Monthly Archives: September 2019

Reforming Pensions While Retaining Shareholder Voice

David H. Webber is Professor of Law at the Boston University School of Law. This post is based on his recent article, recently published in the Boston University Law Review.

In my article, Reforming Pensions While Retaining Shareholder Voice, published in the Boston University Law Review as part of the symposium on Institutional Investor Activism in the 21st Century: Responses to A Changing Landscape, I argue that the ongoing shift in the public sector from defined benefit to defined contribution pension plans is taking place in the worst possible way, at least from a shareholder rights perspective, one that silences the shareholder voice of millions of workers. I also offer alternative defined-contribution formulations that would help retain that critically important shareholder voice.

Some background: across the country, states and cities face enormous pressure to reform traditional defined-benefit pension plans and replace them with defined-contribution plans. Defined-benefit pension plans promise workers fixed payments in retirement. Defined-contribution plans, like the familiar 401(k), do not guarantee any benefit, instead offering workers a chance to save and invest on their own. The push to shift from defined-benefit to defined-contribution funds is motivated by concern over underfunded pensions, shifting the risk of underfunding from the employer to individual workers. The extent and scope of such underfunding is highly controversial.


Is Your Board Accountable?

Rusty O’Kelley III is the Global Head of the Board Consulting and Effectiveness Practice and Anthony Goodman is a member of the Board Consulting and Effectiveness Practice at Russell Reynolds Associates. This post is based on a Russell Reynolds memorandum by Mr. O’Kelley, Mr. Goodman, Andrew Droste, and Sarah Oliva.

Shareholders and regulators across the globe are demanding improvements in board oversight of corporate culture. Institutional investors seek to better understand companies’ approaches to human capital management (“HCM”), tone at the top, and the attendant reputational risks.

Corporate culture is a business issue for companies and their boards. The new generation of workers weighs workplace culture when choosing their jobs, and the protracted low rates of unemployment have added fuel to the talent war. Best-in-class companies are therefore seeking to distinguish their corporate cultures from those of their peers in ways that will attract and retain today’s top talent. Carefully focused, boards could play a significant role in this effort, even if they remain unmoved by the demands of their other stakeholders.


No-Action Requests to Exclude Shareholder Proposals—A Change of Approach

Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

As foreshadowed by Corp Fin Director Bill Hinman at an event in July put on by the U.S. Chamber of Commerce (see this PubCo post), Corp Fin has announced that it is revisiting its approach to responding to no-action requests to exclude shareholder proposals. In essence, the staff may respond to some requests orally, instead of in writing and, in some cases, may decline to state a view altogether, leaving the company to make its own determination. How will companies respond?

Here is the substance of the announcement:

“The staff will continue to actively monitor correspondence and provide informal guidance to companies and proponents as appropriate. In cases where a company seeks to exclude a proposal, the staff will inform the proponent and the company of its position, which may be that the staff concurs, disagrees or declines to state a view, with respect to the company’s asserted basis for exclusion. Starting with the 2019-2020 shareholder proposal season, however, the staff may respond orally instead of in writing to some no-action requests. The staff intends to issue a response letter where it believes doing so would provide value, such as more broadly applicable guidance about complying with Rule 14a-8.

“The staff continues to believe, as noted in Staff Legal Bulletin 14I and Staff Legal Bulletin 14J, that when a company seeks to exclude a shareholder proposal from its proxy materials under paragraphs (i)(5) or (i)(7) of Rule 14a-8, an analysis by its board of directors is often useful.

“If the staff declines to state a view on any particular request, the interested parties should not interpret that position as indicating that the proposal must be included. In such circumstances, the staff is not taking a position on the merits of the arguments made, and the company may have a valid legal basis to exclude the proposal under Rule 14a-8. And, as has always been the case, the parties may seek formal, binding adjudication on the merits of the issue in court.”


PE Sale of Portfolio Company to a SPAC

Douglas P. Warner is a partner and Dianna Lee is an associate at Weil, Gotshal & Manges LLP. This post is based on their Weil memorandum.

