Monthly Archives: January 2018

Activists and Socially Responsible Investing

Charles Nathan is a senior advisor at Finsbury LLC, and an adjunct professor of law at Yale Law School and Columbia Law School. This post is based on a commentary by Mr. Nathan. Related research from the Program on Corporate Governance includes Who Bleeds When the Wolves Bite? By Leo E. Strine, Jr. (discussed on the Forum here), and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

At first blush, activists embracing socially responsible investing sounds like an oxymoron. After all, a common perception is that activist investors are solely financial engineers who seek short-term stock market gains by leveraging balance sheets, selling off valuable corporate assets and imprudent cost-cutting of R&D and other long-term value creators. What could be farther from short-term financial engineering than socially responsible investing, which typically looks to a much longer-term impact on the company’s financial and commercial performance?

However, like so much in life, the real world is far more complicated and harder to categorize. First, many activist campaigns are not about financial engineering in any sense. While activists sometimes do campaign on platforms that include (or perhaps consist principally of) cost-cutting, far from all of these are imprudent cost reductions at the expense of long-term growth. More important, many activist campaigns focus on building the business through better organizational structures and/or more effective focus on improving the quality of goods and services. Indeed, the latter type of activist investor policy has been in the ascendant among leading activist investors for several years now.

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2017 Year in Review: Corporate Governance Litigation & Regulation

Jason Halper and Nathan Bull are partners and Jared Stanisci is special counsel at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper, Mr. Bull, Mr. Stanisci, Jaclyn Hall, Christina Martin and William Simpson, and is part of the Delaware law series; links to other posts in the series are available here.

Delaware courts have recently issued decisions that have fundamentally altered corporate governance litigation. In 2016, the Court of Chancery changed the landscape for resolution of class actions on the basis of “disclosure-only” settlements, i.e., settlements without any monetary payment to the class. In In re Trulia, Inc. Stockholder Litig., the Court of Chancery refused to approve such a settlement to the extent it provided a class-wide release unless the supplemental disclosure was “plainly material.” In 2015, the Delaware Supreme Court held in Corwin v. KKR Fin. Holdings LLC that a transaction otherwise subject to Revlon review instead would be analyzed under the deferential business judgment rule if the transaction was approved by a majority of fully informed, uncoerced, disinterested stockholders. Confirming the far-reaching implications of Corwin, in Singh v. Attenborough, the Delaware Supreme Court held that “dismissal is typically the result” following Corwin‘s standard shifting, suggesting that the presumption is virtually irrefutable in that it can only be overcome by a showing of waste. The cumulative effect of these decisions has been to discourage pre-closing deal litigation (by making disclosure-based settlement much more difficult) and post-closing deal litigation (by making dismissal a near certainty where the procedural protections articulated in Corwin are in place).

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Destructive Collectivism: Dodd-Frank Coordination and Clearinghouses

Yuliya Guseva is Associate Professor of Law at Rutgers Law School. This post is based on her recent article, published in the Cardozo Law Review.

Research on financial regulation consistently focuses on several critical paradigms, including, inter alia, the calls for better economic justification of regulations and the role of the Financial Stability Oversight Council (FSOC). Prominent commentators, including Robert Bartlett, John Coates, Jeffrey Gordon, Robert Jackson, Eric Posner, Cass Sunstein, and others, have dissected the pros and cons, as well as the feasibility, of economic and cost-benefit analysis in financial regulation. One of the recent articles in this debate, by Prof. Revesz, proposes expanding the FSOC’s role in the economic analysis of individual regulations or, in the alternative, adding an additional layer of administrative review to be provided by the Office of Information and Regulatory Affairs. The underlying presumption is that the independent regulators, such as the Securities and Exchange Commission (SEC), often do not have the required expertise to run proper economic analysis. The FSOC, by contrast, is an entity focused on the gestalt of the financial landscape and systemic risk identification. In this task, it is aided by the well-respected Office of Financial Research.

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A Long/Short Incentive Scheme for Proxy Advisory Firms

Sharon Hannes is Professor of Law and Dean of the Faculty at Tel Aviv University Buchmann Faculty of Law; Asaf Eckstein is Lecturer on corporate law and securities law at Ono Academic College. This post is based on their recent paper.

In our new paper, we propose a novel framework for an incentive pay scheme for proxy advisory firms. Proxy advisory firms play an influential role and wield extensive influence over major corporate decisions in the United States and all over the world. The leading proxy advisory firms—Institutional Shareholder Services (“ISS”) and Glass, Lewis & Co. (“Glass Lewis”), which together account for 97 percent of the industry—were said to be “de facto corporate governance regulators,” or “de facto arbiters of U.S. corporate governance,” and their voting recommendations were described as “a milestone” for many crucial deals. As once noted by Chief Justice Leo Strine:

[P]owerful CEOs come on the bended knee to Rockville, Maryland, where ISS resides, to persuade the managers of ISS of the merits of their views about issues like proposed mergers, executive compensation, and poison pills.

The recognition of the major role played by proxy advisory firms has also sparked much criticism. Above all, critics have accused proxy advisors of having no “skin in the game.” Despite their great influence over companies’ votes and practices, proxy advisory firms “have no economic interest in the companies for which they are giving their recommendation.”

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From Talking the Talk to Voting the Votes

Jonathan Bailey is Head of ESG Investing and Jake Walko is Vice President of ESG Investing at Neuberger Berman Group LLC. This post is based on a Neuberger Berman publication by Mr. Bailey and Mr. Walko.

