Monthly Archives: October 2019

Appraisal Challenges and Benefits to Target Shareholders Through Narrowing Arbitrage Spread

Gaurav Jetley is a Managing Principal and Yuxiao Huang is an Associate at Analysis Group, Inc. This post is based on their recent paper 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

There is an ongoing debate regarding the extent to which increased appraisal litigation in the Delaware Chancery Court is beneficial from a public policy perspective. A paper published in the May 2019 issue of The Journal of Law and Economics—“Merger Negotiations in the Shadow of Judicial Appraisal,” by Audra Boone, Brian Boughman, and Antonio J. Macias (hereafter “Boone et al.”)contributes to this discussion. The authors find, among other things, that compared to deals without appraisal challenges, deals subject to appraisal challenges have, on average, a 6% lower post-announcement arbitrage spread. (See Figure 1.) Based on this observed gap, the authors claim that appraisal challenges benefit target shareholders by narrowing arbitrage spreads. In particular, they state that

“[t]he narrower spread provides preexisting investors in such firms the option to receive approximately 6 percent more value if they decide to sell prior to closing (insuring against the risk of deal failure). Passive investors have the opportunity to share in some of the gains from merger arbitrage.”


Opt-Out Rate in Securities Class Action Settlements

Brendan Rudolph is a principal at Cornerstone Research and Christopher Harris is a partner at Latham & Watkins LLP. This post is based on their Cornerstone memorandum.

Securities class action filings have increased significantly over the past few years and continue to be filed at near-record rates. The majority of class actions end in a dismissal or a settlement, and putative class members have the ability to opt out of settlements in order to pursue their own cases.

Prior research has found that the most relevant predictor of opt-outs is the dollar amount recovered, and studies in the post-PSLRA period have found that the prevalence of opt-out cases—efforts to achieve a larger recovery through settlement or judgment outside the class—has increased relative to the pre-PSLRA period. The research in this and the previous reports has built on these findings by examining the prevalence of opt-out cases, year by year, and analyzing salient publicly available information related to these cases.

  • Out of 382 securities class action settlements in 2014– 2018, based on publicly available data, there were 34 opt-out cases.
  • Overall, out of 1,775 securities class action settlements in 1996–2018, there were 82 opt-out cases.
  • The likelihood of defendants facing an opt-out may be increasing. Prior to 2014, the rate of opt-outs in class action settlements was 3.4 percent, compared to 8.9 percent between 2014 and 2018.
  • Opt-outs remain more likely to occur in larger-dollar class action settlements.
  • Institutional investors such as pension funds, sovereign wealth funds, and hedge funds remain frequent participants in opt-outs.
  • Recent court rulings on tolling the statute of repose were expected to make it harder for investors to opt out of settlements. They may, however, have had the unintended effect of resulting in more preemptive opt-outs by large investors such as pension funds and investment firms, which are able to afford the additional fees involved in bringing a separate lawsuit.
  • If opt-outs become filed more frequently, it may result in inefficiencies for all parties in the court system, as courts may struggle with a higher caseload, defendants may spend more on legal fees, and plaintiffs may face more uncertainty about the necessity of opting out or remaining in classes.


Stakeholder Capitalism and Executive Compensation

Don Delves and Ryan Resch are managing directors at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (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).

The Business Roundtable recently revised its Principles of Corporate Governance to include a new Statement of Corporate Purpose. The new statement is a significant departure from the past in that it includes serving all “stakeholders,” including customers, employees, suppliers, communities, the environment and shareholders. The prior statement only included shareholders.

While many in the legal profession, academia and various “moral” or “conscious” capitalism groups have articulated various forms of the stakeholder argument for a long time, the vast majority of investors, board members and executives of public companies have aligned with the “shareholder primacy” philosophy for the last 30-40 years. Shareholder primacy is based on the belief that generating profits and creating value for shareholders is the primary purpose, if not the only purpose of a corporation. Maximizing long-term shareholder value has been the well-accepted, core measure of success for most corporations, and their management teams and boards, at least since the 1980s.


Evolving Board Evaluations and Disclosures

Steve W. Klemash is Americas Leader and Rani Doyle is Executive Director at the EY Center for Board Matters. This post is based on their EY memorandum.

Effective board evaluations can drive better board performance. So how are today’s leading boards evolving their evaluations to enhance effectiveness, and what are their companies communicating to stakeholders about their board evaluation processes?

Last year we reviewed proxy statements filed by Fortune 100 companies to identify disclosures on notable board evaluation practices and to outline elements in designing an effective evaluation process. This post compares the data to this year, enabling year-over-year comparison of disclosures related to key board evaluation practices. We find that Fortune 100 companies are enhancing disclosures about their board evaluation processes—with some substantial differences in disclosure year over year. Boards are adopting more practices for effective evaluations, such as individual director evaluations, peer evaluations and use of third parties to facilitate the evaluation, and expanding disclosures around evaluation topics and resulting actions.


