Monthly Archives: December 2017

Analysis of New Glass Lewis Guidelines

Abe M. Friedman is Chief Executive Officer of CamberView Partners, LLC. This post is based on a CamberView publication by Mr. Friedman, Robert McCormick, partner at CamberView Partners, and Kevin Liu.

Shortly before the Thanksgiving holiday, Glass Lewis released its 2018 policy guidelines for U.S. and Canadian companies as well as updates to its guidelines on shareholder initiatives. In addition to clarifying several existing policies, this year’s policy update includes an important change regarding the threshold for board responsiveness along with new policies on board gender diversity, dual-class share structures and virtual-only meetings.


Debt Contract Terms and Creditor Control

Adam Badawi is a Professor at UC Berkeley School of Law. This post is based on a recent paper by Professor Badawi. This post 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 Breaking Bankruptcy Priority: How Rent-Seeking Upends the Creditors’ Bargain, by Mark J. Roe and Frederick Tung (discussed on the Forum here).

Debt contracts use covenants as a way to manage conflicts between debt holders and equity holders. Covenants accomplish this goal by limiting the ability of debtors to engage in excessive risk taking, dividend payouts, claim dilution, and other actions that can harm the interests of creditors. But different types of creditors go about limiting the agency costs of debt in quite different ways. A wave of recent research shows that banks manage much of this agency conflict through the use of financial maintenance covenants. These covenants allow banks to accelerate the entire amount of the loan if a financial metric—such as the firm’s net worth—falls below the level specified in the loan agreement. Loan contracts typically set these covenants tightly, meaning they are set at levels that are close to those present at the time of loan origination. This practice ensures that even moderate financial distress will trigger maintenance covenants. When the covenants get tripped, banks rarely actually accelerate the debt. Instead, they typically renegotiate with debtors and, through that process, are able to limit actions that favor equity.


Analysis of SEC Enforcement Division Annual Report

Matthew C. Solomon is Partner, Robin M. Bergen is Partner, and Alexis Collins is Senior Attorney at Cleary, Gottlieb, Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Solomon, Ms. Bergen, and Ms. Collins.

On November 15, 2017, the Securities and Exchange Commission Division of Enforcement released its annual report detailing its priorities for the coming year and evaluating enforcement actions that occurred during Fiscal Year (“FY”) 2017. The Report captures the SEC during a period of transition—Chairman Jay Clayton assumed the helm of the Commission in May 2017 and Stephanie Avakian and Steven Peikin were named co-directors of the Enforcement Division soon thereafter.


SEC Chairman’s Remarks on Small Business Capital Formation

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the Annual Government-Business Forum on Small Business Capital Formation. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Welcome everyone to the 36th annual Government-Business Forum on Small Business Capital Formation. We have made it a priority to reach out to investors and small businesses across the country—including in Texas—and I am delighted that this year’s Forum is being held in Austin. The Texas capital is known for its lively music scene, but the crowd is gathered here today because Austin is known as the “rock star” of small business cities. [1] Austin has received a number of accolades in recent months, including being named the number one place in America to start a business, the top city for “small business vitality,” and the top city for launching a technology startup. [2]

We were excited to take this year’s Forum outside of the nation’s capital, and we have received a warm welcome and generous support from the Herb Kelleher Center at the McCombs School of Business at The University of Texas at Austin. I want to extend our sincere thanks to them for co-hosting this event in the Great State of Texas. I also want to express my gratitude to all of our panelists and moderators and to the staff of the Division of Corporation Finance, as this Forum would not be possible without all of you.


Shareholder Proposals in an Era of Reform

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh which originally appeared in the New York Law Journal.

Securities and Exchange Commission Chair Jay Clayton has emphasized that corporate governance rulemaking under his leadership will be designed to maximize the long-term interests of the retail shareholder. On several occasions over the past year, Chairman Clayton has indicated that the shareholder proposal process is in need of reform, as it is an area in which the SEC can reduce the costs currently borne by—in Chairman Clayton’s terms—“the quiet shareholder, the ordinary shareholder” on behalf of the “idiosyncratic interests” of a louder few. New SEC guidance released this month begins this process by elevating the role of boards in evaluating shareholder proposals for exclusion under Rule 14a-8. Staff Legal Bulletin 14I represents a meaningful change in the way certain shareholder proposals are addressed by boards of directors and reviewed by the SEC staff, with the potential for significant improvement in both process and results. SLB 14I should be a valuable tool for companies to minimize unnecessary costs of the shareholder proposal process while still ensuring that a worthwhile proposals will be presented for shareholder consideration. While further reform of the 14a-8 regime is necessary, SLB 14I is an important development in the right direction.


