Monthly Archives: June 2019

Rent-A-Center: A $1.37 BN Reminder on Reminders

Rachel Fridhandler is an associate at Sidley Austin LLP. This post is based on a Sidley memorandum by Ms. Fridhandler, Asi Kirmayer and Scott Freeman, and is part of the Delaware law series; links to other posts in the series are available hereRelated research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV. 

Rent-A-Center Inc., a Texas based consumer goods rent-to-own retailer (R-A-C) most famous for enabling generations of North Americans to fill their homes with furniture, electronics and household appliances, agreed in June 2018 to a buyout by affiliates of the private equity firm, Vintage Capital Management, LLC (Vintage) in a deal valuing the R-A-C at $1.37 billion (including debt). The transaction, which was subject to customary closing conditions and regulatory approvals, included the nearly universal provision entitling either party to terminate the transaction if it did not close by a specified end date (which date could be extended by either party delivering a written notice to the other of its desire to extend). Perhaps unsurprisingly to readers, given the publication of this article (and many others) on what was otherwise a fairly straightforward merger, the specified end date came and went without either R-A-C or Vintage giving the other notice of a desire to extend. After complex litigation between the parties about an allegedly simple failure to give (an arguably unnecessary) notice, Vice Chancellor Glasscock, in Vintage Rodeo Parent LLC, et al v Rent-A-Center, determined that R-A-C need not go through with the sale even though the parties (at the time) had appeared to understand that the end date would be extended and had continued to work on satisfying the other closing conditions.


Statement on the Adoption of Capital, Margin, and Segregation Requirements for Security-Based Swap Dealers and Major Security-Based Swap Participants

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

The Commission has adopted final rules governing the capital, margin, and segregation requirements applicable to security-based swap dealers (SBSDs) and major security-based swap participants under Title VII of the Dodd-Frank Act. [1] Completion of this rulemaking represents a significant milestone in the Commission’s implementation of its regulatory framework for security-based swaps. I am grateful for Chairman Clayton’s leadership in moving forward on these rulemakings in a way that is both expeditious and prudent. He has facilitated dialogue both within the Commission and with our colleagues at the CFTC that has been frank and productive, and the results of that dialogue are, I think, clear in these final rules.

I would also like to express my gratitude to our staff, particularly Richard Gabbert in my office, Alan Cohen and Jeff Dinwoodie in Chairman Clayton’s office, and the staff in the Division of Trading and Markets and in the Division of Economic and Risk Analysis. I am particularly grateful for the many hours that Mike Macchiaroli, Tom McGowan, and Randall Roy spent working with my office and answering my many questions over the past several months. Throughout the course of our work on this release, I have been extremely impressed by their willingness to wrestle with difficult issues with persistence, patience, and passion for the well-being of our investors and markets. The final rules represent an enormous effort by the staff working tirelessly over the past eight months to develop a recommendation that addresses important policy goals entrusted to the Commission by Congress while also mitigating or eliminating many of the differences between our proposed approach and the approach reflected in the CFTC’s rules, a particularly important objective given that the same market participants play significant roles in both the security-based swap and swap markets.


An Activist Gold Rush?

Wes Hall is Executive Chairman and Founder, Amy Freedman is Chief Executive Officer, and Ian Robertson is Executive Vice President of Communication Strategy at Kingsdale Advisors. This post is based on a their Kingsdale 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).

Momentum is building for M&A across the gold industry driven by the market, balance sheets, and shareholders. Behemoths Barrick Gold Corp. (NYSE: GOLD, TSX: ABX) and Newmont Mining Corp. (now Newmont Goldcorp Corp. (NYSE: NEM, TSX: NGT)) have grabbed headlines with acquisitions of Randgold Resources Ltd. and Goldcorp Inc. respectively, and the junior and intermediate space has seen a flurry of deals as well.

At the same time, shareholders have launched high profile campaigns against Detour Gold Corp. TSX:DGC), Guyana Goldfields Inc. (TSX:GUY), and Hudbay Minerals Inc. (TSX, NYSE: HBM), an integrated mining company with some exposure to gold that is nonetheless instructive, with part of the shareholders’ thesis for change related to the viability of M&A opportunities.

In fact, in the last two quarters (Q4 2018 and Q1 2019) we have seen over CAD$20 billion in deals announced in the gold industry involving Canadian listed companies [1] and 13 activist campaigns in the last 26 months, with activists scoring wins or partial wins in all but three contests. (And these are only the activist actions that we know about; based on our experience only a fraction of activist interactions ever become public.) We would note specifically that the three management wins all came at small companies while the activist wins came at relatively large companies, demonstrating that size is not a defence.


