Yearly Archives: 2019

Securities Class Action Filings—2019 Midyear Assessment

Posted by Alexander “Sasha” Aganin and John Gould, Cornerstone Research, on
Tuesday, August 20, 2019
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Alexander “Sasha” Aganin is senior vice president and John Gould is senior vice president at Cornerstone Research. This post is based on a report by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse.

Executive Summary

Led by a spike in core filings, federal class action securities fraud lawsuits continued at near-record levels in the first half of 2019. Plaintiffs filed more than 1,000 federal securities class actions in the last five semiannual periods—over 20 percent of all filings since 1997.

Core filings in the first half of 2019 increased to 126, one fewer than the historical high. Filings involving merger and acquisition (M&A) transactions decreased but remained well above historical levels.

Six mega DDL filings (at least $5 billion) and 11 mega MDL filings (at least $10 billion) propelled aggregate market capitalization losses to the highest and fourth-highest levels on record, respectively.

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How Do Venture Capitalists Make Decisions?

Posted by Will Gornall (University of British Columbia), on
Tuesday, August 20, 2019
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Will Gornall is an Assistant Professor of Finance at the Sauder School of Business at the University of British Columbia. This post is based on a recent article, forthcoming in the Journal of Financial Economics, by Professor Gornall; Paul A. Gompers, Eugene Holman Professor of Business Administration at Harvard Business School; Steven N. Kaplan, Neubauer Family Professor of Entrepreneurship and Finance at the University of Chicago Booth School of Business; and Ilya A. Strebulaev, the David S. Lobel Professor of Private Equity at the Stanford Graduate School of Business. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups(discussed on the Forum here) and Do VCs Use Inside Rounds to Dilute Founders? (discussed on the Forum here), both by Jesse Fried and Brian Broughman.

Our article, How Do Venture Capitalists Make Decisions?, describes the results of a survey of almost nine hundred venture capitalists (VCs). We asked VCs about eight different topics: deal sourcing; investment selection; valuation; deal structure; post-investment value-add; exits; internal organization of firms; and relationships with limited partners.

We first consider how VCs source their potential investments—a process also known as generating deal flow. The average firm in our sample screens 200 companies and makes only four investments in a given year. Most of the deal flow comes from the VCs’ networks in some form or another. Over 30% of deals are generated through professional networks. Another 20% are referred by other investors while 8% are referred by existing portfolio companies. Almost 30% are proactively self-generated. Only 10% come inbound from company management. These results emphasize the importance of active deal generation.

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SEC Proposal to Modernize Reg S-K

Posted by Cydney Posner, Cooley LLP, on
Tuesday, August 20, 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.

At the end of last week, the SEC voted, without an open meeting, to propose amendments to modernize the descriptions of business, legal proceedings and risk factors in Reg S-K. The proposal is another component of the SEC’s “Disclosure Effectiveness Initiative.” In crafting the proposal, the SEC took into account comments received on the 2016 Concept Release on disclosure simplification and modernization (see this PubCo post), as well as Corp Fin staff experience in review of disclosures. The changes to the rules were proposed “in light of the many changes that have occurred in our capital markets and the domestic and global economy in the more than 30 years since their adoption, including changes in the mix of businesses that participate in our public markets, changes in the way businesses operate, which may affect the relevance of current disclosure requirements, changes in technology (in particular the availability of information), and changes such as inflation that have occurred simply with the passage of time.” There is a 60-day comment period.

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A Win in Proxy Fight for Universal Proxy Card

Posted by Lizanne Thomas and Robert A. Profusek, Jones Day, on
Monday, August 19, 2019
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Lizanne Thomas and Robert A. Profusek are partners at Jones Day. This post is based on a Jones Day memorandum by Ms. Thomas, Mr. Profusek, Randi C. Lesnick, and James P. Dougherty. Related research from the Program on Corporate Governance includes Universal Proxies by Scott Hirst (discussed on the Forum here).

For the first time, a dissident shareholder group won board control in a proxy contest using a “universal proxy card” that included the names of both the company’s and the dissident’s slates. The battle for a majority of the board seats at EQT Corporation was waged by brothers Toby and Derek Rice, whose November 2017 sale of Rice Energy to EQT made EQT the largest natural gas producer in the United States.

