Monthly Archives: August 2018

SEC Concept Release on Compensatory Offerings

Posted by Laura D. Richman, Robert F. Gray, Jr. and Michael L. Hermsen, Mayer Brown LLP, on
Friday, August 10, 2018
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Laura D. Richman is counsel and Robert F. Gray, Jr. and Michael L. Hermsen are partners at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Gray and Mr. Hermsen.

On July 18, 2018, the US Securities and Exchange Commission (SEC) issued a concept release [1] soliciting public comment on potential ways to modernize compensatory offerings and sales of securities, consistent with investor protection. Specifically, the concept release requests comment on aspects of Rule 701 under the Securities Act of 1933 (Securities Act), an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements, and on Form S-8, a registration statement used by SEC-reporting companies for compensatory offerings. This post highlights key questions raised by the concept release. The comment period is scheduled to remain open through September 24, 2018.

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Weekly Roundup: August 3-9, 2018

Posted by Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, August 10, 2018

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This roundup contains a collection of the posts published on the Forum during the week of August 3-9, 2018.

SEC Liability for Social Media Violations

Posted by Michael W. McGrath, Pablo J. Man, and Britney E. Ryan, K&L Gates LLP, on Friday, August 3, 2018
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The Regulation of Proxy Advisors

Posted by Steve Seelig and Puneet Arora, Willis Towers Watson, on Friday, August 3, 2018
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Private Equity Liability Under European Law

Posted by David Vann, Ellen Frye, and Étienne Renaudeau, Simpson Thacher & Bartlett LLP, on Saturday, August 4, 2018
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Recent Developments Relating to Corporate Governance

Posted by Joseph Hall, Marcel Fausten, and Sarah Solum, Davis Polk & Wardwell LLP, on Sunday, August 5, 2018
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Structuring Discretion for Clawbacks

Posted by Seymour Burchman, Kathryn Neel, and Olivia Voorhis, Semler Brossy Consulting Group, LLC, on Monday, August 6, 2018
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The Rise and Fall (?) of the Berle-Means Corporation

Posted by Brian Cheffins (University of Cambridge), on Monday, August 6, 2018
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JOBS Act 3.0

Posted by Glenn Pollner, Elizabeth Ising, and Thurston Hamlette, Gibson, Dunn & Crutcher LLP, on Monday, August 6, 2018
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The Rise of the Net-Short Debt Activist

Posted by Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski, Wachtell, Lipton, Rosen & Katz, on Tuesday, August 7, 2018
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Ratings that Don’t Rate: The Subjective World of ESG Ratings Agencies

Posted by Tim Doyle, American Counsel for Capital Formation, on Tuesday, August 7, 2018
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2018 Proxy Season Review

Posted by Kellie C. Huennekens and Jamie Smith, EY Center for Board Matters, on Wednesday, August 8, 2018
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The Insignificance of NRG Yield

Posted by Itai Fiegenbaum (Harvard Law School), on Wednesday, August 8, 2018
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What Directors Need to Include in Effective Appraisal Notices

Posted by Christopher B. Chuff, M. Duncan Grant, and Joanna J. Cline, Pepper Hamilton LLP, on Wednesday, August 8, 2018
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Are Board Members Overcommitted?

Posted by Sean Barry, Equilar, Inc., on Thursday, August 9, 2018
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Cash America and the Structure of Bondholder Remedies

Posted by Marcel Kahan (NYU) and Mitu Gulati (Duke University), on Thursday, August 9, 2018
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Should a Board Have a Reputation?

Posted by Lex Suvanto, Edelman Financial Communications & Capital Markets, on Thursday, August 9, 2018
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Should a Board Have a Reputation?

Posted by Lex Suvanto, Edelman Financial Communications & Capital Markets, on
Thursday, August 9, 2018
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Lex Suvanto is Global Managing Director at Edelman Financial Communications & Capital Markets. This post is based on an Edelman memorandum by Mr. Suvanto.

Boards of directors have historically operated behind closed doors, unseen and unknown to the outside world. If you asked a director whether they think their board should have a public reputation— one that is distinct from the company—most would respond with a resounding no.

