Monthly Archives: November 2017

Silicon Valley and S&P 100: A Comparison of 2017 Proxy Season Results

Posted by David Bell, Fenwick & West LLP, on

Tuesday, November 14, 2017

Boards of Directors, ESG, Executive Compensation, Peer groups, Proxy access, Proxy season, Proxy voting, Say on pay, Shareholder elections, Shareholder proposals, Shareholder voting, Surveys, Tech companies
More from: David Bell, Fenwick

David A. Bell is partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick publication titled Results of the 2017 Proxy Season in Silicon Valley—A Comparison of Silicon Valley 150 Companies and the Large Public Companies of the Standard & Poor’s 100; the complete survey is available here.

In the 2017 proxy season, 138 of the technology and life sciences companies included in the Silicon Valley 150 Index (SV 150) and all 100 of the S&P 100 companies held annual meetings that typically included voting for the election of directors, ratifying the selection of auditors of the company’s financial statements and voting on executive officer compensation (“say-on-pay”).

Annual meetings also increasingly include voting on one or more of a variety of proposals that may have been put forth by the company’s board of directors or by a stockholder that has met the requirements of the company’s bylaws and applicable federal securities regulations. [1]

Deal Activism: Lessons from the EQT Proxy Contest

Posted by Edward D. Herlihy and Steven A. Cohen, Wachtell, Lipton, Rosen & Katz, on

Monday, November 13, 2017

Board communication, Boards of Directors, Engagement, Long-Term value, Mergers & acquisitions, Proxy advisors, Proxy contests, Proxy fights, Settlements, Shareholder activism, Shareholder voting
More from: Edward Herlihy, Steven Cohen, Wachtell Lipton

Edward D. Herlihy and Steven A. Cohen are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Mr. Herlihy and Mr. Cohen. 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); and Dancing with the Activists by Lucian Bebchuk, Alon Brav, Wei Jiang and Thomas Keusch (discussed on the Forum here).

“Deal Activism,” in which activists invest to oppose announced deals, has become an increasingly frequent component of the activist playbook. While efforts by the target company’s shareholders to oppose a deal to secure a higher bid have received the most media attention, activists have also run campaigns against acquirors to block transactions outright, to extract concessions or to generate pressure against a board. This occurs most frequently in strategic, stock-for-stock transactions where votes are needed on both sides.

The recent proxy contest over EQT Corporation’s strategic merger with Rice Energy demonstrates that these fights can be fought and won. EQT is one of the largest natural gas producers in the United States, and has viewed its vertical integration of production and midstream as a source of competitive strength. At the same time, EQT has taken steps over the last five years to unlock the embedded value of its midstream businesses, including creating two listed midstream MLPs. However, a “sum-of-the-parts” valuation issue then arose, which EQT had announced would be addressed in 2018. The opportunity to acquire Rice Energy, which has a compelling adjacent geography to EQT’s existing acreage, became available in 2017—but activists complained that the transaction should be precluded until the valuation issue was resolved. After a highly visible contest for nearly four months, shareholders voted today to authorize the deal. The EQT proxy contest provides a number of valuable lessons on how companies can successfully navigate this type of activist assault.

Reevaluating Shareholder Voting Rights in M&A Transactions

Posted by Afra Afsharipour, UC Davis School of Law, on

Monday, November 13, 2017

Acquisition agreements, Agency costs, Behavioral finance, Bidders, Incentives, Institutional Investors, Mergers & acquisitions, Shareholder rights, Shareholder value, Shareholder voting
More from: Afra Afsharipour

Afra Afsharipour is Professor of Law & Martin Luther King, Jr. Hall Research Scholar at the UC Davis School of Law. This post is based on a recent article by Professor Afsharipour, forthcoming in the Oklahoma Law Review. Related research from the Program on Corporate Governance includes Mergers, Acquisitions and Restructuring: Types, Regulation, and Patterns of Practice, by John C. Coates.