Following the acquisition, EQT’s performance suffered and its share price declined—ultimately falling to less than half its value at the time of the acquisition. The Rice brothers (who with their allies had a ~3% stake in EQT) reached out privately to EQT in late 2018 to discuss their concerns but then announced that they planned to wage a proxy fight for control of EQT’s board and, if successful, to appoint Toby Rice as its CEO. Ultimately, the Rice Brothers nominated seven candidates to EQT’s 12-member board, including incumbent director Daniel Rice, who joined the EQT board after the sale.

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Relative Performance Evaluation in CEO Compensation: A Talent-Retention Explanation

Posted by David De Angelis (Rice University) and Yaniv Grinstein (Cornell University), on
Monday, August 19, 2019
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David De Angelis is Assistant Professor of Finance at at the Jesse H. Jones Graduate School of Business at Rice University and Yaniv Grinstein is Adjunct Professor of Finance at the Samuel Curtis Johnson Graduate School of Management at Cornell University. This post is based on their recent article, forthcoming in the Journal of Financial and Quantitative Analysis. 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).

In this article, we investigate a market-for-talent rationale for the use of relative performance evaluation (RPE) in CEO compensation. Our premise is based on Gibbons and Murphy (1990), who show RPE in CEO compensation can be used as an efficient way to compensate CEOs for their talent. In their setting, firms learn CEO talent from CEO performance relative to peer CEOs and compensate their CEOs according to their relative performance in order to retain their talent. We study the talent-retention hypothesis in two ways. First, we examine the contractual terms of RPE in CEO compensation and analyze the extent to which they are consistent with talent-retention motives. Second, using an improved empirical specification to detect RPE on a long panel of compensation data of CEOs of US firms, we test whether the transferability of CEO talent relates to a stronger use of RPE in CEO compensation.

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Technology and Life Sciences IPOs

Posted by James D. Evans and Robert A. Freedman, Fenwick & West LLP, on
Monday, August 19, 2019
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James D. Evans and Robert A. Freedman are partners at Fenwick & West LLP. This post is based on their Fenwick memorandum.

As we had predicted in our prior IPO survey, 2019 has proven to be strong for initial public offerings. Following a somewhat sluggish start to the year, technology and life sciences IPOs took off in the second quarter, making for an overall strong first half that is on par with the second half of 2018.

By the Numbers

The 59 life sciences and technology offerings completed in the first half of 2019 compared with the 57 in the second half of 2018, continuing a trend of stability. Still recovering from the effects of the federal government shutdown and stock market volatility that slowed capital markets activity in the last few months of 2018, the first quarter of 2019 saw one tech offering (Lyft) and 10 life sciences offerings. The pace picked up significantly in the second quarter, when 24 tech and 24 life sciences companies debuted. In all, 25 tech companies and 34 life sciences companies went public in H1 2019, on par with the 23 tech offerings and 34 life sciences offerings in H2 2018.

The first half of 2019 included 15 offshore companies, compared with 19 in the second half of 2018. In the United States, 20 companies went public in the San Francisco Bay Area—nine of them tech and 11 life sciences—the highest number since we started tracking the numbers in 2014. Also of note, Slack Technologies went public through a direct listing in the first half of 2019, similar to that of Spotify in the first half of the previous year.

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Making Sense of Monte Carlo

Posted by Ben Burney, Exequity, LLP, on
Sunday, August 18, 2019
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Ben Burney is a Senior Advisor at Exequity, LLP. This post is based on his Exequity memorandum.

When you hear the words “Monte Carlo simulation,” do you:

  1. Scream;
  2. Pack your suitcase—Mediterranean vacation! (Simulation? Nah!); or
  3. Ponder the link between 19th century botany and modern valuation techniques? If you chose a) and would rather b), read this post to c).

For management teams and compensation committees, Monte Carlo simulations are often only marginally understood. Trying to figure out what is going on makes some want to scream (or pack their suitcases). These decision makers may know that Monte Carlo simulations are used to value awards with market conditions (like relative total shareholder return (RTSR)), but not how it works or why values are high or low.

