Monthly Archives: August 2017

Dissident Uses Disclosure Litigation as an Offensive Tactic in Successful Proxy Contest

Steven M. Haas is a partner and Charles Brewer is an associate at Hunton & Williams LLP. This post is based on a Hunton & Williams publication by Mr. Haas and Mr. Brewer, and is part of the Delaware law series; links to other posts in the series are available here. 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 Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

In a recent proxy contest, a dissident stockholder brought a lawsuit against the company claiming that the company’s disclosures about certain incumbent directors were deficient. The court agreed, and enjoined the company’s annual stockholders meeting until at least 10 days after the company supplemented its disclosures. As a result of the court’s ruling, Institutional Shareholder Services (“ISS”) reevaluated its support for the company’s nominees and changed its voting recommendation in favor of the dissident, who ultimately prevailed at the stockholders meeting. Although litigation in proxy contests—whether actual or threatened—is not new, this ruling illustrates how dissident stockholders can use offensive disclosure litigation to influence proxy advisors’ recommendations and win a stockholder vote.


Recent Cases Demonstrate Need for Blockchain

Stephen Fox is an associate at Goodwin Procter LLP. This post is based on a Goodwin Procter publication by Mr. Fox, and is part of the Delaware law series; links to other posts in the series are available here.

A recent Delaware bill is poised to allow private Delaware corporations “use networks of electronic databases (examples of which are described currently as “distributed ledgers” or a “blockchain”) for the creation and maintenance of corporate records, including the corporation’s stock ledger.” The bill is a significant step towards the mainstream adoption of blockchain technology, which has the potential to solve problems that legacy technologies could not previously solve.


Federal Class Action Securities Fraud Filings Hit Record Pace in H1 2017

John Gould is senior vice president at Cornerstone Research. This post is based on a Cornerstone publication.

Executive Summary

Federal class action securities fraud filings hit a record pace in the first half of 2017. Over the past 18 months, more securities fraud class actions have been initiated in federal court than in any equivalent period since enactment of the Private Securities Litigation Reform Act of 1995 (PSLRA).

Number and Size of Filings

  • Plaintiffs filed 226 new federal class action securities fraud cases (filings) in the first six months of 2017. This was 135 percent above the 1997–2016 historical semiannual average of 96 filings and the highest filing rate since the Securities Clearinghouse began tracking these data.
  • Disclosure Dollar Loss (DDL) rose to $74 billion in the first half of 2017, 23 percent above the historical semiannual average of $60 billion. Neither DDL nor MDL, shown below, is at the historic levels exhibited by the number of filings.
  • After a large increase in 2016, Maximum Dollar Loss (MDL) dropped to $302 billion, on par with the historical semiannual average MDL of $303 billion.
  • In the first half of 2017, three mega filings made up 24 percent of DDL, and eight mega filings made up 43 percent of MDL. These filings comprised a smaller fraction of the DDL and MDL indices compared to 2016 and the 1997–2016 average. Filings with a DDL of at least $5 billion or an MDL of at least $10 billion are considered mega filings.


Equity Issuances and Agency Costs: The Telling Story of Shareholder Approval Around the World

Clifford G. Holderness is Professor of Finance at the Carroll School of Management at Boston College. This post is based on a recent paper by Professor Holderness.

In the United States and a few other countries, management typically needs only board of director approval to issue common stock. But in most countries by law or stock-exchange rule, shareholders must vote to approve equity issuances undertaken by a certain method or exceeding a specified fractional threshold. In some countries shareholders must approve all equity issuances. Even in the United States shareholder approval is mandatory under certain circumstances.

This widespread heterogeneity in shareholder approval, which has been overlooked to date, is associated with several robust empirical regularities. Most notably, shareholder-approved issuances are associated with positive and higher announcement returns compared with managerial issuances, 2% versus -2%. The closer the vote is to the issuance or the greater is the required plurality, the higher are the returns for public offers, rights offers, and private placements. When shareholders must approve equity issuances, rights offers are far more common than public offers. When managers may issue equity without shareholder approval, public offers are far more common than rights offers.


You Want Mandatory Arbitration in your Charter? Hey, Just Ask!

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

This is the opening paragraph from Tuesday’s column by Alison Frankel, one of my favorite legal columnists/bloggers:

This could be the start of something huge: Securities and Exchange Commissioner Michael Piwowar said in a speech Monday to the Heritage Foundation that the SEC is open to the idea of allowing companies contemplating initial public offerings to include mandatory shareholder arbitration provisions in corporate charters. If Piwowar’s statements…mark a new SEC policy on mandatory arbitration, they could be the beginning of the end of securities fraud class actions.


S&P and FTSE Russell on Exclusion of Companies with Multi-Class Shares

The following post is based on a publication from CamberView Partners, authored by Abe M. Friedman, Bob McCormick, Allie M. Rutherford, and Rob Zivnuska.