Management teams at companies often say that they wished they had more clarity from their investors as to the types of sustainability data and disclosures that they would like to see. They believe that it is difficult to understand which, if any, of the many different surveys and questionnaires that they get from data providers, research companies, and non-profit organizations are actually used by investors in valuing a company and making a buy decision. That is why the Sustainability Accounting Standards Board’s (SASB) development of a market-based, investor-ready set of material sustainability disclosures is so important. Many of the world’s leading asset owners and asset managers were among the 2,800+ participants in SASB’s industry working groups that helped develop the standards, and many of those same investment firms have voiced their support for their implementation by companies.
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Preparing a Successful IPO in 2018

Philip Oettinger is a partner and Andrew Ellis is an associate at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Oettinger and Mr. Ellis.

Globally, 2017 was the biggest year for IPOs since 2007, both in terms of the number of deals (1,624 IPOs) and proceeds raised ($188.8 billion), with 49 percent and 40 percent increases, respectively, compared with 2016. In the United States, there were 174 IPOs raising $39.5 billion in 2017, which is an increase of 55 percent in volume and 84 percent in proceeds raised compared to 2016. [1] Biotech IPOs also had a good year, with 40 IPOs raising approximately $4 billion in 2017 versus 28 IPOs raising approximately $2 billion in 2016. [2] WSGR represented Denali Therapeutics Inc. (NASDAQ:DNLI) in the landmark biotech IPO of 2017, which raised approximately $250 million in December 2017. [3] Because of the momentum caused by Denali and others, we are encountering optimism from investment bankers and clients about the healthcare and biotech IPO market in 2018, and we have anecdotally seen more companies start the IPO process or contemplate an IPO in late 2017 and early 2018.

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Mergers and Acquisitions: 2018 With a Brief Look Back

Andrew R. Brownstein, Steven A. Rosenblum, and Victor Goldfeld are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Brownstein, Mr. Rosenblum, and Mr. Goldfeld.

M&A vastly accelerated in the fourth quarter of 2017, as confidence increased in the likelihood of U.S. tax and regulatory reform. U.S. M&A in particular had a very strong fourth quarter, with the volume in that quarter accounting for more than a third of the full year’s volume and up 75% from the third quarter. The three largest deals of 2017 (both in the United States and globally) were announced in November and December, creating momentum into 2018.

Total deal volume in 2017 reached $3.7 trillion globally (roughly equivalent to 2016), making it the fourth busiest year on record. The volume of deals involving U.S. targets was just over $1.5 trillion and represented a share of total global M&A volume comparable to 2016. There continued to be a number of large deals, with 46 deals over $10 billion (compared to 45 in 2016) and 3 deals over $50 billion, all announced in the fourth quarter (compared to 4 in all of 2016). Also as was the case in 2016, a large volume of announced friendly deals were withdrawn or terminated in 2017, with $715 billion of U.S. M&A deals falling into this category.

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Activism in 2018

Ethan A. Klingsberg is a partner and Elizabeth Bieber is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg and Ms. Bieber. 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 Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

Two years ago, we explained to clients that the shareholder activism landscape was undergoing significant change. Returns at many of the “brand name” activist funds were down, companies had become savvier at messaging to their investors about why their positions on areas of activist focus were well-founded and, in numerous cases, companies had preemptively taken steps to adjust their strategic plans to be consistent with the approaches that activists would take.

Many clients remained on high alert, but they were regularly encountering “false alarms” when famous activists would show up in their profiles after the quarterly Form 13F filings and generate media buzz, but the investment would turn out to be for purposes of liquidity rather than influencing management. In addition, a number of clients received requests for meetings or telephone calls with activist investors, only to realize later that the investor was primarily interested in gathering information for purposes of macro-economic analysis, rather than as a first step in launching a campaign.

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The Effects of Investment Bank Rankings: Evidence from M&A League Tables

François Derrien is professor of finance at HEC Paris, and Olivier Dessaint is assistant professor of finance at University of Toronto Rotman School of Management. This post is based on their recent article, forthcoming in the Review of Finance.

In the article The Effects of Investment Bank Rankings: Evidence from M&A League Tables, forthcoming in the Review of Finance, we study how league tables affect the behavior of investment banks in the M&A industry. League tables are simple rankings based on banks’ market shares. Anecdotal evidence suggests that banks pay a lot of attention to them. To understand why this is the case, we first ask whether current league table ranks affect future M&A activity. One might think that league tables, which contain public information on bank activity that is simply repackaged into a ranking, are just a sideshow. In this case, they may matter because they affect the self-image of bankers, their status or their compensation. Alternatively, inexperienced managers may rely more on league tables to choose these advisors because they believe that the rank of a bank in the league table, which reflects past demand from other clients, is a good measure of its expertise. Hiring high-ranked banks signals the quality of the transaction to other stakeholders of the company (e.g., board members, shareholders, employees, customers, suppliers).

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The Corporate Governance World in 2018: A Global Review

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Mishra. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

2017 was an eventful year in corporate governance. With significant shifts in investor preferences, voting outcomes, societal norms, and the regulatory environment, 2018 promises to be just as eventful. In anticipation of the New Year, we asked our research experts around the globe to gaze into the crystal ball and give us their predictions in relation to corporate governance developments for their regions.

Cultural Evolution

A common theme among our analysts’ predictions is that 2018 promises to be a year of corporate cultural evolution, with growing focus on gender issues and corporate behaviors and attitudes. In North America, conditions are right for women joining boards in unprecedented numbers, reversing the trend of the U.S. slowly falling behind global norms. Given many recent high-profile cases and allegations of sexual harassment hitting the news, corporate culture is likely to become even more of a focal point for both boards and investors globally, ensuring that risks are being managed much more proactively than ever before.

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