markets, the ways in which they are allowed to participate in the system, and the effect these realities have on what corporate governance system would be best for them. After describing human investors’ attributes in detail—their dependence on wages and locked-in, long-term investment needs—this essay examines what people mean when they refer to “activist hedge funds” or “wolfpacks” and considers what risks these phenomena may pose to human investors. Finally, this essay proposes a series of reforms aimed not at clipping the wings of activist hedge funds, but at reorienting our corporate governance republic to truly serve the needs of those whose money it puts to work—human investors.

The full essay is available for download here.

A Broader Perspective on Corporate Governance in Litigation

Ronald J. Gilson is Marc & Eva Stern Professor of Law and Business at Columbia Law School, Meyers Professor of Law and Business (Emeritus) at Stanford Law School, and a senior fellow at the Stanford Institute for Economic Policy Research. Hans Weemaes is a principal at Cornerstone Research. This post is based on a Cornerstone Research publication by Professor Gilson, Mr. Weemaes, Ilene Friedland, and Cameron Hooper.

Corporate governance issues often figure prominently in litigation, but the issues raised typically have a narrow focus. Disputes most often build on the formal legal skeleton of corporate governance created by the state’s corporation’s statutes, the particular corporation’s organizational documents, and the judicially imposed fiduciary duty of directors and officers. However, this structure represents an overly formal and significantly incomplete understanding of what makes up a publicly held corporation’s corporate governance structure. In this article, we outline the much broader corporate governance structure that underlies the operation of a modern public corporation, and show how that structure has important implications for a wider range of litigation than is commonly understood.
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Related Investing: Corporate Ownership and Capital Mobilization During Early Industrialization

B. Zorina Khan is Professor of Economics at Bowdoin College and a Research Associate with the National Bureau of Economic Research. This post is based on her recent paper.

Family businesses and concentrated ownership have been the norm across time and place. Business historians like Alfred Chandler have noted these patterns with disapproval, attributing the decline of European industrial dominance in part to subjective “family capitalism,” and the advance of the United States to its development of objective and impersonal “managerial capitalism.”

According to economic models, market efficiency implies depersonalized transactions where outcomes are based on prices and fundamentals rather than the identity of participants. Personal or familial connections can serve as conduits for inefficiency, with the potential for nepotism, corrupt governance, and exploitation of other stakeholders. Outsider investors face the risk that both internal and external control mechanisms may be too weak to protect them from “tunneling” or corruption in the firm. By contrast, others maintain that such personalized institutions as family firms or venture capital might provide a mechanism to reduce risk or asymmetries in information, and to increase trust, social capital and the enforceability of contracts. The intergenerational links that characterize family membership can similarly provide a cost-effective signal to outsiders that a firm values continuity and future exchange.

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Directors Must Navigate Challenges of Shareholder-Centric Paradigm

Stephen F. Arcano and Thomas H. Kennedy are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Arcano and Mr. Kennedy. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The corporate governance landscape has become more complicated, making it more difficult for directors to manage the often inconsistent demands of multiple constituencies while pursuing the fundamental fiduciary obligation to act in the best interests of the corporation and its stockholders. Evolution in the prevailing corporate governance model to a more shareholder-centric paradigm, widening fault lines between the perspectives of different types of shareholders, and the expanding reach of governmental regulation and enforcement efforts, among other forces, have contributed to the issues contemporary boards face. Directors’ ability to assess these factors and successfully navigate these challenges will be critical in the year ahead.

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Delaware Supreme Court Confirms BJR Application After Disinterested Shareholder Approval

Scott B. Luftglass and Philip Richter are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Luftglass, Mr. Richter, Steven EpsteinWarren S. de WiedPeter L. Simmons, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

In Volcano Stockholders Litigation, the Delaware Supreme Court, on February 9, 2017, in a one-sentence affirmance, upheld the Court of Chancery’s decision dismissing the post-closing challenge of the $1.2 billion merger of Volcano Corp. with Philips Holding USA Inc. The plaintiffs claimed that the Volcano board had failed to fully inform stockholders in connection with their vote on the transaction—including with respect to a previous higher offer made by Philips and alleged conflicts of interest of Volcano’s financial advisors. The decision is consistent with the Delaware courts’ continued expansive interpretation of the seminal 2015 Corwin decision, which has resulted in a strong trend of early dismissal of litigation challenging M&A transactions (not involving a “controller”—see below).

