Monthly Archives: April 2020

Is Financial Globalization in Reverse after the 2008 Global Financial Crisis? Evidence from Corporate Valuations

Craig Doidge is Professor of Finance at the University of Toronto; G. Andrew Karolyi is the Harold Bierman, Jr. Distinguished Professor of Management at the Cornell University SC Johnson Graduate School of Management; and René M. Stulz is the Everett D. Reese Chair of Banking and Monetary Economics at the Fisher College of Business at The Ohio State University. This post is based on their recent paper.

Before the 2008 global financial crisis (GFC), it seemed that financial globalization was increasing inexorably. For financial economists, one natural indicator of financial globalization is the extent to which similar firms are valued similarly across the globe. In a world of perfectly integrated financial markets, the same firm should be valued the same everywhere. Before the GFC, valuations had not fully converged, but there is much evidence that the forces of globalization affected valuations, if not across the globe, then at least within the world of developed economies.

In our paper, Is Financial Globalization in Reverse after the 2008 Global Financial Crisis? Evidence from Corporate Valuations?, available at SSRN, we investigate whether the forces of financial globalization weaken after the 2008 global financial crisis (GFC) by assessing how the valuations of non-US firms evolve relative to the valuations of comparable US firms from before to after the GFC. Our evidence says that financial globalization is indeed in reverse after the 2008 global financial crisis but not necessarily in a way one may have expected.


The Impact of COVID-19 on Executive Compensation

Debra B. Hoffman, and Ryan J. Liebl are partners and Katherine H. Dean is counsel at Mayer Brown LLP. This post is based on their Mayer Brown 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 majority of the benefit and compensation provisions of the Coronavirus Aid Relief and Economic Security Act (the “CARES Act”) provide critical relief to companies and rank and file employees in light of the COVID-19 pandemic (see our previous blog posts on the impact of the CARES Act on health and welfare plans, on the impact on retirement plans, and on executive compensation, employment, leave and payroll tax issues). In addition to supporting their general employee population, most company boards of directors (or applicable board committees) are also grappling with the unique issues relating to compensation and benefits of their executive employees at an uncertain time when such employees are critical to the company’s ability to weather the storm. The following is a summary of key executive compensation issues that boards and executives may want to consider during these trying times.


ISS and Glass Lewis Guidances on Poison Pills during COVID-19 Pandemic

Paul Shim and James Langston are partners and Charles Allen is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here) and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

Last month, we described the increased threat of activists and acquirors seeking to capitalize on the COVID-19 sell-off to build positions in high-value companies at depressed prices. Even before the current crisis emerged, we recommended that all U.S. public companies regularly review their defense profile and have a shareholder rights plans “on the shelf.” For companies uniquely impacted by the crisis—especially those whose market capitalization has fallen below $1 billion—we suggested they re-assess their vulnerabilities in this new environment and consider whether now was the right time to adopt a rights plan to ward off potential opportunistic behavior. Some companies have done just that—since March 1, 2020, 24 U.S. public companies have adopted a defensive shareholder rights plan (6 other U.S. public companies have adopted NOL rights plans).

As we noted at the time, for a rights plan to comport with long-standing ISS and Glass Lewis guidance it must be limited in duration (one year or less unless otherwise approved by a shareholder vote) and the ownership trigger cannot be so low as to be unduly restrictive (recent precedents have tended to cluster in the 10-15% range, unless the shareholder rights plan is designed to protect tax attributes, in which case it will typically have a 4.9% trigger; ISS’ official position is that defensive pills generally should have a trigger no lower than 20%). If a rights plan adopted by a board adheres to this guidance, ISS and Glass Lewis will consider the adoption on a “case-by-case” basis in issuing their respective recommendations for the election of the directors adopting the rights plan. As witnessed last week, a board adopting a rights plan that meaningfully departs from a proxy advisor’s guidance can result in the firm issuing a withhold recommendation for one or more of the directors.


