Yearly Archives: 2019

Providing Retail Investors a Voice in the Proxy Process

Posted by J.W. Verret (George Mason University), on
Thursday, April 25, 2019
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J.W. Verret is Associate Professor at George Mason University Antonin Scalia Law School and Managing Director of Veritas Financial Analytics LLC. This post based on a survey report that Professor Verret designed in collaboration with Spectrem Group, available here.

As the SEC continues its consultation into the proxy process, in particular its consideration of the role of proxy advisory firms in that process, it’s more important than ever to understand how this process affects average retail investors and what, if any, changes they’d like to see. To that end, I collaborated with wealth management research specialist Spectrem Group, to design a survey of retail investor to hear directly from the ultimate stakeholders of proxy voting.

This survey of more than 5,000 retail investors—including those accessing the capital markets through pension funds or private retirement accounts—reveals that retail investors are indeed concerned about the growing influence of the proxy advisory firms and that their concerns are only magnified as they learn more about this opaque part of the proxy process.

Below are the recommendations provided within the report—which can be accessed here.

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Claims Based on Warranty and Indemnity Liability (W&I) Policies

Posted by Joseph A. Castelluccio, Rebecca Bothamley, and Jennifer M. Miller, Mayer Brown LLP, on
Thursday, April 25, 2019
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Joseph A. Castelluccio and Rebecca Bothamley are partners and Jennifer M. Miller is an associate at Mayer Brown LLP. This post is based on their Mayer Brown memorandum.

A consortium of 12 insurance underwriters led by Liberty GTS recently paid a €50 million claim under a warranty and indemnity liability (W&I) insurance policy issued in connection with FSN Capital’s acquisition of Gram Equipment. [1] This is one of the largest, publicly announced claims paid under a W&I policy in recent memory. A few key points about W&I policies and claims in general can be derived from publicly available information about this claim, [2] and we briefly describe these points below.

As background, according to FSN Capital, it filed its insurance claim in June 2018, shortly after its acquisition of Gram Equipment in early 2018. The insurance claim alleged that the seller breached several of the warranties in the share purchase agreement, including warranties related to accounting material and the seller’s duty of disclosure. Following an investigation, the insurers agreed to pay the full €50 million limit under the W&I insurance policy.

A few key points to note:

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Five Ways to Enhance Board Oversight of Culture

Posted by Steve W. Klemash and Jamie C. Smith (EY Center for Board Matters) and Joe Dettmann (Ernst & Young LLP), on
Wednesday, April 24, 2019
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Steve W. Klemash is America’s Leader and Jamie C. Smith is Associate Director at the EY Center for Board Matters and Joe Dettmann is Principal at Ernst & Young LLP. This post is based on their EY memorandum.

Corporate culture is defined by the implicit, unwritten rules that create expectations for how people choose to behave. It is reflected by what people actually do every day, by what’s celebrated, emphasized and overlooked. Culture is also how companies create and protect value through people. A company’s intangible assets, which include talent and culture, are now estimated to make up 52% of a company’s market value. And for some companies, it can be as high as 90%. [1] This is higher than at any point in modern history, and most likely to accelerate. Today, company value is defined less by industrial-era physical assets like plants and equipment and more by information-age human capital. It is clearer than ever that a company’s talent, and the culture that enables that talent, are sources of quantifiable competitive differentiation.

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The Undesirability of Mandatory Time-Based Sunsets in Dual Class Share Structures: A Reply to Bebchuk and Kastiel

Posted by Bernard S. Sharfman, R Street Institute, on
Wednesday, April 24, 2019
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Bernard S. Sharfman is an associate fellow of the R Street Institute. This post is based on his recent article, forthcoming in the University of Southern California Law Review Postscript. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel, the keynote presentation on The Lifecycle Theory of Dual-Class Structures, and the posts on The Perils of Dell’s Low-Voting Stock, The Perils of Lyft’s Dual-Class Structure and the Perils of Pinterest’s Dual-Class Structure (discussed on the Forum here, here, and here).

