Monthly Archives: March 2020

Friend or Foe? The Convergence of Private Equity and Shareholder Activism

Aneliya S. Crawford is a partner and Matthew J. Gruenberg is special counsel at Schulte Roth & Zabel LLP. This post is based on their SRZ article, recently published in Ethical Boardroom. 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) and The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here).

The lines between shareholder activist strategies and traditional private equity strategies are starting to become blurred.

Historically, private equity firms have adhered to the “rules of the road” set out by companies looking to explore strategic alternatives or realise monetisation events for their equity holders.

The company, after approval from its board, engages a financial advisor and the firm is approached by the bankers to do a deal on, generally, the company’s timeline. They follow the auction process set out by the company and its advisors and look to gain support of the board for their proposed transaction terms. Once the deal is signed, the board recommends the transaction to its stockholders, fully aware of the buyout firm’s intentions. Until the time of execution, the buyout firm’s interest stays out of the public eye. Most importantly, the deal is “friendly”: a buyout firm will not proceed in a transaction without support of the company’s board. This strategy has allowed private equity (PE) firms to monopolise potential value creation at cheap, underperforming companies.

Activist firms, on the other hand, have traditionally taken a different approach, looking to gain a toehold by acquiring an equity position without the board’s consent and effecting change by launching campaigns in the public. The activist will take its argument to the stockholders directly and may target board representation or force other strategic initiatives to be undertaken by the company by leveraging public pressure on the board. Recently, however, activists have added more “friendly” buyout initiatives to their strategic arsenal.

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Key Issues for Directors Relating to COVID-19

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. David A. Katz and David E. Shapiro are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication.

As the world reacts to the COVID-19 pandemic, directors on corporate boards play a vital role in navigating the path forward. Key issues facing corporate directors include:

  1. Maintaining close contact with the CEO and working with management to ensure the safety and well-being of the company’s employees and other stakeholders as well as the public at large.
  2. Understanding the risks to the company and its stakeholders from the COVID-19 pandemic, and discussing, as a board, management’s strategies for minimizing and mitigating these risks.
  3. Reviewing the viability of the enterprise from a short-term and long-term perspective and making appropriate changes to the corporate strategy to ensure that viability.
  4. Receiving a board-level briefing on company indebtedness, including bank and bond financings, lines of credit, availability of revolvers, key covenant terms and, in conjunction with that briefing, understanding the company’s near-term liquidity needs and working with management to secure liquidity needs.
  5. Appropriately messaging the company’s actions with respect to the crisis and providing the CEO and management with assistance in handling communication with internal and external constituents.
  6. Communicating frequently with, and seeking guidance from, applicable regulators and other government agencies with oversight.
  7. Responding to activist attacks and other actions by those seeking to take advantage of the situation and promote their own agenda.
  8. Evaluating opportunities for transactions that are made available by the changed circumstances.
  9. Working with management in engaging shareholders and other stakeholders on corporate operations, impact to strategy, and other important concerns, including ESG issues such as climate change and sustainability.
  10. Reviewing compensation plans and considering whether changes are required, particularly with respect to equity arrangements, unforeseen employee cash needs and mission-critical personnel.
  11. Evaluating the company’s current and future dividend and buyback policy as well as capital allocation and liquidity generally.
  12. Maintaining respect among board members and promoting effective decision-making through stressed and stressful conditions.

Engagement Priorities for 2020

Barbara Novick is Vice Chairman and Co-Founder and Michelle Edkins is Global Head of Investment Stewardship at BlackRock. This post is based on their BlackRock memorandum.

As a fiduciary investor, BlackRock undertakes all investment stewardship engagements and proxy voting with the goal of protecting and enhancing the long-term value of our clients’ assets. In our experience, sustainable financial performance and value creation are enhanced by sound governance practices, including risk management, oversight, and board accountability.

2020 Engagement Priorities

We are committed to providing transparency into how we conduct investment stewardship activities in support of long-term sustainable performance for our clients. As part of our commitment to clients, we are enhancing our disclosures in 2020. Key steps towards increased transparency include 1) moving from annual to quarterly voting disclosure, 2) prompt disclosure around key votes including an explanation of our voting decisions, and 3) enhanced disclosure of our company engagements.

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Human Capital Management Disclosure

Doreen E. Lilienfeld is a partner and Max Bradley is an associate at Shearman & Sterling LLP. This post is based on their Shearman memorandum.

Current law does not require much from a public company in the way of disclosing information concerning its workforce (its “human capital”) outside the C-suite or with respect to the philosophies, policies and practices it implements to select, oversee, nurture and develop that workforce (its system of “human capital management”). Under SEC disclosure requirements (Item 101 of Regulation S-K) a public company need disclose no more than its total number of employees, and common practice is to do no more than that. Recently, though, a growing number of stakeholders—special interest groups, investors, the SEC and public companies themselves—have questioned and publicly discussed whether human capital management disclosure requirements should be expanded or, if not, whether a public company should voluntarily disclose its approach to ensuring that its human capital is diverse, developing, motivated and positioned to contribute to the long-term value of the company. To that end, the SEC, on August 8, 2019, issued proposed amendments to Item 101 of Regulation S-K that would require principles-based disclosure of matters related to human capital.