U.K. and EU Regulators Move Ahead on ESG Disclosures and Benchmarks

David M. SilkDavid A. Katz, and Sabastian V. Niles are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Silk, Mr. Katz, Mr. Niles, Carmen X. W. Lu and Ram Sachs.

Amid the ongoing push for standardized, comparable and decision-useful ESG disclosures, regulators in the United Kingdom and the European Union have proposed additional disclosures and benchmarks to promote sustainable economic activity. The United Kingdom’s Financial Conduct Authority (FCA) has published a consultation paper proposing that certain U.K. issuers make climate change disclosures consistent with the recommendations of the Task Force on Climate-related Financial Disclosures (TCFD) or explain why they have not. The European Commission’s Technical Expert Group on Sustainable Finance has published its final Taxonomy report for screening environmentally sustainable activities.


Re-Thinking Long-Term Performance Plan Periods Within the Context of COVID-19

Brian Lane is a Partner, Linda Pappas is a Principal, and Peter a consultant at Pay Governance LLC. This post is based on their Pay Governance 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).


On March 23, Pay Governance released a Viewpoint article discussing COVID-19’s impact on executive compensation programs. The article—“Everything Should Be On The Table”—outlined several high-level initial considerations that should be “on the table” as possible responses to the disruption caused by COVID-19.

It is still too early to understand the full impact, financial and otherwise, that the pandemic will have. Its effect on business and the appropriateness of potential responses will vary by industry and company. Our objective in presenting these considerations broadly is to arm compensation committees with a toolkit of possible adjustments and a general understanding of the benefits, drawbacks, and implications of any such actions.

This post explores one consideration in detail: re-thinking long-term performance periods within performance stock unit (PSU) designs. We present potential alternative approaches to the traditional three-year cumulative measurement.


Federal District Court Dismissal of Challenge to Board Diversity Statute

William SavittRyan A. McLeod and Anitha Reddy are partners at Wachtell, Lipton, Rosen & Katz. This post is based on their Wachtell memorandum. Related research from the Program on Corporate Governance includes Politics and Gender in the Executive Suite by Alma Cohen, Moshe Hazan, and David Weiss (discussed on the Forum here).

A federal district court this week dismissed a shareholder plaintiff’s attempt to invalidate the nation’s first law mandating gender diversity on corporate boards. Meland v. Padilla, No. 2:19-cv-02288-JAM-AC (E.D. Ca. Apr. 20, 2020).

In September 2018, California enacted legislation requiring any public company with its principal executive offices in the state to “have a minimum of one female director on its board” by the end of 2019. A shareholder of OSI Systems, Inc., a Delaware-chartered company headquartered in California, sued to block the law, alleging that the statute impaired his right to vote for corporate directors in violation of the Equal Protection Clause of the federal constitution.


The Rise of the Aggressive Poison Pill

Sanjay M. Shirodkar is of counsel and Sidney Burke and Joshua M. Samek are partners at DLA piper. This post is based on their DLA Piper memorandum. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here) and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

I. Background

The general purpose of a shareholder rights plan or “poison pill” is to deter and mitigate the time pressures of non-negotiated, hostile takeover attempts made at unfair or inadequate prices, or by coercive or unfair tactics. Rights plans have been around for quite some time. Rights plans generally give the adopting corporation’s stockholders (excluding the potential acquiror) the right to purchase stock at a nominal price, triggered by the acquirer’s acquisition of beneficial ownership of a specified percentage of the corporation’s stock. This right is typically applicable to stock in the corporation prior to the proposed business combination, or in the final corporation after a successful hostile takeover.

There is, however, no one-size-fits-all rights plan and it is incumbent upon a board that is considering the adoption of a rights plan (including the adoption of a rights plan that was previously “on the shelf”) to receive input from its advisors concerning the current state of the market with respect to key features of the plan. There are several design features that allow a board to customize its rights plan to take into account, among other matters, prevailing market conditions and particular facts and circumstances applicable to the corporation. In the next section, we provide a brief discussion of some of the key levers available to a board that are currently being discussed in virtual boardrooms. In the third section, we provide additional details about the changes to these levers that we are observing. [1]


A Look at the Data Behind Recent Poison Pill Adoptions

Ethan Klingsberg and Paul Tiger are partners and Elizabeth Bieber is counsel at Freshfields Bruckhaus Deringer US LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Mr. Tiger, Ms. Bieber, and Paul Gray.

