Yearly Archives: 2017

Activism, Strategic Trading, and Liquidity

Posted by Vyacheslav Fos, Boston College, on
Thursday, January 5, 2017
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Vyacheslav Fos is Assistant Professor of Finance at Boston College Carroll School of Management. This post is based on a recent paper authored by Professor Fos; Kerry Back, J. Howard Creekmore Professor of Finance at Rice University Jones Graduate School of Business; Pierre Collin-Dufresne, Professor of Finance at the Swiss Finance Institute at École Polytechnique Fédérale de Lausanne; Tao Li, Associate Professor of Finance at City University of Hong Kong; and Alexander Ljungqvist, Ira Rennert Professor of Finance at NYU Stern School of Business. 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 Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Activist shareholders play an important role in modern corporate governance. The Economist describes them as “capitalism’s unlikely heroes” and reports that, between 2010 and 2014, half the companies in the S&P 500 index had an activist shareholder and one in seven were the target of an activist campaign (The Economist, February 7th 2015).

Activism comes in many forms. Perhaps the best known involves hedge funds accumulating stakes in firms with the intention to create value by influencing management. Prominent examples include William Ackman, Carl Icahn, Daniel Loeb, and Nelson Peltz. Existing shareholders can turn from being passive to being active when they recognize an opportunity for enhancing the value of their holdings. CALPERS and the Norwegian sovereign wealth fund are well known examples of this form of activism. And activist short-sellers can take actions so as to reduce firm value to benefit their short positions. For an example, see Bloomberg Business on how “Hedge funds found a new way to attack drug companies and short their stock” (March 20th 2015), describing how some activist hedge funds challenge pharmaceutical patents in court to reduce the value of the firms owning these patents, presumably benefitting from previously established short positions. The profitability of activism for investors hinges on their ability to trade before stock prices reflect their intention to become active. Thus, there is a fundamental link between market conditions (liquidity), activism, and firm value.

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REIT M&A, Governance and Activism—Themes for 2017

Posted by Adam O. Emmerich, Wachtell, Lipton, Rosen & Katz, on
Wednesday, January 4, 2017
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Adam O. Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz, focusing primarily on mergers and acquisitions, corporate governance and securities law matters. This post is based on a Wachtell Lipton publication by Mr. Emmerich, Robin Panovka, Michael J. Segal, and Sabastian V. Niles.

REIT expansion and consolidation continued their steady march in 2016, and, based on the current pipeline, appear to be on track for a similar, steady pace in 2017. The wild cards, of course, are interest rates and political uncertainty. At the same time as they have scaled up, REITs have also grown in sophistication and in many cases have become models of good corporate governance and responsible stewardship. Of course, the landscape keeps evolving, and REITs, like other public companies, need to assess, adjust and address an ever-changing array of issues and challenges, some truly substantive and others mostly cosmetic.

We offer below some observations and practical suggestions on a number of key M&A and governance themes that we expect to continue to warrant attention in 2017:

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Jury Verdict in “Spread Bet” Insider Trading Case: A Reminder of U.S. Long-Arm Regulatory Risk

Posted by Daniel M. Hawke, Arnold & Porter Kaye Scholer LLP, on
Wednesday, January 4, 2017
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Daniel M. Hawke is a partner at Arnold & Porter Kaye Scholer LLP. This post is based on an Arnold & Porter Kaye Scholer publication by Mr. Hawke; the complete publication, including footnotes, is available for download here.

Trading firms in the United Kingdom and elsewhere outside the United States should continue to monitor ongoing efforts by U.S. regulators to assert long-arm jurisdiction over their trading activities. That’s the implication of a jury verdict recently obtained by the U.S. Securities and Exchange Commission (SEC) in SEC v. Sabrdaran et al. against a U.K.-based trader who used spread bets [1] to engage in insider trading in violation of the U.S. securities laws.

The SEC’s case appears to be the first insider trading case involving the use of spread bets to reach a trial verdict. [2] The case is also significant because the SEC successfully established jurisdiction over spread bets originating in the U.K. as the equivalent of U.S. “domestic transactions” under Morrison v. National Australia Bank, Ltd. [3] and because it proved that the spread bets were “in connection with the purchase or sale of [a] security” as required under Section 10(b) [4] of the Securities Exchange Act of 1934 and Rule 10b-5 [5] thereunder (collectively, the “Exchange Act”).

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Are Shareholder Votes Rigged?

Posted by Laurent Bach and Daniel Metzger, Stockholm School of Economics, on
Wednesday, January 4, 2017
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Laurent Bach and Daniel Metzger are Assistant Professors of Finance at the Stockholm School of Economics. This post is based on their recent paper.

Shareholder voting is increasingly used to settle governance issues, such as compensation, in a transparent and democratic way. Yet, it is well known that corporate elections do not even closely resemble political elections of modern democracies (Bebchuk, 2007). Managers of public corporations have considerably greater ability to constrain the set of choices made available to voters. They also have more discretion over the amount and the quality of information that voters can access. What is somewhat less known is that the management of big U.S. corporations also has an extraordinary advantage in the campaigning process as it holds privileged access to the identity of voters and to partial vote tallies in real time. In the paper entitled Are Shareholder Votes Rigged?, we show that many corporations have been using this privilege to fight shareholder proposals that have a good chance to obtain a majority and impose substantial governance reforms. We call these kinds of corporate behavior “vote rigging” because, contrary to regular campaign activities, managers may affect the voting results so precisely that the defeat of shareholder proposals appears to be the result of luck rather than managerial action.

