Monthly Archives: April 2019

Lazard’s 1Q 2019 Activism Review

Jim Rossman is Head of Shareholder Advisory at Lazard. This post is based on their Lazard 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).

1. Slower Pace than Record 2018, but In Line with Historical Levels

Q1 2019’s campaign activity (57 new campaigns against 53 companies) was down year-over-year relative to 2018’s record pace, but in line with multi-year average levels

  • Capital deployed in Q1 2019 ($11.3bn) was in line with recent quarters, and the top 10 activists had a cumulative $75.5bn deployed in public activist positions (new and existing)1 at the end of the quarter
  • Starboard overtook Elliott as the most prolific activist in Q1 2019, launching seven new campaigns

2. Activism’s Transactional Focus Continued

  • Transaction-focused campaigns were by far the most common in Q1 2019, with an M&A-related objective arising in nearly 50% of all new campaigns
    • Pushes to sell the company (e.g., Caesars, Zayo) or engage in break-up or divestiture transactions (e.g, Dollar Tree, eBay) were the most frequent M&A objectives
    • Attempts to scuttle or sweeten existing deals were relatively less frequent than in prior quarters


Truth and Bias in M&A Target Fairness Valuations: Appraising the Appraisals

Matthew Shaffer is a PhD candidate at Harvard Business School and an assistant professor at the University of Southern California starting summer 2019. 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Since the Trans Union case (Smith v. Van Gorkom, 1985), it has been considered effectively mandatory for target directors to seek and consider a third-party “fairness opinion” with supporting financial analyses and valuations (henceforth “fairness valuations”) before accepting a takeover offer. Despite their ubiquity in M&A, their role is, to put it mildly, controversial.

First, critics allege that the providers of these fairness opinions—which are often affiliated investment banks—have conflicts of interest, and incentives to rubber stamp or rationalize the negotiated deal price ex post, instead of providing a truly independent valuation “audit.” The providers claim they have implemented sufficient controls to protect the independence of their work.

Second, more fundamentally, critics argue that even unbiased, independent valuations would not be useful to directors when they have a market signal of the value of their company. For a public target, they argue, the pre-announcement stock price is a summary statistic for its value, and so the market premium is a sufficient statistic for a well-priced offer. What value can a subjective valuation—which must rely on uncertain forecasts and other discretionary inputs—add to this “market test”? (This basic question—on the relevance of valuation in checking a deal price when a market signal is available—is also at the center of the live debate over appraisal rights, as in the Aruba Networks case.)


Cryptocurrency and Other Digital Assets for Asset Managers

Gregory S. Rowland is partner and Trevor I. Kiviat is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk publication.


In 2008, an unknown author publishing under the name Satoshi Nakamoto released a white paper describing Bitcoin, a peer-to-peer version of electronic cash, and the corresponding software that facilitates online payments directly between counterparties without the need for a financial intermediary. In the decade that has followed, Bitcoin and countless other open-source, decentralised protocols inspired by Bitcoin (for example, Ethereum and Monero) have come to represent a $300 billion-plus market of alternative assets, commonly referred to as “digital assets”, which are typically traded over the internet using online exchange platforms.

Digital assets can serve several functions. Although the following categories are not independent legal categories under U.S. law, such distinctions are helpful for understanding and crafting various investment strategies involving these assets. Some digital assets, such as Bitcoin or Litecoin, are widely regarded as decentralised stores of value or mediums of exchange due to certain common economic features that support these functions; these are sometimes referred to as “pure cryptocurrencies”. Other digital assets, such as Monero or Zcash, are a subset of pure cryptocurrencies that also possess certain features designed to enhance transaction privacy and confidentiality (“privacy-focused coins”).