Weekly Roundup: June 14–20, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 14–20, 2019.

Defined Contribution Plans and the Challenge of Financial Illiteracy

Exchanging Views on Exchange-Traded Funds

Investors Bancorp‘s Impact on Long-Term Incentive Plans

NYS Common Retirement Fund’s Climate Action Plan

Mootness Fees

Calling the Cavalry: Special Purpose Directors in Times of Boardroom Stress

Debt Default Activism: After Windstream, the Winds of Change

Do Firms Issue More Equity When Markets Become More Liquid?

U.S. Board Diversity Trends in 2019

Regulation Best Interest

Impact of the California Consumer Privacy Act on M&A

The Modern Dilemma: Balancing Short- and Long-Term Business Pressures

The Modern Dilemma: Balancing Short- and Long-Term Business Pressures

Beatriz Pessoa de Araujo is a partner at Baker McKenzie and Adam Robbins is Practice Lead, Long-Term Investing Initiatives at the World Economic Forum. This post is based on their recent World Economic Forum memorandum. 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) 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).

We are pleased to share the latest collaboration between Baker McKenzie and World Economic Forum in the publication of a white paper entitled “The Modern Dilemma: Balancing Short and Long Term Business Pressures“.

The leadership challenge of balancing short and long-term business pressures, and doing so in an ethical way in which both a company and its stakeholders can thrive, is a challenge that is well-known to all business leaders. To address this challenge, in 2016 the International Business Council (IBC), a community of the World Economic Forum’s most engaged CEOs, initiated the CEOs’ Modern Dilemma discussion series focused on balancing short- and long-term business pressures, and the set of business and ethical considerations imbedded within that balance.

Over the past 12 months The Forum’s Investors Team and Baker McKenzie interviewed a number of CEOs and chairpersons of the Forum’s International Business Council and the Community of Chairpersons; Baker McKenzie also surveyed legal requirements in a number of countries to understand whether reporting requirements and various other legal considerations might influence the dilemmas confronting CEOs and boards. Our examination of reporting requirements primarily concerned the shift from quarterly reporting to six monthly reporting and whether it focused on longer term viability. To complement this, we assessed a number of regulatory drivers so as to examine whether they might address or assist efforts to balance decision making around short-term and long-term interests of a company in the boardroom.

Key reflections arising from our research included:


The Chilling Effect of Regulation FD: Evidence from Twitter

James Naughton is Assistant Professor of Accounting Information and Management at Northwestern University; Mohamed Al Guindy is Assistant Professor of Finance at the Sprott School of Business at Carleton University; and Ryan Riordan is Associate Professor at the Smith School of Business. This post is based on their recent paper.

Regulation Fair Disclosure (“Reg-FD”) was intended to stop the practice of selective disclosure, in which companies provided material information to select analysts and institutional investors prior to public disclosure. It achieved this goal by requiring that material disclosures be broadly disseminated to the public through non-exclusionary channels. While the underlying concept of broad non-exclusionary disclosures is simple, the legislative implementation of this regulation generated significant controversy. In particular, a number of stakeholders believed that the difficulty associated with identifying material disclosures and broad non-exclusionary methods of dissemination would discourage firms from providing informal communications that could potentially violate Reg-FD, thus leading to a deterioration in the overall level of disclosure. While a number of prior studies have documented that Reg-FD has eliminated certain selective disclosures, it remains unclear how Reg-FD affects the firm’s overall disclosure policy and information environment.

In our paper, we contribute to our understanding of how Reg-FD may have influenced firms’ overall disclosure policy by examining one specific aspect—the adoption of new disclosure technologies. More specifically, we provide insights as to whether firms are reluctant to adopt new disclosure technologies without clear guidance from the SEC endorsing their use for the purposes of complying with Reg-FD. We focus on Twitter because prior studies have established that there are positive capital market benefits to Twitter usage, suggesting that Twitter would be broadly adopted if there were limited costs to doing so. In addition, firms do not have to use Twitter to disseminate information provided through traditional channels, which allows us to isolate the voluntary adoption of Twitter as a new disclosure medium.


