Monthly Archives: April 2018

Review and Analysis of 2017 U.S. Shareholder Activism

Melissa Sawyer is a partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Ms. Sawyer, Marc Treviño, Lauren S. Boehmke, and Korey R. Inglin. 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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst.

Shareholder activist hedge funds grew modestly in 2017, not yet restoring global activist fund assets under management (“AUM”) to 2015 highs. Moreover, the rate of formation of new activist funds continued to decline, and the “winners” in this environment—those activists attracting the most new capital—seemed to be the well-established activists with strong brand names and track records of outperforming the market. Mirroring this development in fundraising, 2017 also saw a resurgence of campaign activity by frequent activists. Notably, these frequent activists appeared to focus on the largest companies, with activists targeting large-cap companies in over 21% of all campaigns (up from 19% in 2016). Large-caps like P&G, GE, General Motors, Nestle and ADP became notable targets. Despite this increased activity by frequent activists, the overall number of proxy contests and the number of board seats sought by activists both declined during 2017, continuing similar declines observed during 2016.

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The Cost of Political Connections

Antoinette Schoar is the Michael M. Koerner Professor of Entrepreneurship at the MIT Sloan School of Management. This post is based on a recent article, forthcoming in the Review of Finance, by Professor Schoar; Marianne Bertrand, Chris P. Dialynas Distinguished Service Professor of Economics at the University of Chicago Booth School of Business; Francis Kramarz, Associate Professor at Ecole Polytechnique; and David Thesmar, Franco Modigliani Professor of Financial Economics at the MIT Sloan School of Management.

A large literature in corporate governance has analyzed the nexus between politics and business to show that politically connected firms can benefit from connections, for example, by receiving preferential access to government resources or favorable regulations, see Fisman (2001) or Morck and Yeung (2003). In this article, we explore a potential downside for a firm of having a politically connected CEO: Connections might lead CEOs to use firm resources to help incumbent politicians stay in power even if it is not beneficial for the firm, since it might advance their own careers or personal interests. We use France as our research setting since a large fraction of publicly-traded assets are managed by CEOs whose past professional experience involved serving in government.

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Real Talk on Executive Compensation

Glenn Davis is Director of Research at the Council of Institutional Investors. This post is based on a CII publication by Mr. Davis.

This post summarizes and paraphrases comments shared at a roundtable on executive compensation that CII organized on Jan. 9, 2018, in Denver, CO. Participants included representatives of asset owners, asset managers, employee unions, corporations and think tanks. By design, investor representatives constituted a significant majority of roundtable participants, while executive compensation consultants and proxy advisors were not represented. A full participant list is provided at the bottom of the post.

The roundtable was conducted under rules that encourage participants to speak freely, with no attribution to them or their affiliated organizations. Views conveyed in this report do not necessarily represent the views of employers of roundtable participants, CII, its board members or staff. CII Research Director Glenn Davis organized the roundtable, and edited remarks for use in this report

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Executive Pay at Public Corporations After Code §162(m) Changes

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.

Internal Revenue Code §162(m) imposes limitations on the deductibility of executive pay by public corporations. The new tax law, Public Law No. 115-97 (the “Tax Cuts and Jobs Act” (TCJA)), makes a number of changes in Code §162(m). These changes generally take effect for taxable years commencing after Dec. 31, 2017 (exceptions noted below). This post discusses these changes, how the changes might impact on different forms of executive pay and some of the steps public corporations need to take in light of these changes.

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Selecting Directors Using Machine Learning

Michael S. Weisbach is Ralph W. Kurtz Chair in Finance at The Ohio State University Fisher College of Business, and Research Associate at the National Bureau of Economic Research. This post is based on a recent paper by Professor Weisbash; Isil Erel, Distinguished Professor of Finance at The Ohio State University Fisher College of Business; Léa Stern, Assistant Professor of Finance and Business Economics at the University of Washington Foster School of Business; and Chenhao Tan, Assistant Professor at the University of Colorado Boulder.

In this paper, we present a machine-learning approach to selecting the directors of publicly traded companies. In developing the machine learning algorithms, we contribute to our understanding of governance, specifically boards of directors, in at least three ways. First, we evaluate whether it is possible to construct an algorithm that accurately forecasts whether a particular individual will be successful as a director in a particular firm. Second, we compare alternative approaches to forecasting director performance; in particular, how traditional econometric approaches compare to newer machine learning techniques. Third, we use the selections from the algorithms as benchmarks to understand the process through which directors are actually chosen and the types of individuals who are more likely to be chosen as directors counter to the interests of shareholders.

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Discounted Deal Price in Appraisal Litigation

Jason Halper, Joshua Apfelroth, and Nathan Bull are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Halper, Mr. Apfelroth, Mr. Bull, William P. Mills, Jared Stanisci, and William Simpson, 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings by Guhan Subramanian (discussed on the Forum here).

