Monthly Archives: December 2019

Financial Institutions Developments: Merger of Equals

Edward D. HerlihyRichard K. Kim, and Matthew M. Guest are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Messrs. Herlihy, Kim, Guest, and Patricia A. Robinson.

The approval by the Federal Reserve and the FDIC of BB&T Corporation’s merger of equals with SunTrust Banks, Inc. is a landmark in the post-crisis regulatory environment. Notably, the transaction was unanimously approved by the boards of both agencies at a time when the Democratic appointees have been known to vote against pro-industry measures. Measured by deal value at announcement, the BB&T/SunTrust merger is the largest U.S. bank merger since that of JPMorgan Chase and Bank One in 2004. The approval paves the way for the companies to merge on December 6th and become Truist Financial Corporation.

In many respects, the transaction is closer to a true merger of equals than those before it and was made possible by the strategic vision and leadership of the CEOs and the remarkable compatibility of the two organizations’ cultures, business lines and management. Early in the negotiations, the companies agreed on an even board and executive management split, a new headquarters city and even a new name. On completion of the merger, Truist will be the sixth largest U.S. commercial bank with more than 2900 branches in 17 states.


NYSE Direct Listing Proposal

Alan F. Denenberg, Marcel Fausten, and Richard D. Truesdell are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Denenberg, Mr. Fausten, Mr. Truesdell, Michael Kaplan, Joseph A. Hall, and Byron B. Rooney.

Key Takeways

  • Direct listings to date have not permitted companies to raise capital, and have required 400 holders of company stock prior to listing.
  • The proposed NYSE rule would address both of these limitations.
  • Underwritten IPOs are still expected to remain attractive to most private companies.

The “traditional” IPO model has received a lot of criticism recently in the media and from venture capital investors for perceived “mispricings” that result in a pop in the opening trade. Recently, the media and investors have seized upon “direct listings,” where a company is listed on an exchange without a capital raising transaction, and instead files a registration statement to facilitate a listing and permit existing shareholders to sell into the market without a formal offering. While this structure has been utilized by three companies to date (full disclosure: this firm worked on two of them), the structure has two significant infirmities that the proposed NYSE rule change would address. These proposed changes are welcome and may facilitate more direct listings, but it is unclear whether this rule change will solve all concerns with direct listings and encourage a meaningful number of private companies to abandon the traditional underwritten IPO, which continues to work well for many companies.


Agency Costs, Corporate Governance and the American Labor Union

Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale Law School. This post is based on his recent paper.

Union officials, who represent workers in collective bargaining over workers’ wages, hours and working conditions, are agents of the workers whose interests they are supposed to represent. And, of course, agency costs manifest themselves in the union-worker relationship just as they do in other contexts in which principal-agent relationships exist. Such other contexts, such as the class-action plaintiff/ lawyer relationship and the corporate director/ shareholder relationship, have been the subject of focused attention by policymakers and scholars. Far less attention has been paid to addressing the agency costs in unions.

The lack of attention the agency costs inherent in the union/worker context is somewhat surprising in light of the fact that union officials (who owe fiduciary duties to the rank-and-file members whose dues and fees pay their salaries) have proven to be highly imperfect representatives of the workers. The lack of adequate focus and attention on agency costs in the union context can be attributed to three sources.


Weekly Roundup: December 7–12, 2019

More from:

This roundup contains a collection of the posts published on the Forum during the week of December 7–12, 2019.

Keynote Speech by PCAOB Chairman William D. Duhnke III at the 14th Annual Audit Conference Baruch College

SEC Punked?

More Meaningful Ethics

Thoughts for Boards of Directors in 2020

Barbara Novick’s Keynote Address at Harvard Law School

SEC Process for Responding to Shareholder Proposal No-Action Requests

Expected Effects of SEC Proposals on Public Companies & Proxy Advisors’ Dialogue

Steve Seelig is Senior Director, Executive Compensation, Brian Myers is a Consultant, Executive Compensation, and Gary Chase is Director, Retirement & Executive Compensation at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum.

Last week, in a 3 to 2 vote in favor, the Securities and Exchange Commission’s (SEC) proposed regulations that would change how proxy advisory firms interact with public companies and their institutional investor clients regarding proxy voting recommendations. The headline for companies is that the SEC proposal would permit them more time to respond directly to proxy advisors with feedback on proposed voting recommendations.

This is the second action the SEC has taken regarding the proxy advisory process, and should be read together with that prior guidance as detailed in “Recent SEC guidance may affect how your company works with proxy advisors,” Executive Pay Matters, September 26, 2019.

The time frame for comments will differ depending on how many days before the annual meeting the company files its proxy. Those that file 45 calendar days or more before the shareholder meeting would have at least five business days to review the proxy voting advice and provide feedback, while those who file at least 25 but less than 45 calendar days before the meeting would have no fewer than three business days. The SEC expects that companies that want to use the five day comment period will file earlier than they have historically.


Pay for Performance… But Not Too Much Pay: The American Public’s View of CEO Pay

David F. Larcker is James Irvin Miller Professor of Accounting at Stanford Graduate School of Business and Brian Tayan is a Researcher with the Corporate Governance Research Initiative at Stanford Graduate School of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The CEO Pay Slice by Lucian Bebchuk, Martijn Cremers and Urs Peyer (discussed on the Forum here); The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein; and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, by Jesse Fried (discussed on the Forum here).