SPAC activity has enjoyed a healthy uptick in recent years. More SPACs went public in 2018 than in any year since 2007, raising more than $10 billion in capital to deploy towards new investment opportunities. Private equity sponsors are increasingly finding themselves on the opposite side of the table from SPACs as the owner of a portfolio company considering a sale to a SPAC. A sale to a SPAC makes sense for certain portfolio companies, though it does raise certain issues for sellers that do not exist in a regular sale process and there have been some high profile “busted” sales of portfolio companies to SPACs. This article highlights certain key considerations for private equity sponsors in navigating a potential sale to a SPAC.

Is your Portfolio Company a Suitable Candidate for being a Public Company?

A sale to a SPAC is fundamentally an alternative to an IPO in terms of an exit strategy for your portfolio company. Like an IPO and unlike a regular way sale process it is unlikely you will be able to cash out 100% of your equity stake in the sale. You will therefore need to determine that your portfolio company is a suitable candidate for the public trading markets and that there will be enough investor support so that the company will trade well and allow you to sell the remainder of your equity stake in the company at an attractive valuation. Selling to a SPAC will also require that your company satisfy certain public disclosure requirements as part of the approval process for the transaction, akin to the level of information disclosed in an IPO prospectus, which includes preparing financial statements that meet certain SEC requirements.


ISS 2019 Benchmarking Policy Survey—Key Findings

Betty Moy Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

[On Sept. 11, 2019], Institutional Shareholder Services Inc. (ISS) announced the results of its 2019 Global Policy Survey (a.k.a. ISS 2019 Benchmark Policy Survey) based on respondents including investors, public company executives and company advisors. ISS will use these results to inform its policies for shareholder meetings occurring on or after February 1, 2020. ISS expects to solicit comments in the latter half of October 2019 on its draft policy updates and release its final policies in mid-November 2019.

While the survey included questions targeting both global and designated geographic markets, the key questions affecting the U.S. markets fell into the following categories: (1) board composition/accountability, including gender diversity, mitigating factors for zero women on boards and overboarding; (2) board/capital structure, including sunsets on multi-class shares and the combined CEO/chair role; (3) compensation; and (4) climate change risk oversight and disclosure. We previously provided an overview of the survey questions.

The ISS report distinguishes responses from investors versus non-investors. Investors primarily include asset managers, asset owners, and institutional investor advisors. In contrast, non-investors mainly comprise public company executives, public company board members, and public company advisors.


Market Based Factors as Best Indicators of Fair Value

Jason Halper and Nathan Bull are partners and Sara Bussiere is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Bull, Ms. Bussiere, and Monica Martin, 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.

Three recent Delaware Court of Chancery appraisal decisions offer a wealth of guidance not only regarding the determination of a merger partner’s fair value, but also regarding elements that potentially undermine a quality sale process and strategic considerations for litigating valuation and sale process issues.

Statutory appraisal litigation, initiated after virtually every sizeable merger, requires the Delaware Court of Chancery to determine the fair value of a target company’s shares, exclusive of any merger-created value, as of the effective date of the merger. Though the appraisal statute broadly empowers the Court to consider “all relevant factors” in determining fair value, the Delaware Supreme Court has clarified the particular importance of certain market-based factors, namely, unaffected market price and merger consideration. Though the unaffected market price is an “important indicator” of fair value (so long as the stock is trading in an efficient market), deal price that is the product of “a robust market check will often be the most reliable evidence of fair value[.]”


Audit Committee Reports to Shareholders

Steve W. Klemash is Americas Leader, Jamie Smith is Investor Outreach and Corporate Governance Specialist, and Jennifer Lee is Audit and Risk Specialist, all at the EY Americas Center for Board Matters. This post is based on their EY memorandum.

As US public companies and their audit committees maintain an almost decade-long trend of increased voluntary disclosures to shareholders about audits, it’s clear that rigorous oversight of public company audits by independent audit committees helps protect investors, and disclosing information about that oversight process contributes to investor confidence.