Shareholder voting plays a central role in corporate governance. Yet, for many public company acquisitions, only the target firm’s shareholders may be able to exercise voting rights. The lack of voting rights for bidder shareholders is problematic given evidence that many acquisitions involve negative returns for bidders. Bidder overpayment is particularly acute in the case of takeovers of publicly traded targets by publicly traded acquirers. Research shows that compulsory shareholder voting reduces the problem of bidder overpayment. In my article, Reevaluating Shareholder Voting Rights in M&A Transactions, which was recently published in Oklahoma Law Review, vol. 70, Fall 2017, I review the empirical and legal literature on the role of bidder shareholders in acquisitions and suggest ways that shareholder voting can be implemented in large public company acquisitions to reduce the overpayment problem.

CEO Pay Ratios: What Do They Mean?

Posted by Joseph E. Bachelder, McCarter & English LLP, on

Monday, November 13, 2017

Compensation ratios, Dodd-Frank Act, Executive Compensation, Executive performance, Executive value, Management, Market conditions
More from: Andy Tsang, Joseph Bachelder, McCarter & English

Joseph E. Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on a column by Mr. Bachelder which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this post.

Two ratios often cited to support the argument that CEO pay is too high are:

the growth rate of CEO pay compared with the growth rate of the stock market; and
the ratio of CEO pay to average worker pay.

As discussed in this post, these two ratios do not necessarily support the argument that CEO pay is too high. Also, the ratios do not explain underlying factors that cause pay levels to be where they are. Such factors include the competition of major US corporations for a very limited supply of top CEO talent. A recent Rock Center/Stanford Business School report on this subject is noted at the end of today’s column.

Innovative Insurance Products and M&A Risk

Posted by Richard Butterwick, Latham & Watkins LLP, on

Sunday, November 12, 2017

Acquisition agreements, Bidders, Bonds, Break fees, Capital formation, Deal protection, Going private, Insurance, International governance, Private firms, Takeover premiums, Takeovers, UK
More from: Latham

Richard Butterwick is a partner at Latham & Watkins LLP. This post is based on a Latham publication by Mr. Butterwick and Stuart Alford and Catherine Campbell.

Dealmakers’ appetite for transactions involving publicly listed companies remains strong — 2016 saw an increase in deal volume, a trend which continues into 2017. However, deals remain challenging, partly due to limitations on bidder deal protections and financing requirements. In response, innovative products have been developed by the insurance industry of provide solutions. In our view, these insurance products will help some bidders or public companies overcome perceived barriers to success in the UK market.

Takeover Code Requirements

Concern over Kraft’s 2009/2010 acquisition of Cadbury prompted a strengthening of deal requirements from bidders by the Takeover panel. This new approach—which the UK Takeover Code (the Code) enshrines—includes a general prohibition on certain deal protection measures on public acquisitions, such as “break fees”. A break fee is a fee that a seller or target company agrees to pay to another party (typically the bidder), if a specified event causes the transaction to fail. Further, Code cash confirmation rules require bidders to launch offers for public companies with “certain funds” financing in place, that a financial adviser has publicly confirmed to exist.

Benefits of CEO Pay Ratio Guidance

Posted by Steve Seelig, Puneet Arora, and Rich Luss, Willis Towers Watson, on

Saturday, November 11, 2017

Compensation disclosure, Compensation ratios, Compliance and disclosure interpretation, Dodd-Frank Act, Executive Compensation, SEC, SEC rulemaking, Securities regulation
More from: Puneet Arora, Rich Luss, Steve Seelig, Willis Towers Watson

Steve Seelig is a senior regulatory advisor for executive compensation, Puneet Arora is a regulatory advisor and Rich Luss is a senior economist in Willis Towers Watson’s Research and Innovation Center. This post is based on a Willis Towers Watson publication by Mr. Seelig, Mr. Arora, and Mr. Luss. 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); and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

After hearing that the CEO pay ratio rules were still cumbersome and difficult to maneuver, the Securities and Exchange Commission (SEC) recently issued three pieces of guidance that will markedly improve the process, especially for global companies. We believe that the SEC is now much closer to its goal of providing flexibility in a manner that would “reduce costs and burdens for registrants” that should prompt companies to revisit their approaches.

