Monthly Archives: July 2018

Shareholder Rejection of Chair-CEO Separation

Joseph Kieffer is a Research Analyst at Equilar. This post is based on an Equilar memorandum by Mr. Kieffer.

Since the introduction of Say on Pay, shareholders have maintained a larger degree of influence over CEO compensation. The ability to vote in an advisory capacity on CEO compensation strengthened the voice of shareholders. However, a particularly interesting case arises when the CEO occupies the position of the chair of the board. Potentially, this could create a conflict of interest between the board and management, where the CEO-chair has significant leverage over compensation decisions. It is partly for this reason, in combination with the board’s desire for independent oversight of management, that shareholders often take an active stance in making decisions about CEO-chairs.

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Back in the Groove

Josh Black is Editor-in-chief of Activist Insight. This post is  based on an excerpt from the Activist Insight Monthly Half-Year Review 2018, published in association with Olshan Frome Wolosky and authored by Mr. Black, Husein Bektic, Dan Davis, Iuri Struta, and Elana Duré.

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).

Merger madness, flush balance sheets and the integration of environmental, social, and governance (ESG) issues into mainstream activism in the first half of the year mean 2018 should be set for record levels of activism.

Note: All data as of June 30.

Activism looks poised for another record year in 2018. By the end of June, 610 companies worldwide had been publicly subjected to activist demands year-to-date, driven by record activity in North America. Indeed, the U.S. may be on course for over 500 companies to face financial or governance demands from shareholders by the end of 2018, while Canadian basic materials activism has returned with a vengeance.

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Brexit Update: Keeping Track of the Moving Pieces

Mark Bergman and David Lakhdhir are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Bergman and Mr. Lakhdhir. Additional posts on the legal and financial impact of Brexit are available here.

The second anniversary of the Brexit referendum is upon us, an entirely inconclusive meeting between Prime Minister Theresa May and her fellow members of the European Council has just ended, and the proverbial clock continues to count down to the October deadline for an exit deal and the March 2019 exit date. Yet, if anything the situation has become more, not less, complicated and unclear. No definitive deal is in sight. The possibility that the UK may crash out of the EU with no deal appears increasingly—and to business frighteningly—real. And each potential path out of the present morass appears fraught with political landmines.

While Brexit falls further down the list of priorities for the EU27, as member states grapple with a host of other issues, ranging from existential negotiations over migration into the EU to trade issues and reform of the Eurozone, and member states such as Germany and Italy remain more focused on their domestic political dynamics, the British government continues to be at war with itself.

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Successful CFIUS Monitorships

Randall H. Cook is Senior Managing Director, Mona Banerji is a Director, and Steve Klemencic is Managing Director at Ankura Consulting Group. This post is based on an Ankura memorandum by Mr. Cook, Ms. Banerji, and Mr. Klemencic.

This post describes critical considerations for a successful monitorship of mitigating controls required by the Committee on Foreign Investments in the United States (“CFIUS” or the “Committee”). CFIUS is an interagency US Government committee that reviews Foreign Direct Investment (“FDI”) into the United States to identify and address any consequent national security risks. Growing concern with the impact of foreign countries acquiring national security-critical technologies and other strategic advantages through investment activity has prompted CFIUS to become more active and assertive. Moreover, legislation is pending in both houses of Congress that will significantly expand CFIUS’s jurisdiction to review FDI and require mandatory declaration of specified investment types.

When CFIUS identifies possible national security risks arising from a reviewed transaction, the Committee may make implementation of mitigating control measures a condition of allowing the deal to go forward. In order to assure the effectiveness and persistence of such measures, CFIUS often requires the concurrent appointment of an independent third-party monitor (“TPM”) to oversee and periodically report on these controls. Indeed, given the increasing demands on scarce CFIUS resources consequent to the policy trends described above, both the Committee and industry are increasingly looking to TPMs to play a critical facilitating role to enable valuable transactions to proceed while addressing national security concerns.

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The Virtue of Common Ownership in an Era of Corporate Compliance

Asaf Eckstein is assistant professor at Ono Academic College. This post is based on his recent paper; related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Horizontal Shareholding (discussed on the Forum here) and New Evidence, Proofs, and Legal Theories on Horizontal Shareholding (discussed on the Forum here), both by Einer Elhauge.

“Common ownership” describes a structure in which a small group of large institutional investors—such as BlackRock, Vanguard, State Street Advisors and Fidelity—have significant ownership in horizontal competitors. Between 1980 and 2012 common ownership rates increased dramatically. Since its rise in popularity, common ownership has become the topic of heated debate. A growing body of scholarship now criticizes the common ownership phenomenon, arguing that it causes corporations to compete less vigorously with each other, thereby harming consumers. Accordingly, many scholars now call for legal and regulatory intervention in order to limit common ownership levels. Furthermore, this criticism has spurred the Justice Department’s investigation of potential antitrust issues arising from common ownership. On the other side of the debate, many scholars argue that the dangers of common ownership on competition are overblown. These scholars conclude that there is no need for intervention.

