Monthly Archives: July 2018

Statement Announcing SEC Staff Roundtable on the Proxy Process

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement, 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.

Shareholder engagement is a hallmark of our public capital markets, and the proxy process is a fundamental component of that engagement. In 2010, the Commission issued a concept release seeking public comment on whether the U.S. proxy system as a whole operates with the accuracy, reliability, transparency, accountability, and integrity that shareholders and companies should expect. [1] In light of the many changes in our markets, technology, and how companies operate since then, SEC staff will host a roundtable this fall to hear from investors, issuers, and other market participants about whether the SEC’s proxy rules should be refined.

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What’s in a Name? Regulation Best Interest v. Fiduciary

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks at the National Association of Plan Advisors D.C. Fly-In Forum, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you for that kind introduction. I am excited to be with a group of people who play such a vital role in helping to provide peace of mind to workers planning for and heading into retirement. The Commission also has a role to play in helping to enhance retirement security for Americans. I want to focus today’s [July 24, 2018] remarks on our work in overseeing the broker-dealers and investment advisers that work with investors to secure their retirements. You will not be surprised to hear that my particular focus will be on the recently proposed standards for broker-dealers and investment advisers providing investment assistance to investors. Before proceeding, I must, as always, provide the standard disclaimer that the views I express today are my own, and do not necessarily reflect the views of the Commission or my fellow Commissioners.

I. Words—What do They Mean?

I am going to start with a little Latin, but it may not be what you are thinking; I am not going to start with the Latin etymology of the word “fiduciary.” [1] Instead, the Latin lesson of the day is “Malo malo malo malo.” I struggled through a lot of years of Latin in school, but for all that study, I still was stumped by “malo malo malo malo” when someone challenged me with that sentence recently. It is the same word four times in a row, so how hard could it be? I assumed it was “bad, bad, bad, bad” or “evil, evil, evil, evil,” which might be a pretty good sentence to have handy in connection with a lot of financial regulatory policy debates.

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The Evolution of Corporate Cash

John Graham is the D. Richard Mead, Jr. Family Professor at Duke University’s Fuqua School of Business and Mark Leary is Associate Professor of Finance at Washington University in St. Louis’ Olin School of Business. This post is based on a recent article by Professor Graham and Professor Leary, forthcoming in The Review of Financial Studies.

The large increase in corporate cash balances in recent years has garnered much attention in both the academic literature and popular press. Several explanations for this apparent shift in corporate policies have been proposed, including increased riskiness of corporate cash flows, a change in the nature of firms’ assets or the nature of firms going public, a decline in the opportunity cost of holding cash (due to low interest rates), agency conflicts, and U.S. repatriation tax law, which led to trapped foreign cash. While each of these hypotheses is instructive, to fully understand what is different about modern cash policies and what drives time-series changes in corporate cash, one needs to put the recent trends in historical perspective. We gather data back to 1920 to provide this perspective.

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Information Rights of Conflicted Directors

Amy Simmerman and Brad Sorrels are partners and Nate Emeritz is of counsel at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini memorandum by Ms. Simmerman, Mr. Sorrels, Mr. Emeritz, David Berger, Bradley Finkelstein, Douglas Schnell, 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 Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

The Delaware Court of Chancery recently addressed important issues concerning the information rights of directors designated by a significant stockholder, as well as a board committee’s ability to withhold information from certain directors. These types of issues frequently arise in practice when there are competing factions of directors or other types of governance disputes within a company. In a short letter decision during the discovery phase of the contentious In re CBS Corporation Litigation[1] Chancellor Andre Bouchard reinforced previous guidance from Delaware in holding that (1) directors could not access certain categories of information as to which adversity existed between the company and the stockholder that designated those directors, but (2) the designating stockholder also would not otherwise be prevented from seeing information to which its designated directors were entitled.
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Review of Shareholder Activism: 1H 2018

Jim Rossman is head of Shareholder Advisory, Chris Couvelier is Director, and Kashyap Shah is an Analyst at Lazard. This post is based on a Lazard publication by Mr. Rossman, Mr. Couvelier, and Mr. Shah, Mary Ann Deignan, Dennis Berman, and Rich Thomas. 

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 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).

Key Observations on the Activist Environment in 1H 2018

1. New campaigns initiated and capital deployed by activists reached record levels in 1H 2018

  • 1Q 2018 and 2Q 2018 were the two most active quarters ever, resulting in a record 145 new campaigns launched against 136 companies in 1H 2018
    • Elliott’s 17 new campaigns in 1H 2018—nearly three times the level of the next most prolific activist—accounted for ~12% of all activity
  • An all-time high ~$40.1bn of capital was deployed by activists in new campaigns in 1H 2018, representing a ~6% increase over the same period last year
  • The broadening use of activism as a tactic continued, with 104 investors (including 20 “first timers”) launching new campaigns in 1H 2018

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Lorenzo v. SEC: Will the Supreme Court Further Curtail Rule 10b-5?

Roger A. Cooper and Matthew C. Solomon are partners and Leslie N. Silverman is senior counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Cooper, Mr. Solomon, and Mr. Silverman.

