Monthly Archives: May 2018

Spotlight on Boards 2018

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton.

The ever-evolving challenges facing corporate boards prompt an updated snapshot of what is expected from the board of directors of a major public company—not just the legal rules, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:


Stock Market Short-Termism’s Impact

Mark J. Roe is the David Berg Professor of Law at Harvard Law School. This post is based on a recent paper by Professor Roe, available here.

Related research from the Program on Corporate Governance includes Corporate Short-Termism—In the Boardroom and in the Courtroom by Mark Roe (discussed on the Forum here); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

Stock-market driven short-termism is crippling the American economy, according to legal, judicial, and media analyses. Firms are forgoing the R&D they need, sharply cutting capital expenditures, and buying back their own stock so feverishly that they starve themselves of cash. The stock market is the primary cause: corporate directors and senior executives cannot manage for the long-term when their shareholders furiously trade their company’s stock, they cannot make long-term investments when stockholders demand to see profits on this quarter’s financial statements, they cannot even strategize about the long-term when shareholder activists demand immediate results, and they cannot keep the cash to invest in their future when stock market pressure drains away that cash in stock buybacks.


Principles and Best Practices for Virtual Annual Shareowner Meetings

Anne Sheehan and Darla C. Stuckey are Co-Chairs of The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings. This post is based on a report by The Best Practices Committee for Shareowner Participation in Virtual Annual Meetings. The Committee consists of interested constituents, comprised of retail and institutional investors, public company representatives, and proxy and legal service providers.

State laws require companies to hold annual meetings of their shareowners to elect directors and to allow their shareowners to vote on matters in which a vote by shareowners is required for approval. In that context shareowners may be permitted to ask questions about items on the ballot prior to voting. The annual meeting often also serves as an opportunity for management to update the company’s shareowners on company developments and to review the company’s performance. It also can be an opportunity for shareowners to ask questions of management and directors about the business of the company if they wish to do so. It is generally accepted that shareowner participation should be welcomed and encouraged at a company’s annual meeting of shareowners.


CEO Pay Ratio: A Deep Data Dive

Jessica Phan is a research analyst at Equilar, Inc. This post is based on an Equilar publication by Ms. Phan.

The introduction of the CEO Pay Ratio has created interest not only in how CEO compensation compares against pay for a company’s median employee, but also how employee pay compares across companies and industry sectors. The SEC required companies with a fiscal year beginning on or after January 1, 2017 to disclose their CEO pay ratio for the first time, and with the proxy filing deadline for these companies passing on April 30, a critical mass of data is now available for analysis.

The Equilar CEO Pay Ratio Tracker aggregates weekly and provides cumulative results on the lowest, median, and highest CEO pay ratios. With over 2,000 data points available as of May 10, 2018, the median pay ratio was 70:1 for all Russell 3000 companies and 166:1 for all Equilar 500 companies.


US Contentious Situations Update

Cristiano Guerra is Head of Special Situations Research, Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Guerra. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

As the U.S. proxy season is heating up, activity in contentious situations remains as energetic as ever, with a healthy number of high-profile company targets, personal disputes, and even unexpected shareholder alliances. While it is still relatively early in the year, we begin to see some interesting patterns. Many of the largest companies that have been targeted by activists appear to prefer the settlement route instead of proceeding to full-blown proxy contests, continuing a trend observed in the past three years. The newer trend we see pertains to an increased number of “vote no” campaigns that are primarily motivated by concerns related economic or strategy-related issues. Some of these campaigns stem from dissatisfaction with company performance or disagreements about strategic decisions, while some take place in lieu of proxy contests.


Do Founders Control Start-Up Firms that Go Public?

Jesse Fried is the Dane Professor of Law at Harvard Law School and Brian Broughman is Professor of Law at Indiana University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Renegotiation of Cash Flow Rights in the Sale of VC-Backed Firms, by Jesse Fried and Brian Broughman (discussed on the Forum here).

Startup founders, who typically must cede control of their firms to obtain VC financing, are widely believed to regain control in the event of an IPO. This view is reinforced by the media salience of prominent founders such as Facebook’s Mark Zuckerberg, Google’s Sergey Brin and Larry Page, and Snap’s Evan Spiegel. Trevor Kalanick’s loss of the CEO position before Uber’s anticipated IPO seems to be the exception that proves the rule.