The SEC guidance was in three parts that included an Interpretive Release, new Division of Corporation Finance Guidance on Calculation of Pay Ratio Disclosure and amended and restated Compliance & Disclosure Interpretations (C&DIs).

Key aspects of the changes include:

Social Media and Proxy Contests

Posted by Andrew M. Freedman, Steve Wolosky, and Ron S. Berenblat, Olshan Frome Wolosky LLP, on

Friday, November 10, 2017

Andrew M. Freedman, Steve Wolosky, and Ron S. Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan publication by Mr. Freedman, Mr. Wolosky, Mr. Berenblat, and Kenneth Mantel. 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); and Dancing with the Activists by Lucian Bebchuk, Alon Brav, Wei Jiang and Thomas Keusch (discussed on the Forum here).

As shareholder activists fine-tune their communications strategies for the upcoming proxy season, we expect that many will view social media as an increasingly important means of getting their message out to shareholders. Although a number of prominent investors have used certain forms of social media for years (e.g., Carl Icahn’s use of Twitter), we have only recently seen investors begin to engage with multiple social media platforms as part of a comprehensive digital and social media strategy for their campaigns. Noted examples include Elliott Management’s successful campaign at Arconic and Pershing Square’s ongoing election contest at Automatic Data Processing.

This post lays out the important legal issues and other information that investors should consider when evaluating whether and how to use social media in their upcoming campaigns.

New House Bills on Securities Offerings

Posted by Joseph A. Hall, Sophia Hudson, and Michael Kaplan, Davis Polk & Wardwell LLP, on

Friday, November 10, 2017

Accredited investors, CHOICE Act, Equity offerings, FINRA, Institutional Investors, Investment advisers, IPOs, JOBS Act, SEC, Securities regulation, US House
More from: Joseph Hall, Michael Kaplan, Sophia Hudson, Davis Polk

Joseph A. Hall, Sophia Hudson, and Michael Kaplan are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Hall, Ms. Hudson, Mr. Kaplan, Bruce K. Dallas, Derek Dostal, and Richard D. Truesdell, Jr..

Bills Would Expand Testing the Waters, Codify Confidential Submission of Draft Registration Statements and Modify Accredited Investor Definition

On November 1, the House passed two bills designed to encourage capital formation by extending JOBS Act testing-the-waters provisions to all companies, codifying the SEC’s earlier expansion of confidential submission of draft registration statements by a non-emerging growth company for its IPO and during the one-year period after going public, and modifying the definition of an accredited investor to make more individuals eligible to participate in private placements. The bills were passed on a bipartisan basis and echo proposals that were part of the Financial Choice Act passed by the House in June 2017 and the Treasury Department’s recent regulatory reform report on capital markets. We expect the bills would likely be passed and signed into law if they reach the Senate floor for a vote.

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

Posted by Vasiliki Athanasakou (London School of Economics), Daniel Ferreira (London School of Economics), and Lisa Goh (Hang Seng Management College), on

Friday, November 10, 2017

Agency model, Behavioral finance, Boards of Directors, Capital allocation, Compensation committees, Decision-making, Equity-based compensation, Executive Compensation, Firm performance, Managerial style, Pay for performance, Short-termism, Stock options
More from: Daniel Ferreira, Lisa Goh, Vasiliki Athanasakou

Vasiliki Athanasakou is Assistant Professor of Accounting at the London School of Economics; Daniel Ferreira is Professor of Finance at the London School of Economics; and Lisa Goh is Assistant Professor of Accounting at Hang Seng Management College. This post is based on their recent paper.

In our paper, Changes in CEO Stock Option Grants: A Look at the Numbers, we look at changes in stock option granting behavior towards CEOs. We find that, on average, the number of stock option grants to CEOs changes over time, and that such changes can be predicted by CEO corporate investment decisions; CEOs of firms that have very high or very low levels of investment subsequently receive fewer stock options.

