Monthly Archives: October 2019

Outlaws of the Roundtable? Adopting a Long-term Value Bylaw

Neil Whoriskey is partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Whoriskey. Related research from the Program on Corporate Governance includes 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 The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The CEOs of 150 major US public companies recently pledged to act for all of their “stakeholders”—customers, employees, suppliers, communities and yes, even stockholders. [1] Much commentary ensued. But before we get too excited about whether these CEOs are grasping the mantle of government to act on behalf of the citizenry and other people who aren’t paying them, there is the prior question of whether, as a matter of Delaware law, they can.

Under Delaware law, directors owe a fundamental duty of loyalty—the question is, to whom? There has been some academic debate over the years as to whether this duty is owed exclusively to stockholders or is also owed to other stakeholders of the corporation, but the weight of decided Delaware law comes down firmly on the side of stockholders. [2] The Delaware Supreme Court ruled 30 years ago that the interests of other stakeholders may be considered only if “there are rationally related benefits accruing to the stockholders.” [3] The current Chief Justice of the Delaware Supreme Court echoed this view: “[T]he object of the corporation is to produce profits for the stockholders. . . [T]he social beliefs of the manager, no more than their own financial interests, cannot be their end in managing the corporation.” [4] In other words, the duty of loyalty requires that the corporation be run for the benefit of stockholders—a predictable result, as the Chief Justice points out, in a governance system that in all its particulars is based on the “relationship between corporate managers and stockholders. . . where only stockholders get to vote and only stockholders get to sue to enforce directors’ fiduciary duties.” [5]


Examining Corporate Priorities: The Impact of Stock Buybacks on Workers, Communities and Investors

Jesse Fried is the Dane Professor of Law at Harvard Law School. This post is based on his recent testimony before the United States House of Representatives’ Committee on Financial Services. 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).

Chairwoman Maloney, Ranking Member Huizenga, and members of the Subcommittee: I thank you for inviting me to testify. Stock buybacks are an important and increasingly controversial feature of our capital markets. I am honored to have been asked to participate in this hearing.

I was asked for comment on the role of buybacks in the economy and their regulation, including: (1) whether the cash distributed via buybacks could instead be better used for other purposes, such as investing more in R&D; (2) the appropriate level of transparency surrounding buybacks; and (3) executives’ conflicts of interest in buybacks related to their stock-based compensation.

I was also asked for comment on the following pieces of legislation: (1) H.R.         , Stock Buyback Reform and Worker Dividend Act of 2019; (2) H.R.         : Stock Buyback Disclosure Improvement Act of 2019; (3) H.R. 3355, Reward Work Act; and (4) H.R.         , To amend the Securities Exchange Act of 1934 to require issuers to disclose to the Securities and Exchange Commission the details of any repurchase plan for an equity security, and to prohibit such a repurchase unless it is approved by the Commission (hereinafter, “SEC Approval Act”).

In this statement, I share my background and credentials and then, in five Parts, offer my views on buybacks and my general reactions on the provisions in these pieces of legislation, some of which currently are in discussion-draft form.


A Review of ISS Proposed 2020 Policy Changes

Lisa Stimmell is a partner and Courtney Mathes is a practice support lawyer at Wilson Sonsini Goodrich & Rosati. This post is based on their WSGR memorandum.

On October 7, 2019, Institutional Shareholder Services (ISS) released its Proposed Benchmark Policy Changes for 2020, reflecting 17 proposed new policies or policy changes, three of which are applicable to U.S. issuers. ISS is soliciting feedback from governance stakeholders on its proposed benchmark voting policies through 5:00 p.m., ET, on October 18, 2019.

The following is a summary of the three proposed policy changes to the ISS United States Proxy Voting Guidelines Benchmark Policy Recommendations.

Problematic Governance Structure—Newly Public Companies.

Under its current voting policy, ISS generally recommends a vote against or withhold from directors individually, committee members, or the entire board (except new nominees, who should be considered case-by-case) if, prior to or in connection with the company’s initial public offering, the company or the board (a) adopted bylaw or charter provisions materially adverse to shareholder rights, or (b) implemented a multi-class capital structure having unequal voting rights. In addition, ISS provides a list of factors that it will consider in determining whether to recommend a vote against or withhold from the pre-IPO directors including, among others, the level of impairment of shareholders’ rights, the disclosed rationale, the ability to change the governance structure (e.g., limitations on shareholders’ right to amend the bylaws or charter, or supermajority vote requirements), and the ability of shareholders to hold directors accountable through annual director elections, or whether the company has a classified board structure. [1]


CFIUS Modernization

Eric J. Kadel, Jr. and Christopher L. Mann are partners and Kathryn E. Collard is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Mr. Kaddel, Mr. Mann, Ms. Collard, John Evangelakos, Benjamin R. Weber, and Dharak V. Bhavsar.

