Monthly Archives: November 2017

Short Activism: The Rise in Anonymous Online Short Attacks

Jeff Katz is a partner in Ropes & Gray’s corporate department, and regularly works on shareholder engagement and activism matters. Annie Hancock is an associate in the litigation department, and works on transactional and securities litigation as well as government enforcement matters. This post is based on a Ropes & Gray publication by Mr. Katz and Ms. Hancock. 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).

In recent years, anonymous online hit pieces against public companies have become an increasingly common and effective form of short activism. Given their success in driving down stock prices, anonymous online short campaigns are likely here to stay. Anonymous online short attacks pose unique challenges to public companies. In order to defend successfully against anonymous online short attacks, public companies must have ready-to-execute plans in place—whether or not an online short attack appears imminent.

This post has five main sections: Section I discusses the rise in anonymous online attacks, Section II analyzes the effectiveness of short seller campaigns, Section III discusses how anonymous short attacks are waged, Section IV analyzes the challenges that anonymous online attacks pose for public companies, and Section V discusses different considerations in determining whether and how to respond to anonymous online attacks, and the strategic decisions required to successfully defend against them.


Gender Diversity Index

Dan Marcec is Director of Content at Equilar, Inc. This post is based on an Equilar publication by Mr. Marcec, Thao Nguyen and Courtney Yu.

For the third quarter in a row, the Equilar Gender Diversity Index (GDI) remained at 0.32, as the percentage of women on Russell 3000 boards was steady at 16.2% between June 30 and September 30, 2017. Despite the representation of women on boards staying the same over the latest three-month period, there are signs of progress. The number of boards with zero women continues to decline rapidly, and the number of boards that have reached parity ticked up steadily once again.


Finance and Corporate Innovation: A Survey

Jie (Jack) He is Associate Professor of Finance and BB&T Scholar at University of Georgia Terry College of Business, and Xuan Tian is JD Capital Chair Professor of Finance at Tsinghua University PBC School of Finance. This post is based on their recent paper.

Corporate innovation has become an increasingly important topic that attracts a great deal of attention from academic researchers in financial economics in recent years. How to motivate and finance corporate innovation? To what extent do financial markets and systems shape the initiation, process, features, and outcomes of technological innovation by corporations? These questions are particularly important to investors, business practitioners, social scientists, as well as policy makers due to the fact that technological innovation is vital for a country’s economic growth and a firm’s long-term competitive advantage. Given the important roles played by technological innovation, more and more financial economists have started exploring a wide spectrum of firm-, market-, as well as country-level determinants of corporate innovation over the past few decades. Although the top three finance journals (i.e., the Journal of Finance, the Journal of Financial Economics, and the Review of Financial Studies) together published a total of only 5 papers on the topic of corporate innovation between 2000 and 2008, the number of such papers published by these three journals has skyrocketed to 56 ever since 2009 (until 2017Q3). This newly emerged strand of research generally has two central themes: (1) how to best motivate corporate managers to invest in innovation; and (2) how to finance innovation efficiently.


Comparison of House and Senate “Tax Cuts and Job Acts” Bills

Maureen J. Gorman, Debra B. Hoffman, and Ryan J. Liebl are partners at Mayer Brown LLP. This post is based on Mayer Brown publication by Ms. Gorman, Ms. Hoffman, Mr. Liebl, and James C. Williams.

HR 1, the Tax Cuts and Jobs Act (House Bill), as introduced in the House Ways and Means Committee on November 2, 2017, included provisions that would, among other things, dramatically affect the taxation of employees and other service providers with respect to nonqualified deferred compensation (including stock options, stock units and stock appreciation rights) and would modify the rules of Section 162(m) of the Internal Revenue Code (Code) governing corporate deductions for compensation paid to certain executive officers. On November 6 and 9, Chairman Brady of the Ways and Means Committee proposed two amendments to the House Bill, later adopted by the committee, that (i) removed the draconian provisions that would have modified the taxation of nonqualified deferred compensation (while preserving the House Bill’s proposed changes to Code Section 162(m)) and (ii) added certain enhancements relating to the taxation of stock options and restricted stock units granted to employees by certain private companies.


Five Ways to Improve Your Compensation Disclosure

Jeannemarie O’Brien is a partner and Erica E. Bonnett is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Ms. O’Brien and Ms. Bonnett.

As preparation for the 2018 proxy statement season commences, companies should take a fresh look at their compensation disclosure, including a review of the entire Compensation Discussion and Analysis (“CD&A”) for comprehensiveness, cohesion and consistency. After multiple years of ad hoc revisions, the CD&A can read as disjointed or inconsistent and include stale or repetitive disclosure. Getting an early start to reviewing the CD&A as a whole, focusing on why each element of disclosure is included and how it helps investors understand the company’s compensation programs and philosophy, will help ensure that the CD&A clearly communicates the information that investors are seeking. In addition, companies looking for specific ways to improve the effectiveness of their disclosure as a tool for investor communication should consider the following suggestions.

