Monthly Archives: January 2018

The Most Important Developments in M&A Law in 2017

Gail Weinstein is senior counsel, and Philip Richter and Steven Epstein are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Richter, Mr. Epstein, Scott B. LuftglassWarren S. de Wied, and Matthew V. Soran, and is part of the Delaware law series; links to other posts in the series are available here.

Appraisal, Corwin, Controllers, Director Self-Interest, Disclosure, M&A Agreements, MLPs, Financial Advisors

Below, we (i) outline the key developments in M&A law in 2017; (ii) review the transformation that has occurred since 2014; and (iii) summarize the Delaware courts’ major 2017 decisions.

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Political Uncertainty and Cross-Border Acquisitions

Chunfang Cao is an associate professor of accounting at the Business School, Sun Yat-sen University; Xiaoyang Li is an associate professor of finance at the Shanghai Advanced Institute of Finance (SAIF), Shanghai Jiao Tong University; and Guilin Liu is with Huatai Property & Casualty Insurance Co., Ltd. This post is based on their recent article, forthcoming in the Review of Finance.

Cross-border acquisitions have become increasingly popular as more firms expand their businesses across national borders. Yet, politicians frequently make decisions that alter the environment in which firms operate, which creates a significant amount of uncertainty for acquisition decisions. Business executives often cite uncertainty as a major threat to investments and growth. Considering the rising importance of cross-border acquisitions and executives’ concerns over heightened political uncertainty, the authors investigate how political uncertainty affects such decisions.

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Activist Investing in Europe—2017 Edition

Armand W. GrumbergScott C. Hopkins, and Lorenzo Corte are partners at Skadden, Arps, Slate, Meagher and Flom LLP. This post is based on a Skadden publication by Mr. Grumberg, Mr. Hopkins, Mr. Corte, Matthias HorbachFrancois Barrière, and Holger Hofmeister. 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).

By the end of September, 2017 had seen more than 100 European-based companies publicly subjected to shareholder demands. Reached slightly later this year than last, and much earlier than in 2015, that milestone signals that if activism in Europe has lost its capacity to shock, its future also looks secure.

Activity is still a long way behind the U.S., where the annual number of companies publicly targeted has ranged from more than 300 to nearly 500 over the last four years. And at least part of the increase in European activism in recent years has been due to a higher incidence of foreign activists looking for opportunities as the U.S. market has become increasingly picked-over. Often the most high-profile of situations, campaigns by U.S. activists at European companies this year have included Third Point Partners at Nestlé, Elliott Management at AkzoNobel, and Corvex Management at Clariant.

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CEO Gender and Corporate Board Structures

Melissa B. Frye is an Associate Professor of Finance at the University of Central Florida and Duong T. Pham is an Assistant Professor of Finance at Georgia Southern University. This post is based on a recent article by Professor Frye and Professor Pham, forthcoming in the Quarterly Review of Economics and Finance.

In our article, CEO Gender and Corporate Board Structure (forthcoming in the Quarterly Review of Economics and Finance), we investigate the relationship between the gender of the CEO and corporate board structures. In recent years, women have made strides in cracking the glass ceiling in leadership positions in corporate America. Female CEOs have been appointed not only in female-friendly industries such as healthcare and consumer products but also in fields that are traditionally dominated by their male counterparts such as energy, utilities or automotive. The number of female CEOs leading S&P 500 companies reached a record high in 2016 with 27 women at the helm of these firms. However, women CEOs only make up 5.4% of the total S&P 500 CEO positions.

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Pay-for-Performance Mechanics

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Mishra.

Following the implementation of mandated advisory shareholder votes on executive compensation under the Dodd-Frank Act of 2010, investors have regular opportunities to opine on executive pay programs. Investor feedback on the issue of pay-for-performance has indicated a preference for a focus on long-term alignment, board decision-making, and pay relative both to market peers and company performance. As a result, ISS’ approach to evaluating pay-for-performance comprises an initial quantitative assessment and, as appropriate, an in-depth qualitative review to determine either the likely cause of a perceived long-term disconnect between pay and performance, or factors that mitigate the initial assessment.

The initial quantitative screens are designed to identify outlier companies that have demonstrated significant misalignment between CEO pay and company performance over time. The screens measure alignment on both a relative and absolute basis, and over multiple time horizons. The screening process applies to constituents of the Russell 3000E Index, a collection of the largest 3,500 (approximate) equity securities traded on U.S. stock exchanges. Beginning with annual meetings on or after Feb. 1, 2018, the quantitative screen includes a new financial performance assessment that measures on a long-term basis the relative alignment between CEO pay and key financial metrics. Before this 2018 model change, the financial performance assessment was limited to ISS’ qualitative evaluation.

