Monthly Archives: October 2017

Coordinating Compliance Incentives

Veronica Root is Associate Professor of Law at Notre Dame Law School. This post is based on her recent article, forthcoming in the Cornell Law Review.

The notion that corporations must develop effective ethics and compliance programs is uncontroversial. Earlier this month, Deputy Attorney General Rod Rosenstein explained that the “sophistication of compliance measures and tools that we see today regularly exceed the measures that were in place ten years ago.” [1] In part, this increased sophistication may be credited to the robust enforcement actions taken by a variety of governmental actors—whether regulators or prosecutors—which have served to incentivize corporations to develop robust compliance programs. And yet, there appear to be gaps within the government’s enforcement strategy when dealing with potential corporate repeat offenders.


SEC’s Proposed Modernization of Regulation S-K

This post is based on a publication from Ropes & Gray LLP.

On October 11, 2017, at the first open meeting under Chairman Jay Clayton’s tenure, the SEC proposed amendments to modernize and simplify certain disclosure requirements in Regulation S-K. The proposed amendments are largely consistent with the recommendations in the SEC’s FAST Act Report to Congress in November 2016 (the “Report”). [1] The rulemaking proposal is intended to improve the readability and navigability of SEC documents and discourage repetition and disclosure of immaterial information.

The rulemaking proposal includes approximately 30 discrete changes to Regulation S-K, and related rules and forms. With a couple of exceptions that we note below, none of the changes is likely individually to have a significant impact. Taken together, however, they should have a salutary effect on the preparation and presentation of disclosure documents. Highlights of several key aspects of the proposal are summarized in this post.


Weekly Roundup: October 20–26, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 20–26, 2017.

Fire Sale Discount: Evidence from the Sale of Minority Equity Stakes

Busy Directors: Strategic Interaction and Monitoring Synergies

Why Does Fast Loan Growth Predict Poor Performance for Banks?

Preferred-Stock Minority Investments in the Private Equity Context

Environmental and Social Proposals in the 2017 Proxy Season

Thomas Singer is a principal researcher in corporate leadership at The Conference Board, Inc. This post is based on a publication from The Conference Board, authored by Mr. Singer and Ramsha Khursheed. Related research from the Program on Corporate Governance includes Social Responsibility Proposals by Scott Hirst (discussed on the Forum here).

The Conference Board recently released a report that reviews the key environmental and social (E&S) proposals in the 2017 proxy season. The report provides details on some of the most prominent topics, including topics which received high levels of shareholder support and topics that have seen notable changes in support levels compared to previous years.

The report reviews the period between January 1 and June 30, 2017. Of the 465 voted proposals brought to shareholders at Russell 3000 companies 201 related to E&S issues, making up 43.2 percent of proposals brought to a vote during this period. The report finds the volume of E&S proposals has consistently gone up in the past five years.


The Hart-Scott-Rodino Act’s First Amendment Problem

Scott Gant is a Partner at Boies, Schiller, and Flexner LLP. This post is based on a recent article, forthcoming in the Cornell Law Review Online, by Mr. Gant, Andrew Z. Michaelson, and Edward J. Normand.

The Hart-Scott-Rodino Antitrust Improvements Act (“HSR Act”) is a centerpiece of federal antitrust law. Designed to aid enforcement of Clayton Act Section 7, which prohibits mergers and acquisitions that “may … substantially … lessen competition” or “tend to create a monopoly,” the statute requires the prospective acquirer of an issuer’s voting securities exceeding a certain amount to notify the Federal Trade Commission (“FTC”) and the Antitrust Division of the Department of Justice (“DOJ”) of the potential acquisition, pay a filing fee, and observe a thirty-day waiting period before proceeding.

The FTC or DOJ may thereafter issue to the proposed acquirer a “second request” for additional information about the acquisition, and conduct an investigation, take testimony, and seek to prevent the acquisition. Investors that have acquired shares without complying with these requirements are subject to civil penalties of up to $40,000 per day.


FPI Director Oversight over Related Party Transactions

Edward Barnett and Joel H. Trotter are partners and Paul M. Dudek is counsel at Latham & Watkins LLP. This post is based on a Latham publication by Mr. Dudek, Mr. Barnett, Mr. Trotter and Ryan Maierson.

