Monthly Archives: February 2019

Preventing the Destruction of Shareholder Value in M&A Transactions

​​​​​Stephen L. Weiss is Chief Investment Officer and Managing Partner at Short Hills Capital Partners LLC. This post is based on his SHCP memorandum. 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).

The interests of shareholders are too often subjugated to those of interested parties. This circumstance has resulted in the transference of significant value from the rightful owners, the shareholders, to those unentitled. Institutional fund managers have undertaken commendable initiatives toward improving compliance with environmental, social and governance (“ESG”) principles at their investee companies but structural constraints have limited their actual impact on governance. The diversity of portfolios, coupled with broad ESG initiatives, may dilute these efforts since it is impractical and costly to directly engage with individual company managements on a broad and timely basis to proactively ensure that shareholder interests are being considered on critical events. Most often, by the time shareholders are informed of the corporate action, the damage has been done, leading to inefficient remedial measures such as litigation, an avenue that institutional managers rarely take. Preventative measures, on the other hand, would act as a significant deterrent as well as a solid defense to deleterious behavior ensuring that shareholders are not disadvantaged. Thus, while the impact on portfolios from driving awareness of environmental and social issues is real but somewhat difficult to define, the destruction of shareholder value from poor corporate governance is substantial, tangible and preventable.

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US Corporate Governance: Turning Up the Heat

Marc S. Gerber is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Gerber. 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).

U.S. public companies face a wide array of challenges, from greater market volatility and increasing economic and geopolitical uncertainty to disruptive technologies, artificial intelligence, social media and cybersecurity incidents The new year also began with a shutdown of the federal government and a divided government, reflecting deep societal schisms on numerous and varied questions that may impact the environment in which companies and boards operate.

Public companies face traditional challenges regarding long-term financial performance and earnings growth, as well as newer ones presented by a range of topics that fall within the umbrella of environmental, social and governance, or ESG. The “E” and “S” topics include items such as sustainability, climate change, use of plastics, water management, human capital management, gender pay equity, diversity, supply chain management, political and lobbying expenditures, the opioid crisis and gun control. For some, these issues raise fundamental questions about the role corporations and businesses in society.

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Stablecoins

Ben Regnard-Weinrabe is a partner, Heenal Vasu a senior PSL, and Hannah Pack a Trainee Solicitor at Allen & Overy UK LLP. Hazem Danny Al Nakib is Managing Partner at Sentinel Capital Group. This post is based on their Allen & Overy memorandum.

With the value of cryptocurrencies fluctuating on an almost daily basis, there has been an increased focus on creating a cryptoasset which can be transferred digitally but also crucially benefits from stability and trust. Such an asset is known in the industry as a “stablecoin”, and over recent months, this latest innovation has seen a significant growth in adoption.

A stablecoin is generally understood to be a cryptoasset pegged in value to fiat currency or other assets. It is designed to avoid the volatility inherent in other cryptocurrencies whose price is entirely market driven. While the price fluctuations of other cryptoassets make them perhaps more attractive for speculation, the relative stability of stablecoins offers the possibility of cryptocurrencies being adopted for use in everyday transactions and of becoming a digital form of cash. This would allow a much wider pool of users access to the benefits of digital currencies, for example greater speed and certainty of settlement across a blockchain. In this way, stablecoins offer a bridge between the traditional financial markets and the emerging opportunities offered by cryptocurrency technology.

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Industry as Peer Group Criterion

Louisa Lan is a Research Analyst at Equilar, Inc. This post is based on her Equilar memorandum. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.

Regarding the process of benchmarking executive compensation, the SEC has detailed requirements for companies to disclose their peer group companies with appropriate justification. Peer group analysis has become a key step to ensure competitive pay practice. However, selecting which companies to consider as “peers” can be a difficult process for many, especially for companies that have a foot in multiple industries. This process also gives valuable insight to shareholders about the industry landscape in which the company frames its compensation decisions. Peer group construction criteria is, for the most part, at the company’s discretion, yet peer group selection disclosure has become more scrutinized in order to avoid peer group manipulation. Such manipulation occurs when higher-paying and larger companies are selected to justify executive pay. The following investigation into current trends in peer group disclosure among the Equilar 500 companies may shed light on what is deemed effective in constructing peer groups.

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Good Faith, Fair Dealing, and Exit Provisions

Robert B. Little is a partner and Eric B. Pacifici is an associate at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently overruled a Court of Chancery opinion that had relied on the covenant of good faith and fair dealing to allow the minority owners in a joint venture to force an exit transaction. In its opinion, the Delaware Supreme Court offered useful guidance for parties seeking to draft joint venture exit provisions and indicated that parties should not expect to rely on the implied covenant of good faith and fair dealing to deliver them from a harsh outcome dictated by clear contractual language.

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Remarks to 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 SEC Investor Advisory Committee Members, 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] and the Committee for the invitation to join your call today. I appreciate your scheduling flexibility and look forward to our next in person meeting.

I will start with a few words about disclosure requirements as well as today’s topics—human capital and proxy plumbing—to give you a sense of how I think about these matters. [1] Afterwards, I would be happy to help facilitate a discussion of those topics, and take questions, if that makes sense to the group.

