Monthly Archives: June 2018

Understanding the Dutch Poison Pill

Seve Jan van der Graaf is an analyst at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. van der Graaf.

Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here), and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

Ahold Delhaize, the biggest food retail group in the Benelux region with a rough market cap of €25 billion, is facing pushback from shareholders over a unique Dutch practice. The company recently announced that it had extended its call option agreement with a foundation called “Stichting Continuïteit Ahold Delhaize” or “SCAD” (roughly translated as the foundation for continuity of Ahold Delhaize), without giving investors the opportunity to vote on the deal.

To be clear, SCAD is not a charitable foundation—instead, the entity effectively functions as a poison pill for Ahold Delhaize. In Dutch corporate law, foundations need to have a purpose, but that purpose does not need to include the public good. As a result, these legal structures are the go-to anti-takeover mechanisms for Dutch companies, from family-owned entities to public issuers, taking several different forms. Here, SCAD was established for the purpose of protecting the continuity, independence and identity of Ahold Delhaize. It fulfils this purpose through the call option agreement, which gives SCAD the right to buy all 2,250 million of Ahold Delhaize’s authorised but unissued cumulative preference shares—which, not coincidentally, amount to 50% of the company’s authorised share capital, effectively blocking any attempt to take control.


The Effect of Enforcement Transparency: Evidence from SEC Comment-Letter Reviews

Miguel Duro is Assistant Professor of Accounting and Control at University of Navarra IESE Business School, Jonas Heese is Assistant Professor of Business Administration at Harvard Business School, and Gaizka Ormazabal is Associate Professor of Accounting and Control at University of Navarra IESE Business School. This post is based on their recent paper.

Regulators increasingly rely on policies to disseminate their oversight actions, with the assertion that the disclosure of regulatory oversight activities can enhance the effect of enforcement by increasing third-party monitoring. However, the validity of this assertion has rarely been tested. In this study, we examine the effect of the public disclosure of the Securities and Exchange Commission (SEC) oversight activities on firms’ financial reporting. Specifically, we exploit a major change in the SEC’s policy regarding comment-letter reviews (henceforth “CLs” or “CL reviews”). Contrary to its prior policy, the SEC announced in 2004 that it would begin to publicly disseminate all CLs. From a research-design perspective, our setting provides three strengths: (1) the change was unexpected, (2) affected all public firms (all public firms are subject to CL reviews at least once every three years), and (3) did not modify the underlying regulation, but simply required the disclosure of CLs.


T. Rowe Price’s Investment Philosophy on Shareholder Activism

Donna F. Anderson is Head of Corporate Governance at T. Rowe Price. This post is based on a T. Rowe Price memorandum by Ms. Anderson and Eric Veiel. 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).

We are long-term investors. The core of the T. Rowe Price client-centered investment philosophy is to utilize proprietary research to guide active investment selection and diversification to reduce risk. For more than 80 years, our collaborative, disciplined approach has stood the test of time.

Proprietary, fundamental research is a critical foundation of our equity investment processes, and our ability to generate unique insights about companies is, in turn, dependent on our ability to cultivate constructive, private, two-way communication with the managements of these companies over time. Therefore, as we think about the effects shareholder activism may have on our investment process, we take a very long-term perspective because well-functioning capital markets and plentiful high-quality investment opportunities are essential to the future of our investment process, our clients, and our firm.


Significant Revisions of the Volcker Rule

Nathan S. Brownback and V. Gerard Comizio are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Brownback and Mr. Comizio.

This week, the Board of Governors of the Federal Reserve System (the “Board”), the Federal Deposit Insurance Corporation (the “FDIC”), and the Office of the Comptroller of the Currency (the “OCC”) each issued a Notice of Proposed Rulemaking (“the Notice”) proposing a number of changes to the Volcker Rule.

