Monthly Archives: March 2020

The Impact of Coronavirus Fears on Annual Shareholder Meetings

Chris Rushton is Lead Analyst, DACH Region; Jeff Jackson is Manager, Asia Research; and Marie Römer is Senior Research Analyst, DACH Region at Glass, Lewis & Co. This post is based on their Glass Lewis memorandum.

As governments, regional authorities, and companies adopt measures to curtail the spread of coronavirus, we are seeing an impact on annual shareholder meetings to be held in the coming months. Coronavirus, a respiratory disease, has been detected in 70 locations internationally and has been deemed “a public health emergency of international concern by the World Health Organization. Here is a review of how some global markets are addressing the situation.

Reporting and Meeting Delays

China

The Shenzhen (“SZSE”) and Shanghai (“SSE”) Stock Exchanges have taken a number of steps in response to the outbreak. They are extending the reporting period for annual results from March 30, 2020 to April 30, 2020; waiving initial an annual listing fees for issuers registered in Hubei province; and encouraging companies to hold their meetings electronically. As of February 16, 2020, the SSE had arranged for more than 70 companies to delay their annual report disclosure. Additionally, in an effort to mollify the economic impact of the virus on the Chinese markets, the China Securities Regulatory Commission (“CSRC”) revised its rules (PDF) on Seasoned Equity Offerings (“SEO”) to allow for a greater discount on offering prices (80% of benchmark price, compared to 90% previously). Moreover, the upper limit of investors for each SEO has been increased to no more than 35 from 10, while the cap of the issuance size has been increased to 30% of the total share outstanding before the issuance.

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Is the Coronavirus Killing the Proxy Season?

Kai Haakon E. Liekefett and Derek Zaba are partners at Sidley Austin LLP. This post is based on their Sidley memorandum.

Everybody is talking about it: the coronavirus or COVID-19. It has started to impact the global economy and affect people’s everyday lives. Will it impact the 2020 proxy season as well?

The vast majority of public companies in the U.S. hold their annual shareholder meeting between April and June. Most of these companies require in the bylaws advance notice of director nominations by shareholders. These nomination deadlines are typically between January and March. In other words, now is the time of the year when activists are forced to “put up or shut up.”

However, it is important to understand that if an activist launches a proxy contest to replace directors, an activist must be prepared to remain in the stock for the foreseeable future—at least until the annual shareholder meeting and, if successful in obtaining board seats, at least 6-12 months beyond that. While there are no legal restrictions to the contrary, as a practical matter, an activist cannot initiate a proxy contest and sell or reduce its position shortly afterward. An activist who does this stands to lose credibility with long-term institutional investors and becomes more susceptible to being portrayed as a “short term” investor in future activism campaigns. It is even more difficult for an activist to exit a stock if an employee of the activist fund, rather than candidates that are at least nominally independent, takes a board seat. Material nonpublic information received by the activist employee in the board room is imputed to the activist fund, thereby restricting the fund’s ability to trade in the stock.

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A New Framework for Executive Compensation

Seymour Burchman is managing director at Semler Brossy Consulting Group, LLC. This post is based on his Semler Brossy memorandum. 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).

The nature of change in business today differs from the past in both magnitude and pace: Technology is disrupting fundamental business models, forcing transformation across whole industries. According to a 2019 Accenture study, 71 percent of 10,000 companies in 18 industry sectors are “either in the throes of or on the brink of significant disruption.” Similarly, McKinsey concluded a major study of automotive, electronics, aerospace, and defense industries, saying, “The industrial sectors will see more disruption within the next five years than in the past 20 years combined.”

At the same time, societal forces and new business priorities are undercutting shareholder primacy while strengthening other stakeholder interests. Strategic stability has fallen from its pedestal in favor of strategic agility.

The responses to this disruption, however, have not been matched in long-term incentive design. Conventional plans reward executives for winning over three years. Because companies now are vying to reshape their business over much longer periods, executives are essentially tied to a structure that supports only incremental change versus radical transformation. This disconnect means a clash is inevitable.

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A Case of Mistaken Identity: Correcting the Record on EVA

Bennett Stewart is Senior Advisor at Institutional Shareholder Services Inc. This post is based on his ISS memorandum.

In recent months, critics have emerged with claims that Economic Valued Added (EVA) is a less effective judge of corporate performance than other metrics, particularly in comparison to EBITDA. The assertions are based on studies that purport to show that EVA is less correlated to shareholder returns than EBITDA. These critics also express concern over the complexity of EVA as an impediment to its adoption. Some cite academic research that suggests that EVA does not help investors to value stocks or enhance portfolio returns.

We beg to differ on all counts. Indeed, the studies we have examined are so deeply flawed that any conclusions drawn from them cannot be taken seriously.

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

James Bamford and Geoff Walker are Managing Directors and Martin Mogstad is a Director at Water Street Partners LLC. This post is authored by Mr. Bamford, Mr. Walker, Mr. Mogstad, and Shishir Bhargava.

Twelve years ago, we co-authored with CalPERS a set of guidelines for joint venture governance. At the time we argued, and still believe, that good governance in joint ventures strongly correlates with sustained financial performance, sound management of risks, and the ability of JVs to adapt to the changing needs of the market and their shareholders. We have asserted that joint venture governance is pound-for-pound more ‘physical’ than corporate governance due to the unique nature of a joint venture’s relationship with its shareholders. [1] While the number of shareholders is far more limited in JVs compared to those of public companies, the interests of the shareholders in JVs is more expansive, dynamic, and prone to conflict—which ultimately makes joint venture governance proportionately more demanding and consequential.