Many investors, regulators and other stakeholders share the view that increased transparency regarding the audit committee’s oversight process builds investor confidence. [1]

EY’s Center for Board Matters (CBM) measured this trend in its eighth annual assessment of voluntary disclosures by Fortune 100 companies relating to the important audit oversight role carried out by audit committees.

To help raise awareness of the audit, and audit committees’ important role in the audit process, the CBM seeks to shed light on the types of information about the audit available to investors—beyond disclosures required by laws or regulations—and how the availability of information is increasing.

To carry out this assessment, CBM has reviewed the proxy statements of Fortune 100 companies to compare audit-related disclosures from 2012–19, providing a clear view of trends.


Financial Contracting with the Crowd

Usha Rodrigues is the M.E. Kilpatrick Chair of Corporate Finance and Securities Law at the University of Georgia School of Law. This post is based on her recent article, forthcoming in Emory Law Journal.

Today’s equity crowdfunding is a sucker’s game. It’s no wonder. The prospect of allowing the general public—widows, orphans, grandmothers, and all—the chance to invest in private companies for the first time in eighty years understandably spooked the powers that be. First Congress and then the SEC in turn layered requirement after requirement on crowdfunding companies seeking to raise money from the public capital markets. The result, unfortunately, is a burdensome compilation of regulations that is widely regarded as not being worth the effort, especially when companies can raise at most only $1.07 million for their troubles.

Regulation CF almost certainly does not reflect the investor protections that market forces on their own would require from companies seeking funding. But, of course, that’s sort of the point—at least since 1933, the government has always dictated what investor protections (largely disclosure based) firms seeking public money should provide. What would the market for investor protections look like without the interpolation of government regulation? In the past, the answer to that question could come only from speculation. Yet if we could look to actual market demands, we might discover more effective investor protections than what legislators and bureaucrats dream up. Coupling such market-tested protections with raising the cramped amounts ceiling might well rescue equity crowdfunding from its current irrelevancy.


Weekly Roundup: September 6-12, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of September 6-12, 2019.

Implicit Communications and Enforcement of Corporate Disclosure Regulation

Putting to Rest the Debate Between CSR and Current Corporate Law

Proxy Scorecard and Fund Competition

SEC Proposal Concerning Regulation S-K

Presidential Authority to Ban Companies from Operating in China

Firearms—Investor Responses amid Political Inaction

Incorporating Market Reactions Into SEC Rulemaking

Rule 14a-8 No-Action Requests

Executive Compensation and ESG

The SEC and Regulation of Exchange-Traded Funds: A Commendable Start and a Welcome Invitation

Proxy Plumbing Recommendation

Making a Comeback: SEC Fines for Regulation FD Violations

A Tale of Two Markets: Regulation and Innovation in Post-Crisis Mortgage and Structured Finance Markets

Remarks to the Economic Club of New York

Finalized Changes to Volcker Rule

Board Compliance

Stakeholder Governance and the Freedom of Directors to Embrace Long-Term Value Creation

Richard S. Horvath is Of Counsel at Paul Hastings LLP. This post is based on his Paul Hastings 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); 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); and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The debate regarding the adoption of sustainable governance principles has reached a crescendo. This debate started with whether corporate boards should factor Environmental, Social, and Governance (“ESG”) and similar sustainability concerns into their decision-making process. That debate is fairly settled. Boards should. The debate has since shifted to whether the dominant shareholder primacy model embraced by Delaware should be replaced by a stakeholder governance model as a proxy for ESG initiatives.

Under existing Delaware law, a board of directors can—and many times should—consider ESG factors in their efforts to prioritize shareholder value. That a board of directors is protected in approving ESG initiatives with the potential to promote shareholder value, however, is not enough. The board also needs investor support. If desiring to adopt ESG initiatives, a board could develop meaningful relationships with the company’s long-term shareholders—including permanent investors such as mutual funds and ETFs. Indeed, many of these long-term shareholders are increasingly issuing ESG policy statements and committing to long-term stewardship principles. There is thus a growing overlap between long-term shareholders on one hand and stakeholders more broadly on the other to create sustainable value. And that value creation squarely fits within the current shareholder primacy model. No change to a stakeholder governance model is needed.


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