Impact of the California Consumer Privacy Act on M&A

Pritesh P. Shah is a partner and Daniel F. Forester is an associate at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Shah, Mr. Forester, Jon Leibowitz, Frank J. Azzopardi, and Matthew J. Bacal. Related research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here) both by John C. Coates, IV.


Similar to the European Union’s General Data Protection Regulation, the passage of the California Consumer Privacy Act (“CCPA”) is ushering in a new era of data privacy and data security considerations in the United States as companies are preparing for its effectiveness, the possibility for follow-ons in other states and the potential for preemptive federal legislation. Since the CCPA’s passage in 2018, the CCPA’s requirements have been a focus for companies based not only in California, but throughout the United States and abroad due to its extraterritorial scope. While the CCPA does not become effective until January 2020, companies would be well served to evaluate now how the law’s requirements may apply to them and impact their day-to-day operations, and, in particular, their M&A transactions.

We discuss below the transactional considerations for investors, purchasers and sellers of companies that collect or process personal data of California residents arising from the CCPA.


Business Chemistry: A Path to a More Effective Board Composition

Dannetta English Bland is a Senior Manager at the Center for Board Effectiveness at Deloitte LLP. This post is based on her Deloitte memorandum.


The average board member spends about 245 hours on board matters over the course of a year, according to the 2018-2019 NACD Public Company Governance Survey. [1] However, less than one-third of this time, 74 hours, [2] consists of board member interactions, such as telephonic and in-person board and committee meetings and a handful of board dinners. [3] Given these limited interactions, how well do board members actually know one another? Do they appreciate why some like to listen to the facts before commenting or why some comment before facts have been shared? Do they know why some board members lean in more heavily on details, while others seem to be exclusively focused on big picture matters? Do they understand why some members of management just do not click with the board, or why some directors don’t seem to get along?

Business Chemistry may help to answer the above questions and many others, and can play a fundamental role in understanding how the board works—or does not work—both internally and in its interactions with management. Business Chemistry is relevant for and can impact such wide-ranging matters as the composition of the board and its committees, the board’s risk posture, decision making, potential biases, and friction points. In other words, a board’s Business Chemistry can greatly affect its effectiveness and have an impact on the performance of the company.


Delaware’s New Competition

William J. Moon is Assistant Professor of Law at the University of Maryland. This post is based on his recent article, forthcoming in the Northwestern University Law Review. Related research from the Program on Corporate Governance includes The Market for Corporate Law by Oren Bar-Gill, Michal Barzuza, and Lucian Bebchuk; Federal Corporate Law: Lessons from History by Lucian Bebchuk and Assaf Hamdani; Delaware Law as Lingua Franca: Evidence from VC-Backed Startups by Brian Broughman, Darian Ibrahim, and Jesse Fried, and (discussed on the Forum here); and Delaware’s Competition by Mark J. Roe.

American corporate law is built on a metaphor of a race: states compete to supply corporate law. For nearly half a century, corporate law scholarship has revolved around endemic questions about whether other states put competitive pressure on Delaware, and whether this competition is normatively desirable.

There is a missing piece to this important body of scholarship. In my article, Delaware’s New Competition (forthcoming in the Northwestern University Law Review and available on SSRN), I introduce foreign nations as emerging lawmakers that compete with American states in the increasingly globalizing market for corporate law. In recent decades, entrepreneurial foreign nations in offshore islands—principally the Cayman Islands, the British Virgin Islands, and Bermuda—have attracted publicly traded American corporations by offering permissive corporate governance rules and specialized business courts.


Regulation Best Interest

Bradley Berman is counsel, Anna T. Pinedo is partner, and Michael D. Russo is an associate at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

On June 5, 2019, the Securities and Exchange Commission (SEC) adopted Regulation Best Interest (Rule 15l-1 under the Securities Exchange Act of 1934 (Exchange Act)), which requires broker-dealers and their associated persons who are natural persons to act in the best interest of their retail customers when making a recommendation. The SEC also adopted Form CRS Relationship Summary, which requires registered investment advisers (RIAs) and broker-dealers to deliver to retail investors a succinct, plain English summary about the relationship and services provided by the firm and the required standard of conduct associated with the relationship and services. (Rule 17a-14 and Form CRS under the Exchange Act.)

Regulation Best Interest (Regulation BI), Form CRS and the related rule will become effective 60 days after their publication in the Federal Register. The compliance date for both rules is June 30, 2020.

This post necessarily summarizes the principal aspects of Regulation Best Interest, as the Release runs to 771 pages.


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