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Weekly Roundup: March 6-12, 2020


More from:

This roundup contains a collection of the posts published on the Forum during the week of March 6-12, 2020.

Potential Impact of New SEC Guidance on Performance Metrics on Disclosure of ESG Metrics


US Securities Law Liability for Securities Issuers Outside the U.S.


Executive Pay for Luck: New Evidence Over the Last 20 Years





Assessment of ISS’s Use of EVA in CEO Pay-for-Performance Model



Pervasive Threat of Business Email Compromise Fraud


Demonizing Wall Street


The Age of ESG


Directors’ Fiduciary Duties: Back to Delaware Law Basics


Appraisal and Merger Synergies—Right to a Refund on Prepayments



Securities Class Action Settlements—2019 Review and Analysis




The Toshiba Securities Litigation: Perils For Foreign Issuers



The Road to Glasgow

The Road to Glasgow

Mark Carney is Governor of the Bank of England. This post is based on his recent speech.

Introduction

Sir David Attenborough’s prophetic introduction has exposed the scale of the challenges and hinted at the enormous opportunities before us. And the Secretary of State has just described the prospect of a lasting COP 26 legacy and the opportunity for finance to be the force for good we know it can be.

Now is the time to answer these calls to action. Private finance will have a critical role to play in a successful transition to a net zero carbon economy. With the UK COP26 Presidency, in partnership with Italy, the world is watching.

Today is all about action. The actions the private financial sector can take to support a whole economy transition. The actions that regulators, governments and countries will take to catalyse your efforts. The actions that our fellow citizens are demanding, and that future generations deserve.

And you have already begun. Private finance is now increasingly focused on the opportunities and risks in the transition. Every major systemic bank, the world’s largest insurers, its biggest pension funds and top asset managers are calling for the disclosure of climate-related financial risk through their support of the Taskforce for Climate-related Finance Disclosures (TCFD). [1] Investors controlling over $40 trillion in assets (across Climate Action 100+, UN PRI, and the Net Zero Asset Owner Alliance) want to see transition plans to a low carbon world from their portfolio companies. [2] This is backed by the critical roles that Multilateral Development Banks, Development Finance Institutions and National Development Banks are playing to accelerate their support to low carbon growth.

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Passive Investors Get Active on Sustainability Risks

Edouard Dubois is a partner at SquareWell Partners Ltd. This post is based on his SquareWell memorandum. 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); The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here); Reconciling Fiduciary Duty and Social Conscience: The Law and Economics of ESG Investing by a Trustee by Robert H. Sitkoff (discussed on the Forum here); Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

After all the Best Wishes cards, executives and board members have become accustomed to receiving another type of letter every January. These coming from the CEOs of two of their largest investors, BlackRock and State Street Global Advisors (SSgA), managing respectively USD 6.96 trillion and 2.95 trillion of assets. Larry Fink (BlackRock) and Cyrus Taraporevala (SSgA) have written this year again to their portfolio companies, restating some familiar as well as some newer messages. Companies should pay attention to these missives as in the past they have not only set the tone for the engagements with these two global investment firms but also had an impact on the public policy debates around the world.

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The Toshiba Securities Litigation: Perils For Foreign Issuers

Roger Cooper and Jared Gerber are partners and Les Silverman is senior counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum.

On January 28, 2020, following remand from the Ninth Circuit, the district court in Stoyas v. Toshiba Corp. denied a motion to dismiss a complaint asserting claims under the U.S. Securities Exchange Act of 1934 (the “Exchange Act”) and Japanese law against a foreign issuer on behalf of investors in unsponsored American Depositary Receipts (“ADRs”), so-called “F-shares,” and common stock traded only on Japanese stock exchanges. In reaching that decision, the district court held that the plaintiffs adequately alleged they purchased the unsponsored ADRs in domestic transactions, as well as that the foreign issuer was sufficiently involved in the sale of those securities to satisfy the “in connection with” element of the federal securities laws. Having declined to dismiss the plaintiffs’ U.S. law claims, the district court further determined that principles of comity and forum non conveniens did not compel the dismissal of the plaintiffs’ Japanese law claim concerning the company’s underlying common stock on the Japanese stock exchanges.

The decision, if broadly followed by other courts, would threaten foreign issuers with potentially expansive securities liability in U.S. courts, even where those issuers had little involvement with the issuance of securities in the United States and even with respect to shares listed only on foreign exchanges, notwithstanding the Supreme Court’s attempt to limit such liability in Morrison v. National Australia Bank Ltd.

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Speech by Commissioner Roisman at the Council of Institutional Investors Conference

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent speech. The views expressed in this post are those of Mr. Roisman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I. Introduction

Thank you for inviting me to speak today, at CII’s Spring 2020 Conference. Since I assumed office eighteen months ago, I believe I have had more meetings with CII and its members than any other group. I have appreciated these candid exchanges of ideas, and they have influenced my thinking about many issues before the Commission. I am happy to continue our dialogue.

As you all know, there is a lot going on in our markets—especially with the continually evolving news concerning the Coronavirus. While the SEC is, of course, actively monitoring market developments, our staff remains focused on our core mission and the day-to-day work that goes into protecting investors, maintaining fair, orderly, and efficient markets, and promoting capital formation. So, today I will discuss a number of matters that relate to a topic which is inextricably linked to our mission: the proxy process. Before I go further, I will of course remind you: My views and remarks are my own and do not necessarily represent those of the SEC or other Commissioners.

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