In a 2017 Virginia Law Review article, The Untenable Case for Perpetual Dual-Class Stock, Lucian Bebchuk and Kobi Kastiel made the argument that time-based sunset provisions (a forced unification of shares into one share structure with equal voting rights after a certain period of time) should be a mandatory feature of dual class share structures (classes of common stock with unequal voting rights). Their article has recently been used as authority by the Council of Institutional Investors’ (“CII”) in its petitions to the NASDAQ Stock Market (“NASDAQ”) and the New York Stock Exchange (“NYSE”) to amend their listing standards. The requested amendments would require companies seeking to go public with dual class shares to include in their certificates of incorporation a time-based sunset provision that must go into effect no more than seven years after the initial public offering (IPO) unless minority shareholders vote to extend up to an additional seven years. This delayed unification based on a shareholder vote is incorporated in Bebchuk and Kastiel’s argument.

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Governing Law and Forum Selection Clauses

Posted by Daniel Wolf and Stefan Atkinson, Kirkland & Ellis LLP, on
Wednesday, April 24, 2019
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Daniel Wolf and Stefan Atkinson are partners at Kirkland & Ellis LLP. The following post is based on their Kirkland memorandum and is part of the Delaware law series; links to other posts in the series are available here.

A number of recent cases highlight the importance of properly drafting governing law and forum selection clauses to give maximum effect to the parties’ preferences.

An earlier M&A Update covered some practical differences resulting from choosing New York or Delaware governing law for a contract, including situations where the choice can be outcome determinative in subsequent litigation.

A number of recent cases highlight the importance of not just selecting the preferred governing law (and its close cousin, the forum selection clause, which identifies the courts where disputes will be resolved), but also of properly drafting the contract provisions to give maximum effect to those choices.

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Disclosure Simplification Round Two: a Deep Dive into SEC’s New Amendments

Posted by John O. Newell, Goodwin Procter LLP, on
Tuesday, April 23, 2019
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John Newell is counsel and Manager of Public Company Practice at Goodwin Procter LLP. This post is based on a Goodwin memorandum by Mr. Newell.

Overview

On March 20, 2019, the SEC adopted amendments (Adopting Release) designed to “modernize and simplify” numerous disclosure requirements of Regulation S-K and SEC rules and forms under the Securities Act of 1933, as amended (Securities Act) and the Securities Exchange Act of 1934, as amended (Exchange Act).

The amendments are intended to make information in SEC disclosure documents clearer, discourage unnecessary repetition and immaterial disclosure, and leverage technology to make disclosures more accessible to investors and the public.

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Three Dilemmas for Creating a Long-Term Board

Posted by Ariel Fromer Babcock (FCLTGlobal), Robert G. Eccles (University of Oxford), and Sarah Keohane Williamson (FCLTGlobal), on
Tuesday, April 23, 2019
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Ariel Fromer Babcock is director at FCLTGlobal; Robert G. Eccles is Visiting Professor of Management Practice at the Saïd Business School at the University of Oxford; and Sarah Keohane Williamson is Chief Executive Officer of FCLTGlobal. This post is based on a chapter in the forthcoming The Handbook of Board Governance (2nd Ed.). Related research from the Program on Corporate Governance includes The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (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).

Research from FCLTGlobal and others confirms that long-term companies outperform on financial metrics, including revenues, profitability, and stock price, as well as non-financial ones like job creation and sustainability. As a recent study of large public companies in the USA found, from 2001-2014 long-term companies cumulatively grew their revenues 47% more on average as compared to their shorter-term peers, and with less volatility. During the same period, these same long-term companies similarly outperformed on measures of economic profit—cumulatively growing by more than 80% on average compared to peers—while also enjoying earnings growth 35% higher than peers.

How do these companies maintain their relentless focus on the long term, investing even in the face of significant upheaval and global market uncertainty? Time and time again, we find that successful companies, in addition to producing compelling financial returns, have long-term oriented cultures and values, underscored by a framework of consistent governance principles, that guide them through tough times. Values and culture are shaped by the tone and actions from the top of an organization—and the board is the ultimate top.

