Monthly Archives: October 2019

Deutsche Bank Case Study: How CGLytics Tools Inform Glass Lewis’ Pay and Governance Analysis

Silvia Gatti is a Senior Research Analyst—Dach Region at Glass, Lewis & Co. This post is based on her Glass Lewis memorandum. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here).

In the following case study, we describe how CGLytics’ analytical tools informed Glass Lewis’ review of Deutsche Bank ahead of the 2019 AGM.

Overview of DBK

Annual Say-on-Pay won’t be mandatory in Germany until SRD II is implemented, allowing Deutsche Bank to omit any remuneration-related votes from its 2019 AGM agenda; the multinational last sought shareholder approval of its remuneration policy in 2017. Nonetheless, for large cap companies Glass Lewis provides a remuneration analysis comprising CGLytics graphs and tables and a write-up to summarise any material issues. Even when there is no proposal focused solely on remuneration, this analysis informs our assessment of overall governance practices and the performance of the board, its committees and directors. Beyond the Proxy Paper report and voting recommendations, the analysis helps us to shape our engagement agenda and identify areas for further research.


Mechanisms of Market Efficiency

Kathryn Judge is a professor at Columbia Law School. This post is based on her recent article, forthcoming in the Journal of Corporation Law.

Today’s financial markets are awash with instruments that holders accept at face value with minimal investigation into the quality of the underlying assets. Sometimes this is because everyone trusts the issuer. U.S. Treasuries are a prime example. But the demand for so-called “safe assets” often exceeds the volume of truly safe assets available. When this happens, private actors step in to bridge the gap. Traditionally, it was banks that played this role, and bank deposits continue to be among the most pervasive privately issued safe assets in the financial system. Over the last few decades, however, the capital markets have become increasingly important in the production of safe assets. Mechanisms of market inefficiency—structures that impede or otherwise discourage information generation—have been critical to this rise. These dynamics, and the questions they raise, are the topic of my new essay, The New Mechanisms of Market Inefficiency, forthcoming in the Journal of Corporation Law. Starting from the assumption that safe assets are useful when times are good but can exacerbate shocks when conditions deteriorate, the essay shows the need for an institutional account of how mechanisms of market inefficiency operate across good states and bad and the distinct challenges that they pose during periods of transition.


Spin-offs Unraveled

Cathy A. Birkeland, Mark D. Gerstein, and Laurence J. Stein are partners at Latham & Watkins LLP. This post is based on a Latham & Watkins memorandum by Ms. Birkeland, Mr. Gerstein, Mr. Stein, Ryan J. Maierson, Pardis Zomorodi, and Alexa M. Berlin.

In a spin-off, a public company separates one or more of its businesses into a new, publicly traded company. For the public company that initiates it, a spin-off can achieve a number of critical business and financial objectives, including:

  • Potentially achieving a greater valuation multiple and unlocking shareholder value by disposing of lower-valuation business segments
  • Permitting investors to evaluate and make investment decisions based on the separate investment characteristics of each company
  • Allowing the management teams of the separate companies to focus on their distinct core business, unhindered by the needs of the other business, leading to superior performance and results
  • Providing the separate companies the flexibility to pursue distinct capital allocation strategies based on their respective business needs and priorities, and potentially achieving a more favorable cost of capital and greater access to the capital markets
  • Allowing the divestment of a non-core business in a tax-efficient manner

A spin-off requires advanced planning across a number of disciplines, incorporating elements of capital markets, tax, finance, intellectual property, and mergers and acquisitions. This post identifies some of the primary considerations companies may wish to take into account to help ensure a successful spin-off.


NYC Comptroller Boardroom Accountability 3.0

Michael Garland is Assistant Comptroller for Corporate Governance and Responsible Investment and Jennifer Conovitz is Special Counsel of Pensions in the Office of New York City Comptroller Scott M. Stringer. This post is based on their recent Office of New York City Comptroller memorandum.

In its new initiative, Boardroom Accountability Project 3.0, the Office of New York City Comptroller Scott M. Stringer calls on boards of directors to adopt a diversity search policy requiring that the initial lists of candidates from which new management-supported director nominees and chief executive officers (CEOs) are chosen include qualified female and racially/ethnically diverse candidates (a version of the “Rooney Rule” pioneered by the National Football League) and that director searches include candidates from non-traditional environments such as government, academic or non-profit organizations in order to broaden the pool of candidates considered. The policy should provide that any third-party consultant asked to conduct a director or CEO search will be required to follow the policy.

As Comptroller of the City of New York, Comptroller Stringer is the investment advisor to, and custodian and a trustee of, the New York City Retirement Systems (“NYCRS”), which have more than $200 billion in assets under management and are substantial long-term shareowners of more than 3,000 U.S. public companies. The campaign is part of the successful “Boardroom Accountability Project” launched in the fall of 2014.


Dilution, Disclosure, Equity Compensation, and Buybacks

Bruce Dravis is Chair of the Corporate Governance Committee of the Business Law Section at the American Bar Association. This post is based on his article, recently published in The Business Lawyer. Related research from the Program on Corporate Governance includes  Short-Termism and Capital Flows by Jesse Fried and Charles C. Y. Wang (discussed on the Forum here)  and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, by Jesse Fried (discussed on the Forum here).

Buybacks and equity compensation are two sides of a single coin. In a buyback, a company spends cash to repurchase its own shares, reducing its total outstanding share count. In the case of equity compensation, a company issues shares, receiving cash and tax benefits, increasing its total outstanding share count.