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Compensation Season 2018

Jeannemarie O’Brien, Adam J. Shapiro, and Andrea K. Wahlquist are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Ms. O’Brien, Mr. Shapiro, Ms. Wahlquist, and David E. Kahan.

Boards of directors and their compensation committees will soon shift attention to the 2018 compensation season. Key considerations in the year ahead include the following:

Tax Cuts and Jobs Act Implications.

The new tax law has significantly altered the compensation design landscape. Notable implications of the new tax law include:

No Performance-Based Exception to §162(m). The new law eliminates the performance-based exception to the $1 million per-executive annual limit on the deductibility of compensation for certain public company executives under §162(m) of the tax code. This change will result in a significant increase in disallowed tax deductions. Nevertheless, we expect that companies will accept this result as a necessary consequence of the competitive marketplace for talent. Ultimately, it remains within the business judgment of the board of directors to set compensation at the levels and in the manner that it determines to be appropriate to attract and retain the executives the board believes will best serve the needs of the corporation.

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Analysis of SEC Ruling on Apple Shareholder Proposal

Arthur H. Kohn and Sandra Flow are partners, and Mary E. Alcock is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Kohn, Ms. Flow, Ms. Alcock, and Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

On November 1 2017, the Securities and Exchange Commission (“SEC”) released guidance (Staff Legal Bulletin No. 14I (“SLB 14I”)) clarifying the scope and application of the ordinary business and economic relevance grounds for excluding a shareholder proposal under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from a company’s proxy statement. [1] On November 20, Apple Inc. became the first corporation to attempt to use this guidance in a request for no-action relief from the staff of the SEC’s Division of Corporation Finance (the “Staff”), in response to governance activist Jing Zhou’s proposal that Apple create a board committee focused on human rights (the “Proposal”). On December 21, 2017, the Staff responded, denying Apple’s request to exclude the Proposal from its proxy materials.

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Managing the Family Firm: Evidence from CEOs at Work

Andrea Prat is Richard Paul Richman Professor of Business at Columbia Business School and Professor of Economics at Columbia University. This post is based on a recent paper by Professor Prat; Oriana Bandiera, Professor of Economics at the London School of Economics; Renata Lemos, Economist at the World Bank and Research Associate at the London School of Economics; and Raffaella Sadun, Thomas S. Murphy Associate Professor of Business Administration at Harvard Business School.

Family Firms: An Obstacle to Growth? 

Family firms are often seen as an engine of growth. For instance, the exceptional economic success of many European countries in the post-War period was characterized by the wide presence of family firms across the Continent. Particularly in countries like Germany and Italy, family ownership came to be seen as the best guarantee of economic and social development. However, the consensus that family firms are good for growth has come under scrutiny in recent years.

An emerging body of evidence indicates that family management is actually detrimental for performance. Exploiting a remarkable natural experiment, Bennedsen et al (2007) estimate a 4% profitability loss for Danish firms due to having a family manager rather than a professional one. Lippi and Schivardi (2014) find that family firms have worse executive selection (because they prefer to hire a less qualified family manager rather than an external professional manager) and this accounts for a 6% productivity loss as compared to conglomerate-owned firms. Given the magnitude of the estimated effect, family ownership might be a serious obstacle to productivity growth in Europe.

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Raising the Stakes on Board Gender Diversity

Brianna Castro is an analyst covering the U.S. market for Glass, Lewis & Co. This post is based on a Glass Lewis publication by Ms. Castro and Starlar Burns.

2017 has seen interest in board composition intensify. Investors have long scrutinized individual directors’ qualifications; however, increasingly they are asking how those individuals complement each other, and whether the overall board reflects a diverse mix of backgrounds, skills and qualifications. Investors want to know how boards ensure that they are recruiting directors whose expertise aligns with company strategy, and numerous investment firms have updated their proxy voting policies to punish boards that lack diversity.

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Delaware Court Ruling on Dual-Class Recapitalization Involving Controlling Stockholders

David J. Berger is a partner at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Berger, Amy Simmerman, Katherine Henderson, and Brad Sorrels, and is part of the Delaware law series; links to other posts in the series are available hereRelated research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here), and The Geography of MFW-Land, by Itai Fiegenbaum.

On December 11, 2017, the Delaware Court of Chancery issued a decision that will be important for companies looking to implement measures to extend or make changes to dual-class voting structures and for companies with controlling stockholders. The decision addressed stockholder fiduciary duty challenges to a recapitalization undertaken by NRG Yield, Inc. (the “Company”), which, prior to the recapitalization, had a dual-class stock structure and a controlling stockholder. The court held that the transaction was conflicted because it was specifically designed to benefit the controlling stockholder. Despite this conflict, the court dismissed the litigation because of the process employed by the Company in adopting the recapitalization.

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