Yearly Archives: 2017

The Impact of Shareholder Activism on Board Refreshment Trends at S&P 1500 Firms

Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on
Thursday, October 19, 2017
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Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on a co-publication by ISS and the Investor Responsibility Research Center Institute. 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).

Few business-related topics provoke more passionate discussions than shareholder activism at specific companies. Supporters view activists as agents of change who push complacent corporate directors and entrenched managers to unlock stranded shareholder value. Detractors charge that these aggressive investors force their way into boardrooms, bully incumbent directors into adopting short-term strategies at the expense of long-term shareholders, and then exit with big profits in hand.

Lost in this heated long- versus short-term debate is the significant, real-time impact that such activism has on corporate board membership and demographics. ISS identified a recent surge in its evaluation of refreshment trends at S&P 1500 firms between 2008 and 2016 (see Board Refreshment Trends at S&P 1500 Firms, published by IRRCi in January 2017). This accelerated boardroom turnover coincided with an increase in activists’ success in securing board representation, particularly via negotiated settlements. A recent study of shareholder activism by Activist Insights pegged activists’ annual U.S. boardroom gains at more than 200 seats in 2015 and 2016. While a significant portion of this activism was aimed at micro-cap firms, threats of fights have become commonplace even at S&P 500 companies in recent years.

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Rejection of the Universal Proxy Card

Posted by Ning Chiu, Davis Polk & Wardwell LLP, on
Thursday, October 19, 2017
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Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

ADP rejected Pershing Square’s recommendation to use a universal proxy card, arguing that given the solicitation has already commenced, changing the voting procedures for a new and untested process could disenfranchise shareholders.

Pershing Square has nominated three candidates to ADP’s board. In September the activist wrote to the board calling for both sides to use a universal proxy card that would list all the nominees, calling it a “hallmark of good corporate governance” and citing to the CII report advocating for the practice. The activist had to seek approval from the company because the company nominees must consent to be named in its proxy statement. They also acknowledged that the company may have already sent proxy cards to their shareholders and additional details may need to be worked out with Broadridge, but given that a number of additional cards were likely to be mailed in any case, the company could include a new universal card in one of its mailings.

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The Delaware Corporate Law Resource Center

Posted by Lawrence A. Hamermesh, University of Pennsylvania, and Michael L. Wachter, University of Pennsylvania, on
Wednesday, October 18, 2017
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Lawrence A. Hamermesh is Executive Director of the University of Pennsylvania Law School Institute for Law and Economics and Professor Emeritus at Widener University Delaware Law School. Michael L. Wachter is the William B. and Mary Barb Johnson Professor of Law and Economics at the University of Pennsylvania Law School, and is Co-Director of its Institute for Law and Economics. This post describes the content of a newly available website, the Delaware Corporation Law Resource Center, containing current and historical resources about the development of the Delaware General Corporation Law. The website includes a section of oral history materials relating to some of the iconic Delaware corporate law cases. This post is part of the Delaware law series; links to other posts in the series are available here.

The University of Pennsylvania Law School Institute for Law and Economics (ILE) is pleased to announce the creation and public availability of a new website devoted to resources relating to the development of the Delaware General Corporation Law and related case law. This website (the Delaware Corporation Law Resource Center) has two principal components. The first is a compilation of resources relating to the Delaware General Corporation Law itself, including a link to the text of the statute, and links to the bills to amend the statute since its general revision in 1967. This portion of the website also includes links to annual commentaries on those amendments, the reports and minutes generated in the 1967 revision process, and memoranda disseminated by the Council of the Delaware State Bar Association Corporation Law Section describing some of the more significant and controversial amendments to the statute.

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Novel Defensive Tactics Against Activist Shareholders

Posted by Rodd Schreiber, Richard Grossman, and Robert Saunders, Skadden, Arps, Slate, Meagher & Flom LLP, on
Wednesday, October 18, 2017
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Rodd Schreiber, Richard Grossman, and Robert Saunders are partners at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Schreiber, Mr. Grossman, Mr. Saunders, David Clark, and Rachel Cohn, and 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 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); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

In the past year, more than 50 publicly traded companies, including 19 on the Standard & Poor’s 500 index, have amended their bylaws to address the potential for a so-called “placeholder slate” of directors. The bylaw amendments began to appear in response to a tactic used last year to end-run typical advance notice bylaws for director nominations. However, neither the bylaw amendments nor the placeholder-slate tactic have been tested in court, leaving their ultimate fate undetermined even as the adoption of these amendments appears to be growing.