The two kinds of transactions—buybacks and equity compensation—are complementary, but their connection is obscured by the asymmetries in the timing, approval processes, and securities and financial disclosures for each. The article Dilution, Disclosure, Equity Compensation, and Buybacks (published The Business Lawyer, Vol. 74, 631-658, Summer 2019) describes those differences, and quantifies the share-denominated and dollar-denominated effects of buyback and equity compensation transactions over a 10-year period for selected Fortune 100 companies.


Response to the Chamber of Commerce’s Outrageous Comment to DOL

Nell Minow is Vice Chair of ValueEdge Advisors. This post is based on her recent comment letter to the Department of Labor.

VEA Vice Chair Nell Minow has submitted a comment to the Department of Labor on proxy advisory firms and proxy voting by pension fiduciaries. This is a follow-up to two previous letters on the issue and in response to a letter from the Chamber of Commerce calling for the same kinds of restrictions on proxy voting and proxy advisors they are pushing for at the SEC.

October 19, 2019

Assistant Secretary Preston Rutledge
Department of Labor
200 Constitution Ave, NW, Ste S-2524
Washington DC 20210

Re: Executive Order on Energy Infrastructure/Rulemaking

Dear Assistant Secretary Rutledge,


Private Equity’s Governance Advantage: A Requiem

Elisabeth de Fontenay is Professor of Law at Duke University School of Law. This post is based on her article, recently published in the Boston University Law Review.

Is private equity still special? Although the industry’s returns have been envied for decades, recent studies show that they have declined over time and converged with public-market returns. In Private Equity’s Governance Advantage: A Requiem, I document that the means by which private equity generates those returns have changed as well.

Private equity’s original value proposition was optimizing companies’ governance and operations. Reuniting ownership and control in corporate America, the leveraged buyout (or the mere threat thereof) undoubtedly helped reform management practices in a broad swath of U.S. companies. In a leveraged buyout, the private equity fund acquires a public or private company, adds a heavy debt load to its capital structure, makes operational improvements, and then sells the company or takes it public after a few years. The potential governance advantages of LBOs are many, including the sponsors’ willingness to cut costs and replace management, the disciplining effect of high leverage, and the careful monitoring provided by a small, incentivized board that meets frequently.


The Beneficial Owner

Jeff Lubitz is Head of ISS Securities Class Action Services, Institutional Shareholder Services, Inc. This post is based on an ISS publication by Elisa Mendoza, Vice President with ISS Securities Class Action Services.

Well versed in claims filing for over fifteen years, ISS Securities Class Action Services (ISS SCAS), along with other third-party filers, has experienced new challenges due to a seemingly new requirement on the part of law firms and claim administrators for precise beneficial owner information. Previously, claim administrators accepted the account name and account number to begin processing claims without requiring the beneficial owner information specifically. Now, submitted claims will not even be processed by many claim administrators without precise, unabbreviated identification of the beneficial owner for each claim. Claims administrators have made clear they will no longer accept the account name as sufficient. This post explores the impact the increased scrutiny of the beneficial owner name has had on the claims filing process, how the increased scrutiny came about, and the challenges and benefits of requiring this information.


The New Paradigm

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy, and William Savitt is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum.

With the adoption this week of The UK Stewardship Code 2020, to accompany The UK Corporate Governance Code 2018, the UK Financial Reporting Council has promulgated corporate governance, stewardship and engagement principles closely paralleling The New Paradigm issued by the World Economic Forum in 2016.

While the FRC codes are “comply and explain,” they fundamentally commit companies and asset managers and asset owners to sustainable long-term investment. As stated by the FRC:

The new Code sets high expectations of those investing money on behalf of UK savers and pensioners. In particular, the new Code establishes a clear benchmark for stewardship as the responsible allocation, management and oversight of capital to create long-term value for clients and beneficiaries leading to sustainable benefits for the economy, the environment and society (emphasis added).

There is a strong focus on the activities and outcomes of stewardship, not just policy statements. There are new expectations about how investment and stewardship is integrated, including environmental, social and governance (ESG) issues ….


The Myth of Creditor Sabotage

Vince Buccola is an assistant professor at the Wharton School at the University of Pennsylvania; Jameson Mah is an Investment Analyst at Cyrus Capital Partners; and Tai Yi Zhang is an economics undergraduate student at the Wharton School at the University of Pennsylvania. This post is based on their recent article forthcoming in the University of Chicago Law Review.

Net-short creditor activism isn’t real. The fact that people talk as though it were real is, however, deeply interesting as a matter of economic sociology. So we claim in our new article, The Myth of Creditor Sabotage.

Readers of this blog are likely familiar at least in outline with the Windstream case. In 2017, Aurelius acquired a majority position in some of Windstream’s notes. Aurelius used the customary authority of a majority holder to assert that a spin-off transaction Windstream had closed some two years earlier was in fact an incurable breach of its sale-leaseback covenant. The matter went to trial, Aurelius prevailed, and Windstream filed for bankruptcy relief. That much is fact. But it is a theory of Aurelius’s motivation rather than the bare facts that has intrigued market participants as well as scholars. According to a widely rehearsed story (for example, here, here, and here), Aurelius did not believe its lawsuit would maximize the value of its notes. On the contrary, it believed (and hoped) the lawsuit would reduce the notes’ value. Having established a short position in CDS bigger in magnitude than its long position in Windstream’s notes, Aurelius had, the story goes, found a way to profit from value destruction.


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