Indeed, the possibility of founder control-reacquisition via IPO underlies an influential theory for why venture capital requires a robust stock market (Black & Gilson 1998). On this theory, an IPO-welcoming stock market makes possible a VC exit that can return control to founders, enabling VCs to implicitly give founders a valuable “call option on control” that they can exercise if successful. VCs’ ability to offer this call option, this theory claims, makes VC financing more acceptable to control-loving founders and can thereby spur more founder-VC “deals.”


Directors’ Notes: A Trap for the Unwary?

David A. Katz is partner and Laura A. McIntosh is consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh that originally appeared in the New York Law Journal.

“To take notes or not to take notes—that is the question” often asked in corporate board rooms today. As a matter of good governance, it is important that the minutes serve as the single, clear, official record of each in-person or telephonic board and committee meeting. Board materials that are circulated and discussed at the meeting should be part of the official record and either attached to the minutes or maintained in the corporate secretary’s files, as appropriate. In connection with significant transactions, board minutes will be reviewed by third parties for diligence purposes and to confirm that all appropriate (and required) actions have been taken. Moreover, these minutes will be scrutinized closely in the event that a decision taken at the board meeting is subsequently challenged in litigation or otherwise. Directors should use caution in creating or retaining any notes, texts or emails that could be considered an unofficial record of a board meeting. Directors’ notes and emails are discoverable in litigation and can confuse or even undermine the official account of the meeting in question. Various forms of notes—paper, electronic, and email—raise slightly different issues, all of which directors need to understand in advance of their creation.


China as a “National Strategic Buyer”: Towards a Multilateral Regime for Cross-Border M&A

Jeffrey N. Gordon is Richard Paul Richman Professor of Law at Columbia Law School and Curtis J. Milhaupt is Professor of Law at Stanford Law School. This post is based on their recent paper.

Unlike the case of cross-border trade, there is no explicit international governance regime for cross-border M&A; rather, there is a shared understanding that publicly traded companies are generally available for purchase to any bidder—domestic or foreign—willing to offer a sufficiently large premium over a target’s stock market price. This expectation is of course limited by the shifting boundaries of host country protectionism and the prevailing patterns of corporate ownership in different countries.  But the unspoken premise that undergirds the system is that the prospective buyer is motivated by private economic gain-seeking.


Regulatory Reform Should Spur Consolidation

Edward D. Herlihy and Richard K. Kim are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell publication.

[The May 22, 2018] passage by the House of Representatives of a bill raising the “SIFI threshold”—the threshold for banks to be deemed systemically important financial institutions and subject to more burdensome regulation—from $50 billion to $250 billion brings welcome relief that should spur bank M&A activity. Now that the bill has passed both chambers of Congress, all that remains is for the President to sign it in order for the Economic Growth, Regulatory Relief and Consumer Protection to become law. He is expected to do so prior to Memorial Day. No other factor has had more of an impact on bank M&A than regulation and this will be the first piece of legislation passed in nearly twenty years that is aimed at encouraging, rather than deterring, bank consolidation.


The Xerox Takeover Saga

Steve WoloskyAndrew Freedman, and Ron Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan publication by Mr. Wolosky, Mr. Freedman, and Mr. Berenblat.

Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

On April 27, 2018, the New York State Supreme Court issued an important decision temporarily blocking a proposed business combination between Xerox Corporation (“Xerox”) and Fuji Xerox Co., Ltd. (“Fuji Xerox”), the longstanding joint venture between Xerox and Fujifilm Holdings Corporation (“Fuji”). The “lynchpin” of the Court’s decision to block the transaction turned on the conduct of Xerox’s “massively conflicted” CEO Jeff Jacobson in negotiating the transaction, and the Board’s “acquiescence” to such conduct. The Court was convinced that once Jacobson learned that Carl Icahn, the largest shareholder, and the board of directors of Xerox (the “Board”) were seeking to replace him as CEO, he “abandoned the Board’s request to obtain a value-maximizing all-cash transaction and engineered the framework for a one-sided deal” with Fuji that would result in him retaining the CEO position with the combined company.

In addition to blocking the transaction, the Court enjoined Xerox from enforcing its nomination deadline for its 2018 annual meeting of shareholders (the “2018 Annual Meeting”), representing a monumental victory for shareholder activists. This post focuses on the Court’s decision to enjoin enforcement of the nomination deadline given the major impact we believe it will have on strategies that could be deployed by shareholder activists after a nomination deadline has passed.


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