Monthly Archives: January 2020

Best Practices for Disclosing Executive Health Issues

Susan S. MuckDavid A. Bell, and Michael S. Dicke are partners at Fenwick & West LLP. This post is based on a Fenwick memorandum by Ms. Muck, Mr. Bell, Mr. Dicke, and Alison Jordan.

The death of Oracle CEO Mark Hurd in October has highlighted a longstanding public company dilemma: whether and when to disclose the news that a senior leader has a serious health challenge.

Not only is the topic sensitive from a personal and privacy perspective, but there is no specific rule or duty that requires disclosure of a CEO’s or other executive’s adverse health information—unless the executive is incapacitated. [1] While commentators and news articles sometimes suggest companies should publicly disclose any serious health issue affecting a CEO, the law leaves substantial discretion for the board of directors to evaluate the specific facts, and allows for a non-disclosure approach when the CEO can continue to perform his or her key duties. This is partly because health falls into a category of information that has over time been treated differently from core business information for purposes of judging materiality—that is, information a reasonable investor would consider important—under the federal securities laws.


The Value Killers

Nuno Fernandes is Professor of Finance at IESE Business School. This is based on a book, recently published with Palgrave Macmillan. Related research from the Program on Corporate Governance includes Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders?; M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice; and Why Have M&A Contracts Grown? Evidence from Twenty Years of Deals, all by John C. Coates, IV.

In a business climate marked by escalating global competition and industry disruption, successful mergers and acquisitions are increasingly vital to the growth and profitability of many companies.

Yet research shows most mergers fail—destroying shareholder value and costing companies billions in dollars. Over the decades, multiple studies have shown that most mergers and acquisitions fail to generate the anticipated synergies—and many actually destroy value instead of creating it. In other words, a significant percentage of M&As cause 2 + 2 to equal 3 instead of 5.

So, why do so many companies continue to pursue these value-destroying deals? What can be done to reverse this sad state of affairs? How can companies dramatically increase the odds that their future M&As will be among the minority that actually succeed? And how can managers and boards increase their odds of M&A success?


A Five-Year Review of Discretionary Compensation

Paul Schneider is Head of Corporate Governance at the Ontario Teachers’ Pension Plan. This post is based on a publication by the Ontario Teachers’ Pension Plan corporate governance group, led by Mr. Schneider.

With over US$20 billion paid out in total over the past five years, discretionary compensation has become a systemic compensation issue that needs to be addressed.

Since 2014, at least US$3.7 billion has been paid in discretionary compensation to executives in any given year. Not only are the amounts substantial, around 80% of all awards are not performance based. This means that for over US$16 billion of the discretionary awards there were no additional performance conditions required. We believe that given the exceptionality of these awards, it is appropriate they be conditional upon the executives achieving some specific performance objective that is tied to strategic objectives. The absence of performance conditions runs contrary to a pay-for-performance objective. Furthermore, discretionary awards fall outside the regular compensation program and may not be captured in a say-on-pay analysis.

For a number of companies it appears that discretionary compensation has become a regular compensation tool—the exceptional is becoming the acceptable. Finally, about 60% of all awards dollars are directed at sign-on and retention, raising questions about management of succession planning. Also, awarding discretionary compensation for retention purposes is at odds with the claim that the compensation program (i.e. salary, short- and long-term compensation components) is designed to attract and retain. We believe there is a place for discretionary compensation in a compensation program. However, the frequency, size, and structure we have observed raises concerns that discretionary compensation is not being used in a manner consistent with good compensation governance.


Corporate Governance for Sustainability Statement

Andrew Johnston is Professor of Company Law and Corporate Governance at the University of Sheffield School of Law. This post is based on a statement of 76 academic signatories, whose names are listed at the end of the post. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).


The current model of corporate governance needs reform. There is mounting evidence that the practices of shareholder primacy drive company directors and executives to adopt the same short time horizon as financial markets. Pressure to meet the demands of the financial markets drives stock buybacks, excessive dividends and a failure to invest in productive capabilities. The result is a “tragedy of the horizon”, with corporations and their shareholders failing to consider environmental, social or even their own, long-term, economic sustainability. [1]

The urgent need to address adverse impacts and risks produced by and associated with this model is reflected in the Statement on the Purpose of a Corporation issued by the Business Roundtable in the US, the “Purpose” Letter issued by Larry Fink, CEO of Blackrock, comments by the Governor of the Bank of England and Chairman of the Financial Stability Board Mark Carney, as well as in the corporate governance codes in the Netherlands and South Africa and the Loi PACTE in France.