In the summer of 2016, activist hedge fund Corvex Management LP announced its intent to oust all 10 members of the board of The Williams Companies, Inc. The move was part of a two-year battle for influence over Williams, during which Corvex’s founder, Keith Meister, and five other Williams directors resigned over strategic disputes with management, culminating in a failed $33 billion merger that would have created the nation’s largest natural gas transporter.

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Modernization and Simplification of Regulation S-K

Posted by Cydney Posner, Cooley LLP, on
Wednesday, October 18, 2017
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

The SEC has now posted its release regarding FAST Act Modernization and Simplification of Regulation S-K, which proposes amendments to rules and forms based primarily on the staff’s recommendations in its Report to Congress on Modernization and Simplification of Regulation S-K (required by the FAST Act). (See this PubCo post.) That Report, in turn, was premised on the review that the SEC conducted as part of its Disclosure Effectiveness Initiative and the related Concept Release, which addressed a broader range of potential changes. (See this PubCo post and this PubCo post.) A new approach to confidential treatment, not addressed in the Report, is also proposed. As indicated by the title, the proposed amendments are intended to modernize and simplify a number of disclosure requirements in Reg S-K, and related rules and forms, in a way that reduces the compliance and cost burdens on companies while continuing to provide effective disclosure for investors, including improvements designed to make the disclosures more readable, less repetitive and more easily navigable. (The release also proposes certain parallel amendments to investment company and investment adviser rules and forms, not discussed in this post.)

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Is Pollution Value Maximizing?

Posted by Roy Shapira, IDC Herzilya; and Luigi Zingales, University of Chicago, on
Tuesday, October 17, 2017
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Roy Shapira is Associate Professor at IDC Herzliya Radzyner Law School; Luigi Zingales is Robert C. McCormack Distinguished Service Professor at University of Chicago Booth School of Business. This post is based on their recent paper.

Why do firms pollute even when polluting is socially inefficient (i.e., the harm caused greatly exceeds the cost of curbing the toxic emissions)? Is this undesirable outcome the result of corporate myopia, bad internal governance, or weak external constraints? In our new working paper, we study DuPont’s emissions of a toxic chemical dubbed C8 to shed some light on these questions. C8 was used in DuPont’s West Virginia plant in the process of manufacturing Teflon®. In February 2017, DuPont settled a C8-related litigation for $670M. Thus, it may seem that the system works and legal liability should deter firms from polluting. However, by using evidence discovered during the C8-litigation we show that it was perfectly rational for DuPont to pollute ex ante, in spite of the costs it ended up paying ex post, and the costs it imposed on society.

Two unique aspects of the C8 pollution case make it worth studying. First, the firm involved, DuPont, is not a fly-by-night company. It is one of the most respected American companies (as Chief Justice Strine details in a paper profiled on this blog), consistently scoring good marks on corporate governance indices, and a known leader in toxicological and occupational safety research. Understanding how such a company continues to pollute for several decades can improve our understanding of what works and what does not work in deterring pollution. Second, the litigation against DuPont unearthed a trove of internal company documents that allow us to reconstruct when key decisions were made and what were the costs and benefits of such decisions.

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Proposed Overhaul of Disclosure and Shareholder Proposal Rules

Posted by Aabha Sharma, Weil, Gotshal & Manges LLP, on
Tuesday, October 17, 2017
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Aabha Sharma is an associate at Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Sharma.

The U.S. Department of Treasury issued a comprehensive report last week with recommendations to reform the U.S. capital markets regulatory system. The Report to President Trump recommends sweeping changes, including ones aimed to roll back certain Dodd-Frank rules issued after the 2008 financial crisis. It responds to the “core principles” for regulating the U.S. financial system identified in Presidential Executive Order 13772. [1]

The Treasury’s broad-based recommendations are aligned with several proposed changes in the Financial Choice Act of 2017 (generally referred to as CHOICE 2.0). Consistent with CHOICE 2.0, the Treasury recommends repealing Dodd-Frank provisions that directed the SEC to require disclosures regarding CEO pay ratio, use of conflict minerals, mine safety information, and governmental payments by resource-extraction issuers. [2]

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Pay Ratio: The Time Has Come

Posted by Amy L. Blackman, Donald P. Carleen, and Adam Kaminsky, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Tuesday, October 17, 2017
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Amy L. Blackman, Donald P. Carleen, and Adam Kaminsky are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Blackman, Mr. Carleen, and Mr. Kaminsky. .Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here).

