Monthly Archives: December 2018

Mutual Fund Board Connections and Proxy Voting

Paul Calluzzo is assistant professor of finance at Queen’s University Smith School of Business and Simi Kedia is the Albert R. Gamper Chair in Business at Rutgers Business School. This post is based on their recent article, forthcoming in the Journal of Financial Economics. 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) and Index Fund and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Mutual funds own 24 percent of the U.S equity market and are dominant players in proxy voting. If mutual funds were to vote their proxies to maximize firm value, they would play an important role in corporate governance. However, many funds may not find it optimal to invest resources to get informed about specific votes. Proxy advisory firms like Institutional Shareholder Services (ISS) fill this gap by gathering information across firms to guide mutual funds in their voting decisions.

ISS recommendations have an important impact on voting patterns and a negative ISS recommendation will significantly reduce the aggregate support for management. Even if management wins the vote, low management support has consequences. The proxy vote has increasingly become a referendum on a firm’s performance with investors using their vote to express concerns about firm policies or stewardship.


ISS and Glass Lewis Policy Updates for the 2019 Proxy Season

Holly J. Gregory and John P. Kelsh are partners and Rebecca Grapsas is counsel at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Gregory, Mr. Kelsh, Ms. Grapsas, Claire H. HollandCorey Perry, Kai H.E. Liekefett and Thomas J. Kim.

Institutional Shareholder Services (ISS) and Glass Lewis & Co. (Glass Lewis) have updated their proxy voting policies for shareholder meetings held on or after February 1, 2019 (ISS) or January 1, 2019 (Glass Lewis). [1] This post (i) summarizes the changes in proxy voting policies that apply to U.S. companies, (ii) discusses the practical implications of the changes and (iii) provides guidance about preparing for the 2019 proxy season in light of these developments and related deadlines.

The Appendix to the complete publication (available here) identifies the various circumstances in which ISS and Glass Lewis may recommend voting against one or more directors in an uncontested election.

The key changes to ISS’ proxy voting policies for 2019 relate to:


The Lifecycle Theory of Dual-Class Structures

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance at Harvard Law School. Kobi Kastiel is Assistant Professor of Law at Tel Aviv University, and Fellow at the Harvard Law School Program on Corporate Governance. Related Program research 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.

We have recently placed on SSRN an academic presentation, The Lifecycle Theory of Dual-Class Structures, that we prepared for delivery as Lucian Bebchuk’s keynote address at the December 2018 ECGI-BIU conference on differential voting structures. The presentation focuses on the structure and influence of the lifecycle theory of dual-class structure introduced in Bebchuk and Kastiel, The Untenable Case for Perpetual Dual-Class Stock, 2017 (discussed on the Forum here).

The presentation begins with discussion of precursor works to, and the motivation for developing, the lifecycle theory. The presentation then proceeds to describing the elements of the theory. In particular, it explains the reasons for expecting the efficiency benefits of dual-class structures to decline over time; for the efficiency costs to increase over time; and for controllers to choose to retain a dual-class structure even when it ceases to be efficient.

The presentation also discusses a number of cases that vividly illustrate arguments advanced by the lifecycle theory. Among cases discussed are dual-class companies Viacom, CBS, and Facebook, as well as single-class companies Amazon, Microsoft and Yahoo!. We also explain that time-based sunsets can address the identified problems, and we discuss the design of, and objections to, such sunsets. Finally, we discuss the influence that our lifecycle theory has had on subsequent policy discourse and on empirical work testing the theory’s predictions.

The presentation concludes that the lifecycle theory has solid theoretical foundations and is confirmed by recent empirical testing. We hope that the lifecycle theory that we introduced will continue to prove useful for researchers and policymakers and to contribute to the adoption of dual-class sunsets.

The presentation is available here. Our work on dual-class structures is ongoing, and comments would be most welcome.

Investment Returns and Distribution Policies of Non-Profit Endowment Funds

Sandeep Dahiya is Associate Professor at Georgetown University and David Yermack is Albert Fingerhut Professor of Finance and Business Transformation and Chair of Department of Finance at New York University Stern School of Business. This post is based on their recent paper.

Endowment funds are repositories for gifts and operating surpluses generated by non-profit organizations. Often described by their parent organizations as “nest eggs” or “rainy day funds,” endowments invest in stocks, bonds, and alternative asset classes such as hedge funds and private equity, and they pay income to their parents to subsidize operating costs and capital expenditures. In recent decades, many endowments have grown rapidly due to an influx of gifts as well as riskier investment policies that have increased their returns. Probably the best-known example is Yale University, which in 2018 reported having grown to $29.4 billion with an annualized return of 11.8% per year over the prior 20 years. The exponential growth of Yale’s and other high-profile universities’ endowments has led to political scrutiny of the objective functions of their parent organizations and, as of 2018, a new 1.4% federal income tax on a portion of their profits. There is an old joke that describes Harvard as a “$37 billion hedge fund with a university attached.”


The Prescience of 5% of Investors: A Monsanto Case Study

Sanford Lewis is Director at the Shareholder Rights Group. This post is based on a Shareholder Rights Group publication by Mr. Lewis, and was adapted from comments submitted by the Shareholder Rights Group to the Securities and Exchange Commission in response to remarks made at the SEC’s Roundtable on the Proxy Process.