On Proxy Advisors and Important Issues for Investors in 2019

Rick A. Fleming is an Investor Advocate with the U.S. Securities and Exchange Commission. This post is based on Mr. Fleming’s recent remarks at SEC Speaks. The views expressed in this post are those of Mr. Fleming and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Good afternoon. I hope you are enjoying this year’s edition of SEC Speaks, which gives the public a good overview of all the work that is going on at the Commission. [1] In the Office of the Investor Advocate, we track all of these issues, as well as the activities of the self-regulatory organizations, and this conference can give you some idea of the breadth of issues that are covered by the phenomenal staff in my Office. We also try to provide an important outreach mechanism so that Commissioners and staff can hear directly from investors and their representatives, and I particularly want to commend SEC Ombudsman Tracey McNeil and her counsel, Dan Morris, for putting together an event last week that allowed SEC staff to interact with 60 law students and faculty who represent investors of limited means in law school advocacy clinics.

Like all the speakers at this conference, I remind you that the views I express are my own and do not necessarily reflect the views of the Commission, the Commissioners, or my colleagues on the Commission staff.

This year, there are many important things happening at the Commission, and not just with Regulation Best Interest. In a 15-minute speech, I can’t possibly react to every issue that will be raised during this two-day conference, so I would like to highlight just a few items that are on the Commission’s agenda this year. From an investor’s perspective, there are some really exciting ideas on that agenda, but there are also a few things that are cause for concern.


The Delaware Supreme Court’s Decision in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc.—Calculating Fair Value in Statutory Appraisal Cases

Jason M. Halper and Joshua Apfelroth are partners and Jared Stanisci is special counsel at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Messrs. Halper, Apfelroth, Stanisci, Nathan M. Bull, Hyungjoo Han, and James Orth, 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.

In an extraordinary decision as notable for its criticisms of the trial court judge as its contributions to Delaware appraisal jurisprudence, the Delaware Supreme Court in Verition Partners Master Fund Ltd. v. Aruba Networks, Inc. reversed a decision of the Delaware Court of Chancery in a statutory appraisal proceeding. The lower court had relied on the 30-day unaffected stock price to determine that $17.13 per share was the fair value of Aruba Networks, Inc. at the time of its acquisition by Hewlett Packard Companies (“HP”). The Supreme Court—in a unanimous per curiam decision—held that Aruba’s fair value per share was $19.10, representing the deal price minus synergies realized in the merger, and that the Court of Chancery abused its discretion by relying on the 30-day unaffected market price of Aruba’s stock before the transaction was publicly announced. In so holding, the Supreme Court remarked that the decision by the trial judge to rely exclusively on the unaffected market price—even though neither party advanced that argument until the judge broached the subject in connection with post-trial briefing—“could be seen” as a “results-oriented move to generate an odd result compelled by his personal frustration at being reversed in Dell [Inc. v. Magnetar Global Event Driven Master Fund Ltd].” The Supreme Court also clarified its holdings in DFC Global Corporation v. Muirfield Value Partners L.P. and Dell, and affirmed its longstanding recognition of merger consideration as strong evidence of fair value in statutory appraisal actions. Given the significance of the agreed-upon merger consideration in determining a company’s fair value (coupled with the requirement to reduce that amount by any synergies generated by the merger), the decision likely will further reduce the volume of appraisal arbitrage in Delaware.


Decarbonization Advisory Panel Report and Letter to NYS Comptroller

Joy-Therése Williams is chair and Alicia Seiger is a member of the Decarbonization Advisory Panel for the New York State Common Retirement Fund. This post is based on a recent letter to the New York State Comptroller Thomas P. DiNapoli, and an Advisory Panel report, by Ms. Williams, Ms. Seiger, Bevis Longstreth, Cary Krosinsky, George Serafeim, and Timothy Smith. 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  Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Thomas P. DiNapoli
State Comptroller State of New York
Office of the State Comptroller
110 State Street
Albany, New York, 12236

Dear Comptroller DiNapoli,

On behalf of the Decarbonization Advisory Panel, I am pleased to submit our recommendations for your consideration. It has been a privilege to serve as Chair of this Panel of distinguished peers who volunteered their time and expertise to reach a consensus of opinion for the Report’s recommendations.

The Panel would like to commend you, your department and the staff of the New York State Common Retirement Fund for your leadership and the willingness to explore options of managing climate change impacts on the Fund as a whole.

