Monthly Archives: December 2018

13F Analysis: Q3 2018

Posted by Jim Rossman, Lazard, on
Wednesday, December 5, 2018
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Jim Rossman is head of Shareholder Advisory at Lazard. This post is based on a Lazard publication by Mr. Rossman. 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).

  • 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 September 30, 2018 were due on November 14, 2018
  • Lazard’s Shareholder Advisory Group has identified 16 core activists, 28 additional activists and 32 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 76 investors, the focus of Lazard’s analysis was on holdings in companies with market capitalizations in excess of $500 million
  • Lazard’s analysis, broken down by sector and by company, is enclosed. The nine sector categories are:
    • Consumer
    • FIG
    • Healthcare
    • Industrials
    • Media/Telecom
  • Within each of these sectors, Lazard’s analysis is comprised of:
    • A one-page summary of notable new, exited, increased and decreased positions in the sector
    • A list of companies in the sector with activist holders and other notable investors
  • Companies are listed in descending order of market capitalization
  • Lazard will continue to conduct this analysis and produce these summaries for future 13F filings
    • The 13F filing deadline for the quarter ending December 31, 2018 will be February 14, 2019

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Who Acquires Toxic Targets?

Posted by Chelsea Liu and Alfred Yawson (University of Adelaide), on
Wednesday, December 5, 2018
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Dr. Chelsea Liu is senior lecturer at University of Adelaide Business School and Alfred Yawson is professor of Corporate Finance at the University of Adelaide. This post is based on their recent article, recently published in the Journal of Empirical Legal Studies.

Growing media attention is devoted to corporate environmental misconduct, as more investors and consumers consider environmental performance in making green choices. There is, however, limited academic research on the consequences of corporate environmental violations: Karpoff et al. (2005) find that firms accused of environmental infractions suffer share price declines, however, such losses of market value only reflect the legal penalties incurred, but no additional reputational penalties. Similarly, researchers find no evidence that executive officers incur personal job-market consequences after their firms are accused of environmental breaches (Aharony et al., 2015; Liu et al., 2016).

In our article, Who Acquires Toxic Targets?, recently published in the Journal of Empirical Legal Studies, we investigate the consequences of environmental lawsuits in the mergers and acquisitions (M&A) market. We use a sample of environmental lawsuits filed against the Standard & Poor’s 1500 firms in the United States Federal Courts during 2000–2007 to examine four key questions:

  • Are sued firms less likely to be acquired?
  • Are sued firms less likely to acquire other firms?
  • Is it value-creating to acquire targets that have been sued for environmental breaches?
  • What type of acquirers would purchase such sued targets?

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Universal Proxies: What Companies Need to Know

Posted by Tiffany Fobes Campion, Christopher R. Drewry and Joshua M. Dubofsky, Latham & Watkins LLP, on
Wednesday, December 5, 2018
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Tiffany Fobes Campion is a senior attorney, Christopher R. Drewry is partner and Joshua M. Dubofsky is partner at Latham & Watkins LLP. This post is based on a Latham memorandum by Ms. Campion, Mr. Drewry, and Mr. Dubofsky. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

Key Points

  • In contested director elections, the binary nature of the current US proxy voting regime requires a choice between either a company’s or an activist’s slate without the ability to “mix and match” among nominees. This regime can impact voting, and thus outcomes, in proxy contests, creating risk that the company might lose its entire slate in a contested election.
  • Universal proxies allow stockholders to vote for nominees of their choosing from both the company and activist slates, mitigating binary “win or lose” outcomes. [1]
  • Universal proxies are generally thought to favor activists because of an increased likelihood that at least some activist nominees are elected, but in the context of activist nomination of majority- or full-board slates, there may be strategic advantages for a company to use a universal proxy.
  • The SEC proposed rules to require universal proxy cards in all contested elections in October 2016. [2] While the SEC’s plans for adoption are unclear, there is a renewed interest in universal proxy cards, particularly after the SEC’s November 15 roundtable on the proxy process.
  • Despite the absence of adopted SEC rules, in the 2018 proxy season some companies, like Mellanox Technologies and SandRidge Energy, Inc., took steps to use a universal proxy in proxy contests with Starboard Value and Carl Icahn, respectively. [3]
  • A company’s governing documents may determine its ability to use a universal proxy when an agreement with the dissident to use a universal proxy cannot be reached.

