Monthly Archives: June 2018

Lazard’s 1Q 2018 13F Filing Analysis

Jim Rossman is head of Shareholder Advisory at Lazard. This post is based on a Lazard publication by Mr. Rossman.

  • Rule 13F-1 of the Securities Exchange Act of 1934 requires institutional investors with discretionary authority over more than $100m of public equity securities to make quarterly filings on Schedule 13F
    • Schedule 13F filings disclose an investor’s holdings as of the end of the quarter, but generally do not disclose short positions or holdings of certain debt, derivative and foreign listed securities
    • Filing deadline is 45 days after the end of each quarter; filings for the quarter ended March 31, 2018 were due on May 15, 2018
  • Lazard’s Shareholder Advisory Group has identified 16 core activists, 29 additional activists and 34 other notable investors (listed on the following page) and analyzed the holdings they disclosed in their most recent 13F filings and subsequent 13D and 13G filings, other regulatory filings and press reports
    • For all 79 investors, the focus of Lazard’s analysis was on holdings in companies with market capitalizations in excess of $500 million


Measuring the Impact of Median Employee Pay on the CEO Pay Ratio

Ira Kay is a Managing Partner and Blaine Martin is a Consultant at Pay Governance LLC. This post is based on their Pay Governance memorandum.

For the first time, the Securities and Exchange Commission (SEC) mandated that thousands of companies disclose the ratio of CEO pay to median employee pay (“ratio”) in their annual proxy statements for 2018. The S&P 500 company ratios disclosed thus far show substantial variation, with a median of 155:1 and a range from 0:1 to 5,000:1. While the ratio was never designed to facilitate cross-company comparisons, recent media coverage has done just that, and company management teams and Boards are asking, “What does our ratio mean, and where does our pay ratio stand versus those of our competitors?” Answering this is more complex than it may seem. There are many economic, organizational, and strategic variables that make fair and appropriate comparison between companies, even those within the same industry, technically challenging if not impossible.


Post-Dell Appraisal—Still Work to be Done

Daniel E. Wolf is a partner and Gilad Zohari is an associate at Kirkland & Ellis LLP. This post is based on their Kirkland & Ellis publication, 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 the aftermath of the long-awaited Delaware Supreme Court appraisal decisions in Dell (which we reviewed in a previous note) and DFC, there was cautious optimism that the court’s guidance would eliminate or at least significantly reduce the uncertainty that surrounded appraisal proceedings in Delaware courts in recent years. It was hoped that the decisions would improve predictability and consistency in the application of different valuation metrics used to appraise the fair value of target companies.

In both Dell and DFC, the Supreme Court held that if the deal price resulted from a robust, informed and competitive process and arm’s-length negotiations, the trial judge would be required to assign substantial weight to the deal price as evidence of fair value in subsequent appraisal proceedings. While the Supreme Court did not take the final step of adopting a presumption in favor of deal price as the sole measure, the decisions strongly suggested that, if a deal resulted from a well-designed and competitive process, parties could expect that the deal price would be decisive in appraisal.


Board Lessons: Succeeding with Investors in a Crisis

Krystal Gaboury Berrini and and Rob Zivnuska are partners at CamberView Partners. This post is based on a Bloomberg Law article by Ms. Berrini, Mr. Zivnuska, Eric Sumberg, and Kathryn Night.

Each year, a small number of companies confront crisis-level events that draw high-profile scrutiny from a range of stakeholders. A well-executed emergency response plan can help limit the immediate fallout from a negative incident. However, in recent years, the companies that have been the most successful in managing the longer-term effects of a crisis have paid an increasing amount of attention to the viewpoints and concerns of investors. Though each situation presents a unique fact pattern, companies that have invested in building relationships with shareholders over time have been able to leverage those relationships to achieve better outcomes when a crisis hits. Below we outline the importance of relationship-building, effective ways to address investor engagement during a crisis and the importance of transparency and board leadership in maintaining credibility with investors over the long-term.

Building investor relationships before a crisis hits

From an investor perspective, crisis preparation begins months and years before an event occurs. Companies that dedicate resources to building strong relationships with their investors through a robust engagement plan are taking the necessary steps to generate a reservoir of credibility and trust which can be drawn upon in the face of a difficult event. There are a few main reasons why building relationships over time is so important:


Cheap-Stock Tunneling Around Preemptive Rights

Jesse Fried is the Dane Professor of Law and Holger Spamann is Professor of Law at Harvard Law School. This post is based on their recent paper.

In a paper recently posted on SSRN, Cheap-Stock Tunneling Around Preemptive Rights, we show that preemptive rights are much less effective at protecting outside investors than is widely believed.

Corporate insiders may engage in tunneling—transactions to transfer value from outside shareholders to themselves. Reducing tunneling is corporate law’s most basic function, as fear of tunneling undermines entrepreneurs’ ability to raise capital from outside investors ex ante (Shleifer and Vishny 1997). Preemptive rights are the oldest and most widely-used tool for preventing one of the main forms of tunneling, “cheap-stock tunneling:” an equity issue to the insiders at a low price that economically dilutes the interest of outside shareholders. To defend against cheap-stock tunneling, preemptive rights give all shareholders the right to participate pro rata in equity offerings. In listed firms, preemptive rights are implemented via “rights issues” in which a firm distributes to all shareholders pro rata rights to buy additional shares.