This post surveys the current landscape and provides recommendations to public companies considering how to approach disclosure in this increasingly important area.

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Virtual Annual Meetings and Coronavirus

Michael Albano, Sandra Flow, and Francesca L. Odell are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Albano, Ms. FLow, Ms. Odell, Mary Alcock and Jina Davidovich.

With rising concerns around the spread of COVID-19 (“coronavirus”) in the United States and globally, in order to mitigate health risks, many public companies may consider adding a virtual component to the format of their annual shareholder meetings. In the United States, state law generally governs the availability of a virtual meeting format. At the federal level, the SEC regulates the filing and mailing of proxy solicitation materials. While we have not seen direct guidance from state legislatures on virtual or hybrid meetings in the context of the coronavirus pandemic, on March 13, 2020, the SEC released guidance (“SEC Coronavirus Guidance”) addressing annual shareholder meetings [1] in light of recommendations by the Centers for Disease Control and Prevention (“CDC”) and other public health officials to cancel, or explicitly state policies that prohibit, large, in-person gatherings [2] in an effort to prevent the spread of coronavirus. [3] Set forth below are various considerations that a company should take into account when determining whether to move from an in-person to a virtual or hybrid [4] annual meeting

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Weekly Roundup: March 13-19, 2020


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This roundup contains a collection of the posts published on the Forum during the week of March 13-19, 2020.

Joint Venture Governance Index: Calibrating the Strength of Governance in Joint Ventures


A Case of Mistaken Identity: Correcting the Record on EVA


A New Framework for Executive Compensation


Is the Coronavirus Killing the Proxy Season?


The Impact of Coronavirus Fears on Annual Shareholder Meetings


Cybersecurity: An Evolving Governance Challenge


Canadian Proxy Contest Study


Board and Director Assessments that Matter


To Lead or Not to Lead: Contrasting Recent Statements by SEC and ESMA Chairs on ESG Disclosure


More than 1,000 Empirical Studies Apply the Entrenchment Index of Bebchuk, Cohen and Ferrell (2009)


2019 Developments in Securities and M&A Litigation


The Long Rise and Quick Fall of Appraisal Arbitrage


Executive Pay Matters—Say-on-Pay 2019 Annual Update


New Report on California Board Gender Diversity Mandate



Impact of the Coronavirus on Public Disclosure and Other Obligations



Diagnosing and Treating Coronavirus Risks in M&A Transactions


Compensation Committee Guide 2020

Compensation Committee Guide 2020

Jeannemarie O’BrienAndrea Wahlquist, and Adam Shapiro are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Ms. O’Brien, Ms. Wahlquist, Mr. Shapiro, David E. KahanMichael J. Schobel, and Erica E. Bonnett. Related research from the Program on Corporate Governance includes Executive Compensation as an Agency Problem by Lucian Bebchuk and Jesse Fried; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Public company compensation committees continue to be challenged as they seek to approve compensation programs that directors believe will promote the sustainable long-term increase in value of a company, while taking into account all key constituent views to maximize investor support for those programs.

In 2019, as the dialogue about corporate responsibility for Environmental, Social and Governance – “ESG” – issues intensified, the focus in the compensation arena included whether to incorporate ESG-related performance metrics into compensation programs at large public companies in a meaningful way. Boards of directors will need to remain mindful that in designing compensation arrangements for their companies’ leaders, a focus beyond traditional measures of profit maximization may be warranted. Companies that give balanced consideration to the needs of all constituencies will be best positioned to achieve sustainable long-term growth.

In 2019, we also saw an emphasis on complex corporate transactions, as companies across a range of industries sought to unlock and create value in creative ways. In a fast-changing global and domestic landscape, directors continue to recognize that providing appropriate retention and severance protections for their corporate leaders affords more freedom for company leaders to nimbly adapt corporate strategies and respond collaboratively to various transactions. The social and governance issues in transformative transactions are often the key to reaching agreement in the first place and necessary predicates to a collaborative and successful integration.

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Diagnosing and Treating Coronavirus Risks in M&A Transactions

Ryan Scofield and Parthiv Rishi are partners at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Scofield, Mr. Rishi, Dan Clivner, Brian Fahrney, Paul Choi, and Charlie Wilson. Related research from the Program on Corporate Governance includes Allocating Risk Through Contract: Evidence from M&A and Policy Implications by John C. Coates, IV (discussed on the Forum here).

