Yearly Archives: 2019

What’s the Problem with Dual Class Stock? A Brief Response to Professors Bebchuk and Kastiel

Posted by David J. Berger, Wilson Sonsini Goodrich & Rosati, on
Wednesday, April 17, 2019
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David Berger is a partner at Wilson Sonsini Goodrich & Rosati. This post is based on a response by Mr. Berger to two recent posts published on the Forum.

Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), The Perils of Small-Minority Controllers (discussed on the Forum here), the keynote presentation on The Lifecycle Theory of Dual-Class Structures, and the Forum 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 Structures, all by Lucian Bebchuk and Kobi Kastiel.

The distinguished scholars Professors Lucian Bebchuk and Kobi Kastiel (both of whom I am proud to call my friends) are once again targeting technology companies with dual class stock. In two posts published in the past two weeks and based on a similar analysis, the subject of their ire has been Lyft and Pinterest, respectively. [1] The Bebchuk/Kastiel posts focus on the “governance costs” facing investors in both companies at some point “down the road” as a result of their dual class structures. In particular, and based upon their earlier research on what they call “small-minority controllers” and “perpetual dual-class stock,” Bebchuk and Kastiel conclude that the dual class structures of both companies will eventually pose “substantial risks” for investors, and as a result can be expected to “significantly decrease the economic value of [each company’s] low-voting shares that public investors will hold.”

The day before Lyft’s IPO I was invited by Nasdaq’s Listing Council to speak on dual class stock. Specifically, the Council asked that I respond to the petition submitted by the Council of Institutional Investors (“CII”) that companies going public with dual class shares include mandatory sunset provisions in their charters, effectively terminating the dual class structure after seven (7) years (my remarks are available on SSRN). [2] CII’s Petition relied upon the same scholarship by Professors Bebchuk and Kastiel that they now use to criticize the dual class governance structures adopted by Lyft and Pinterest.

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Uncorporate Insider Trading

Posted by Peter Molk (University of Florida), on
Wednesday, April 17, 2019
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Peter Molk is associate professor of law at the University of Florida Levin College of Law. This post is based on a recent article by Professor Molk, forthcoming in the Minnesota Law Review. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Insider trading has long been restricted by federal law. Corporate executives owe fiduciary duties of loyalty and care to their companies and shareholders, duties that are breached when those insiders trade in company stock or with company information. Because these fiduciary duties are a mandatory feature of corporate law, quintessential insider trading cases fall squarely within the prohibition.

Now, long after the fiduciary theory of insider trading liability was developed, “uncorporate” LLC and LP substitutes to corporations have emerged as alternative ways to organize businesses. Unlike corporations, these entities can, and often do, completely waive all management fiduciary duties owed to the entities or shareholders. In my article Uncorporate Insider Trading, I analyze the implication that, through these fiduciary duty waivers, these entities can effectively waive core insider trading liability.

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Recent Developments in Human Capital Management Disclosure

Posted by Betty M. Huber and Paula H. Simpkins, Davis Polk & Wardwell LLP, on
Wednesday, April 17, 2019
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Betty M. Huber is counsel and Paula H. Simpkins is an associate at Davis Polk & Wardwell LLP. This post is based on their Davis Polk memorandum.

IAC Meeting

[In late March, 2019], the Investor Advisory Committee (IAC or Committee) to the Securities and Exchange Commission (SEC) voted to ask the SEC to further investigate and evaluate whether public companies should be required to disclose information related to human capital management (HCM), in other words, how companies manage workplace relationships including training, talent development and retention.

Over the last few decades, as the US economy has increasingly become based on technology and services, certain investors have expressed more interest in HCM disclosure.

Although the vote carried, close to one-third of the IAC members dissented. Some of the most controversial points centered on (i) augmenting current disclosures of executive compensation to include summaries of broader workforce compensation and incentive structures; (ii) measuring worker productivity; and (iii) disclosing the number of full-time, part-time and contingent workers. Certain commentators feared that this language was simply a blueprint for line item disclosure requirements.

The Committee recommended that the SEC consider requiring HCM disclosure and, to aid in its decision-making, seek input from a wide range of stakeholders, including investors, issuers, asset owners and academics.