Reviewing Monte Carlo simulation results prepared by valuation firms is not always helpful either—the materials are often filled with statistical jargon. The implication is clear: This analysis is really, really complicated.

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Remarks before the 38th Government-Business Forum on Small Business Capital Formation

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Saturday, August 17, 2019
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent remarks before the 38th Government-Business Forum on Small Business Capital Formation, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Martha [Miller]. It is wonderful to be here in Omaha. Thank you to all the participants in today’s program. Dean [Anthony] Hendrickson, thank you for welcoming us to Creighton University’s Heider College of Business. It is a beautiful facility that reflects the thriving economic region in which it sits.

I remember my first trip to Nebraska about twenty years ago. I was driving through the state and was just stunned by its Great Plains beauty. Since then, Nebraska has always been one of my favorite states, although I have not had many opportunities to visit. I am therefore happy to be back to talk about capital formation in the Silicon Prairie.

Reading Martha’s introduction to today’s forum deepened my affinity for Nebraska because I learned that the Reuben sandwich—my favorite—has its origins here. I understand, however, that there is a competing origin story that says the Reuben was invented in New York City. [1] The dueling sandwich origin narrative is a fitting theme for a discussion of capital formation. There will always be competition for capital, and too often New York claims capital that could have been put to good use right here in Omaha.

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What the Capital One Hack Means for Boards of Directors

Posted by John Reed Stark, John Reed Stark Consulting LLC, on
Saturday, August 17, 2019
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John Reed Stark is President at John Reed Stark Consulting LLC. This post is based on his memorandum.

Another day, another data breach. This time at Capital One, the fifth largest credit card issuer in the United States.

Specifically, on July 29, 2019, FBI agents arrested Paige A. Thompson on suspicion of downloading nearly 30 GB of 100 million Capital One Financial Corp credit applications from a rented cloud data server. The FBI says Capital One learned about the theft from a July 17, 2019, email stating that some of its leaked data was being stored for public view on the software development platform Github. That Github account was for a user named “Netcrave,” which includes the resume and name of Paige A. Thompson. According to the FBI, Thompson also used a public Meetup group under the alias “erratic,” where she invited others to join a Slack channel named “Netcrave Communications.”

KrebsOnSecurity actually entered the open Netcrave Slack channel on July 30, 2019, and reviewed a June 27, 2019 commentary Thompson, which listed various databases she found by hacking into improperly secured Amazon cloud accounts, suggesting that Thompson may also have exfiltrated tens of gigabytes of data belonging to other major corporations.

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Audit Committee Disclosure in Proxy Statements—2019 Proxy Review

Posted by Leeann Arthur, Krista Parsons, and Robert Lamm, Deloitte LLP, on
Friday, August 16, 2019
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Leeann Arthur is a senior manager, Krista Parsons is a managing director, and Robert Lamm is an independent senior advisor, all at the Center for Board Effectiveness, Deloitte LLP. This post is based on their Deloitte memorandum.

In recent years, the role of the audit committee—and, in particular, its oversight of the independent auditor—has been subject to increased scrutiny from regulators, investors, and other stakeholders. The independent auditor is critical to maintaining confidence in the reliability of financial information and, ultimately, in the proper functioning of the capital markets. Increasingly, investors also look to the independent auditor to provide insights that support sound, well-informed financial decisions. With changes to the auditor’s reporting model that went into effect this year, and the imminent requirement to identify critical audit matters (CAMs), transparency around the audit committee’s interactions with the independent auditor is even more essential.

Now in its fifth year, Deloitte’s observations and analysis of trends in audit committee disclosures in the proxy statements of S&P 100 [1] companies reflect moderate increases in disclosure in certain areas of frequent focus by regulators and investors.

In 2019, certain disclosures relating to the independent auditor increased. A greater percentage of S&P 100 companies disclosed that the audit committee evaluates the independent auditor, the reasons why the committee decided to reappoint the independent auditor, and the tenure of the independent auditor. More audit committees also disclosed that they discussed the scope and plan for the audit with the independent auditor. While some other voluntary disclosures appear to have plateaued, these modest increases may have been in preparation for the new and upcoming regulatory requirements previously discussed.

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