Proxy Voting Analytics (2016-2019) and 2020 Season Preview

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to Proxy Voting Analytics (2016-2019) and 2020 Season Preview, an annual benchmarking report authored by Dr. Tonello and published by The Conference Board and ESGAUGE, in collaboration with Russell Reynolds Associates and Rutgers University’s Center for Corporate Law and Governance.

Proxy Voting Analytics reviews proxy voting data of business corporations registered with the U.S. Securities and Exchange Commission (SEC) that held their annual general shareholder meetings (AGMs) between January 1, 2019, and June 30, 2019, and that were in the Russell 3000 index as of January 2019. Unless specifically noted, the report examines data compiled by ESGAUGE and drawn from public disclosures as of July 10, 2019. The Russell 3000 index was chosen because it assesses the performance of the largest 3,000 US companies, representing approximately 98 percent of the investable US equity market.

The report compares findings from 2019 with figures from recent years to highlight key trends and offer insights into what companies should expect from 2020 annual general shareholder meetings (AGMs). Insights extend to evolving sponsor types, new proposal topics, and the traction that certain demands receive when put to a vote.

Insights for What’s Ahead in 2020

Looking ahead:

Companies should be prepared for investors’ increased use of exempt solicitations and other channels to ask for change in governance and organizational practices. In 2019, shareholder proposal volume continued its decline and is down about 30 percent from the level The Conference Board reported in 2010. While shareholders continue to use proposals to seek changes in areas such as social and environmental policy, they are actively pursuing alternative means of effecting change, from private engagements with boards and management to public campaigns meant to promote an alternative view of the firm’s strategy or governance. Companies should be particularly aware of the rise of exempt solicitations, especially those in the form of “just vote no” campaigns (where a shareholder solicits others to withhold their votes at a director election or to vote against a management proposal).


Mutual Fund Borrowing Poses Risk to Investors

A. Joseph Warburton holds a shared appointment at Syracuse University as Professor of Law at the College of Law and Professor of Finance at the Whitman School of Management and Michael Simkovic is Professor of Law and Accounting at the USC Gould School of Law. This post is based on their recent paper, forthcoming in the Journal of Empirical Legal Studies. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here); Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Millions of Americans rely on mutual fund investments to pay for their retirement, but mutual funds contain hidden, previously under-appreciated risks.

Our new study, forthcoming in the Journal of Empirical Legal Studies, provides evidence that mutual funds borrow in an attempt to improve their performance. But those attempts not only fail to boost average returns, they also increase the volatility of returns, potentially creating serious problems for those who need to withdraw their money at a time when the market is down.

The Investment Company Act of 1940 permits mutual funds to have a capital structure that is up to one-third debt. Our paper is the first to study the performance of open-end funds that exploit their statutory borrowing authority.

We constructed a database using information contained in annual filings of open-end domestic equity funds covering 17 years from 2000 to 2016. A surprising number of funds—18 percent—bulked up at some point by borrowing money for leverage. These borrowing funds underperform their non-borrowing peers by 62 basis points per year on a total return basis, while also incurring greater risk. After accounting for risk, borrowers underperform by 48 to 72 basis points annually. We find that funds borrow in an unsuccessful effort to juice performance after having lagged in the mutual fund rankings.


Undressing the No-Vote Fee

Daniel E. Wolf is a partner at Kirkland & Ellis LLP. This post is based on his Kirkland & Ellis memorandum.

A break-up fee payable by a public target company associated with a competing proposal is a near universal feature of public company sales. The fee is typically payable if the target exercises a fiduciary termination right to accept a superior proposal or in a “tail” situation where a competing proposal is completed during a set period after a termination of the current deal as a result of a no-vote of the target shareholders where a competing proposal had been made public prior to that vote. While the size of the fee varies based on deal-specific circumstances, recent studies show an average in the range of 3% of deal value.