Analysis of SEC Shareholder Proposal Guidance

Sandra Flow is a partner and Mary Alcock is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Flow, Ms. Alcock, Elizabeth Bieber, and Katy Yang.

Just as companies are starting to gear up for the 2018 proxy season, on November 1, 2017, the staff (the “Staff”) of the Division of Corporation Finance of the Securities and Exchange Commission released new guidance on shareholder proposals that seems to indicate the Staff will be taking a more company-friendly approach in its review of no-action letter requests.

Specifically, Staff Legal Bulletin No. 14I (“SLB 14I”) clarifies the scope and application of two grounds for excluding a shareholder proposal from a company’s proxy statement—the “ordinary business” exception (Rule 14a-8(i)(7)) and the “economic relevance” exception (Rule 14a-8(i)(5))—and provides guidance on proposals submitted on behalf of shareholders (“proposals by proxy”) and the use of graphs and images in proposals. The following is a summary of the guidance:


Peer Information and Empowered Voters: Evidence from Voting on Shareholder Proposals

Xiao Li is an assistant professor at Central University of Finance and Economics; Jeffrey Ng is a professor at The Hong Kong Polytechnic University; and Hong Wu is an assistant professor at The Hong Kong Polytechnic University. This post is based on their recent paper.

Corporate voting on shareholder proposals, an exercise in corporate democracy, is an important mechanism through which shareholders try to influence how a firm is run (e.g. McCahery, Sautner, & Starks, 2016). Increasing evidence points to shareholder proposals leading to changes in compensation policy, firm strategy, corporate governance, and corporate social responsibility (e.g. Ertimur, Ferri, & Muslu, 2010; Flammer, 2015). Shareholder proposals, which are often based on actual or perceived underperformance relative to peer firms, can generate significant tension between shareholders and the firm’s board of directors and management. Soltes, Srinivasan, and Vijayaraghavan (2016) find that managers sought to exclude a large proportion of shareholder proposals from being voted on and provided evidence that managers often sought to exclude legitimate shareholder interests from such votes. In recommending against a shareholder proposal calling for the independence of the board chairman, the board of Ashford Hospitality Trust, Inc. stated, “There is no established consensus that having an independent chairman or separating the roles of the chief executive officer and chairman enhances returns for stockholders. … In fact, in the case of our company, we have materially and consistently outperformed our peer average on the basis of total stockholder returns and earnings before interest, taxes, depreciation, and amortization (EBITDA) margins over the past three (3) years, while having a non-independent chairman.” [1] If accounting numbers are used in peer comparisons, the comparability of peer information becomes an important issue (De Franco, Kothari, & Verdi, 2011). In this paper, we seek to examine the role of comparable accounting information about peer firms in empowering shareholders to vote on shareholder proposals.


Weekly Roundup: November 17-22, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of November 17-22, 2017.

ISS Final 2018 Voting Policies

Stock Trades of SEC Employees

Second Circuit Analysis of Fraud-on-the-Market Doctrine

Analysis of SEC Guidance on Shareholder Proposals

Impact of Tax Reform Bill on Executive Compensation

Crowdfunding Signals

ISS’ 2018 Policy Changes for U.S. Companies

The following post is based on a publication from CamberView Partners, authored by Abe M. Friedman, Chief Executive Officer and a founder of CamberView Partners, and Partners Bob McCormick, Allie M. Rutherford, and Gibson Smith.

On Thursday, November 16th, ISS released its 2018 Benchmark Policy changes that will be effective for annual meetings that occur on or after February 1st, 2018. This year’s update includes new policies for U.S. companies around shareholder proposals regarding gender pay equity and climate change risk, disclosure on responsiveness to low say-on-pay votes, excessive compensation for non-employee directors, recommendations to vote against board members at companies with long-term poison pills and a new metric on relative financial performance assessment. The policy updates are the culmination of ISS’ policy development process, which includes consideration of the results of ISS’ 2017-2018 Global Policy Survey as well as feedback received over the past few months in various roundtable and group discussions with investors and corporate directors, including four held in the U.S.


Crowdfunding Signals

Darian M. Ibrahim is the Tazewell Taylor Research Professor of Law at William & Mary Law School. This post is based on his recent paper.

Crowdfunding is the hot new method by which new companies raise their first capital. Selling unregistered securities over the Internet was prohibited in the past because it constituted a “general solicitation” of investors. Then came the JOBS Act of 2012, which initially only allowed general solicitation of accredited investors (Title II offerings). [1] It was not until October 2015 that the Securities and Exchange Commission (SEC) passed the final rules implementing Title III, dubbed “Regulation Crowdfunding” (Regulation CF), which allowed general solicitation—and thus Internet sales—to unaccredited investors. [2]


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