Yearly Archives: 2017

SEC Clarifications for Non-GAAP M&A Disclosures

Posted by Trevor S. Norwitz, Sabastian V. Niles, and Samson Z. Mesele, Wachtell, Lipton, Rosen & Katz, on
Wednesday, November 15, 2017
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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

Posted by Aaron Bernstein and Larry Beeferman, Harvard Law School, on
Wednesday, November 15, 2017
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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

Posted by Nicole M. Boyson, Northeastern University; Nickolay Gantchev, Southern Methodist University; and Anil Shivdasani University of North Carolina, on
Tuesday, November 14, 2017
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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

Posted by CamberView Partners, on
Tuesday, November 14, 2017
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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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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
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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]

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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
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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.

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Reevaluating Shareholder Voting Rights in M&A Transactions

Posted by Afra Afsharipour, UC Davis School of Law, on
Monday, November 13, 2017
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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.

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CEO Pay Ratios: What Do They Mean?

Posted by Joseph E. Bachelder, McCarter & English LLP, on
Monday, November 13, 2017
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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:

  1. the growth rate of CEO pay compared with the growth rate of the stock market; and
  2. 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.

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Innovative Insurance Products and M&A Risk

Posted by Richard Butterwick, Latham & Watkins LLP, on
Sunday, November 12, 2017
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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.

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Benefits of CEO Pay Ratio Guidance

Posted by Steve Seelig, Puneet Arora, and Rich Luss, Willis Towers Watson, on
Saturday, November 11, 2017
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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:

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