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Controlling Stockholder M&A Does Not Automatically Trigger Entire Fairness Review

Posted by Daniel E. Wolf and Gilad Zohari, Kirkland & Ellis LLP, on
Tuesday, January 3, 2017
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Daniel E. Wolf is a partner and Gilad Zohari is an associate at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis publication by Mr. Wolf and Mr. Zohari, and is part of the Delaware law series; links to other posts in the series are available here.

Delaware courts have outlined a “taxonomy” of controller transactions so that dealmakers can, with the benefit of a nuanced analysis of the specific facts and circumstances at hand, properly match the appropriate procedural protections to the degree of inherent conflict.

Two years ago we highlighted a string of Delaware cases that addressed the question of whether a stockholder is deemed to be “controlling,” observing that the Delaware approach was nuanced with a focus on both the ownership percentage and exercise of actual control. But a finding that there is a controlling stockholder of a target company is just the first part of the analysis in determining the applicable standard of review that the court will use in assessing an M&A transaction involving that target. As a number of recent cases have shown, the contours and terms of the M&A transaction are as important as the question of whether the stockholder is “controlling” to the court’s determination of whether—and to what extent—heightened scrutiny will be applied. Understanding the dual aspects of the court’s inquiry allows dealmakers to ensure that necessary procedural safe-guards for the benefit of the minority stockholders are implemented where appropriate and achievable, and that excessive and unnecessary procedural protections are avoided.

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Rethinking Compensation Philosophies: Top 5 Questions for Boards

Posted by Aalap H. Shah, Pearl Meyer & Partners, LLC, on
Tuesday, January 3, 2017
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Aalap H. Shah is Managing Director at Pearl Meyer & Partners, LLC. This post is based on a Pearl Meyer publication by Mr. Shah which originally appeared in Workspan, available here.

Does your organization’s philosophy on compensation deliver? In an age when competitive advantage is often tied to differentiation or industry disruption, many organizations focus on providing a unique value proposition to shareholders through their business strategy. But what about the role human-capital strategy plays? Can an organization’s approach to leadership development and talent management also be a driver of growth and differentiation?

We say yes.

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Progress in Understanding Proxy Access and the Shareholder Proposal Process

Posted by Tara Bhandari, U.S. Securities and Exchange Commission, on
Tuesday, January 3, 2017
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Tara Bhandari is a Financial Economist at the U.S. Securities and Exchange Commission. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or of the author’s colleagues upon the staff of the Commission. Peter Iliev is an Associate Professor of Finance at Pennsylvania State University. Jonathan Kalodimos is an Assistant Professor of Finance at Oregon State University. This post responds to a post, Creating a Foundation for a Substantive Debate on Proxy Access Proposals. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

In an August 2016 post on this blog, Bernard Sharfman discussed a previous version of our paper, Governance Changes through Shareholder Initiatives, describing it as a well-done study but one whose results he interpreted differently than us. We agree with Sharfman that careful analysis and continued research in this area is important. However, we believe important progress has been made. In particular, there is substantial evidence that the market believes that proxy access would be value-enhancing at many companies, but also that the expected benefits of proxy access vary significantly across companies.

In our paper, we use proxy access as a unique setting to study the shareholder proposal process from targeting through implementation, in order to better understand the effectiveness of this channel for governance change. One of our findings, which Sharfman discusses at length, is that the announcement of proxy access proposals was associated, on average, with a positive abnormal return of 53 basis points for the targeted company.

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The Life (and Death?) of Corporate Waste

Posted by Harwell Wells, Temple University, on
Monday, January 2, 2017
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Harwell Wells is I. Herman Stern Professor of Law at Temple University Beasley School of Law. This post is based on his recent article, forthcoming in the Washington and Lee Law Review, and is part of the Delaware law series; links to other posts in the series are available here.

At first glance, corporate law’s waste doctrine makes little sense. The classic definition of waste—a transaction “for consideration so disproportionately small as to lie beyond the range at which any reasonable person might be willing to trade,” an act equivalent to “gift” or “spoliation” of corporate assets—suggests that waste should never arise, for what corporation would ever enter into a transaction so absurd, absent self-dealing or gross negligence? Yet waste claims are regularly made. The conventional wisdom is that waste claims never succeed; but empirical studies show that’s wrong, and some of the most significant corporate law cases of the last two decades have dealt with waste. Respected judges have called for the doctrine’s abolition, referring to it as a “vestige” and memorably deriding it as the mythical “Loch Ness Monster” of corporate law; still, waste survives. It is a remnant of ultra vires, a doctrine proclaimed dead for over a hundred years—but waste is not dead. It confounds our model of managerial responsibility; after decades in which discussion of directors’ and officers’ duties have focused on the fiduciary duties of care and loyalty, waste still sits largely outside that framework, for waste isn’t a fiduciary duty at all. And, after almost a century of life, waste may now be fading as an independent doctrine in corporate law.

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