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Clearing the Bar: Shareholder Proposals and Resubmission Thresholds

Posted by Brandon Whitehill, Council of Institutional Investors, on
Tuesday, December 4, 2018
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Brandon Whitehill is a Research Analyst at the Council of Institutional Investors. This post is based on a CII Research and Education Fund memorandum by Mr. Whitehill.

The shareholder proposal process—when a public investor submits a proposal, the board of directors considers the issue and the company’s shareholders vote on the proposal—is a leading conduit for engagement and dialogue between investors and issuers in the U.S. public capital markets. Between 2011 and 2018, more than 3,600 shareholder proposals went to a vote at Russell 3000 companies, and many more were submitted but not voted. [1]

One-third of the proposals voted over this period went to a vote two or more times at the same company. But to be eligible for resubmission, a proposal must meet a minimum threshold of support in previous attempts. This analysis uses a dataset of the voted shareholder proposals between 2011 and 2018 at Russell 3000 companies to determine the impact of the current resubmission thresholds as well as the potential impact of proposals to raise them. [2]

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Why Common Ownership Is Not an Antitrust Problem

Posted by Douglas H. Ginsburg (U.S. Court of Appeals), on
Tuesday, December 4, 2018
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Douglas H. Ginsburg is a Judge of U.S. Court of Appeals for the District of Columbia Circuit and Professor of Law at the Antonin Scalia Law School, George Mason University. This post is based on his recent co-authored article, forthcoming in Frederic Jenny: Standing Up for Convergence and Relevance in Antitrust, Liber Amicorum – Volume II (Concurrences, 2019). Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); 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.

More than 100 million Americans now hold a stake in a mutual fund, ETF, or closed-end fund. (2018 Investment Company Factbook, at i, 34.) Those funds have an aggregate value of $22 trillion. (Id.) (For simplicity, we refer herein to all of these investments as “mutual funds.”) Because a few families of mutual funds have significant holdings in many of the same companies, legal and economic scholars have debated whether the funds’ “common ownership” impairs competition among their portfolio companies, in violation of the antitrust laws. The U.S. antitrust agencies—the U.S. Department of Justice Antitrust Division and the Federal Trade Commission—define common ownership as “the simultaneous ownership of stock in competing companies by a single investor, where none of the stock holdings is large enough to give the owner control of any of those companies.” (See Note to the OECD by the United States at ¶ 1.)

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Default Activism in the Debt Market

Posted by Steven A. Cohen, Emil A. Kleinhaus, and John R. Sobolewski, Wachtell, Lipton, Rosen & Katz , on
Tuesday, December 4, 2018
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Steven A. Cohen, Emil A. Kleinhaus, and John R. Sobolewski are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Cohen, Mr. Kleinhaus, Mr. Sobolewsky, and Joshua A. Feltman.

We have recently seen an increase in contentious disputes, some public and many not, between companies and their debt investors. Clashes between borrowers and their lenders are as old as debt itself, but what we are seeing now is something different. In these situations, debt investors are not merely seeking to enforce their contractual entitlement to payment, or to challenge transactions that will impair the borrower’s ability to pay. Rather, they are purchasing debt on the theory that the borrower is already in default and then actively seeking to enforce that default in a manner by which they stand to profit. Call it Default Activism: default as opportunity rather than risk.

In our recent post The Rise of the Net-Short Debt Activist, we discussed one type of default activism: namely, a “net-short” strategy under which an activist amasses a large “short” position in a company together with a smaller “long” position, and then uses the long position to assert that the company is in default on its debt, so that it can reap gains on its short position.

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State of Integrated and Sustainability Reporting 2018

Posted by Jon Lukomnik, Investor Responsibility Research Institute, on
Monday, December 3, 2018
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Jon Lukomnik is Executive Director at the Investor Responsibility Research Institute (IRRCI). This post is based on an IRRCI report by Mr. Lukomnik; Sol Kwon, Senior Consultant at the Sustainable Investments Institute (Si2); and Heidi Welsh, Executive Director at Si2. 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).

