Monthly Archives: April 2020

Trading on Public Trust

David Nydam is CEO of Business Intelligence Advisors, Inc. This post is based on a BIA publication. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).


In this post, we analyze statements made by Senators Richard Burr and Kelly Loeffler in response to allegations of insider trading. While many U.S. Senators had been actively trading stocks before the spread of the coronavirus caused U.S. markets to fall, Mr. Burr and Ms. Loeffler have attracted the highest level of media attention surrounding their actions. This is in part because they both sit on the Senate Health Committee and attended the Committee’s January 24 closed-door briefing on the coronavirus just prior to their stock trades. These trades reportedly saved Mr. Burr and Ms. Loeffler $250,000 and $480,000 in losses respectively. Moreover, shortly after the trades in question, Mr. Burr, who is also the Chair of the Senate Intelligence Committee and receives daily briefings on the pandemic, made public statements downplaying the risk of the spread of the virus, and Ms. Loeffler made public statements downplaying its economic impact. Our analysis shows that it is likely that both Ms. Loeffler and Mr. Burr portrayed the impact of the virus in a more positive light than they believed, and that they both made or authorized inappropriate trades based on what they knew by virtue of their positions.


ESG Issues in the Forefront

Robert Newbury is Director, and Don Delves and Ryan Resch are managing directors at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. 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); and The Illusory Promise of Stakeholder Governance by Lucian A. Bebchuk and Roberto Tallarita (discussed on the Forum here).

The ongoing coronavirus pandemic has brought the issues of employee safety and engagement, community support, compliance and stakeholder communications to the forefront of most companies’ responses. S&P 500 companies are well on their way to integrating ESG in their compensation and human capital governance programs, but there is still work to do to meet the increasing demands of stakeholders.

A slim majority of S&P 500 companies use environmental, social and governance (ESG) metrics as part of their compensation evaluations, Willis Towers Watson research finds. This comes at a time when public statements of support from major business leaders and investors suggest that these metrics are poised for even greater adoption.

Just over half (51%) of S&P 500 companies use ESG metrics in their incentive plans, with 50% including it in annual incentive programs (AIPs), just released research by Willis Towers Watson’s Global Executive Compensation Analysis team (GECAT) confirmed. However, only 4% use ESG metrics for long-term incentive programs (LTIP).


Deal Protection Devices

Albert H. Choi is Professor of Law at the University of Michigan Law School. This post is based on his recent paper, forthcoming in the University of Chicago Law Review. 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); and The New Look of Deal Protection (discussed on the Forum here) by Fernan Restrepo and Guhan Subramanian.

In mergers and acquisitions transactions, a buyer and a seller will often agree to contractual mechanisms, such as termination fees and match rights, to protect the deal. Judicial attitude towards various deal protection devices migrated from fairly strong hostility to a more permissive allowance over time. This is evidenced by the line of cases, starting from Revlon and Paramount v. QVC to In re Toys R Us, Lyondell Chemical, and C&J Energy Services. While the question of whether entering into certain deal protection devices can constitute a breach of target directors’ fiduciary duty has not been fully resolved, the recent controversy over appraisal has breathed new life into the questions over the desirability of deal protection devices. A prominent issue was whether the court could use the deal price itself as an indicator of “fair value.” In cases, such as DFC Global, Dell, and Aruba, the Delaware Supreme Court stated that when an acquisition is done at “arms’ length” and when there is sufficient competition for the target, either before or after the agreement has been signed, the deal price is a reliable indicator of “fair value” of the target’s shares. In determining whether a transaction satisfies such a standard (i.e., whether “Dell-compliant”), the presence or absence of deal protection devices has become one of the core issues.

The line of cases, from Revlon and Paramount v. QVC, through In re Toys R Us, Lyondell Chemical, and C&J Energy Services, and to the recent appraisal cases (DFC Global, Dell, Aruba, and their progeny) raises interesting and important questions about deal protection devices. To the extent that the parties are trying to “lock up” the deal, to what extent are deal protection measures successful in ensuring that a third party buyer will not try to “jump” the deal? How do they affect a third party’s incentive to compete? For instance, can the inside buyer’s unlimited match right deter a third party from competing against the buyer? Will an unlimited match right create a “winner’s curse” problem? What if the target has to pay a sizable termination fee? What about for the target shareholders: do the deal protection devices undercut their return? Finally, in the context of appraisal, does the presence of deal protection devices undermine the reliability of the deal price as an indicator of “fair value”? Should the presence of an unlimited match right, for instance, make the deal price inadmissible as evidence of “fair value”?


Director Fiduciary Duty in Insolvency

Brad Eric Scheler, Gary L. Kaplan, and Jennifer L. Rodburg are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Scheler, Mr. Kaplan, Ms. Rodburg, Ashley Katz, and Peter B. Siroka.