We focus on the number of stock options granted to CEOs. We know relatively little about how the number of options granted changes over time, and how this varies across firms, even though regulators and investors often focus their attention on the number of stock options granted. For example, under current NYSE listing requirements, companies need only to obtain shareholder approval for the total number of options to be granted, and not for the value of these options. Consistent with this focus, patterns in option pay, such as the rigidity of annual stock option grants, and the high correlation of CEO pay with stock market indices (Shue and Townsend 2017), suggest that boards also think of option compensation in terms of numbers of options granted. It is natural for boards to focus on the number of options granted, as this is the main item over which they can actually exercise control. Nevertheless, academic research mainly focuses on the dollar value of stock option grants. Our paper examines option-granting behavior using the number of options granted as the main outcome variable. Do boards grant the same number of options to CEOs each year, or do they revise their granting behavior? What factors drive changes in stock option grants?

Weekly Roundup: November 3–9, 2017

Posted by HLS Forum on Corporate Governance and Financial Regulation, on

Friday, November 10, 2017

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of November 3–9, 2017.

Takeovers and (Excess) CEO Compensation

Posted by Isabel Feito-Ruiz (University of Leon) and Luc Renneboog (Tilburg University), on Friday, November 3, 2017

Tags: Agency costs, Equity-based compensation, EU, Europe, Executive Compensation, International governance, Management, Mergers & acquisitions, Pay for performance, Shareholder value, Stock options, Takeovers

Treasury Recommendations for Capital Markets

Posted by Bjorn Bjerke, Lona Nallengara, and Reena Sahni, Shearman & Sterling LLP, on Friday, November 3, 2017

Tags: Capital formation, Capital markets, CFTC, Derivatives, Financial regulation, Institutional Investors, Regulation NMS, SEC, Securities enforcement, Securities litigation, Securities regulation, Treasury Department

New PCAOB Auditor Reporting Standard Analysis

Posted by Michael Scanlon and Lori Zyskowski, Gibson, Dunn & Crutcher LLP, on Saturday, November 4, 2017

Tags: Accounting standards, Audit committee, Contracts, Disclosure, Earnings disclosure, External auditors, Financial reporting, PCAOB

The Impact of Executive Pay Decisions

Posted by Margaret Hylas and Barry Sullivan, Semler Brossy Consulting Group, on Sunday, November 5, 2017

Tags: Boards of Directors, Compensation committees, Equity-based compensation, Executive Compensation, Executive value, Incentives, Management, Pay for performance, Public firms, Say on pay, TSR

How Should a “Sustainable Corporation” Account for Natural Capital?

Posted by Richard Barker and Colin Mayer (University of Oxford), on Monday, November 6, 2017

Tags: Accountability, Accounting, Corporate Social Responsibility, Environmental disclosure, ESG, Financial reporting, Shareholder value, Sustainability

SEC Guidance on Ordinary Business and Economic Relevance Exclusions

Posted by Ning Chiu, Davis Polk & Wardwell LLP, on Monday, November 6, 2017

Tags: Boards of Directors, Compliance and disclosure interpretation, No-action letters, Proxy disclosure, Rule 14a-8, SEC, SEC rulemaking, Securities regulation, Shareholder proposals, Shareholder voting

Getting Along with BlackRock

Posted by John C. Wilcox, Morrow Sodali, on Monday, November 6, 2017

Tags: BlackRock, Board composition, Boards of Directors, Disclosure, Engagement, ESG, Index funds, Institutional Investors, Long-Term value, Mutual funds

Impediments to Books and Records Demands

Posted by Christopher B. Chuff, Pepper Hamilton LLP, on Tuesday, November 7, 2017

Tags: Accounting, Boards of Directors, Books and records, Delaware cases, Delaware law, Securities litigation, Shareholder suits

Do Women CEOs Face Greater Shareholder Activism Compared to Male CEOs? A Role Congruity Perspective

Posted by Vishal Gupta (University of Alabama), Sandra Mortal (University of Alabama) and Daniel B. Turban (University of Missouri), on Tuesday, November 7, 2017

Tags: Behavioral finance, Diversity, Executive performance, Filings, Management, Manager characteristics, Schedule 13D, Shareholder activism, Shareholder value