However, proprietary research conducted by Edelman concludes that a board of directors does indeed possess its own reputation, which must be actively considered and managed. The research surveyed institutional investors with assets under management of over $1 trillion. Two thirds of respondents said they “must trust a company’s board of directors” before making or recommending an investment. Two thirds of respondents also agreed “an engaged and effective board is important when considering a company in which to invest”.

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Cash America and the Structure of Bondholder Remedies

Posted by Marcel Kahan (NYU) and Mitu Gulati (Duke University), on
Thursday, August 9, 2018
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Marcel Kahan is George T. Lowy Professor of Law at NYU Law School and Mitu Gulati is Professor of Law at Duke Law School. This post is based on their recent article, forthcoming in the Capital Markets Law Journal.

On September 19, 2016, the Southern District of New York released its opinion in Wilmington Savings Fund FSB v. Cash America International Inc. At issue was a claim by Wilmington Savings, the trustee on a $300 million bond issued by Cash America some years prior, that Cash America had breached one of its covenants by spinning off a major subsidiary and that this breach had resulting in a covenant default. The court ruled in favor of the investors on the question of the breach. What got the attention of the market observers, however, was not the ruling on the breach but the remedy that the bondholders obtained.

The standard remedy for garden variety covenant violations that result in a default is acceleration—the payment of the obligations at par. But because the covenant breach was voluntary, the court awarded the creditors the amount that Cash America would have owed them had it chosen to redeem the bond early—par plus a sizeable contractually pre-specified “make-whole” premium. The Cash America court, following an earlier Second Circuit opinion, reasoned that the redemption provision set the effective price for a company that choses to violate a covenant and ordered the payment of the redemption price as specific performance of the redemption clause. In a “make-whole” redemption provision, the company has to pay as redemption price the higher of par and the discounted value of the future principal and interest payments.

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Are Board Members Overcommitted?

Posted by Sean Barry, Equilar, Inc., on
Thursday, August 9, 2018
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Sean Barry is Senior Research Analyst at Equilar, Inc. This post is based on an Equilar memorandum by Mr. Barry.

Does the presence of multiple board memberships signal an experienced and dedicated board member or one who has overcommitted his or her time? For years, shareholders have questioned whether the experience and industry knowledge gained from sitting on multiple boards is overshadowed by excessive time commitments. Approximately 19% of Russell 3000 board members currently occupy more than one board seat, making it far from an oddity for a director to sit on multiple boards. The issue many shareholders and boards encounter is where to draw the line between a knowledgeable and practiced director and one who is possibly unable to fulfill their duties due to excessive commitments.

Proxy advisor Glass Lewis makes this distinction clear in its most recent proxy guidelines, recommending that “shareholders vote against a director who serves as an executive officer of any public company while serving on more than two public company boards and any other director who serves on more than five public company boards.” As of June 2018, the Russell 3000 contains only one over-boarded outside director based on Glass Lewis’ guidelines and 43 executive officers who serve on more than the recommended two public boards. Of the 44 over-boarded directors, 80% are male and 20% are female, which follows general board diversity trends as reported in the most recent Equilar Gender Diversity Index.

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What Directors Need to Include in Effective Appraisal Notices

Posted by Christopher B. Chuff, M. Duncan Grant, and Joanna J. Cline, Pepper Hamilton LLP, on
Wednesday, August 8, 2018
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Christopher B. Chuff is an associate and M. Duncan Grant, and Joanna J. Cline are partners at Pepper Hamilton LLP. This post is based on a Law360 article published by Mr. Chuff, Mr. Grant, and Ms. Cline 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 (discussed on the Forum here); and Appraisal After Dell, both by Guhan Subramanian.

A recent Delaware Court of Chancery opinion serves as a stark reminder of the information that must be included in appraisal notices delivered pursuant to Section 262 of the Delaware General Corporation Law. As explained in the opinion, merely providing notice of a merger and the existence of appraisal rights is not sufficient. Rather, appraisal notices must provide stockholders with the information they need to determine whether to accept the merger consideration or to seek appraisal. More specifically, appraisal notices should include information regarding (1) the background and terms of the merger, (2) the value of the constituent corporations, (3) the board’s decision-making process, and (4) potential conflicts of interest.