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2019 U.S. Executive Compensation Trends

Posted by John Roe and Kosmas Papadopoulos, ISS Analytics, on
Tuesday, April 16, 2019
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John Roe is Head of ISS Analytics, the data intelligence arm of Institutional Shareholder Services, Inc; and Kosmas Papadopoulos is Managing Editor and Executive Director with ISS Analytics. This post is based on an ISS Analytics memorandum by Mr. Roe and Mr. Papadopoulos. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried.

As we enter the peak of proxy season, we review executive compensation trends in the U.S. based executive pay disclosures so far this year. Our key findings include:

  • Compensation disclosures so far suggest continued increases in CEO pay across all market segments and almost all industries.
  • The proportion of stock-based compensation as a percentage of total pay continues to increase, crossing the threshold of 50 percent of total pay for large companies for the first time this year.
  • Performance-based equity compensation also continues to increase despite concerns of a potential reversal in the aftermath of the repeal of 162(m).
  • CEO pay ratios remain relatively unchanged on aggregate, despite some fluctuations observed at individual companies.

More than two-thirds of S&P 500 companies and approximately half of all Russell 3000 companies have filed proxy statements containing executive pay information for the previous fiscal year. Same-store CEO pay levels show a healthy increase, with a median change in same-store S&P 500 CEO pay of approximately 6 percent compared to the previous fiscal year. These are companies that had the same CEO for the most recent two fiscal years. Non-S&P 1500 companies in the Russell index demonstrate the highest increase in same-store CEO pay with a median increase of 7.4 percent compared to the previous year.

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The Purposive Transformation of Company Law

Posted by David Kershaw (London School of Economics) and Edmund‐Philipp Schuster (London School of Economics), on
Tuesday, April 16, 2019
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David Kershaw is Professor of Law at London School of Economics and Edmund‐Philipp Schuster is an Associate Professor of corporate law at London School of Economics. This post is based on their recent paper.

In December of 2018 a potentially transformative event occurred within UK corporate law and corporate governance. In the course of its latest revision, the UK Corporate Governance Code has introduced the idea that establishing a “company purpose” is essential for the effective functioning of corporations. This may not, at first glance, seem all too revolutionary—especially to a US corporate lawyer. Within the context of UK law, however, the Code’s new requirement for the board to “establish the company’s purpose, values and strategy and satisfy itself that these and its culture are aligned”, raises a number of foundational questions about companies and the nature of their relationships with shareholders and other stakeholders.

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M&A/PE and Governance Update

Posted by Gail Weinstein, Steven Epstein, and David L. Shaw, Fried, Frank, Harris, Shriver & Jacobson LLP., on
Tuesday, April 16, 2019
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Gail Weinstein is senior counsel, and Steven Epstein and David L. Shaw are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on their Fried Frank memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

Court of Chancery Enjoins a Controller-Led Merger Pending Corrective Disclosures—FrontFour v. Medley Capital

In FrontFour Capital Group, LLC et al v. Brooke Taube et al [Medley Capital] (March 11, 2019), the court determined that, based on the precedent set in the Delaware Supreme Court’s 2014 C&J Energy decision, it could order only a disclosure remedy and not more substantive relief (such as ordering that the company be shopped) in the context of what it viewed as a controller-led merger of three affiliated entities in a “deeply flawed” sale process. The judicial outcome turned on the court’s finding that the plaintiff had not proved (indeed, had offered no evidence whatsoever to prove) that the acquiring entity had aided and abetted what the court viewed as fiduciary breaches by the target company’s board. Vice Chancellor McCormick indicated that if the plaintiff had proved the aiding and abetting claim, then C&J would not have precluded the court from ordering a “curative shopping process.” The decision may be expected to encourage plaintiffs to make (and try hard to substantiate) aiding and abetting claims to avoid this application of C&J.

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2019 Proxy Season Preview

Posted by Shirley Westcott, Alliance Advisors, on
Monday, April 15, 2019
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Shirley Westcott is a Senior Vice President at Alliance Advisors LLC. This post is based on an Alliance Advisors publication by Ms. Westcott. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

With the 2019 proxy season now underway, several trends are emerging in shareholder campaigns:

Environmental and social (E&S) topics will once again dominate the shareholder proposal landscape. For a third consecutive year, E&S issues account for a majority of all shareholder proposals filed, outpacing those related to governance and compensation. Topping the list of submissions are political spending resolutions, which proponents have ramped up in advance of the 2020 elections (see Table 1).

