Monthly Archives: June 2017

Are Shareholder Proposals on Climate Change Becoming a Thing?

Cydney S. Posner is Special Counsel at Cooley LLP. This post is based on a Cooley publication.

Are we witnessing the beginning of a new trend? The history of shareholder proposals to enhance disclosure regarding climate change has been a dismal one. But suddenly, this proxy season, we have climate change proposals succeeding at two—and, as of [May 31, 2017], three—major companies. Is this the start of something big?

The proposals asked each of the companies—Occidental Petroleum, PPL and ExxonMobil—to issue a report providing a “2 degree scenario analysis”—a term that refers to the goal of the Paris Climate Accord of limiting global temperature increases to 2 degrees Celsius (3.6 degrees Fahrenheit). The report would assess the impact on the company’s asset portfolio of long-term climate change, explaining (as stated in the Occidental proxy) “how capital planning and business strategies incorporate analyses of the short- and long-term financial risks of a lower carbon economy,” including specifically, “the impacts of multiple, fluctuating demand and price scenarios on the company’s existing reserves and resource portfolio.” The proposal to Occidental was submitted by Wespath Investment Management and the Nathan Cummings Foundation and was subsequently supported by a coalition of other large asset owners that included CalPERS, and the proposals to PPL and ExxonMobil were submitted by the New York State Common Retirement Fund.


Skin or Skim? Inside Investment and Hedge Fund Performance

Arpit Gupta is Assistant Professor of Finance at NYU Stern School of Business. This post is based on a recent paper by Professor Gupta and Kunal Sachdeva, Ph.D. candidate in Finance at Columbia Business School.

Our paper, Skin or Skim? Inside Investment and Hedge Fund Performance, publically available on SSRN, examines the decision of insiders to allocate private capital between funds under their control, and the impact of this “skin in the game” on returns received by outside investors. Delegated asset managers are commonly thought of being compensated only through fees imposed on outside investors. However, access to profitable, but limited, internal investment opportunities can also be a form of compensation for managers. Consider the hedge fund industry, which manages over $3 trillion in assets under management, of which $400 billion can be attributed to investments from insiders and related parties. [1] The discretion of where and how to invest this large allocation of insider capital suggests that returns to insider capital is an important, but previously overlooked, component of hedge fund compensation and potential source of conflict of interest between investors.


Delaware Appraisal at a Crossroads?

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a publication by Mr. Mirvis. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court heard argument recently in the appraisal proceeding arising out of the 2014 acquisition of DFC Global Corporation by Lone Star, a private equity firm. The Court of Chancery had found that the statutory “fair value” of DFC was higher than the deal price, based on a tripartite equal weighting of the transaction price, a DCF valuation, and a comparable company analysis which the court called “a blend of three imperfect techniques.” One key element of the appeal is the proper role of deal price in fair value determinations. The Court of Chancery noting that the sale process was lengthy, involved financial and strategic buyers, and resulted in an arm’s-length sale with no conflicts determined that the deal price was “one measure” of value. But the court gave the deal price limited weight. It found that the sale process coincided with the company’s being subject to “turbulent regulatory waters” that rendered uncertain its future profitability and even viability; the court suggested that the PE buyer may have understood those uncertainties better than other bidders, and been focused as a financial sponsor on achieving a required internal rate of return consistent with its financing constraints, rather than DFC’s fair value.


Letter to Paul Ryan: The Financial CHOICE Act of 2017

Jeff Mahoney is General Counsel of the Council of Institutional Investors. This post is based on an open letter from CII, sent on behalf of over 50 co-signatories.

May 17, 2017

The Honorable Paul Ryan
Longworth House Office Building, Room 1233
United States House of Representatives
Washington, DC 20515-4901

Re: The Financial CHOICE Act of 2017

Dear Speaker Ryan:

On behalf of the Council of Institutional Investors and the undersigned investors, I am writing to share with you our concerns about several provisions currently included in the Financial CHOICE Act of 2017 (Act).

The Council of Institutional Investors (CII) is a nonprofit, nonpartisan association of corporate, public and union employee benefit funds and endowments with more than 120 members with combined assets that exceed $3 trillion. In addition, our associate (nonvoting) members include more than 50 asset management firms that manage assets in excess of $20 trillion.


Corporate Liquidity, Acquisitions, and Macroeconomic Conditions

Michael S. Weisbach is Ralph Kurtz Professor of Finance at The Ohio State University Fisher College of Business, and a Research Associate of the National Bureau of Economic Research. This post is based on a recent paper authored by Professor Weisbach; Isil Erel, Distinguished Professor of Finance at The Ohio State University Fisher College of Business; Yeejin Jang, Assistant Professor of Finance, Purdue University Krannert School of Business; and Bernadette Minton, Professor of Finance and Arthur E. Shepard Endowed Professorship in Insurance at The Ohio State University Fisher College of Business.