The Hypocrisy of Hedge Fund Activists

Kai Haakon Liekefett is Partner at Sidley Austin LLP. This post is based on his recent publication in the 2018 Spring Edition of Ethical Boardroom.

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); Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here); and Stock Market Short-Termism’s Impact by Mark Roe, (discussed on the Forum here).

In virtually every activism campaign, hedge fund activists don the mantle of the shareholders’ champion and accuse the target company’s board and management of subpar corporate governance.

This claim to having “best practices of corporate governance” at heart is hollow—even hypocritical—as evidenced by at least three examples: hedge fund activists actually undermine the shareholder franchise, they weaken the independence and diversity of the board, and they waffle on their anti-takeover protection stance.


Anticipating and Planning for Geopolitical & Regulatory Changes

Steve W. Klemash is Americas Leader at the EY Center for Board Matters; and Jon Shames is Global Leader at the EY Geostrategic Business Group. This post is based on an EY Center for Board Matters publication by Mr. Klemash and Mr. Shames.

Late in 2017, the EY Center for Board Matters highlighted the importance of anticipating and planning for geopolitical and regulatory changes in our report, Top priorities for US boards in 2018. That priority has since intensified. In the first few months of 2018, US stock indexes experienced the highest levels of volatility since 2014. Long-standing trade agreements, tax and regulatory systems, and defense treaties are being renegotiated, transformed or absolved. And the International Monetary Fund has warned that rising US-China trade restrictions are threatening to derail growth and undermine confidence.

Rising geopolitical tensions and increasing electoral share for populist parties are a concern for businesses. With policy becoming harder to predict, many executives see policy uncertainty, geopolitical tensions, and changes in trade policy and protectionism as key risks to their business. At the same time, business leaders are optimistic about the near-term US outlook—in part because of deregulation and the passage of US tax reform. In fact, the recent Borders vs. Barriers report from EY, Zurich Insurance and the Atlantic Council indicates that despite concerns about policies restricting their ability to transport goods and raise capital, global CFOs are overwhelmingly bullish on investing in the US, and 71% expect continued improvement in the US business environment in the next one to three years.


The Importance of Inferior Voting Rights in Dual-Class Firms

Dov Solomon is an Associate Professor at the College of Law and Business, Ramat Gan Law School. This post is based on his recent article, forthcoming in the Brigham Young University Law Review. 

Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here) and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

Over the past several years, corporate law scholarship has carefully analyzed the effects of dual-class capital structures, which allocate superior voting rights to insiders and inferior voting rights to public shareholders. My article, The Importance of Inferior Voting Rights in Dual-Class Firms, which will be published by the Brigham Young University Law Review, adds to the literature by focusing on a unique and novel type of dual-class structure—one in which the public shares have no voting rights at all. This structure is fundamentally different because in the absence of even highly diluted voting rights in public hands, the firm does not have to meet certain types of disclosure rules and corporate governance standards. Nonvoting shareholders are deprived of these significant components of investor protection.


How To Avoid Bungling Off-Cycle Engagements with Stockholders

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.

Many clients are now turning from their annual meeting to plans for off-cycle engagements with their institutional investors, including the passive strategy behemoths (Blackrock, State Street and Vanguard which tend to own, in the aggregate, around 20% of many of our mid- and large-cap clients), traditional actively managed funds, pension funds, and hedge funds. [1] The rationale for these meetings is that postponement of outreach until a threat of a contested situation (such as a short-slate proxy contest or aggressive shareholder proposal) may be “too little, too late” and that these one-on-one meetings on “sunny days” (and even “partly cloudy days”) are critical, if not for locking up support, at least for establishing a foundation for obtaining support if and when the storm clouds arrive.


Nomination Committees and Corporate Governance: Lessons from Sweden and the UK

Sophie Nachemson-Ekwall is an Affiliated Researcher at the Stockholm School of Economics. This post is based on a recent paper by Ms. Nachemson-Ekwall and Colin Mayer, Peter Moores Professor of Management Studies at the University of Oxford Said Business School.

The board of director nomination-process is a particularly important but largely ignored aspect of corporate governance. It has been ignored in relation to the attention that has been paid to other corporate governance committees, such as the remuneration and audit committees. Both of these appear to have greater relevance to the financial performance of firms and the correction of managerial failure. EU legislation has addressed both areas.

This paper suggests that, on the contrary, the nomination committee (NC) should be a primary focus of attention in corporate governance debates. As custodians of the corporate purpose and firm values, the board plays a critical role in establishing the objectives of the firm and overseeing their implementation through the formulation of strategy, measurement of performance and setting of standards and incentives. The identification of the right members of the board is therefore a primary influence on the operation of the firm. Thus, the legitimacy of the NC in the eyes of the shareholder community and the trust received from minority shareholders is pivotal to the empowerment of the board.


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