Novel coronavirus (COVID-19) continues to dominate headlines as confirmed cases of the virus escalate. As of March 2, 2020, the World Health Organization reported over 80,100 confirmed cases of the disease in China, and roughly another 8,800 elsewhere. These developments have led global markets to decline precipitously, local economies to suffer and governments to take dramatic steps to protect against the spread of the virus turning into a pandemic. Factory, school and office closures, quarantine and stay-at-home orders, travel and transport restrictions and other measures have been introduced around the world and will inevitably expand as more nations report COVID-19 cases. These steps have significant consequences on businesses across industries by reducing consumer spending, creating disruption to supply chains and workforces and decreasing energy demand. The full effect of COVID-19 on global M&A activity will not be known for some time, but as buyers and sellers continue to diligence businesses and negotiate transactions, they can take certain steps to protect against risks introduced by this outbreak.

This post seeks to help parties navigate such issues in the context of M&A transactions. While these issues are most acute when the target business is based or has significant operations in Asia, as COVID-19 continues to spread globally, so too will the relevance of the issues discussed below.

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Proposed Revisions to the Volcker Rule: Prohibitions and Restrictions with respect to Covered Funds

Joel Wattenbarger is a partner and Gideon Blatt is an associate at Ropes & Gray LLP. This post is based on their Ropes & Gray memorandum.

On January 30, 2020, the Federal Reserve Board issued a notice of proposed rulemaking and asked for comments on a proposed rule to simplify, streamline and tailor the “covered fund” provisions under the regulation implementing section 13 (commonly known as the “Volcker Rule”) of the Bank Holding Company Act (“BHC Act”) (the “Proposal”).

The Proposal is the culmination of a process first announced in March 2018 to significantly revise all aspects of the Volcker Rule’s implementing regulations in light of the experience of the federal banking agencies—the Federal Reserve Board, the Office of the Comptroller of the Currency, the Securities and Exchange Commission, the Commodity Futures Trading Commission and the Federal Deposit Insurance Corporation (together, the “Agencies”)—since the final rule was issued in December 2013 (the “Final Rule”). It is the first time the Agencies have targeted the implementing regulations related to the Volcker Rule’s general prohibition on banking entities investing in or sponsoring hedge funds or private equity funds—known as “covered funds.”

The Proposal will be of interest to the asset management industry. Working within the confines of the statute, the Proposal would introduce four new exclusions from the definition of covered fund (credit funds, venture capital funds, family wealth management vehicles and customer facilitation vehicles) and simplify three existing ones. In addition, it would expand the scope of permissible relationships that a banking entity may have with covered funds, codify existing guidance related to certain foreign funds and clarify issues surrounding ownership interests and permissible parallel investments by a banking entity and its employees.

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Impact of the Coronavirus on Public Disclosure and Other Obligations

Brad S. KarpScott A. Barshay, and Mark S. Bergman are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Karp, Mr. Barshay, Mr. Bergman, Christopher J. Cummings, John C. Kennedy, and Audra J. Soloway. Related research from the Program on Corporate Governance includes Price Impact, Materiality, and Halliburton II by Allen Ferrell and Andrew Roper (discussed on the Forum here).

In December 2019, an outbreak of a new strain of coronavirus, COVID-19, emerged in Wuhan, China. Within weeks, despite efforts to contain the virus in China that included widespread shutdowns of cities and businesses, the number of those infected grew significantly, and beyond China’s borders. As of today, the coronavirus is reported to have spread to over 80 countries, and the list is expected to continue to grow. As the virus continues to spread and effect business operations, supply chains, business and leisure travel, commodity prices, consumer confidence and business sentiment, and as companies ponder the impact on their businesses of employees working from home and consumers shunning air travel, stores, restaurants, sports events and other venues, it is hard to imagine a business or a sector that will be unaffected. SEC reporting companies need to consider not only the impact of the coronavirus on their operations from business continuity and risk management perspectives, but also on their public disclosure and SEC filing obligations. 

The coronavirus outbreak is still evolving and its effects remain unknown. As SEC Chairman Jay Clayton noted in a January statement, available here, the SEC recognizes “that [the current and potential effects of the coronavirus] may be difficult to assess or predict with meaningful precision both generally and [on] an industry- or issuer-specific basis.” While it may be impossible to predict the ultimate impact of the coronavirus, what is clear today is that SEC reporting companies need to consider their disclosure obligations as events unfold. The coronavirus will impact public statements generally (including earnings releases), SEC reports (including financial statements), disclosure controls and procedures (“DCP”) and internal control over financial reporting (“ICFR”). The disclosure effort could require the attention of the audit committee, senior management, the financial reporting function, the legal/compliance function and internal audit. Presumably most, if not all, of these functions are represented on a company’s disclosure committee. And all of this will likely be taking place in the context of broader business continuity efforts, governmental actions and market turbulence. 

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