In summary, as described in more detail below, the Notice proposes significant changes to the Volcker Rule’s proprietary trading restrictions, a new tiered system of compliance, and a streamlined set of compliance metrics. In contrast, the Notice proposes few specific proposals for regulatory relief from the covered fund limitations and prohibitions; it primarily focuses on seeking public comment on the covered fund provisions—71 questions focus on them—but also reaffirms existing FAQs and guidance regarding the interaction of the Volcker Rule definitions of “covered fund” and “banking entity.” The existing FAQs and guidance provide some regulatory relief from the potential inclusion, in certain circumstances, of registered investment companies and foreign public funds (during their permissible seeding periods), and foreign excluded funds—none of which are covered funds—in the definition of “banking entity” under the Volcker Rule. With respect to these and other issues, the Notice requests comment on at least 342 questions related to the Volcker Rule, its scope and operations—a seemingly high number of questions for a proposed rulemaking of this type.


Political, Social, and Environmental Shareholder Resolutions: Do they Create or Destroy Shareholder Value?

Joseph P. Kalt is the Ford Foundation Professor (Emeritus) of International Political Economy at the John F. Kennedy School of Government, Harvard University and a Senior Economist at Compass Lexecon. L. Adel Turki is a Senior Managing Director of Compass Lexecon. Kenneth W. Grant and Todd D. Kendall are Executive Vice Presidents, and David Molin is Vice President, at Compass Lexecon. The views expressed here are solely those of the authors and do not necessarily reflect the views of their employers or the National Association of Manufacturers and/or its members.

The increased use of politically-charged shareholder resolutions has garnered considerable attention in recent years, as shareholder meetings have become venues for discussion and debate regarding corporate positions and actions on issues of the day. Recent proxy seasons have seen corporate management being asked to address issues as diverse as deforestation, corporate clean energy goals, climate change, the uses of antibiotics and pesticides, political contributions, human rights risks through the supply chain, indigenous rights and human trafficking, cybersecurity, the development and reporting of sustainability metrics, and tax fairness. As we show, this change has both expanded the number of resolutions to which a given company may be required to respond and broadened the range of issues that boards and senior managers are being asked to address.


Untangling the Tangled Web of Cybersecurity Disclosure Requirements: A Practical Guide

Pamela L. Marcogliese is partner and Rahul Mukhi is counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Ms. Marcogliese, Ms. Mukhi, Olivia Espy, Richard Cipolla, and Stephanie Kelly.

The consequences of a cybersecurity incident can be severe. The economic loss associated with an incident can often be compounded by reputational damage, loss of trade secrets, destruction of assets, operational impairment, lost revenue following the announcement of the cybersecurity incident and the expense of implementing remedial measures. The timing and content of any public communication about a suspected or confirmed cybersecurity incident can exacerbate this loss and have a significant impact on the trading price of the issuer’s securities. The disclosure considerations become even more complex when a company is subject to overlapping, and potentially conflicting, regulatory obligations in multiple jurisdictions, including the United States and the European Union (“EU”). This issue is now at the forefront with the EU’s new data security and privacy regime, the General Data Protection Regulation (“GDPR”), which became effective on May 25, 2018.


The Law and Finance of Initial Coin Offerings

Aurelio Gurrea Martínez is a Fellow of the Program on Corporate Governance at Harvard Law School and Executive Director of the Ibero-American Institute for Law and Finance; Nydia Remolina is Senior Advisor for Innovation, Regulation and Digital Transformation at Grupo Bancolombia and Lecturer in International Financial Regulation at Javerina University. This post is based on their recent paper.

The rise of new technologies is changing the way companies raise funds. Along with the increase of crowdfunding in recent years, the use of Initial Coin Offerings (ICOs) has emerged more recently as a new form to raise capital. Companies in the United States raised more than $4 billion in 2017 and over $6.3 billion were raised through ICOs in the first three months of 2018. In a typical ICO, a company receives cryptocurrencies in exchange for certain rights embodied in “tokens”, whose nature, treatment and implications are generating controversy among securities regulators around the world.