For anyone involved in the preparation of an issuer’s compensation disclosures as part of its annual proxy statement or Form 10-K filing, the time has come to tackle the “pay ratio” calculation and disclosure requirements. After an extended period in development and considerable public speculation in recent months about its fate, it is becoming increasingly clear that the implementation of the final pay ratio rules issued by the Securities and Exchange Commission (SEC) in August 2015 (the “Final Pay Ratio Rules”) will proceed on the currently scheduled timetable, with the first disclosures for calendar year issuers due in their next annual proxy statements (i.e., those to be filed, generally, in spring 2018). In light of the approaching compliance deadline, on September 21, 2017, the SEC and, separately, the SEC’s Division of Corporate Finance issued related guidance designed to aid companies as they work to comply with the Final Pay Ratio Rules. The latest guidance emphasizes the fact that many aspects of the rules are designed to provide flexibility in how issuers approach compliance with the pay ratio calculation and disclosure requirements and that there is the ability to use methods that are tailored to fit an issuer’s facts and circumstances.

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New Special Study of the Securities Markets: Institutional Intermediaries

Posted by Allen Ferrell, Harvard Law School, and John Morley, Yale Law School, on
Monday, October 16, 2017
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Allen Ferrell is Harvey Greenfield Professor of Securities Law at Harvard Law School and John D. Morley is Professor of Law at Yale Law School. This post is based on their recent paper.

This paper, written for the Conference on the New Special Study of Securities Markets at Columbia Law School, identifies and reviews the key regulatory challenges posed by institutional intermediaries in America’s capital markets. We cover investment funds, credit-rating agencies and broker-dealers. We review existing research, identify new areas of research and suggest possibilities for legal reform.

We begin with investment funds, focusing primarily on publicly registered investment companies, such as open-end mutual funds. The first task of the regulation of these funds is to define what exactly an investment fund is. And on this score the existing regulation is doing poorly. The industry’s principal regulatory statute, the Investment Company Act of 1940, defines an “investment company” (the statute’s name for what is commonly known as an “investment fund”) as a company that holds a lot of securities, rather than a company that holds operating assets like land and intellectual property. This definition is impractical and often has the unintended effect of treating operating companies—including Microsoft and Yahoo!—as though they were the legal equivalent of mutual funds. We suggest that rather than focusing on securities ownership, the definition of an investment company should focus on organizational structure. The truly distinctive feature of an investment fund, we argue, is a fund’s unusual tendency to maintain a separate existence and a separate set of owners from the management company that operates it.

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Capable Boards and Value Creation

Posted by Edward D. Herlihy, Richard K. Kim, and Matthew M. Guest, Wachtell, Lipton, Rosen & Katz, on
Monday, October 16, 2017
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Edward D. Herlihy, Richard K. Kim, and Matthew M. Guest are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Messrs. Herlihy, Kim, and Guest.

Directors of regulated financial institutions have exceedingly difficult jobs with many demands. The aftermath of the financial crisis led to countless new regulatory requirements and expectations, many of these unwritten and evolving based on political currents or varying views at different levels of the regulatory hierarchy. Governance processes and actions are examined and second-guessed like never before. For many companies, new and shifting compliance burdens tend to crowd out other business on board agendas.

At the same time, these boards have faced prolonged operating and economic challenges. Initially, defaults and delinquencies in loan portfolios and low interest rates choked financial performance. While these conditions have improved dramatically, many banks continue to face tepid loan growth. Others have encountered challenges in responsibly and profitably growing deposits. The best performing boards have responded throughout this period by demanding and overseeing more detailed and sophisticated strategic plans. The boards have then acted on these plans decisively, and remained committed to their plans even when confronting daunting obstacles.

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