Even though a proposal receives only a fraction of shareholder support, it may still be the best available opportunity to bring more foresight to investors, board, and management on an issue that may eventually prove costly to a company. Only a small portion of investors may be exercising prescience on risk management or governance issues that will, in fact, prove to be material for the long-term well-being of the company.

In the roundtable discussion and correspondence, corporate representatives have been implying that 3% or 5% of investors supporting a proposal is insignificant, such that the resubmission thresholds should be altered to disallow this minority from having the ability to require continued debate and attention to an issue on the annual proxy. Yet, recent developments at Monsanto demonstrate that a subgroup of this size may be prescient in their divergent or contrarian perspective. Allowing them to bring continuing attention and debate could mean the difference between a company that succeeds, and one which fails to take in crucial input beyond the insular boardroom and executive suites.


Second Corwin Denial Due to Restatement Process

Meredith E. KotlerRoger A. Cooper, and Mark E. McDonald are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Kotler, Mr. Cooper, Mr. McDonald, and Kal Blassberger, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery recently denied Corwin cleansing [1] in a case involving the sale of a public company while it was engaged in a restatement of its prior audited financial statements. See In re Tangoe, Inc. S’holders Litig., C.A. No. 2017-0650-JRS (Del. Ch. Nov. 20, 2018). If this sounds familiar, that is because it is the second time in two years that the Court of Chancery has denied a motion to dismiss shareholder litigation on Corwin grounds where the target was in the middle of a restatement process. [2] Together, these decisions suggest that if a board decides to sell the company while under a cloud of an ongoing restatement process, it would need to satisfy a heightened level of scrutiny of its disclosures in order to obtain the benefit of Corwin. The court in Tangoe, however, sought to reassure practitioners that it is not impossible to satisfy Corwin in a case involving an ongoing restatement by the target, and provided a checklist of the kinds of facts that, if disclosed, would result in pleading stage dismissal of a shareholder lawsuit in such a case.


Material Adverse Effect Clauses and the Delaware Supreme Court

Richard Slack is a partner and Joshua Glasser is an associate at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum 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 Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) and M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, both by John C. Coates, IV.

[On December 7,] the Delaware Supreme Court issued a three-page order in Akorn, Inc. v. Fresenius Kabi AG, No. 535, 2018 (Del. Dec. 7, 2018), affirming the Court of Chancery’s 246-page opinion finding that Fresenius Kabi AG validly terminated its merger with Akorn, Inc., based on the existence of a material adverse effect (MAE). The affirmance confirms Fresenius’s ability to walk away from its announced $4.3 billion merger with Akorn based on the first court-approved MAE in Delaware history.

Specifically, the Court held that the factual record:


Some Thoughts for Boards of Directors in 2019

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton, Steven A. Rosenblum, Karessa L. Cain, Amanda S. Blackett, and Kathleen C. Iannone.

In recent years, it has become increasingly evident that the activism-driven corporate world is relatively fragile and is proving to be unsustainable, particularly when viewed in the broader context of rapidly changing political and social norms and increasing divisiveness across many planes of the social contract. The exponential widening of income inequality, the increasing sense of urgency around climate change, and the widespread socioeconomic upheaval resulting from the displacement of human capital by technology have all been filtering into the debate about the role and governance of the corporate ecosystem. Persuasive academic and empirical evidence has established the causal link between short-termism and widespread harms to GDP, national productivity and competitiveness, innovation, wages and employment. In addition, the concepts of sustainability, ESG (environment, social and governance) and “corporate purpose” have all been gaining traction in the corporate governance lexicon.


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.

Thank you, Anne (Sheehan). Good morning everyone. I would like to thank the Committee members and the panelists for taking the time to engage on the topics on today’s [December 13, 2018] agenda.

I understand that the planned discussion regarding disclosures on human capital will be postponed to a later date. I believe that the strength of many of our public companies is due, often in large part, to their human capital, and I therefore appreciate that the Committee is focusing on these disclosures. I look forward to a discussion on this topic in the future.

In lieu of this discussion, the Committee has asked that we use this time to discuss the Commission’s rulemaking and regulatory efforts in 2018 and my agenda for 2019. I am pleased to lead this discussion and answer questions that Committee members may have.


Common Ownership: The Investor Protection Challenge of the 21st Century

Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on his recent testimony before the Federal Trade Commission Hearing on Competition and Consumer Protection, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. 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) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Thank you so much, Scott [Hemphill], for that incredibly kind introduction. It’s a real honor to be here with you—and to be invited to testify before the Federal Trade Commission (FTC). I share your commitment to making sure our markets are competitive and fair for all Americans. And I’m delighted that the FTC has convened this important conversation about the increasingly concentrated ownership profiles of America’s public companies.

I should begin, of course, with the standard disclaimer: the views I express here are my own and do not reflect the views of the Securities and Exchange Commission, my fellow Commissioners, or the SEC’s terrific Staff. [1] And, because I’m in the unique position of testifying before a sister agency, a further caveat is necessary: I work at the SEC, not the FTC, and the two agencies’ missions and perspectives on our markets are not the same.


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