Monthly Archives: November 2017

Congruence in Governance: Evidence from Creditor Monitoring of Corporate Acquisitions

David Becher is David Cohen Research Scholar and Associate Professor of Finance; Thomas Griffin is a Ph.D. Candidate in Finance; and Greg Nini is Assistant Professor of Finance, all at Drexel University LeBow College of Business. This post is based on their recent paper.

Corporate creditors play an important role in firm governance. For example, Lee Enterprises, Inc. reported in their third quarter 2008 financial statement that “the Company’s strategies are to increase its share of local advertising through increased sales activities in its existing markets and, over time, to increase its print and online audiences through internal expansion … [and] acquisitions.” [1] The company financed these plans, in part, with a credit facility containing a minimum net worth covenant. In the fourth quarter, Lee’s net worth fell below the contractual limit, resulting in a violation of the credit agreement. To remedy this, Lee Enterprises and their lenders amended the credit agreement to “modify other covenants, including restricting the Company’s ability to make additional investments and acquisitions without the consent of its Lenders.” [2]

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Weekly Roundup: November 10–16, 2017


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This roundup contains a collection of the posts published on the Forum during the week of November 10–16, 2017.

Changes in CEO Stock Option Grants: A Look at the Numbers


New House Bills on Securities Offerings


Social Media and Proxy Contests


Benefits of CEO Pay Ratio Guidance



CEO Pay Ratios: What Do They Mean?



Deal Activism: Lessons from the EQT Proxy Contest




Activism Mergers


Corporate Disclosure of Human Capital Metrics


SEC Clarifications for Non-GAAP M&A Disclosures


Break Fees and Broken M&A Deals


The 10 Highest-Paid Boards of Directors



The Economics of PIPEs

The Economics of PIPEs

Jongha Lim is Assistant Professor of Finance at California State University Fullerton Mihaylo College of Business and Economics; Michael Schwert is Assistant Professor of Finance at The Ohio State University Fisher College of Business; and Michael S. Weisbach is Ralph W. Kurtz Chair in Finance at The Ohio State University Fisher College of Business, and Research Associate at the National Bureau of Economic Research. This post is based on their recent paper.

Private placements of equity, commonly referred to as “PIPEs,” are an important source of financing for many public corporations. According to PrivateRaise, a leading database on PIPE transactions, between 2001 and 2015, there were 11,296 private placements of common stock by U.S. listed firms that raised $243.9 billion. Firms raising funds through PIPEs tend to be small, with 93% of common stock PIPE issuers having market capitalization below $1 billion. As a point of comparison, U.S. firms with market capitalization below $1 billion raised $240.3 billion in SEOs over the same period.

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Employee Reaction to CEO Pay Ratio Disclosure

Jim Kohler is a director, Steve Seelig is a senior regulatory advisor, and Rich Luss is a senior economist with Willis Towers Watson. This post is based on a Willis Towers Watson publication by Mr. Kohler, Mr. Seelig, and Mr. Luss. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

The question of how to provide context for their CEO pay ratio proxy disclosure has been one companies have been turning to as they near completion of their calculation work. One perspective on this issue has come from a recent ISS Position Paper that recommends companies include in their disclosure a comparison to peer group disclosures. We would make the case that taking an approach that focuses solely on placing the pay ratio in context for shareholders is likely at odds with the message companies want to communicate to their employees, which they’ve expressed to be their biggest challenge regarding the pay ratio. For more on this topic, see our article, “Employee reaction tops U.S. companies’ concerns over fast approaching, pay ratio disclosure rule“, Executive Pay Matters, October 18, 2017. Moreover, we believe that the data that led ISS to its conclusions would lead far too many companies to conclude their pay ratios are too high, prompting them to provide unnecessary explanations that could trigger negative employee reactions.

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The 10 Highest-Paid Boards of Directors

Dan Marcec is Director of Content at Equilar, Inc. This post is based on an Equilar publication by Mr. Marcec.

Though board of directors’ pay pales in comparison to that of CEOs, compensation for board service can inch into the half-million dollar range—and in a few cases, may be much higher. Below is a list of the highest-paid boards of directors at large-cap companies, based on annual retainers awarded to all non-employee directors, according to Equilar data.

Company Name Annual Director Retainer
Regeneron Pharmaceuticals $2,074,085
Tesla $1,664,928
The Goldman Sachs Group $575,000
Salesforce.com $550,000
Celgene Corporation $524,871
Reynolds American $496,480
Valeant Pharmaceuticals International $475,000
Allergan PLC $450,000
Everest Re Group, Ltd. $447,030
Oracle $429,172

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Break Fees and Broken M&A Deals

Oliver E. Browne is a partner at Latham & Watkins LLP. This post is based on a Latham publication by Mr. Browne, Catherine Campbell, and Ashleigh Gray.