In a recent paper, entitled The Law and Finance of Initial Coin Offerings, we address the primary legal and finance issues raised by ICOs. In our view, the first challenge for securities regulators should consist of clarifying the nature of tokens in order to determine whether, and if so when, they should be subject to securities laws. For that purpose, we propose a definition of tokens based on both their function and their legal nature. As to their function, we follow the classification suggested by FINMA. Therefore, we distinguish between asset tokens (those that resemble shares, bonds, etc.), utility tokens (those that offer access to goods and services) and payment tokens (those that represent cryptocurrencies). As to their legal nature, we distinguish between security tokens (those that qualify as “securities” under a particular country´s securities laws) and non-security tokens (everything else). We argue that the legal classification of the token, which should be the relevant one for securities regulation depends on the features, structure, distribution, and marketing of the issuance of tokens, as well as a particular country´s securities laws. Hence, even though the function of the token may help determine its legal nature, a further analysis will be required.


Don’t Blame Stock Markets for Peril of Short-Termism

Mark Roe is the David Berg Professor of Law at Harvard Law School. This post is based on an op-ed by Professor Roe that was published today in The Financial Times and is based on his paper, Stock-Market Short-Termism’s Impact, (discussed on the Forum here).

Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Uneasy Case for Favoring Long-term Shareholders (discussed on the Forum here) by Jesse Fried, 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).

The Business Roundtable, a prestigious organisation of the CEOs of the largest American companies, last week urged large public companies to stop telling investors what senior executives expect quarterly earnings will be. Their effort arises from the widespread belief that the scourge of market-driven short-termism is seriously damaging the American economy. Ending this quarterly earnings advice would help. Respected business leaders like Jamie Dimon and Warren Buffett have promoted the idea under the headline that “Short-Termism is Harming the Economy”.

The advice on forgoing advance projections of quarterly earnings is sensible as such efforts largely waste managerial time—the earnings will be announced soon enough. But the thinking behind the advice, that market-driven short-termism is seriously harming the American economy, is unsound. Critiquing short-termism is now an idea whose time has come and, for many, its severity is so obvious that the idea needs no support. Like the recent attacks on open trade, basic marketplace advantages do not seem as advantageous, even to market leaders like the Business Roundtable, as they once did.


Remarks to the SEC Investor Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks to the SEC Investor Advisory Committee, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I’d like to start by extending a special welcome to the three individuals who have generously agreed to serve as new Committee members. Paul Maloney, Lydia Mashburn, and J.W. Verret, thank you for joining us. I look forward to your contributions to the important work of this Committee.

I would also like to thank our host, the Georgia State University College of Law and Dean Wendy Hensel. The SEC has an outstanding Regional Office in Atlanta, and I think I speak for my colleagues when I say that we have all felt very welcome in Atlanta. Atlanta is a perfect place for the first IAC meeting outside of Washington. It is important to me that we—all of us at the SEC—spend time with Main Street investors across the country. These are the women and men who depend on our nation’s capital markets to provide quality, long-term investment opportunities that will enhance their lives and their futures.

As I hope you know, ensuring that Main Street investors have quality investment opportunities, and that they are well informed and well protected, are my focus and the focus of the staff at the SEC. In fact, I often say, the interests of our long term retail investors is the touchstone by which we should view each and every action we take. It is certainly at in the heart of the SEC staff and is central to the topics that we are discussing today.


Highlights of Proposal to Simplify the Volcker Rule

Katherine Mooney CarrollDerek Bush, and Hugh C. Conroy, Jr. are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a recent Cleary Gottlieb publication by Ms. Mooney Carroll, Mr. Bush, Mr. Conroy, Michael Mazzuchi, Patrick Fuller, and Alexander Young-Anglim.

[On May 30, 2018], the Federal Reserve Board approved a 373-page notice of proposed rulemaking that represents a first step toward simplifying and clarifying the Volcker Rule. The other four agencies responsible for implementation are expected to approve the notice in the coming days. Below is a brief summary of the key headlines and proposals from the release.


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