Framework for Analyzing Disclosure Rules

As you know from my previous remarks to the Committee, I believe the Commission’s disclosure requirements must be rooted in the principles of: (1) materiality—as so well defined by Justice Marshall [2]; (2) comparability—as demonstrated by our commitment to U.S. GAAP; (3) flexibility—as requirements that are too rigid can lead to superfluous and, in some cases, misleading disclosure; (4) efficiency—as the question generally is not rule or no rule, but rather what rule is most effective with the least cost; and (5) responsibility (or liability)—as rules have little long-term value if they cannot be effectively monitored and enforced. I also believe that our disclosure requirements and guidance must evolve over time to reflect changes in markets and industry while being true to the principles I articulated.

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Public Markets for the Long Term: How Successful Listed Companies Thrive

Sarah Williamson is the Chief Executive Officer of FCLTGlobal. This post is based on a FCLTGlobal memorandum by Ms. Williamson, Steve Boxer, Victoria Tellez, and Josh Zoffer. Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); The Uneasy Case for Favoring Long-Term Shareholders by Jesse Fried (discussed on the Forum here); and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law by Leo E. Strine (discussed on the Forum here).

By some accounts, public markets are out of fashion. Detractors point to the decline of IPOs in developed economies and the growth of private capital pools over the last few years. But these trends tell only one side of the story. Private markets are doing well, but their success does not suggest the decline of public markets. Public markets continue to be an essential driver of wealth creation, innovation, and capital stability for high-performing companies. Despite the short-term pressures of public markets, the best-managed companies can and do take advantage of the benefits public markets have to offer. For companies playing at the highest level, public markets remain an integral element of their long-term growth.

During the 20th century, public markets were the indisputable core of economic dynamism in developed markets. The great companies of that period—BP, Ford, General Electric, IBM, Sony, Toyota, and the like—were more than just household names. They were sources of innovation, growth, and jobs powered by public markets. Their success was reflected in soaring stock markets that illustrated the link between their long-term success and broader economic health. That connection went both ways—these companies also relied on public markets for the capital driving their growth and prosperity.

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Securities Class Action Filings—2018 Year in Review

Alexander “Sasha” Aganin is vice president and John Gould is senior vice president at Cornerstone Research. This post is based on their Cornerstone memorandum.

Executive Summary

Securities class action activity remained at near record levels for both core and M&A filings. Driven by a large number of mega filings, market capitalization losses surpassed $1 trillion. Last year also saw more companies on U.S. exchanges facing a greater threat of securities litigation than in any previous year.

Number and Size of Filings

  • Plaintiffs filed 403 new federal class action securities cases (filings) in 2018. This was 2 percent lower than 2017, but still nearly double the 1997–2017 average. “Core” filings—those excluding M&A filings—increased to the fifth-most on record.
  • Disclosure Dollar Loss (DDL) increased by 152 percent to $330 billion, the highest on record.
  • Maximum Dollar Loss (MDL) also grew by more than 150 percent to $1,311 billion in 2018.
  • In 2018, 17 mega filings made up 64 percent of DDL and 27 mega filings made up 73 percent of MDL. Both of these percentages are above historical averages. Filings with a DDL of at least $5 billion or an MDL of at least $10 billion are considered mega filings.

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Weekly Roundup: February 1-7, 2019


More from:

This roundup contains a collection of the posts published on the Forum during the week of February 1-7, 2019.

Potential Changes to Fund of Funds Arrangements


The Latest on Proxy Access


Spotlight on Boards


SEC Staff Letter on Administrative Services



From Justice Kennedy to Justice Kavanaugh—Is a Shift in Securities Law Underway?



State Street and Corporate Culture Engagement


Employee-Manager Alliances and Shareholder Returns from Acquisitions



Internal Forecasts and M&A






S&P 500 CEO Compensation Increase Trends




Amicus Brief of Law and Finance Professors in Verition Partners v. Aruba Networks

Brian Broughman is Professor of Law at Indiana University. This post relates to an Amicus Brief submitted by Law and Finance Professors, led by Professor Broughman, in the case of Verition Partners v. Aruba Networks, available here. This post is part of the Delaware law series; links to other posts in the series are available here.

In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., the Delaware Court of Chancery appraised the “fair value” of Aruba’s shares as their average market price during the 30 days prior to the announcement of Aruba’s merger with HP. The Court’s fair-value determination was not only 31% below the merger price, but also below the fair-value estimate of defendant’s own expert. Aruba appears to be the first Delaware decision to “hold that the unaffected market price was the best evidence of fair value and award that figure.” Not surprisingly, the decision attracted considerable attention (including here, here, here, here, and here on this blog). The case is now on appeal before the Delaware Supreme Court.

We filed an amicus brief in connection with the appeal. The brief makes two simple points. First, even if a target’s stock traded in an efficient market, its pre-announcement market price will often be an unreliable measure of fair value at the close of the merger. Second, the available evidence suggests that Delaware stockholders have benefitted from the protection provided by fair-value appraisal, and consequently could be hurt if Aruba’s approach is sustained and appraisal valuations collapse down to unaffected market price.

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