Investors and regulators in the current corporate governance environment have increased their focus on companies’ transactions with their directors, senior management, and other related persons. These related-party transactions raise special disclosure issues for non-US companies, known as foreign private issuers (FPIs), that are listed on US stock exchanges.

FPIs may engage in related-party transactions that remain undisclosed as a matter of customary market practice in their home jurisdictions. Concurrently, the US Securities and Exchange Commission (SEC) requires FPIs to disclose related-party transactions that are material to the company, without referencing a specific transaction amount. This approach, which is separate from home country disclosure and shareholder consent rules for related-party transaction disclosures, differs from the US$120,000 transaction threshold that applies to US domestic companies.


The Rise of Investor-Centric Activism Defense Strategy

Peter Michelsen is President and Derek O. Zaba is Partner at CamberView Partners, LLC. This post is based on a CamberView publication by Mr. Michelsen and Zaba. 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).

Shareholder activism is often thought of in binary terms: activist v. company, dissident nominees v. company directors. Media coverage dramatically frames the “showdown” of prominent and press-savvy activists taking on companies as both sides seek the upper hand on the way to the ballot box. While an “us vs. them” mentality makes for a compelling narrative, this framework has a major flaw: it doesn’t include shareholders, who are the most important constituency in driving the outcome of proxy contests.

Gaining the support of shareholders, in particular large institutional shareholders, through a well-crafted “investor-centric” activism defense strategy is increasingly the key to success in activism situations. Below we outline how activism defense and the investor landscape have evolved and why the “investor-centric” strategy has become the optimal path to victory for most proxy contests, regardless of whether they culminate in the withdrawal of the activist, a shareholder vote or a mutually agreed settlement.


Preferred-Stock Minority Investments in the Private Equity Context

Edward Ackerman and Angelo Bonvino are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Ackerman and Mr. Bonvino.

When purchasing a company, private equity sponsors typically use a combination of debt and equity to fund the purchase price. When structuring a transaction, private equity sponsors may invest all or a portion of their equity capital in the form of preferred stock or issue preferred stock to minority investors if sufficient debt is not available. Similarly, a company may, from time to time, issue one or more series of preferred stock to raise necessary operating capital when debt financing is only available on restrictive terms or not available at all.

This post explores such uses of preferred stock in private equity transactions, with a particular focus on its use in minority investments, including as an alternative or supplement to debt financing, and will analyze the relative benefits and drawbacks of utilizing preferred stock in this context from the perspective of both the issuing company (which also may be controlled by a private equity sponsor) and the private equity minority investor. Relatedly, it will address how, in the context of financing an acquisition, a private equity sponsor may allocate financing risk and the risk of an acquisition not being consummated with its minority preferred investors, including in connection with commitment letters, guarantees, and termination fees.


Building a Better Board Book

Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on a recent paper by Mr. Tayan; Alexander Baum, Vice President at ValueAct Capital; David Larcker, James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; and Jacob Welch, Partner at ValueAct Capital.

We recently published a paper on SSRN, Building a Better Board Book, that evaluates the quality of information presented by management to directors in advance of board meetings.

Board members rely on information provided by management to inform their decisions on strategy, capital allocation, performance measurement, and risk management. These materials suffer from three overarching problems. First, they prioritize the director’s duty to oversee financial reporting above the need to truly understand the economic drivers of business performance. Second, board books tend to have an abundance of information but a dearth of metrics that lead to true insight. Third, the structure of board presentations becomes formulaic over time. As a result, board books do not change with the marketplace, preventing directors from understanding how the industry—and therefore their corporation’s strategy and investments—needs to evolve.


Where’s the Board? Questions for Equifax

Gary Cook is Managing Director of Cook & Company. This post is based on a recent publication by Mr. Cook.

On Tuesday, October 3, 2017, Richard F. Smith the former CEO of Equifax testified before the House Energy And Commerce Committee. In his apology for the exposure from Equifax files of sensitive personal information for nearly 146 million Americans, he indicated that an “individual” in Equifax’s technology department had failed to heed security warnings and did not ensure the implementation of software fixes that would have prevented the breach.


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