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Company Stock Reactions to the 2016 Election Shock: Trump, Taxes and Trade

Richard Zeckhauser is the Frank P. Ramsey Professor of Political Economy at the Harvard University Kennedy School of Government, and a Research Associate at the National Bureau of Economic Research (NBER). This post is based on a recent paper authored by Professor Zeckhauser; Alexander F. Wagner, Associate Professor of Finance at the University of Zurich and Faculty Member at the Swiss Finance Institute; and Alexandre Ziegler, Director of the Center for Portfolio Management at the University of Zurich. Additional posts addressing legal and financial implications of the Trump administration are available here.

Donald Trump’s election was a significant surprise. So too was the dramatic run up in the stock market that followed. A story less told is how individual stocks and industries responded to the Trump surprise, and expectations about the policies that might follow. In fact, some stocks gained significantly relative to the market; others were major losers. The paper Company Stock Reactions to the 2016 Election Shock: Trump, Taxes and Trade, recently made available on SSRN, illuminates the factors that produced winners and losers.

In an era where politics is extremely polarized and forward-looking assessments of economic prospects are often tilted and exaggerated, it is instructive to investigate how investors assessed the prospects for individual firms. Investors clearly expect US corporate taxes to be cut substantially; thus firms paying high taxes out-performed. What to expect for US companies with significant non-US revenues was less clear cut. Trump and his Republican allies had promised to make firms more competitive abroad. But talk of tariffs and trade raised retaliation concerns. In fact, foreign-oriented firms lost significantly. Companies with high interest expenses suffered for two possible reasons: deductions lose value when taxes are slashed, and some Trump/Republican plans threaten interest deductibility. Investors have not yet taken a clear view on the implications of plans to allow expensing of capital investments.

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Using the Deal Price for Determining ‘Fair Value’ in Appraisal Proceedings

Guhan Subramanian is Joseph H. Flom Professor of Law and Business at Harvard Law School and H. Douglas Weaver Professor of Business Law at Harvard Business School. This post is based on a recent article by Professor Subramanian, forthcoming in The Corporate Contract in Changing Times: Is the Law Keeping Up? This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent article I present new data on appraisal litigation and appraisal outs. I find that appraisal claims have not meaningfully declined in 2016, and that perceived appraisal risk, as measured by the incidence of appraisal outs, has increased since the Dell appraisal in May 2016.

After reviewing current Delaware appraisal doctrine, I propose a synthesizing principle: if the deal process involves an adequate market canvass, meaningful price discovery, and an arms-length negotiation, then there should be a strong presumption that the deal price represents fair value in an appraisal proceeding; but if the deal process does not have these features, deal price should receive no weight. The test is a stringent one: it requires not just a “good enough for fiduciary duty” deal process, but rather a deal process that ensures that exiting shareholders receive “fair value” for their shares.

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The Activist Investing Annual Review 2017

Josh Black is Editor-in-Chief at Activist Insight. This post is based on excerpts from The Activist Investing Annual Review 2017, published by Activist Insight in association with Schulte Roth & Zabel, and authored by Mr. Black, Paolo Frediani, Ben Shapiro, and Claire Stovall. 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 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.

The juggernaut of shareholder engagement kept rolling in 2016 as a surge of one-off campaigns, governance-related proposals and remuneration crackdowns made for a busy year. 758 companies worldwide received public demands—a 13% increase on 2015’s total of 673—including 104 S&P 500 issuers and eight of the FTSE 100.

Yet for dedicated activist investors, it was a more muted affair. Investors deemed by Activist Insight to have a primary or partial focus on activism targeted fewer and smaller companies, accounting for just 40% of the total which faced public demands, and 10% fewer companies in North America. Turbulent markets, redemptions and competition all played a part in reducing the volume of activist investing. By contrast, shareholder engagement flourished.

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The Corwin Effect: Stockholder Approval of M&A Transactions

Steven M. Haas is a partner at Hunton & Williams LLP. This post is based on a Hunton & Williams publication by Mr. Haas, and is part of the Delaware law series; links to other posts in the series are available here.

The most important development in Delaware law during 2016 was arguably the courts’ growing deference to stockholder approval. In 2015, the Delaware Supreme Court held in Corwin v. KKR Financial Holdings that a transaction subject to enhanced scrutiny under Revlon will instead be reviewed under the deferential business judgment rule after it has been approved by a majority of fully informed and uncoerced stockholders. During 2016, several Delaware courts applied Corwin with important consequences. Among other things, Delaware judges held that the business judgment rule becomes “irrebuttable” if invoked as a result of a stockholder vote; Corwin is not limited to one-step mergers and thus also applies where a majority of shares tender into a two-step transaction; the ability of plaintiffs to pursue a “waste” claim is exceedingly difficult; and if directors are protected under Corwin, aiding and abetting claims against their advisors will be dismissed too.

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