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Amended Definition of “Smaller Reporting Company”

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley publication by Ms. Posner.

The pressure has been coming from all directions—the Congress, the Treasury—indeed, there’s been nary an advisory committee that hasn’t weighed in on this topic: time for the SEC to change the definition of “smaller reporting company.” After all, the proposal has just celebrated its second birthday—has it aged like a fine wine or is it moldy and stinky like an old piece of cheese? The verdict: moldy cheese that made no one happy, but they all ate it anyway.

On Thursday June 28, 2018, the SEC voted unanimously to amend the definition of “smaller reporting company” to allow more companies to take advantage of the scaled disclosures permitted for companies that meet the definition. (Here is the press release.) The amendments raise the SRC cap from “less than $75 million” in public float to “less than $250 million” and also include as SRCs companies with less than $100 million in annual revenues if they also have either no public float or, in a change from the proposal, a public float that is less than $700 million. The change was intended to promote capital formation and to reduce compliance costs for small public companies, while maintaining “appropriate investor protections.” The amendments become effective 60 days after publication in the Federal Register. (The SEC also voted to mandate Inline XBRL and to propose a number of changes to the whistleblower program. See this PubCo post and this PubCo post.)

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The Board’s Role in Corporate Social Purpose

Amy Silverstein is a Senior Manager at the Monitor Institute by Deloitte; Debbie McCormack is Managing Director at the Center for Board Effectiveness; and Bob Lamm is Independent Senior Advisor at the Center for Board Effectiveness, all at Deloitte LLP. This post is based on their Deloitte memorandum.

Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

Why social purpose?

In a 1970 New York Times article, Milton Friedman proclaimed that the business of business was business, and corporations primarily need to focus on shareholder value. The corporate perspective has evolved significantly since then, though there is ongoing debate as to whether a commitment to social purpose activities detracts from profitability and growth.

The current state of play is reflected in a number of statements and policies issued in 2017 and 2018 by major institutional investors that both reinforce Friedman’s point—the business of business is business—and simultaneously reject the notion that social purpose must come at the expense of sustaining and growing a for-profit operation.

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Awaiting Supreme Court Clarification on Fraudulent Scheme Claims

Daphne Morduchowitz, Vincent A. Sama, and Veronica E. Callahan are partners at Arnold & Porter Kaye Scholer LLP. This post is based on a recent Arnold & Porter memorandum by Ms. Morduchowitz, Mr. Sama, Ms. Callahan, John P. Hunt, and Catherine B. Schumacher.

On June 18, 2018, the Supreme Court granted Francis V. Lorenzo’s petition for certiorari in Lorenzo v. S.E.C., No. 17-1077, to decide whether an action that does not meet the requirements for a misstatement claim “can be repackaged and pursued as a fraudulent scheme claim.” The Supreme Court’s decision to review this case implicates the scope and applicability of its decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011) and its ruling may affect the ability of the US Securities and Exchange Commission (SEC) to enforce the antifraud provisions of the federal securities laws and could limit shareholders’ ability to pursue private claims against certain individuals.

Case Background

The case arises from emails sent by Lorenzo, who was the director of investment banking at Charles Vista, LLC, to two potential investors, which included “several key points” about then-client W2Energy Holdings, Inc.’s convertible debenture offering. The emails failed to mention recent material devaluation of W2Energy’s intangible assets. Lorenzo’s boss asked him “to send the emails, supplied the central content, and approved the messages for distribution.” [1] Lorenzo claimed that he “cut and pasted” his boss’s email into the emails that he sent. [2]

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Weekly Roundup: July 13-19, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of July 13-19, 2018.


State Treasurers’ Opposition Against Forced Arbitration or Class Action Waivers in Shareholder Agreements



Delaware’s Voluntary Sustainability Certification Law


Are Institutional Investors with Multiple Blockholdings Effective Monitors?


Supreme Court Ruling on SEC-Appointed Judges



Do Foreign Investors Improve Market Efficiency?


The UK Corporate Governance Code


Smaller Reporting Companies and XBRL



M&A Litigation Developments: Where Do We Go From Here?


FOIA Disclosure of Federal Compliance Documents?


The Preclusive Effect of Demand Futility


Shareholder Litigation Involving Acquisition of Public Companies: Review of 2017 M&A Litigation

John Gould is Senior Vice President of Cornerstone Research. This post is based on a Cornerstone Research memorandum authored by Ravi Sinha.

This post examines litigation challenging M&A deals valued over $100 million announced from 2008 through 2017, filed on behalf of shareholders of publicly traded target companies.

These lawsuits usually take the form of class actions filed in either federal or state court. Plaintiffs typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value.

Common allegations include:

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