Last month, the Supreme Court granted a writ of certiorari in Lorenzo v. SEC, a case where Francis Lorenzo, a registered representative of a broker-dealer, allegedly emailed false and misleading statements to investors that were originally drafted by his boss. After administrative and Commission findings of liability, a divided panel of the D.C. Circuit determined that, while Lorenzo was not the “maker” of the statements, he did use them to deceive investors, and thereby violated the so-called scheme liability provisions of Section 10(b) of the Securities Exchange Act and Rule 10b-5 thereunder. As described in the petitioner’s motion seeking certiorari, the case presents the question whether, under the Court’s 2011 Janus Capital Group, Inc. v. First Derivative Traders decision, the scheme liability provisions of Rule 10b-5(a) and (c) may be used to find liability in connection with false or misleading statements by persons who are not themselves the maker of those statements and, thus, not liable under the false-and-misleading statements provision of Rule 10b-5(b). The answer to this question could have implications for the Securities and Exchange Commission’s (“SEC” or “Commission”) Enforcement Division as well as potentially significant implications for private securities litigants who principally rely on Section 10(b) to bring private causes of action sounding in fraud.

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The Limits of “The Corwin Effect”

Nicholas D. Mozal is an associate at Ross Aronstam & Moritz LLP. This post is based on a Ross Aronstam & Moritz memorandum by Mr. Mozal. This post is part of the Delaware law series; links to other posts in the series are available here.

In Morrison v. Berry, [1] the Delaware Supreme Court reversed the Court of Chancery’s dismissal of M&A litigation under Corwin v. KKR Financial Holdings LLC. [2] As in Appel v. Berkman, [3] the Supreme Court held that Corwin did not apply because of the target’s failure to disclose all material facts to stockholders. The decision reiterates that Delaware courts will scrutinize disclosures to determine whether Corwin should apply, and Morrison guides boards and their counsel about how to avoid the pitfall of partial disclosures.

Background Facts

The Fresh Market (the “Company”) received an unsolicited offer from Apollo Global Management LLC on October 1, 2015. Apollo stated it had discussed whether Ray Berry, the Company’s founder, board member, and owner of nearly 10% of its shares, would agree to roll his equity in a deal, thus rendering him potentially “interested” in a transaction with Apollo. The board then dutifully created a special committee, hired a banker, and ran a five-month process. At the end of that process the special committee and board recommended a deal with Apollo. The Company released the required Schedule 14D-9, which incorporated Apollo’s Schedule TO. Nearly eighty percent of the Company’s shares tendered into the deal.

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Effects of Executive Pay Levels on Say on Pay

Austin Vanbastelaer and Charles Gray are consultants at Semler Brossy Consulting Group, LLC. This post is based on a Semler Brossy memorandum by Mr. Vanbastelaer, Mr. Gray, Todd Sirras, Kayla Dahlerbruch, and Justin BeckRelated research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation and Executive Compensation as an Agency Problem, both by Lucian Bebchuk and Jesse Fried.

CEO pay gets most of the attention for the Say on Pay vote. It’s less clear how shareholders interpret and evaluate pay levels for the other named executive officers excluding the CEO (“NEOs”) and to what degree these values impact Say on Pay outcomes. We looked at S&P 500 Say on Pay results from the past three years to understand how NEO compensation influences Say on Pay voting and made four key observations:

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Proposed Amendments to Whistleblower Rules

Mark D. Cahn is partner and Joseph Toner is a senior associate at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale memorandum by Mr. Cahn and Mr. Toner.

In 2011, pursuant to authority granted under the Dodd-Frank Wall Street Reform and Consumer Protection Act, the Securities and Exchange Commission (SEC or Commission) adopted rules implementing the whistleblower provisions of Section 21F of the Securities Exchange Act of 1934 (the Whistleblower Program). The Whistleblower Program allows the Commission to provide monetary rewards to whistleblowers who provide the Commission with information that leads to successful enforcement actions. Over the past seven years, the Commission has trumpeted the successes of its Whistleblower Program—namely, that information provided by whistleblowers has led to almost $1.5 billion in disgorgement and penalties and over $275 million has been paid out in whistleblower “awards.”

At the same time, the Whistleblower Program has come under increasing scrutiny. After years of litigation, the anti-retaliation provisions of the Whistleblower Program were recently struck down by the U.S. Supreme Court, which held unanimously in Digital Realty Trust, Inc. v. Somers that the Commission had exceeded its authority by extending the protections to whistleblowers who only reported violations internally. [1] The size of some of the most recent awards has also attracted considerable attention. Indeed, while the Commission has ordered almost 50 awards, over 40% of that money was awarded in three very sizeable awards.

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Gender Diversity and Board Quotas

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 memorandum by Mr. Katz and Ms. McIntosh that originally appeared in the New York Law Journal.

California has made headlines this summer with legislative action toward instituting gender quotas for boards of directors of public companies headquartered in the state. The legislation has passed the state senate; to be enacted, it must be passed by the California state assembly and signed by the governor. In 2013, California became the first state to pass a precatory resolution promoting gender diversity on public company boards, and five other states have since followed suit. The current legislative effort has come under criticism for a variety of reasons, and, while it is not certain to become law, it could be a harbinger of a broader push for public company board gender quotas in the United States. It is worth considering whether quotas in this area would be beneficial or harmful to the larger goals of gender parity and board diversity.

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