We recently published a paper, Paying a Pittance to the CEO: The American Public’s View of CEO Pay, that examines the American public’s view of CEO compensation. Among the controversies in corporate governance, perhaps none is more heated or widely debated across society than that of CEO pay. Americans might not have strong opinions about chairman independence, proxy advisory firms, staggered boards, or dual-class shares, but they almost always have an opinion (usually negative) about how much CEOs are paid. While researchers and practitioners argue over concepts of labor market efficiency, pay for performance, and shareholder alignment, to members of the public the issue of CEO pay boils down to a personal assessment of whether any executive deserves to be paid so much money.

That said, corporations are not monolithic entities. They vary by size, industry, and performance, and it is not practical to assume that CEOs—no matter what pay they are offered on average—will earn the same amounts in all circumstances. To the American public, how should pay vary with size and performance? Under what circumstances do CEOs deserve higher pay, and in those cases, how much higher should it be? When value is created, how much of that value should be paid as compensation, and what are the implications given the incredible size and market valuation of America’s largest companies?


SEC Process for Responding to Shareholder Proposal No-Action Requests

Elizabeth Ising, Ronald O. Mueller, and Lori Zyskowski are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Ms. Ising, Mr. Mueller, Ms. Zyskowski, and Courtney Haseley.

On November 21, 2019, the Division of Corporation Finance (the “Division” or “Staff”) of the Securities and Exchange Commission (“SEC”) provided additional detail on how it will process responses to shareholder proposal no-action requests under Rule 14a-8. As discussed in our prior posts, available here and here, in September 2019 the Division announced that, starting with the 2019-2020 shareholder proposal season, it may respond orally instead of in writing to some no-action requests, and in some cases its response may indicate that it is declining to state a view on whether a proposal satisfies the requirements of Rule 14a-8 or is properly excludable.

On November 21, the Division updated its Rule 14a-8 landing page, providing additional clarity around the first aspect of the September announcement; namely, the Staff’s process for responding to no-action requests. [1] The updated landing page, available here, [2] now links to a new document entitled the 2019-2020 Shareholder Proposal No-Action Response chart (the “Response Chart”), [3] which will list the no-action requests to which the Division has responded, in reverse chronological order (with the most recent responses listed first). The Response Chart presents:


Barbara Novick’s Keynote Address at Harvard Law School

Tami Groswald Ozery is a co-editor of the Forum and Fellow at the Harvard Law School Program on Corporate Governance.

In a recent event of the Harvard Law School Program on Corporate Governance, BlackRock Vice-Chairman Barbara Novick delivered a keynote address on Blackrock’s stewardship. A video of her presentation is available on the Program’s website here. Following her presentation Ms. Novick engaged in a dialog with the participants, but the dialog was subject to Chatham House Rules and is therefore not included in the video.

In her address, titled “The Goldilocks Dilemma,” Ms. Novick focused on the stewardship of BlackRock as well as other large index fund managers. Among other things, she engaged with the analysis and evidence put forward in academic works by Harvard Law School faculty. Such works include Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst; The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst; The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst; and The Future of Corporate Governance Part I: The Problem of Twelve by John Coates.

Ms. Novick is Vice-Chairman and Co-Founder of Blackrock, and a member of BlackRock’s Global Executive Committee, Enterprise Risk Committee and Geopolitical Risk Committee. From the inception of the firm in 1988 to 2008, Ms. Novick headed the Global Client Group. In her current role, Ms. Novick oversees the firm’s efforts globally for public policy and for investment stewardship. Ms. Novick has authored numerous pieces on public policy issues and investment stewardship. She has also contributed a number of posts to our Forum in the past year (see hereherehere and here).

Corporate Governance and Corporate Agility

Kenneth Lehn is the Samuel A. McCullough Professor of Finance at the University of Pittsburgh Katz Graduate School of Business. This post is based on his recent paper.

The financial economics literature on corporate governance, largely non-existent prior to the 1970s, has grown enormously during the past forty years. Most of this literature focuses on three dimensions of governance that are relatively easy to measure—ownership structure, the size and structure of boards, and executive compensation—and most of it examines governance from the perspective of agency theory. This is understandable, given the obvious importance of these governance mechanisms and their role in mitigating agency costs. However, the literature’s focus on this approach has likely blinded us to other dimensions of governance that are difficult to measure, unrelated to agency costs, yet important determinants of firm performance and survival.

In this paper I suggest one such dimension, namely the extent to which governance facilitates or impedes a firm’s ability to adapt to changes in its environment. I refer to this dimension as “corporate agility.” From an evolutionary perspective, agility is likely to be a critical determinant of a firm’s long-run success and survival, yet the relation between governance and agility is largely unexplored in the literature. The value of agility is likely to be greater in rapidly changing environments, such as the one most firms face today with recent changes in technology and consumer preferences.


U.S. Senate Testimony by SEC Chairman Clayton on “Oversight of the Securities and Exchange Commission”

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Chairman Crapo, Ranking Member Brown and Senators of the Committee, thank you for the opportunity to testify before you today about the work of the U.S. Securities and Exchange Commission (SEC or Commission or agency). [1] I am honored to discuss the great work of the women and men of the SEC over the past year in furtherance of our tripartite mission of protecting investors, maintaining fair, orderly and efficient markets, and facilitating capital formation.

Chairing the Commission is a great privilege, and I am fortunate to be able to observe firsthand the incredible work done by the agency’s almost 4,400 dedicated staff in Washington, DC and across our eleven regional offices. Our people are our greatest asset and are often our most direct connection to investors and other market participants. None of the work described in this testimony—which is only a small sample of the overall work of the staff over the past year—is possible without these dedicated and experienced professionals. In turn, our public-facing work is made possible thanks to the important, often behind-the-scenes work of the agency’s administrative and operations personnel. In short, the women and men of the SEC bring a mission-focused, team-oriented perspective to our work every day, always keeping the long-term interests of our Main Street investors front of mind.


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