M&A parties also often discuss the consequences of a straight no-vote by the target company shareholders in the absence of a competing bid—a so-called “naked” no-vote. These conversations have taken on more practical relevance with the increase in activists seeking to disrupt M&A transactions—a recent study showed 18 different U.S. deals challenged in the first half of 2019.


The Group Pleading Doctrine Following Janus

Israel David is partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on his Fried Frank memorandum.

The “group pleading doctrine” has long been a tool employed in class action securities litigation by plaintiffs seeking to name corporate officers who are otherwise not alleged to have directly made any of the challenged statements. It is widely known that the viability of the doctrine was questioned in the wake of 1995 enactment of the PSLRA. Less known or appreciated is the fact that the group pleading doctrine has come into further question in the wake of the Supreme Court’s 2011 decision in Janus Capital Group, Inc. v. First Derivative Traders, 564 U.S. 135 (2011). Since Janus, federal courts nationwide have grappled with the question of whether Janus forecloses use of the group pleading doctrine. This post details that struggle.


The group pleading doctrine, when viable, generally permits securities fraud plaintiffs to rely on a presumption, subject to certain limitations, that statements in group-published documents, such as prospectuses, registration statements, annual reports, or press releases, are the collective work of the high-level individual corporate officers with direct involvement in the everyday running of a company’s business.


SEC Proposed Proxy Rules Changes—A Risk to Companies, Corporate Political Disclosure and Accountability

Bruce F. Freed is President and Dan Carroll is Vice President for Programs at the Center for Political Accountability; and Karl J. Sandstrom is senior counsel at Perkins Coie LLP and counsel at CPA. This post is based on their CPA memorandum. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending by Lucian Bebchuk and Robert Jackson, Jr. (discussed on the Forum here); The Untenable Case for Keeping Investors in the Dark by Lucian Bebchuk, Robert J. Jackson Jr., James David Nelson, and Roberto Tallarita (discussed on the Forum here); Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth? by John Coates (discussed on the Forum here); and The Politics of CEOs by Alma Cohen, Moshe Hazan, Roberto Tallarita, and David Weiss (discussed on the Forum here).

When the Supreme Court eased limits on corporate spending for politics a decade ago, it nonetheless underscored important principles of corporate democracy and political disclosure.

Almost a decade since Citizens United, however, the U.S. Securities and Exchange Commission (SEC) is pressing forward with proposed rules changes that would diminish a pillar of corporate democracy and also imperil a successful shareholder campaign for corporate political disclosure and accountability.

The SEC proposals are supported by large U.S. business groups including the U.S. Chamber of Commerce, the National Association of Manufacturers and the Business Roundtable. These groups and regulators would disenfranchise shareholders who have deployed the proxy process to hold companies accountable on contentious issues such as gun control, diversity, pay, and climate change.


Automating Securities Class Action Settlements

Jessica Erickson is Professor of Law at the University of Richmond School of Law. This post is based on her recent article, published in the Vanderbilt Law Review.

Securities class actions, like nearly all class actions in the United States, are ostensibly opt-out lawsuits. Under the opt-out model, individuals who fall within the class definition are automatically members of the class unless they take affirmative steps to opt out. This model is meant to ensure that individuals who do not have the financial incentive to opt into a lawsuit nevertheless get their day in court. Yet the reality has never been this rosy. True, class members in securities class actions are automatically part of the litigation, but that does not mean that they will get any money as a result. Even if a securities class action ends with a multi-million dollar settlement, investors do not receive any money from the settlement unless they file a claim as part of a complex claims administration process.

A well-known empirical study found that investors often fail to participate in the claims process. This study, which was published in 2005 by Professors James Cox and Randall Thomas, revealed that less than one-third of large institutional investors actually filed claims in securities class actions. The percentage is likely even smaller for less sophisticated investors. This study sparked a number of changes in the claims administration process, including a burgeoning industry of third-party claim filers that assist larger institutional investors with filing their claims. As a result, the percentage of submitted claims is likely higher today. Still, however, no one thinks that all or nearly all shareholders receive their share of the settlement funds. Opt-out securities class actions are still opt-in, at least if investors want their money.


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