In a trio of recent appraisal decisions, Delaware courts declined to use the deal price as the best evidence of fair value, instead using discounted cash flow analyses (“DCF”) and the unaffected market price to determine fair values below the merger consideration. Building on the trend reflected in the Delaware Supreme Court’s high-profile 2017 decisions in Dell, Inc. v. Magnetar Glob. Event Driven Master Fund Ltd. and DFC Global Corp. v. Muirfield Value Partners (discussed in our 2017 year-in-review), L.P., the Delaware Court of Chancery’s recent decisions in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. [1] and In re Appraisal of AOL Inc., [2] and the Delaware Supreme Court’s decision in Merlin Partners, L.P. v. SWS Group, Inc. [3] further underscore the ability of companies and their boards to successfully contest dissenting shareholders seeking appraisal.

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Agency Conflicts Around the World

Erwan Morellec is Professor of Finance at the Ecole Polytechnique Fédérale de Lausanne (EPFL), Boris Nikolov is Assistant Professor of Finance at the University of Lausanne and the Swiss Finance Institute; and Norman Schürhoff is Professor of Finance at the University of Lausanne and the Swiss Finance Institute. This post is based on their recent article, forthcoming in the Review of Financial Studies. Related research from the Program on Corporate Governance includes The Elusive Quest for Global Governance Standards by Lucian Bebchuk and Assaf Hamdani.

We offer a novel approach to measuring agency conflicts. Instead of counting governance provisions that are endogenous to the prevalence of agency conflicts and the institutional and legal environment, we construct theory-grounded indexes of agency conflicts based on revealed managerial preferences. For this purpose, we develop and estimate a dynamic capital structure model augmented by agency. We focus on two types of agency conflicts: controlling-minority shareholders conflicts and shareholder-bondholder conflicts. The indexes are available at the firm level across 14 countries.
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Unequal Voting and the Business Judgment Rule

Charles M. Elson is the Director of the John L. Weinberg Center for Corporate Governance, and the Edgar S. Woolard, Jr., Professor, at the University of Delaware; Craig K. Ferrere is a term clerk for the Honorable Thomas L. Ambro of the United States Court of Appeals for the Third Circuit. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum hereand The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

Increasingly, company founders have been opting to shore up control by creating voting structures that undercut shareholder voting power, where only a decade ago almost all chose the standard and accepted one-share, one-vote structure. Now the Snap Inc. initial public offering has gone even further with the first-ever non-voting stock model. By offering stock in the company with no shareholder vote at all, Snap—the company behind the popular mobile-messaging app Snapchat (that is all about giving a voice to the many)—has acknowledged that public voting power at controlled companies is only a fiction. This stock ownership structure undercuts shareholder influence, undermines corporate governance, and will shift the burden of investment grievances to the courts.

Snap’s March 2017 initial, non-voting-stock public offering is, in modern times, unprecedented. [1] Its multi-class, non-voting capitalization gives Evan Spiegel and Robert Murphy, the company’s founders, and holders of ten-vote shares, a lifetime lock on control, without the need to retain an expensive ownership position. [2] They exercise a decisive 89 percent of the voting power, despite holding only about 44 percent of the company’s total equity.

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In the Spirit of Full Cybersecurity Disclosure

Christine Mazor and Sandra Herrygers are partners at Deloitte & Touche LLP. This post is based on a Deloitte publication by Ms. Mazor and Ms. Herrygers.

On February 21, 2018, the SEC issued interpretive guidance (the “release”) [1] in response to the pervasive increase in digital technology as well as the severity and frequency of cybersecurity threats and incidents. The release largely refreshes existing SEC staff guidance related to cybersecurity and, like that guidance, does not establish any new disclosure obligations but rather presents the SEC’s views on how its existing rules should be interpreted in connection with cybersecurity threats and incidents.

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Activist Arbitrage in M&A Acquirers

Wei Jiang is the Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School; Tao Li is Assistant Professor of Finance at University of Florida Warrington College of Business; and Danqing Mei is a Ph.D. candidate in Finance at Columbia Business School. This post is based on their recent paper.

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).

In our paper, Activist Arbitrage in M&A Acquirers, we study a relatively new activist investor strategy in which investors adopt a non-conventional risk arbitrage strategy in the acquirer firms of announced M&A deals. Recall that, in a conventional risk arbitrage, an investor takes a long position in the target after an M&A deal is announced, sometimes accompanied by a short position in the acquirer. The investor bets on the completion of the deal (and will vote her shares for the deal) and profits from the price spread convergence. In contrast, in an “activist M&A arbitrage,” an investor takes a long position in the announced acquirer, aiming at upsetting an announced deal that is expected to be value destroying by using her shareholder rights.

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