Toward Fair and Sustainable Capitalism

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent paper.

I recently placed on SSRN a new paper, Toward Fair and Sustainable Capitalism:  A Comprehensive Proposal to Help American Workers, Restore Fair Gainsharing Between Employees and Shareholders, and Increase American Competitiveness by Reorienting Our Corporate Governance System Toward Sustainable Long-Term Growth and Encouraging Investments in America’s Future. The Financial Times published earlier this week an op-ed in which I provide an overview of the proposal put forward in this new paper, which was prepared in connection with this week’s A New Deal For This New Century: Making Our Economy Work For All conference in Washington, D.C.

To promote fair and sustainable capitalism and help business and labor work together to build an American economy that works for all, this paper presents a comprehensive proposal to reform the American corporate governance system by aligning the incentives of those who control large U.S. corporations with the interests of working Americans who must put their hard-earned savings in mutual funds in their 401(k) and 529 plans. The proposal would achieve this through a series of measured, coherent changes to current laws and regulations, including:


A Call by Investors on US Companies to Align Climate Lobbying with Paris Agreement

Barbara Grady is the communications manager for the California Program at Ceres. This post is based on her Ceres 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).

With a combined $6.5 trillion in AUM, investors urge companies to ensure corporate and trade association lobbying are consistent

On September 16, 2019, 200 institutional investors with a combined $6.5 trillion in assets-under-management announced they are calling on 47 of the largest U.S. publicly traded corporations to align their climate lobbying with the goals of the Paris Agreement, warning that lobbying activities that are inconsistent with meeting climate goals are an investment risk.

The investors said they view fulfillment of the Paris Agreement goal—to limit the global average temperature increase to well below 2°Celsius and pursue efforts to hold it at 1.5°Celsius—as an imperative.

“We are convinced that unabated climate change will negatively impact our clients, plan beneficiaries, and the value of our portfolios,” wrote the investors in a letter sent to each company in recent days.


Managerial Response to Shareholder Empowerment: Evidence from Majority Voting Legislation Changes

Vicente Cuñat is Associate Professor of Finance at London School of Economics; Yiqing Lü is Assistant Professor of Finance at NYU Shanghai; and Hong Wu is Assistant Professor of Finance at Hong Kong Polytechnic University. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Letting Shareholders Set the Rules by Lucian Bebchuk, and The Case for Increasing Shareholder Power, by Lucian Bebchuk.

Regulators often change the rules of shareholder democracy to improve the effectiveness of shareholder voting and to influence managerial authority. These rules may affect the election of firm directors but also more direct participation channels such as the voting of shareholder proposals. Given that these are two of the main ways through which shareholders can affect firm policies, it is therefore important to assess the effectiveness of reinforcing shareholder democracy and the reaction of managers to it.

In a recent paper we explore this research question by using a quasi-natural experiment the staggered passage of amendments to the Delaware General Corporation Law (DGCL) and Model Business Corporation Act (MBCA). These changes made it more costly for management to not implement the outcome of a subset of shareholder-initiated proposals. Specifically, under the new laws, the board cannot unilaterally amend or repeal the shareholder-adopted majority voting bylaw amendments related to director elections. Several states that use the MBCA as the basis of their own state laws subsequently changed their corporate law provisions to facilitate majority voting. This regulatory change provides a suitable setting for understanding managerial behavior and the underlying incentives when regulators tilt the balance of corporate governance away from managerial authority and toward shareholder empowerment.


2020 Proxy and Annual Report Season: Time to Get Ready—Already

Laura D. Richman is counsel and Michael L. Hermsen is partner at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Hermsen, Jennifer J. CarlsonRobert F. Gray, Jr., and David A. Schuette.

As summer closes and autumn begins, it is time for public companies to begin planning for the 2020 proxy and annual report season. Advance preparations are key to producing proxy statements and annual reports that not only comply with disclosure requirements but also serve as tools for shareholder engagement. This post highlights the following issues of importance to the upcoming 2020 proxy and annual report season:

Proxy Statement Matters

  • Hedging Disclosure
  • Pay Ratio Disclosure
  • Board Diversity
  • Trending Shareholder Proposals
  • Shareholder Proposal Guidance
  • Environmental and Social Disclosure
  • Say-on-Pay
  • Overboarded Directors
  • Proxy Voting Advice Guidance and Investment Adviser Guidance
  • Compensation Litigation and Compensation Disclosure
  • Director and Officer Questionnaires

Annual Report Matters

  • Amendments to Form 10-K Disclosure Requirements
  • Critical Audit Matters
  • Trending Annual Report Topics
  • Risk Factors
  • Inline XBRL
  • Proxy Statement Matters


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