Given ongoing competition between buyers in a strong sellers’ market, the resilience of seller break fees as a feature of the European M&A market is surprising. According to the Latham & Watkins 2017 European Private M&A Market Study (which examined over 190 deals signed between July 2015 and June 2017), 10% of European private M&A transactions featured a seller break fee, slightly up from 8% in 2016.

“Break fee and reverse break fee quantum ranges greatly based on transaction factors. Examples of reverse break fees in UK public M&A in the first half of 2017 ranged from 1% to 2.5% of the deal value.”

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SEC Clarifications for Non-GAAP M&A Disclosures

Trevor S. Norwitz and Sabastian V. Niles are partners and Samson Z. Mesele is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Norwitz, Mr. Niles, and Mr. Mesele.

The SEC Staff recently released Compliance & Disclosure Interpretation 101.01 (the “C&DI”) which provides that financial measures included in forecasts given to a financial advisor and used in connection with a business combination transaction are not non-GAAP financial measures that must be reconciled to GAAP. This applies as long as the forecasts (i) are provided to the financial advisor for the purpose of rendering a fairness or similar opinion and (ii) are disclosed to comply with Regulation M-A Item 1015 (requiring a summary of the analyses supporting a fairness opinion) or to comply with requirements under state or foreign law, including case law, regarding disclosure of financial advisor analyses.

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Corporate Disclosure of Human Capital Metrics

Aaron Bernstein is a Senior Research Fellow at the Harvard Law School Labor and Worklife Program. Larry Beeferman is the Director of the Program’s Pensions and Capital Stewardship Project. This post is based on their recent paper.

The concept of human capital (HC) has for more than a half century informed discussion about how corporations are managed. The idea is typically associated with the skills, knowledge and abilities employees bring to their work. In recent years, institutional investors have taken a mounting interest in the subject, in large part due to the increasing awareness that HC policies are material to long-term financial performance and success. (See our 2015 paper The Materiality of Human Capital to Corporate Financial Performance.) However, investors face significant challenges in the quest for data on the topic that they can use to inform decisions about investments or discussions with boards and executives about corporate strategy and competitiveness.

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Activism Mergers

Nicole M. Boyson is Associate Professor of Finance at the D’Amore-McKim School of Business at Northeastern University; Nickolay Gantchev is Associate Professor at the Cox School of Business Southern Methodist University; and Anil Shivdasani is Professor of Finance at the University of North Carolina Kenan-Flagler Business School. This post is based on a recent article, forthcoming in the The Journal of Financial Economics, by Professor Boyson, Professor Gantchev, and Professor Shivdasani. 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 surge in shareholder activism in recent years has promoted fierce debate over the consequences of activism for targeted companies and their shareholders. Of particular interest has been the question of whether shareholder activism has helped improve the long-term shareholder value of targeted companies. Although several studies argue that hedge fund activism improves the performance of targets, exactly how hedge fund activists enhance shareholder value remains an unresolved issue.

In our new article, Activism Mergers, published in The Journal of Financial Economics, we highlight the critical role that hedge fund activism plays in corporate control transactions. Although shareholder activism and corporate takeovers have historically been viewed as mutually exclusive channels for disciplining management, activist involvement in takeover situations has become increasingly common in recent years. We analyze over 2,000 activism campaigns and over 3,200 M&A transactions between 2000-2014 and find that the probability that an activist target will merge has increased over time, from 20% over 2000–2006 to 25% after 2007. Thus, instead of being two distinct means of shareholder intervention, activism and takeovers appear to be closely interrelated.

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Proxy Drafting Insight

The following post is based on a publication from CamberView Partners, authored by Krystal Berrini, Lauren Gojkovich, Kathryn Night, and Rob Zivnuska.

Shorter days and longer nights are a sign for many corporate secretaries and general counsel that proxy drafting season has arrived. Each year presents a new opportunity for issuers to address evolving and emerging areas of investor interest through proxy statement disclosure. Here are five topics around which enhanced disclosure and clear messaging can set a positive tone for companies in the most important document of the year for governance-focused investors.

Environmental, social and cybersecurity oversight

Environmental and social topics picked up considerable momentum with investors in 2017. Climate disclosure proposals that received majority support at major energy companies this spring are one measure of this shifting landscape, but even more telling is the frequency with which environmental and social topics are raised in shareholder engagement meetings. In broad terms, investors want to understand companies’ perspectives on key risks and opportunities, how they are measuring progress against goals, how these initiatives support long-term strategy and how the board oversees this area of the business. Some companies might consider more disclosure in the proxy about how the board and its committees oversee sustainability-related issues. The disclosure is most helpful if it allows investors to see the connection between sustainability goals, strategy and board oversight.

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