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The Insignificance of NRG Yield

Posted by Itai Fiegenbaum (Harvard Law School), on
Wednesday, August 8, 2018
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Itai Fiegenbaum is a Fellow at the Harvard Law School Program on Corporate Governance. This post is based on his recent paper, 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 pathologies of influential corporate insiders with a significant equity stake were on full display during Oracle’s 2016 acquisition of industry rival NetSuite. Larry Ellison, Oracle’s long-time Chief Executive Officer and dominant figure, played a major role in choosing the acquisition target. Normally, Ellison’s involvement should lay to rest any doubts entertained by Oracle shareholders regarding the deal’s wisdom.

Unfortunately for Oracle’s shareholders, one noteworthy detail portrays the acquisition in a different light. At the time the deal was proposed, Ellison owned 45% of NetSuite’s stock. The conflicting ownership stakes questions Ellison’s singular devotion to maximizing Oracle’s value. Although Ellison’s Oracle stock would depreciate if the transaction was skewered in NetSuite’s favor, the concurrent rise of value in his NetSuite stock would more than make up for it. Oracle’s minority shareholders do not enjoy a similar opportunity to offset their losses.

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2018 Proxy Season Review

Posted by Kellie C. Huennekens and Jamie Smith, EY Center for Board Matters, on
Wednesday, August 8, 2018
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Kellie C. Huennekens and Jamie Smith are Associate Directors at the EY Center for Board Matters. This post is based on their EY publication.

This proxy season we are seeing enhanced disclosure around board composition, gains in board gender diversity and more companies disclosing investor engagement.

These changes reflect shared goals between companies and institutional investors around the benefits of having a diverse board aligned to corporate strategy and key risks.

At the same time, more investors are using proxy votes to amplify the call for more women on boards and to support increased transparency and accountability on environmental and social issues. Overall, investor support remains high—more than 90% average support—for director elections and executive compensation programs across various sectors and market capitalization, despite growing scrutiny of executive compensation and board composition across many dimensions.

This post provides five key takeaways for boards as they reflect on this proxy season and evolving governance developments. [1]

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Ratings that Don’t Rate: The Subjective World of ESG Ratings Agencies

Posted by Timothy M. Doyle, American Council for Capital Formation, on
Tuesday, August 7, 2018
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Timothy M. Doyle is Vice President of Policy and General Counsel at the American Council for Capital Formation. This post is based on an ACCF memorandum by Mr. Doyle.

As the trend of Environmental, Social, and Governance (“ESG”) investing has risen, so too has the influence and relative importance of ESG rating agencies. With an increasing focus on social corporate responsibility, the ability to project a positive image around ESG-related topics is critical. As such, more companies have begun making select and unaudited disclosures in an effort to attract ESG-investing capital. The arbiters for obtaining this capital are the major ESG rating agencies.

However, individual agencies’ ESG ratings can vary dramatically. An individual company can carry vastly divergent ratings from different agencies simultaneously, due to differences in methodology, subjective interpretation, or an individual agency’s agenda. There are also inherent biases: from market cap size, to location, to industry or sector—all rooted in a lack of uniform disclosure.

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The Rise of the Net-Short Debt Activist

Posted by Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski, Wachtell, Lipton, Rosen & Katz, on
Tuesday, August 7, 2018
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Joshua A. Feltman, Emil A. Kleinhaus, and John R. Sobolewski are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Feltman, Mr. Kleinhaus, and Mr. Sobolewski.

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 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).

The market for corporate debt does not immediately lend itself to the same kind of “activism” found in equity markets. Bondholders, unlike shareholders, do not elect a company’s board or vote on major transactions. Rather, their relationship with their borrower is governed primarily by contract. Investors typically buy corporate debt in the hope that, without any action on their part, the company will meet its obligations, including payment in full at maturity.

In recent years, however, we have seen the rise of a new type of debt investor that defies this traditional model. As we previewed here, this investor buys “long” positions in corporate debt not to make money on those positions, but instead to assert defaults that will enable the investor to profit on a larger “short” position. We call this investor a “net-short debt activist.”

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