Institutional Investor Attention and Demand for Inconsequential Disclosures

Andrew Sutherland is Ford International Career Development Professor of Accounting, John Core is Nanyang Technological University Professor of Accounting, and Inna Abramova is a PhD student at at MIT Sloan School of Management. This post is based on their recent paper.

Much research on voluntary disclosure focuses on decisions stemming from persistent factors. For example, the economic forces that give rise to a firm’s level of proprietary costs are persistent, and how the voluntary disclosure decision is affected by proprietary costs is persistent. Institutional investor ownership (IO) is another relatively stable determinant of disclosure. Prior research indicates that increases in disclosure associated with increases in IO can decrease information asymmetry and improve liquidity. In this paper, we hold IO constant, and examine how short-term changes in IO attention affect the firm’s short-term disclosure choices, and the resulting information asymmetry and liquidity consequences.


Contract Rights and Spin-off Transactions

Daniel E. Wolf and David B. Feirstein are partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis publication by Mr. Wolf and Mr. Feirstein, and is part of the Delaware law series; links to other posts in the series are available here.

Most commercial and corporate contracts provide that the agreement is binding on a party’s “successor and assigns”. This boilerplate clause, coupled with the legal consequences of a stock purchase or merger, covers most corporate transaction scenarios and ensures that the agreement remains with, and binding on, the business that signed the contract.

But the current popularity of corporate “separation” transactions highlights that this simple clause may be insufficient to properly address the consequences of spin-offs and other separation transactions. When a company separates itself into two or more pieces via a spin-off, split-off, carve-out or similar deal structure, it is not clear whether contractual rights and obligation replicate themselves at the separated entity.


10 Consensuses on CEO Pay Ratio Planning

James D.C. Barrall is a senior fellow at The Conference Board Center and a visiting scholar and senior fellow in residence at the Lowell Milken Institute for Business Law and Policy at the UCLA School of Law. This post is based on a Conference Board publication by Mr. Barrall. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

More than seven years after the enactment of the Dodd-Frank Act, the CEO pay ratio rule is finally set to require approximately 3,500 U.S. companies to disclose their 2017 ratios of their CEOs’ pay to that of their median employees in their 2018 proxy statements.

Capping the SEC’s valiant efforts in its 2013 proposed and 2015 final rule to make a poor statute workable and relatively cost effective, on September 21 the SEC and its staff issued three pieces of very helpful interpretive guidance ((i) the SEC’s interpretive guidance, (ii) the Division of Corporation Finance’s calculation guidance, and (iii) the updated Reg. S-K Item 402(u) C&DIs, collectively, the “September Guidance,”) [See related Governance Center blog posts here and here.] which succinctly state that companies have significant flexibility in using reasonable methodologies, estimates and assumptions for calculating employee compensation and identifying their median employees and may use their existing internal tax, payroll and other records to do so.


Firm Age, Corporate Governance, and Capital Structure

Robert Kieschnick is Associate Professor Finance and Managerial Economics at the Naveen Jindal School of Management at the University of Texas at Dallas; Rabih Moussawi is Assistant Professor of Finance at Villanova University. This post is based on a recent paper by Professor Kieschnick and Professor Moussawi.

This paper is motivated by two considerations. First, prior research argues that as a firm grows older, it should use more debt as it has more assets-in-place and fewer growth options. Second, prior research argues that as firms age after going public, their governance should adapt to their changing needs. Thus, our paper combines both considerations to examine how the age of a firm since going public affects how its governance influences its capital structure choices.

To address this issue, we must confront a number of empirical issues ignored by related prior research. For example, the factors influencing the decision to use debt may differ from the factors that determine how much debt the firm uses. This issue is more serious than often recognized since a large number of U.S. corporations, about 21.8% of Compustat companies during our sample period, use no long-term debt financing and are called “all equity” firms.


Analysis of Updated ISS Voting Policies

Lyuba Goltser is a partner and Kaitlin Descovich is an associate at Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Goltser and Ms. Descovich.

ISS released its updated proxy voting policies effective for annual meetings held on or after February 1, 2018, which are available here. We previewed ISS’s proposed voting policy changes in our Alert available here. The policy changes include several new policies, as well as codification of existing policies focusing primarily board composition, accountability and responsiveness. In this Alert we provide guidance for U.S. public companies on addressing these developments and practical tips for “What to do Now?” Companies should become familiar with these new policies, especially those that could implicate ISS voting recommendations for their upcoming director elections, and continue to engage with their institutional investors on important governance matters.


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