Sustainability reporting for large public companies around the world has become the norm. Si2’s research this year (2018) found that 78 percent of the S&P 500 issued a sustainability report for the most recent reporting period, most with environmental and social performance metrics. The rate of sustainability reporting for the world’s largest companies is even higher, with some figures noting as high as 93 percent. [1] This is a starkly different picture from the 1980s, when a handful of companies in vulnerable sectors—extractives and chemicals, which had to respond to public backlash against environmental mishaps—were the only ones to publish environmental reports with limited performance metrics. It was not until the 1990s that sustainability reports as we know them today started gaining traction, after the concept of “triple bottom line”—environmental, social and economic—corporate performance was introduced and became popular.

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Financing the Response to Climate Change: The Pricing and Ownership of U.S. Green Bonds

Posted by George Serafeim (Harvard Business School), on
Monday, December 3, 2018
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George Serafeim is Professor of Business Administration at Harvard Business School. This post is based on a recent paper authored by Professor Serafeim; Malcolm Baker, Professor of Finance at Harvard Business School; Daniel Bergstresser, Associate Professor of Finance in the Brandeis International Business School; and Jeffrey Wurgler, Professor of Finance at New York University.

Climate change is accelerating. Since recordkeeping began in 1880, the six warmest years on record for the planet have all occurred since 2010. One estimate suggests that keeping the world below the 2-degree Celsius scenario, a threshold viewed as limiting the likelihood of devastating consequences, will require $12 trillion over the next 25 years.

In the absence of a global carbon pricing scheme, bond markets will be central to financing these interventions. In this paper, we study the U.S. market for “green bonds,” which we and others define as bonds whose proceeds are used for an environmentally friendly purpose. Examples include renewable energy, clean transportation, sustainable agriculture and forestry, energy efficiency, and biodiversity conservation. Since the first green bond was issued in 2007 by the European Investment Bank (EIB), the market has expanded to include a variety of issuers, including supranationals, sovereigns, corporations, and U.S. and international municipalities. It is a small but increasingly well-defined area of the fixed income markets. Yet in spite of the general acceptance of the notion of a “green” bond, there is not yet a single universally-recognized system for determining the green status of a bond. Green bonds may be labeled and promoted as such by the issuer, such as the 2007 EIB issue; formally certified by a third party according to a set of guidelines; or, labeled green by a data provider, for example Bloomberg. We review the origins of the market and standards for identifying green bonds in the next section.

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Virtual Currencies as Commodities?

Posted by J. Paul Forrester and Matthew Bisanz, Mayer Brown LLP , on
Monday, December 3, 2018
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J. Paul Forrester is partner and Matthew Bisanz is an associate at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Mr. Forrester, Mr. Bisanz, David L. Beam, and Jerome J. Roche.

On September 26, 2018, a US federal court found that virtual currency constitutes a class of items that are commodities under the Commodity Exchange Act (“CEA”) because one member of that class, Bitcoin, is the subject of futures trading. [1]  This is the first judicial opinion to directly address the question of whether virtual currencies other than Bitcoin are commodities under the CEA.

Background

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Common Ownership: Do Institutional Investors Really Promote Anti-Competitive Behavior?

Posted by George S. Dallas, International Corporate Governance Network (ICGN), on
Sunday, December 2, 2018
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George S. Dallas is Policy Director at International Corporate Governance Network (ICGN). This post is based on an ICGN memorandum by Mr. Dallas. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); 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, sometimes referred to as horizontal shareholding, is a term that reflects the investment practice of many institutional investors (which we define here to be both asset owners and asset managers) to hold investment positions in more than one company competing in the same sector. Its developing ubiquity stems from the growing share of institutional ownership in stock markets around the world. In particular, it reflects the prevalence of institutional investors with investment strategies, both active and passive, that involve significant portfolio diversification.

A debate is building in the academic community as to the economic impact of common ownership, particularly with regard to its potential to motivate anti-competitive practices by companies in the same sector owned by its “common” investors. To many institutional investors and financial practitioners, this anti-competitive argument may seem initially as an arcane scholarly debate. But, in extremis, the regulatory policy implications of this academic challenge to common ownership are potentially severe and disproportionate. Taken seriously, this challenge could marginalise investors and undermine their fundamental ownership rights, at a time when regulators globally are pressing for more investors to exercise their stewardship obligations.

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