Yearly Archives: 2019

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

Posted by Lenore Palladino (Roosevelt Institute), on
Tuesday, October 22, 2019
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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.

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

Posted by Craig Lewis (Vanderbilt University), on
Tuesday, October 22, 2019
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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.

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

Posted by Beth E. Berg and Karen A. Dewis, Sidley Austin LLP, on
Tuesday, October 22, 2019
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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.

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Proxy Access and Leverage

Posted by Cydney Posner, Cooley LLP, on
Monday, October 21, 2019
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Cydney S. Posner is special counsel at Cooley LLP. This post is based on a Cooley memorandum by Ms. Posner.

Thanks to thecorporatecounsel.net 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.

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The Consequences to Directors of Deploying Poison Pills

Posted by William C. Johnson (Suffolk University), Jonathan M. Karpoff (University of Washington), and Michael D. Wittry (Ohio State University), on
Monday, October 21, 2019
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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.

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Filing Thresholds and Main Street Investors

Posted by Christine Jantz, Jantz Management LLC, on
Monday, October 21, 2019
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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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Time To Demand Accountability Regarding Mutual Fund “Risks”

Posted by Aaron T. Morris, Barr Law Group, on
Sunday, October 20, 2019
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Aaron T. Morris is a partner at Barr Law Group. This post is based on his Barr Law memorandum.

The case law on who bears the risks inherent in a mutual fund’s operations is becoming paradoxical, and may now require intervention by mutual fund boards. Investment advisors have, incredibly, convinced some federal courts that they bear enormous risks in operating their mutual funds—so much so that they’re justified in charging hundreds of millions of dollars in extra advisory fees—but, at the same time, should not be held liable if and when those risks materialize, even if the result is a catastrophic meltdown of the fund.

Two cases exemplify this state of affairs. Last year, JPMorgan was trapped in a litigation requiring it to justify charging $132 million more, annually, to certain JPMorgan-branded funds than it charged third-party funds for the same investment advice. To justify the difference, the advisor hired an economist from Ohio State University to opine about the “substantially greater risks” JPMorgan assumed as to its own funds, which JPMorgan argued “require it to charge higher fees.” [1] This was the argument, despite the fact that, like virtually every other investment advisory contract in the country, JPMorgan’s contract included provisions that immunized it for everything short of bad faith and intentional misconduct. Nonetheless, the court apparently found the argument persuasive because it copied and pasted a section of the economist’s opinion into its order, and ruled in favor of JPMorgan. [2]

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SEC Guidance on Excludability of Rule 14a-8 Shareholder Proposals, Eschewing One-Size-Fits-All Approach

Posted by David A. Katz, Victor Goldfeld, and Elina Tetelbaum, Wachtell, Lipton, Rosen & Katz, on
Saturday, October 19, 2019
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David A. Katz, Victor Goldfield, and Elina Tetelbaum are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz, Mr. Goldfield, Ms. Tetelbaum, and Carmen X. W. Lu.

Yesterday, the Staff of the SEC’s Division of Corporation Finance provided additional guidance in Staff Legal Bulletin (SLB) No. 14K on two key considerations for excluding Rule 14a-8 shareholder proposals under the “ordinary business” exception of Rule 14a-8(i)(7): the significance of the proposal’s subject matter and whether it seeks to “micromanage” the company. SLB 14K also addresses claims of technical deficiencies relating to a shareholder proponent’s proof of ownership letters, noting that companies should not seek to exclude proposals if documentary support sufficiently evidences the requisite minimum ownership requirements. The key takeaway from SLB 14K is that the SEC looks more favorably upon arguments tailored to the circumstances of a particular company, eschewing one-size-fits-all or overly technical approaches in determining if no-action relief is appropriate.

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Conducting a Token Offering Under Regulation A

Posted by Robert Rosenblum, Amy Caiazza, and Taylor Evenson, Wilson Sonsini Goodrich & Rosati, on
Saturday, October 19, 2019
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Robert Rosenblum is partner and Amy Caiazza and Taylor Evenson are associates at Wilson Sonsini Goodrich & Rosati. This post is based on their Wilson Sonsini memorandum.

For many (if not all) companies developing blockchain-based technologies that involve digital assets (“tokens”), success is dependent on two critical issues: (1) the ability of a project sponsor (the “token issuer”) to distribute tokens broadly to its targeted users, often as rewards for contributing to a project’s development, and (2) free transferability of the tokens, without which the tokens are of limited use or value. These two elements together can encourage use and development of a new platform, which in turn can allow it to then achieve visibility and market saturation. In contrast, without these two features, it is unlikely that a token-based platform will be able to fully develop, much less achieve success.

The Problem

Throughout much of 2017 and 2018, many companies developing blockchain-based technologies (and their counsel) steadfastly took the position that tokens were not securities and that, as a result, the federal securities laws did not apply to limit a developer’s ability to distribute freely transferrable tokens broadly.

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2019 Mid-Year Shareholder Activism Report

Posted by Barbara Becker, Richard Birns and Daniel Alterbaum, Gibson, Dunn & Crutcher LLP, on
Friday, October 18, 2019
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Barbara Becker and Richard Birns are partners and Daniel Alterbaum is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn memorandum by Ms. Becker, Mr. Birns, Mr. Alterbaum, Eduardo Gallardo, Saee Muzumdar, and Zoe Carpou. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

This post provides an update on shareholder activism activity involving NYSE- and Nasdaq-listed companies with equity market capitalizations in excess of $1 billion during the first half of 2019. As is typically the case during proxy season, shareholder activism rose during the first half of 2019 relative to the second half of 2018 as reflected in the number of public actions (51 vs. 40), in the number of activist investors that launched campaigns (33 vs. 29) and in the number of companies involved (46 vs. 34). As compared to the same period of 2018, however, shareholder activism activity declined, as reflected by the number of public actions in the first half of 2018 (51 vs. 62), the number of activist investors that launched campaigns (33 vs. 41) and the number of companies involved (46 vs. 54).

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