The U.S. Department of the Treasury has issued proposed regulations to implement CFIUS reforms enacted under the Foreign Investment Risk Review Modernization Act of 2018 (“FIRRMA”). Certain provisions of FIRRMA went into effect immediately upon its adoption in August 2018, but many of the provisions of the legislation require regulations to be prescribed by CFIUS before becoming effective.

The proposed rules, which would implement most of the provisions of FIRRMA that have not already gone into effect, have been issued in two separate proposals, both of which are covered in this memorandum:

  • TID Businesses. The first set of regulations would replace the existing CFIUS regulations codified at part 800 of title 31 of the Code of Federal Regulations, and among other things would implement the provisions of the FIRRMA legislation pertaining to certain non-control but non-passive investments in critical technology, critical infrastructure and sensitive personal data businesses (so-called “TID” businesses).
  • Real Estate. The second set of regulations, to be codified at a new part 802 of title 31 of the Code of Federal Regulations, would implement the expansion of CFIUS jurisdiction under FIRRMA to certain real estate transactions.


Examining Corporate Priorities: The Impact of Stock Buybacks on Workers, Communities and Investors

Lenore Palladino is a Senior Economist and Policy Counsel at the Roosevelt Institute. This post is based on her recent testimony before the United States House of Representatives’ Committee on Financial Services. 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).

Thank you, Chairwoman Maloney and Ranking Member Huizenga, for inviting me to speak today [Oct. 17, 2019]. It is an honor to be here. My name is Lenore Palladino, and I am Assistant Professor of Economics & Public Policy at the University of Massachusetts Amherst, a Fellow at the Roosevelt Institute, and Research Associate at the Political Economy Research Institute.

I join you today to discuss the causes and consequences of the rise of stock buybacks. Stock buybacks may sound like a technical matter of corporate finance: Why should it matter whether or not corporations repurchase their own stock? When a company executes a stock buyback, they raise the price of that company’s shares for a period of time, but the funds spent on buybacks are then unavailable to be spent on the types of corporate activities that could make the company more productive over the long term: investments in future productivity and in the workforce. Stock buybacks are one of the drivers of our imbalanced economy, in which corporate profits and shareholder payments continue to grow while wages for typical workers stay flat.


Examining Corporate Priorities: The Impact of Stock Buybacks on Workers, Communities and Investors

Craig Lewis is the Madison S. Wigginton Professor of Finance and Professor of Law at Vanderbilt University. This post is based on his recent testimony before the United States House of Representatives’ Committee on Financial Services.

Thank you for inviting me to appear today [Oct. 17, 2019] to discuss corporate priorities as they relate to share repurchase program, workers, communities, and investment. I am the Madison S. Wigginton Professor of Finance at Vanderbilt University’s Owen Graduate School of Management and a Professor of Law at the Vanderbilt School of Law. I have been on the faculty since 1987. From 2011 to 2014, I served as the Director of the Division of Economic and Risk Analysis and Chief Economist at the SEC.

1. General 

The House Financial Services Committee is considering a number of regulatory initiatives designed to reduce or even eliminate the ability of corporations to repurchase shares. I discuss the economic substance of share repurchase programs and argue that share repurchases, or “stock buybacks,” represent a highly efficient way to distribute cash to shareholders, and when compared to ordinary dividends, represent nothing more than an alternative mechanism for public corporations to distribute cash to shareholders.


How the Type of Buyer May Affect a Target’s Remedies

Beth E. Berg and Karen A. Dewis are partners at Sidley Austin LLP. This post is based on their Sidley memorandum.

In exploring a potential public company sale, target boards rightly focus on the amount and type of consideration offered by potential buyers and the level of deal certainty. However, when considering offers (including at early stages in the process), target boards should also take into account the risk of a buyer breach, including in connection with a financing failure, and the remedies that will be available to the target as a result. Although, as a matter of principle, the consequences to the target of a failed deal should not be different depending on the type of buyer, as discussed below, the remedies offered by strategic buyers often dramatically differ from the remedies offered by financial buyers. [1]

In public M&A transactions, there are generally three potential remedies available to targets in the event of a buyer breach: (1) specific performance of the merger agreement (and the equity commitment letter, if any), (2) termination of the merger agreement with payment of a reverse termination fee [2] and (3) termination of the merger agreement with the right to recover monetary damages for pre-termination breach.