A number of commentators have written in recent weeks about a growing trend of issuers of all shapes and sizes adopting shareholder rights plans (“poison pills”). Some even tout the benefits, from a fiduciary duty perspective, of adopting these rights plans now while still a “clear day” (i.e., before a specific hostile threat has emerged)—a thesis popularized by lawyers hawking 10-year pills in the pre-ISS days of the 1980s and 1990s—even though it is now clear that Delaware case law provides more than ample flexibility in the application of the Unocal standard for a well-advised board of a non-controlled company with a single class of common stock to adopt a pill quickly “no matter what the weather.”

These voices are playing off fears and anxieties of boards that arise from the COVID-19 era’s unprecedented volatility, uncertain outlook and depressed market capitalizations. Even though we believe many activists are holding back on announcing new campaigns due to uncertainties around forecasts, there is justifiable concern that deep-pocketed hedge funds, and possibly cash-rich corporations and private equity funds, are accumulating “toe-hold” positions under the radar to position themselves for future threats to companies’ stand-alone strategic plans. Hence, it is no surprise that many directors are asking whether it makes sense to prophylactically adopt a rights plan so that they can effectively cap any holder or group from acquiring beneficial ownership in excess of a specified ceiling—typically 10% to 15% of the company’s outstanding voting power.

However, a review of the data and market considerations underlying the adoption of pills since the market’s COVID-19 roller coaster ride began in the second half of February reveals a more nuanced narrative surrounding recently-adopted pills. This narrative provides useful guidelines for boards deciding how to respond to this new chorus of advice urging them to consider the adoption of this anti-takeover mechanism.


Weekly Roundup: April 17–23, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 17–23, 2020

Inspection of PCAOB-Registered Chinese Auditor

Delaware Emergency Order: Remote Shareholder Communication Meetings

Going Private Transactions

Governance Litigation and the COVID-19 Pandemic

Succession Planning in a Time of Crisis

COVID-19 Impact: Potential Risks and Problems in Signed M&A Deals

A Special Committee to Oversee the Corporation’s Response to the Pandemic

Key ESG Considerations in the Crisis

Considerations for 2020 Incentive Compensation Programs

Leadership Resiliency in an Emergency

Temporary Basis NYSE Modifications to Certain Stockholder Approval Requirements

Bebchuk & Hirst Article on Index Funds Selected as One of 2019’s Best Corporate and Securities Articles

The Evolution of Trust in the Era of Stakeholder Capitalism

The Evolution of Trust in the Era of Stakeholder Capitalism

Beatriz Pessoa de Araujo is a partner and Julia Hayhoe is Chief Strategy Officer at Baker McKenzie. This post is based on their Baker McKenzie memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

Enduring and sustainable corporate success hinges on trust. But trust is hard won and easily lost. This series of articles will explore the evolving “Trust Continuum” and how organizations can meet new expectations in the era of stakeholder capitalism [1]—not only of their shareholders and investors but all stakeholders—and build long-term trust based on purposeful, transparent and consistent actions and interactions.

We will examine global governance and the rule of law, the changing face of leadership, ethical technology and more in this series—uncovering the strategies that will enable corporations to become and remain trusted organizations. The purpose of business in society has not changed—the creation of wealth and job opportunities and making things or providing services people need. What is changing is the “how”.

In this post, we explore the evolution of trust in the seven years since Baker McKenzie’s last report on the state of trust in business. We find that efforts to build trust have continued, but the challenge today is greater and more complex as companies try to respond to the new demands of a complex ecosystem of customers, employees, shareholders, regulators and society at large, as well as externalities such as climate change and the ever changing political landscape.


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