The Charge to the Advisory Panel asked us to identify, assess and manage investment risks and opportunities related to climate change, and how to prepare the Fund for a transition to a low-carbon economy. Our approach took a holistic view to ensure the recommendations can make the Fund sufficiently resilient to changing physical conditions and economies. The Panel members aimed high with its recommendations.

The Panel recognizes climate change as an existential threat to global economies, markets and earth systems. The Fund faces real risks related to loss of value and challenges to the ability to secure the needed rate of return. The Panel also recognizes that preparing the Fund to deal with the challenges of climate change provided opportunities. Opportunities focus on capacity to capture value as the world adapts to new realities.


Nuveen 2019 Proxy Season Preview

Peter Reali is Senior Director of Responsible Investing, Anthony Garcia is Director of Responsible Investing and Candace Hewitt is Senior Analyst of Responsible Investing at Nuveen, LLC. This post is based on their Nuveen memorandum. 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 Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Aspirational requests become accountability requirements

In recent years, heightened attention by institutional investors on companies’ responsible business practices has led to increased calls for greater accountability on a variety of environmental, social and governance (ESG) issues.

In the last two years, environmental and social issues collectively overtook traditional governance topics to become the primary drivers of more than half the shareholder proposals submitted to U.S. public companies for consideration during their annual meetings. Approximately 450 ESG shareholder proposals were voted in 2018. The overall average vote result on these proposals resumed a long-term upward trend with over 35% of proposals receiving at least 30% support, an increase from 28% in 2017.


The Long-term Habits of a Highly Effective Corporate Board

Ariel Fromer Babcock is director at FCLTGlobal. This post is based on a FCLTGlobal memorandum by Ms. Babcock, Allen He, Victoria Tellez, Evan Horowitz, and Sarah Williamson.

Research from FCLTGlobal and beyond has shown that long-term companies outperform on financial metrics, including revenues, profitability, and stock price. They also fare better on several nonfinancial metrics, including job creation. As a recent study of large public companies in the United States found, from 2001 to 2014 long-term companies cumulatively grew their revenues 47 percent more on average than their shorter-term peers, with less volatility. During the same period, these long-term companies similarly outperformed on measures of economic profit, cumulatively besting peers by 80 percent, with earnings growth that was also 35 percent higher.

Companies seeking the performance advantages that come from long-term thinking should have a ready partner in their corporate board.


Weekly Roundup: April 12–18, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 12–18, 2019.

The Rise of Books and Records Demands Under Section 220 of the DGCL

Regulators Join in Event-Driven Securities Litigation

2019 Proposed Amendments to DGCL

Lorenzo v. SEC: Expanded Scope of Securities Fraud Liability

2018 Year-End Activism Update

The Life Cycle of Corporate Venture Capital

M&A/PE and Governance Update

The Purposive Transformation of Company Law

Recent Developments in Human Capital Management Disclosure

Bill Proposal—Corporate Executives Criminally Accountable for Negligent Conduct

2019 Say on Pay & Proxy Results

2019 Say on Pay & Proxy Results

Todd Sirras is Managing Director and Austin Vanbastelaer is a Consultant at Semler Brossy Consulting Group, LLC. This post is based on their Semler Brossy memorandum. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried.

Average Say on Pay support in 2018 declined to the lowest level observed since 2012, driven by an increase in the number of companies receiving vote support below 70%. Shareholder engagement increased on environmental proposals; other environmental, social, and governance (ESG) topics; Board diversity; and the use of GAAP versus non-GAAP performance metrics in compensation program design. Shareholders will continue pushing companies to adopt and disclose formal policies on these topics in 2019 and may vote critically in Say on Pay and Director elections if they feel companies are not sufficiently responsive. A politicized external environment and the growing attention to wealth inequality will also influence companies and introduce further messaging challenges during the second year of the CEO Pay Ratio disclosures.

Prediction 1: Russell 3000 average Say on Pay vote support will continue to decline.

Shareholders will vote more critically when casting Say on Pay votes in 2019, and average vote support will decline for a second consecutive year. Shareholders will continue to push company leadership on a broader range of governance issues this year, and we expect that Say on Pay voting will be used as an indirect mechanism for shareholder activism.


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