Proxy Access and Leverage

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

Thanks to for catching this announcement from NYC Comptroller Scott Stringer and the NYC Retirement Systems, which reported that, since the inception of the Comptroller’s “Boardroom Accountability Project,” there has been a 10,000% increase in the number of companies with proxy access. Stringer began the Project in 2014 with proxy access proposals submitted to 75 companies. At the time, Stringer viewed the campaign as having been “enormously successful: two-thirds of the proposals that went to a vote received majority support and 37 of the companies have agreed to enact viable bylaws to date.” (See this PubCo post and this PubCo post.)  So effective was the proxy access campaign that Stringer leveraged its  success and the “powerful tool” it represented to “demand change” through the Boardroom Accountability Project 2.0, focused on corporate board diversity, independence and climate expertise.  Now, five years later, the number of companies with “meaningful” proxy access has climbed from just six in 2014 to over 600—including over 71% of the S&P 500—all as a consequence, Stringer contends, of the Boardroom Accountability Project. But, you say, proxy access has hardly ever been used (see this PubCo post), so what difference it make?  In Stringer’s view, it makes a big difference.


The Consequences to Directors of Deploying Poison Pills

William C. Johnson is Associate Professor of Finance at Suffolk University School of Management; Jonathan M. Karpoff is Professor of Finance at University of Washington Foster School of Business; and Michael Wittry is Visiting Instructor of Finance at the Fisher College of Business at The Ohio State University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here); The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk and What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen, and Allen Ferrell.

How consequential is a firm’s adoption of a poison pill for the firm’s directors? Prior research reflects three conflicting views about this question, which reflect conflicting views about pills themselves. The entrenchment view holds that poison pills entrench managers at shareholders’ expense, implying that directors who adopt pills face the risk of shareholder backlash and negative career consequences (E.g., Malatesta and Walkling (1988)). The shareholders’ interest view holds that pills serve primarily to improve the firm’s operations or increase expected takeover premiums, implying that directors who adopt pills are valuable to shareholders and should enjoy career benefits (E.g., Grossman and Hart (1980)). A third view is that the explicit adoption of a poison pill has little impact, either because the actual adoption of a pill is not meaningful (because all firms have latent pills) or because the director labor market does not react strongly to directors’ actions (E.g., Coates (2000)). This view implies that directors who adopt pills should experience neither negative nor positive career consequences.

Our paper examines the career outcomes for directors who serve on boards that adopt poison pills, and therefore sheds light on the debate over whether pills have negative, positive, or inconsequential effects on the firms that adopt them. We focus on the professional consequences to first-time pill adopters. These are directors who serve on boards that adopt poison pills, but who previously had never served on a pill-adopting board. We show that first-time pill adopters suffer negative career consequences. They receive lower vote support in subsequent board elections at both the pill-adopting firm and in their other directorships. They are more likely to leave the boards on which they currently serve, and are less likely to be appointed as new directors at other firms.


Filing Thresholds and Main Street Investors

Christine Jantz is CEO at Jantz Management LLC. This post is based on a Jantz Management memorandum by Ms. Jantz and Mari Schwartzer, Director of Shareholder Activism and Engagement at NorthStar Asset Management, Inc.

On May 8, 2019, SEC Chairman Jay Clayton testified to the Senate that “[o]ur first goal, which has been a priority of mine since I became Chairman, is focusing on the interests of our long-term Main Street investors.” He went on to say that “the question we ask ourselves every day: how does our work benefit the Main Street investor? Each proposal or action we take is guided by that principle.” [1] [emphasis added]

Perhaps one of the most important benefits of owning stock in a U.S. publicly traded corporation is the opportunity to engage that company as a part-owner. For decades, Main Street investors have had the mechanism of the shareholder proposal process to communicate with company management when they see a problem, identify inefficiencies, or are displeased with how the company has spent investor dollars.

Clayton also stated that:

Main Street investors’ continued participation provides the lifeblood for our capital markets, as at least 52 percent of U.S. households are invested directly or indirectly in the capital markets… This level of retail investor participation stands out against other large industrialized countries. [emphasis added]


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