Monthly Archives: February 2019

REIT M&A: Use and Overuse of Special Committees

Adam O. EmmerichRobin PanovkaWilliam Savitt, and Viktor Sapezhnikov are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell Lipton memorandum.

Special committees are often an indispensable tool in conflict transactions. In REIT management-buyout transactions, a well-functioning and well-advised committee can sometimes shield directors and managers from after-the-fact litigation exposure. But special committees are not one-size-fits-all, and can also be deployed to the detriment of a company and its shareholders. Forming a special committee when not required can needlessly hamper the operations of the company and its ability to transact, create rifts in the board and between the board and management, and burden the company with an inefficient decision-making structure that may be difficult to unwind. It is important, therefore, for REITs to carefully consider—when the specter of a real or potential conflict arises—whether a special committee is in fact the best approach, whether it is required at all, and whether recusal of conflicted directors or other safeguards are perhaps the better approach.

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The NYC Comptroller’s New Normal?

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Post-shutdown, the SEC is starting to catch up on no-action requests to exclude shareholder proposals, posting several new entries at the end of last week. While most of the responses reflected withdrawals of requests in light of withdrawal of the subject proposal, one of the more interesting withdrawal letters relates to a decision to include a shareholder proposal. The proposal, submitted by the New York City Employees’ Retirement System and other pension funds overseen by NYC Comptroller Scott Stringer, sought to have TransDigm Group Incorporated, a manufacturer of aerospace components, adopt a policy related to climate change. After the company sought no-action relief from the SEC staff—and notably well before the government shutdown and before the SEC had even responded to the company’s request—the proponent pension funds filed suit in the SDNY seeking to enjoin the company from soliciting proxies without including the shareholder proposal and declaratory relief that the exclusion of the proposal violated Section 14(a) and Rule 14a-8. Will the Comptroller use the same tactic of circumventing the traditional SEC process and commencing litigation for any proposal the pension funds submit in the future? Will going straight to court be the new normal?

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Mandatory Securities Arbitration Under New Jersey Corporate Law

Jacob Hale Russell is Assistant Professor at Rutgers Law School. This post is based on a white paper authored by Professor Russell and signed by 25 law professors. The white paper and a full list of signatories are available here.

Under New Jersey corporate law, may a corporation adopt a mandatory arbitration provision in its bylaws that would require shareholders to bring federal securities law claims via separate individual arbitration? The issue is squarely raised by a recent shareholder proposal at Johnson & Johnson, a New Jersey corporation, that asks the board to adopt such a bylaw for “disputes between a stockholder and the Corporation and/or its directors, officers or controlling persons relating to claims under federal securities laws.”

This whitepaper explains why such a bylaw (hereafter called a “mandatory securities arbitration bylaw”) would violate the New Jersey Business Corporation Act, N.J.S.A. 14A:1-1 et seq. There are additional, compelling reasons why such a provision might be impermissible, including that it might violate the anti-waiver provisions of federal securities laws or be unenforceable under state contract law. Such arguments have been developed elsewhere and are outside the scope of this white paper.

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The Ashland-Cruiser Proxy Contest—A Case Study

James Woolery and Rob Leclerc are partners and Richard Fields is counsel at King & Spalding LLP. This post is based on a King & Spalding memorandum by Mr. Woolery, Mr. Leclerc, Mr. Fields, Timothy FesenmyerElizabeth Morgan, and Kevin Manz. 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).

Following a contentious two-year campaign, Ashland recently settled its proxy contest with Cruiser after reaching an agreement with Neuberger Berman, an active manager and 2.8% holder. Ashland agreed to refresh committee leadership, appoint a new lead independent director, and add two new directors with Neuberger’s input.

This was a highly unusual development, as active managers do not often publicly intercede to end a proxy contest.

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Investor Engagement and Activist Shareholder Strategies

Chris Ruggeri is National Managing Principal of Risk Intelligence at Deloitte Transactions and Business Analytics LLP. This post is based on her Deloitte memorandum. 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).

It’s not your imagination: shareholders and activists have asserted themselves more in recent years. For better or worse, activists are more numerous and more diverse than they were in the past, both in their agendas and their methods.

This reinforces the need for management, with the board’s oversight and guidance, to engage with shareholders proactively, to be prepared for friendly or confrontational activists, and to have a long-term plan for shareholder engagement. It’s also essential for the board to consciously craft its role in this tricky area, where it is expected to both represent shareholders and advise management.

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Bank Boards: What Has Changed Since the Financial Crisis?