Withdrawals could approach last year’s record. In 2018, nearly half of E&S resolutions were withdrawn as a result of productive engagements, a trend that is likely to continue. Companies are showing more willingness to reach agreements with proponents due to shifts in investor voting, particularly among some of the largest institutional investors, notably BlackRock, Vanguard Group and Fidelity Investments. According to a recent Institutional Shareholder Services (ISS) study, more shareholders are supporting E&S proposals rather than casting abstention votes, which declined from 16% of votes cast in 2010 to 3% in 2018. This in turn translated into a record 12 majority votes on E&S resolutions in 2018, while another 20 received support in the 40% range.

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The Life Cycle of Corporate Venture Capital

Posted by Song Ma (Yale University), on
Monday, April 15, 2019
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Song Ma is Assistant Professor of Finance at the Yale University School of Management. This post is based on his recent article, forthcoming in The Review of Financial Studies.

Recent decades have witnessed non-financial firms’ forays into venture capital by creating Corporate Venture Capital (CVC) divisions. Specifically, firms create corporate-affiliated VC divisions to make systematic minority equity investments in innovative startups. CVC has become a common form of corporate investment adopted by hundreds of firms and has emerged as an important source of entrepreneurial capital. CVC’s nature as corporate investment distinguishes it from the traditional intermediary VC model that seeks pure financial return. A firm that wants to maximize shareholder value should focus not only on financial return but also on the strategic value that CVC investments may add to the parent firm. Survey evidence shows that parent firms view CVCs primarily as strategic investments, with the goal of benefiting internal corporate innovation.

The question naturally arises: What is the strategic role of CVCs in incumbent firms’ innovation efforts? My article, The Life Cycle of Corporate Venture Capital, aims to empirically investigate two different views. On the one hand, firms can make CVC investments with the intention to “fix the weaknesses.” That is, CVCs are used by firms experiencing deteriorating internal innovation to expose themselves to new technologies and regain their innovation edge. This view arises from theories on information acquisition and innovation. These theories argue that firms dedicate resources to external knowledge acquisition, in this case using CVCs to learn from startups, when internal innovation. These information acquisition efforts strengthen internal innovation in later periods.

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2018 Year-End Activism Update

Posted by Richard Birns, Daniel Alterbaum, and William Koch, Gibson, Dunn & Crutcher LLP, on
Monday, April 15, 2019
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Richard Birns is partner and Daniel Alterbaum and William Koch are associates at Gibson, Dunn & Crutcher LLP. This post is based on their Gibson Dunn memorandum. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (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 second half of 2018. Shareholder activism underwent a modest decline in the second half of 2017, but accelerated again in the first half of 2018. A similar pattern emerged during the second half of 2018, with a modest decline relative to the second half of 2017 in the numbers of public activist actions (40 vs. 46), activist investors taking actions (29 vs. 36) and companies targeted by such actions (34 vs. 39). However, in light of the robustness of shareholder activism activity in the first half of 2018, full-year numbers for 2018 are virtually identical to those of 2017, including with respect to the numbers of public activist actions (98 vs. 98), activist investors taking actions (65 vs. 63) and companies targeted by such actions (82 vs. 82).

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Lorenzo v. SEC: Expanded Scope of Securities Fraud Liability

Posted by Martin J. Crisp, David Hennes and R. Daniel O’Connor, Ropes & Gray LLP, on
Sunday, April 14, 2019
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Martin J. Crisp, David Hennes and R. Daniel O’Connor are partners at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum authored by Messrs. Crisp, Hennes, O’Connor, Gregg Weiner, Eva Carman, and Peter Welsh.

On March 27, 2019, the U.S. Supreme Court issued a 6-2 decision in Lorenzo v. SEC holding that an individual who is not a “maker” of a misstatement under Janus v. First Derivative Traders, 564 U.S. 135 (2011) can nonetheless be held primarily liable under Section 10(b) of the Exchange Act and Rules 10b-5(a) and (c) thereunder for knowingly “disseminating” a misstatement made by another person. As we previewed in our Alert following oral argument in Lorenzo, the Court’s decision potentially expands the ability of private plaintiffs to bring Section 10(b) claims against those who knowingly or recklessly transmit false and misleading statements that were made by someone else, and could meaningfully erode the limits on primary liability under Section 10(b) established by the Court in Janus and Central Bank of Denver, N.A. v. First Interstate Bank of Denver, N.A., 511 U.S. 164 (1994).

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