One of the most important decisions a financial manager must make is to determine how liquid his firm’s balance sheet should be. More liquidity means that a firm can make investment decisions without having to raise external capital. Consequently, liquidity on the balance sheet is most valuable to a firm when the cost of external finance is relatively high. One such time occurs during poor macroeconomic conditions, since both practitioners’ viewpoints and the academic literature suggest that most firms’ external financing costs are strongly pro-cyclical. Therefore, liquidity should be particularly important in facilitating firms’ abilities to invest efficiently during poor macroeconomic conditions.


Changing Attitudes: The Stark Results Of Thirty Years Of Evolution In Delaware M&A Litigation

The Honorable J. Travis Laster is Vice Chancellor at the Delaware Court of Chancery. This post is based on a chapter prepared for the Research Handbook on Representative Shareholder Litigation (forthcoming), and is part of the Delaware law series; links to other posts in the series are available here.

Beginning in 1985, the Delaware Supreme Court created a new framework for judicial review of decisions made by boards of directors when considering third-party mergers and acquisitions. Ever since, third-party M&A events, both hostile and friendly, have been reviewed using an intermediate standard known as enhanced scrutiny. Under that standard, the defendant directors bear the burden of proving that they sought to serve a legitimate corporate purpose and that their actions fell within a range of reasonableness.

Although the concept of a range of reasonableness implies an objective test, there is no Platonic form of reasonableness. Attitudes and perceptions necessarily influence what a court regards as reasonable. For the Delaware common law of fiduciary obligations, the attitudes and perceptions that emerge from the Delaware Supreme Court justices’ opinions and their scholarly writings necessarily influence a trial court’s assessment of the range.


Shareholder Proposals: Evidence of Private Ordering Supplanting Public Policy?

John Roe is Head of ISS Analytics at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Roe.

Earlier this [month], ExxonMobil released a preliminary tally revealing that 62.3 percent of shareholders supported a non-binding shareholder resolution calling for “an annual assessment of the long-term portfolio impacts of technological advances and global climate change policies, at reasonable cost and omitting proprietary information.” A similar proposal filed just last year garnered only 38.1 percent shareholder support—which leads to the question, what’s changed so dramatically in the past year? We’ll get to that in a moment—but first, let’s take a look at shareholder proposals voted so far in 2017, and put those into some historical context.


PCAOB Approves Expanded Auditor’s Report

Ellen Odoner is partner and head of the Public Company Advisory Group at Weil, Gotshal & Manges LLP; Peter King is a corporate partner in the London office of Weil. This post is based on a Weil publication by Ms. Odoner, Mr. King, Catherine Dixon, and Alicia Alterbaum.

On June 1, 2017, the Public Company Accounting Oversight Board voted to adopt a new auditing standard that, if approved by the Securities and Exchange Commission, will significantly expand the current auditor’s report. The new report will augment the traditional pass/fail opinion with a discussion of “critical audit matters” (CAMs), disclosure of the auditor’s tenure and certain other information. The revised report also will have a new format. The adopted standard, AS 3101, is substantially the same as the standard reproposed by the PCAOB in May 2016. The full text of the new standard can be found here and the PCAOB’s fact sheet can be found here.


The Voice: The Minority Shareholder’s Perspective

Dov Solomon is an Associate Professor at the College of Law and Business, Ramat Gan Law School. This post is based on his recent article, The Voice: The Minority Shareholder’s Perspective, forthcoming in the Nevada Law Journal.

Minority shareholders tend not to participate in the decision-making process of public companies with a controlling shareholder, and their voice is rarely heard. Even when they disagree with how the company is being managed, they prefer to express this dissatisfaction through exit, i.e., by selling their shares, rather than by expressing their voice at a shareholder meeting. Contrary to the prevailing view, my article, The Voice: The Minority Shareholder’s Perspective, suggests that minority shareholder voice is important and desirable.


Chancery Court Suggests Rights Offerings May Limit Liability in Certain Transactions

Meredith E. Kotler is a partner and Mark E. McDonald is an associate at Cleary, Gottlieb, Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Kotler and Mr. McDonald, and is part of the Delaware law series; links to other posts in the series are available here.

When a corporation sells corporate assets to its (or an affiliate of its) controlling stockholder, Delaware courts generally will review that transaction under the exacting “entire fairness” standard. [1] But what if the corporation’s minority stockholders are given the opportunity to participate along with the controlling stockholder in the purchase of the corporate assets pro rata to the extent of their stock ownership?


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