Shiva Rajgopal is the Kester and Byrnes Professor of Accounting and Auditing at Columbia Business School; Suraj Srinivasan is Philip J. Stomberg Professor of Business Administration at Harvard Business School; and Yu Ting Forester Wong is Assistant Professor of Accounting at the University of Southern California Marshall School of Business. This post is based on their recent paper.

The Financial Crisis Inquiry Commission (FCIC) (2011) identified dramatic failures of corporate governance and risk management at many systemically important U.S. financial institutions as one of the key causes of the 2008 financial crisis. If the crisis is viewed as the byproduct of failed incentives for managers, owners, creditors, and regulators, corporate governance could potential identify and address misaligned incentives to prevent undesirable firm behavior in the future.

However, the prospects for significant improvement in the governance structure of banks remain limited. Banks are pulled by conflicting demands to be value-maximizing business entities and simultaneously to serve the public’s interest. Demonstrating directors’ negligence in a court of law is difficult. The traditional monitors of management and boards, such as equity block holders and the takeover market, are heavily regulated in the banking context. Creditors have diminished incentives to monitor bank management as they can fall back on deposit insurance and potential government bailouts to protect their interests. Given the primacy of the board and conflicting forces affecting improvement in the banks’ governance, it seems natural to ask whether board oversight in banks has strengthened over the decade following the financial crisis.

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Communicating with the Investment Community in the Digital Age

Jonathan Doorley is partner at Brunswick Group LLP. This post is based on his Brunswick memorandum.

Having a sophisticated and current understanding of how the investment community gathers and processes information is critical for success when a corporate issuer is communicating with the market on an ongoing basis or during a complex situation such as a transaction or responding to a shareholder activist.

Brunswick has been tracking the digital consumption habits of institutional investors and sell-side analysts around the world for a decade, and the results of our latest study reveal important trends that should be considered when formulating both ongoing and event-driven investor engagement programs.

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Investing in the Environment

Alissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico. 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) and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Over the past month, media headlines have been conquered by handshakes at Davos, where private and public sector leaders have gravitated again in an attempt to solve the world’s most pressing problems, which have over the past year only gotten more pressing. While climate change has single-handedly dominated the focus of this year’s World Economic Forum (WEF), the sleepy Swiss town was shaken by the landing over 1500 private jets, more than ever before.

Observing WEF this year, the title of a once famous Alanis Morissette song—isn’t it ironic?—definitely springs to mind. As Rutger Bregman, a Dutch historian who has surprisingly broken through the ranks of this year’s Davos invitees confessed, observing the tone of discussions at the Forum, “it feels like I am at a firefighters conference and no one is allowed to speak about water.”

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Institutional Investors as Short Sellers?

Peter Molk is associate professor of law at University of Florida Levin College of Law; and Frank Partnoy is the Adrian A. Kragen Professor of law at University of California Berkeley School of Law. This post is based on their recent article, forthcoming in the Boston University Law Review.

Institutional investors rarely sell short. In Institutional Investors as Short Sellers?, we explore why. We examine how social welfare might be improved if institutions sold short more.

Our core argument is simple: institutional investors obtain negative information about companies, but because they rarely sell short this information is not fully reflected in prices. As an illustrative example, consider three strategies available to a mutual fund manager who regularly obtains a range of information about different companies. It is straightforward for the manager to buy a new position when she receives positive information. Likewise, it would not be unusual for the manager to sell an existing position based on negative information. But if the manager goes one step further, and suggests selling short a company’s shares based on negative information, she likely will face greater resistance. To the extent the fund manager is reluctant to sell short, some negative information becomes “bottled up” within the fund.

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Keeping Investors out of Court—The Looming Threat of Mandatory Arbitration

Salvatore Graziano is a managing partner and Robert Trisotto is a former associate with Bernstein Litowitz Berger & Grossmann LLP. This post is based on their BLB&G memorandum.

Over eighty years ago, federal securities laws were enacted to safeguard investments on national securities markets. These securities laws—premised on the notion that investors should receive accurate and thorough information regarding the public companies that they own—have transformed United States stock exchanges into the most prominent and trusted exchanges in the world.

Despite this impressive history, the management of some publicly-traded companies have increasingly sought to evade federal securities laws by altering their charters or bylaws in ways that the drafters of securities laws likely never imagined. For instance, companies have attempted to deter shareholders from filing lawsuits against corporate management by adopting fee-shifting provisions in their charters or bylaws. Such provisions would place a losing shareholder on the hook for the company’s attorney’s fees and expenses in disputes over management’s actions on behalf of investors.

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