Over the past week, two of the world’s largest index providers have announced decisions to partially or fully exclude companies with multiple-class share structures from their indices. These new policies, made after substantive consultation with index users and other stakeholders, have wide-ranging implications for issuers and investors alike and highlight the growing roles of investors and index providers in shaping governance standards.


Sunrise, Sunset: An Empirical and Theoretical Assessment of Dual-Class Stock Structures

Andrew Winden is a Fellow at the Rock Center for Corporate Governance and a Lecturer in Law at Stanford Law School. This post is based on a recent paper by Mr. Winden. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

The decades-old debate on dual-class stock structures in the United States has recently come to a head again as entrepreneurs are adopting such structures with increasing frequency and institutional investors are mounting a concerted effort to have them prohibited, abandoned or excluded from equity indexes. The debate is ill-informed, however, as the actual terms of dual-class stock structures have been remarkably understudied. When Snap, Inc. debuted with non-voting shares, for instance, many pundits stated the listing was unprecedented, but several companies had already issued non-voting shares in previous IPOs over the years, including Dodge Brothers and Industrial Rayon in 1925. My paper presents the first detailed empirical analysis of the initial, or sunrise and terminal, or sunset provisions found in the charters of dual-class companies, based on a data set of 123 U.S. public companies with dual-class structures. After reviewing the terms of the dual-class structures and arguments for and against them, I conclude that careful selection of sunrise and sunset provisions can satisfy both entrepreneurs’ desire to pursue their visions for value creation without fear of interference or dismissal and investors’ need for a voice to ensure management accountability. Private law firms representing entrepreneurs in initial public offerings play a critical role in the selection of charter provisions, so the onus is on such firms to ensure that private ordering produces a satisfactory resolution to the dual-class debate before momentum builds for a regulatory solution to investors’ concerns.


DFC Global: Delaware Supreme Court Strongly Endorses Reliance on Merger Price

Gail Weinstein is senior counsel and Scott B. Luftglass is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Luftglass, Warren S. de Wied, Robert C. Schwenkel, Steven Epstein, and Philip Richter. This post is part of the Delaware law series; links to other posts in the series are available here. This post discusses in detail the recent the Delaware Supreme Court Ruling on the role of market evidence in appraisal “fair value” determinations. A previous post on the impact of this ruling is available here.

In DFC Global v. Muirfield (Aug. 1, 2017), the Delaware Supreme Court, en banc, reversed the Court of Chancery’s appraisal decision involving the acquisition of DFC Global Corp., a publicly traded payday lending firm, by a private equity firm, and remanded the case for further consideration by the Court of Chancery. In its opinion below, the Court of Chancery had found, following full trial on the merits, that the underlying sales process was robust and competitive. However, the Court of Chancery also found that the extreme regulatory uncertainty facing the target company (specifically, a complete overhaul of the regulatory framework applicable to the company) undermined the reliability, for appraisal purposes, of the market’s assessment of DFC Global’s value. The Court of Chancery also viewed the regulatory uncertainty as undermining the reliability of the company’s projections for a DCF analysis. The Court of Chancery therefore relied on a combination of the merger price, a DCF valuation, and a comparable companies valuation, weighted one-third each, to determine “fair value”—and the result was approximately 8.4% above the merger price.


Say-on-Pay: Is Anybody Listening?

Dan Palmon is William J. von Minden Chair in Accounting at the Rutgers Business School. This post is based on a recent article by Professor Palmon; Stephani A. Mason, Assistant Professor of Accounting at the DePaul University Driehaus College of Business; and Ann F. Medinets, Assistant Professor of Accounting at Rutgers Business School. Related research from the Program on Corporate Governance includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Populist anger in the U.S., Europe, and Australia has triggered an ongoing debate about whether executives receive excessive compensation, and if so, how to control it. Several countries have instituted say-on-pay rules (shareholders’ right to vote on executive compensation) aimed at reducing excessive compensation. Determining the effectiveness of say-on-pay is difficult because its tenets vary by country due to political, institutional, cultural, economic, and social factors that have shaped local governance and compensation practices. Policy issues like say-on-pay are complex and lack the necessary foundation of definitive assumptions and theories. Existing say-on-pay research is inconclusive, since some studies find no change in CEO compensation around its adoption, whereas other studies show that say-on-pay lowers CEO pay or changes its composition. A major factor that hinders the effectiveness of say-on-pay research is the many forms in which it comes. It can be implemented by shareholder proposals or through legislation, and the effect of say-on-pay measures can be binding or non-binding, depending on regulatory requirements or internal corporate policy.


Weekly Roundup: July 28–August 2, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of July 28–August 2, 2017.

Balancing Board Experience and Expertise

SEHK Invites Market Feedback on Establishment of New Listing Board

Deals Mid-Year Review and Outlook

Delaware Update

Managerial Myopia and the Mortgage Meltdown

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