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Strict Interpretation of Merger Agreement: Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc.

Posted by Jason Halper, William Mills, and Joshua Apfelroth, Cadwalader, Wickersham & Taft LLP, on
Tuesday, April 23, 2019
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Jason Halper, William Mills, and Joshua Apfelroth are partners at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Messrs. Halper, Mills, Apfelroth, and Chelsea Donenfeld, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, and Allocating Risk Through Contract: Evidence from M&A and Policy Implications (discussed on the Forum here), both by John C. Coates, IV.

In Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., C.A. No. 2018-0928-SG (Del. Ch. Mar. 14, 2019), Vice Chancellor Glasscock of the Delaware Court of Chancery found that Rent-A-Center, Inc. (“Rent-A-Center”) properly terminated its merger agreement with Vintage Capital Management LLC (“Vintage”) after Vintage failed to submit a notice to extend the drop-dead date for its pending $1.37 billion buyout of Rent-A-Center.  In doing so, the Court strictly interpreted the express language of the merger agreement and permitted Rent-A-Center to terminate the merger unilaterally by delivering a termination notice only hours after the extension deadline passed.

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Lazard’s 1Q 2019 Activism Review

Posted by Jim Rossman, Lazard, on
Monday, April 22, 2019
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Jim Rossman is Head of Shareholder Advisory at Lazard. This post is based on their Lazard memorandum. 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).

1. Slower Pace than Record 2018, but In Line with Historical Levels

Q1 2019’s campaign activity (57 new campaigns against 53 companies) was down year-over-year relative to 2018’s record pace, but in line with multi-year average levels

  • Capital deployed in Q1 2019 ($11.3bn) was in line with recent quarters, and the top 10 activists had a cumulative $75.5bn deployed in public activist positions (new and existing)1 at the end of the quarter
  • Starboard overtook Elliott as the most prolific activist in Q1 2019, launching seven new campaigns

2. Activism’s Transactional Focus Continued

  • Transaction-focused campaigns were by far the most common in Q1 2019, with an M&A-related objective arising in nearly 50% of all new campaigns
    • Pushes to sell the company (e.g., Caesars, Zayo) or engage in break-up or divestiture transactions (e.g, Dollar Tree, eBay) were the most frequent M&A objectives
    • Attempts to scuttle or sweeten existing deals were relatively less frequent than in prior quarters

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Truth and Bias in M&A Target Fairness Valuations: Appraising the Appraisals

Posted by Matthew Shaffer (University of Southern California), on
Monday, April 22, 2019
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Matthew Shaffer is a PhD candidate at Harvard Business School and an assistant professor at the University of Southern California starting summer 2019. This post is based on his recent paper, and is part of the Delaware law series; links to other posts in the series are available here. Related 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.

Since the Trans Union case (Smith v. Van Gorkom, 1985), it has been considered effectively mandatory for target directors to seek and consider a third-party “fairness opinion” with supporting financial analyses and valuations (henceforth “fairness valuations”) before accepting a takeover offer. Despite their ubiquity in M&A, their role is, to put it mildly, controversial.

First, critics allege that the providers of these fairness opinions—which are often affiliated investment banks—have conflicts of interest, and incentives to rubber stamp or rationalize the negotiated deal price ex post, instead of providing a truly independent valuation “audit.” The providers claim they have implemented sufficient controls to protect the independence of their work.

Second, more fundamentally, critics argue that even unbiased, independent valuations would not be useful to directors when they have a market signal of the value of their company. For a public target, they argue, the pre-announcement stock price is a summary statistic for its value, and so the market premium is a sufficient statistic for a well-priced offer. What value can a subjective valuation—which must rely on uncertain forecasts and other discretionary inputs—add to this “market test”? (This basic question—on the relevance of valuation in checking a deal price when a market signal is available—is also at the center of the live debate over appraisal rights, as in the Aruba Networks case.)

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