With businesses focused on the impact of the novel coronavirus (COVID-19) pandemic on current and future liquidity, balance sheet and cash flow concerns, and an expected decline in the level and profitability of business activity in these difficult and uncertain times, in many cases attention has turned to the issue of the duties and responsibilities of directors to creditors when a corporation is financially troubled and is either approaching insolvency (the so-called “zone of insolvency”) or becomes insolvent.

When a corporation is solvent, directors’ fiduciary duties are to shareholders only. It is well-established under Delaware law that, when a corporation is solvent, directors’ duties run to the corporation and the corporation should be managed for the benefit of its shareholders. While there has been some discussion within the corporate community in recent years about boards also taking into consideration the interests of other stakeholders, fiduciary duties are not owed to creditors of a solvent corporation. Instead, creditors of a solvent corporation are protected through other means, such as contracts, fraud and fraudulent conveyance laws, implied covenants of good faith and fair dealing, bankruptcy law, general commercial law and creditors’ rights.


Politics and Gender in the Executive Suite

Alma Cohen teaches at Harvard Law School and Tel-Aviv University School of Economics, and Moshe Hazan and David Weiss teach at Tel-Aviv University School of Economics. This post is based on their recent study. Related program research includes their article with Roberto Tallarita on The Politics of CEOs, available here and discussed on the Forum here.

In a new study placed on SSRN, Politics and Gender in the Executive Suite, we investigate the relationship of CEOs’ political preferences (as reflected in their political contributions) with the prevalence and compensation of women in leadership positions at U.S. public companies.

We find that CEOs who favor the Democratic Party (“Democratic CEOs”) are associated with the presence of more women in the team of non-CEO top executives (“the executive suite”). To explore causality, we use an event study approach and show that replacing a Republican CEO with a Democratic CEO is accompanied by an increased female representation in the executive suite.

To further explore causality, we examine whether CEO political preferences are associated with gender diversity in the boardroom and find no such association. This lack of association is consistent with CEOs’ preferences having less influence over gender diversity in the boardroom than the executive suite because CEOs have less power over the appointment of directors who supposed to supervise the CEO than over that of executives reporting to the CEO.

Finally, examining the gender gaps in the level and performance-sensitivity of executive compensation we documented in the literature, we find that they are driven by companies headed by Republican CEOs and disappear or at least diminish under Democratic CEOs.

To the best of our knowledge, our study is the first to investigate the relationship between the incidence and compensation of females among companies’ top executives and CEOs’ political preferences. Significant separate literatures exist on both subjects, and our work seeks to contribute to each of them.

Below is a more detailed account of our analysis:


Insider Trading Risk During the COVID-19 Outbreak

Rahul Mukhi and Jonathan S. Kolodner are partners and Shannon Daugherty is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Mr. Mukhi, Mr. Kolodner, Ms. Daugherty, Francesca Odell, and Joon Kim. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

On March 20, 2020, news outlets reported that four U.S. Senators sold millions of dollars in stock following classified briefings to the Senate on the threat of a COVID-19 outbreak. Three days later, the Co-Directors of the Securities and Exchange Commission’s (“SEC”) Division of Enforcement, Stephanie Avakian and Steven Peikin, issued a statement reminding market participants of their obligations with respect to material non-public information (“MNPI”) and of the SEC’s commitment to protecting investors from fraud and ensuring market integrity. [1]

The statement stressed that in the current crisis, MNPI “may hold even greater value than under normal circumstances” and a “greater number of people may have access to [MNPI] than in less challenging times.” The Co-Directors urged insiders to comply with prohibitions on illegal securities trading and with obligations to keep MNPI confidential, and they reminded public companies and other market participants to “be mindful” of their established controls and procedures designed to prevent the misuse of MNPI—including disclosure controls and procedures, insider trading prohibitions, codes of ethics and Regulation FD policies.


Planning for the Possibility that the CEO Tests Positive for COVID-19

Serena Saitto is Vice President Financial Communications and Capital Markets, and Laurie Hays is managing director at Edelman. This post is based on their Edelman memorandum.

At least a dozen CEO’s and CFO’s have tested positive for Covid-19 in the past few weeks. Many have chosen to post or email letters to their employees explaining how they are doing, whether they feel well enough to be running the company and if not, who is in charge. The president of Harvard Larry Bacow posted one of the most memorable of these last month in a letter to students, professors and employees of the University.

It’s not known how many C-suite executives might have tested positive and decided not to tell their employees and investors. The Securities and Exchange Commission doesn’t require disclosures around the health of a CEO, and so far that includes Covid-19 illness.

The spread of the novel coronavirus pandemic is forcing companies into making quick decisions about disclosure. Some key issues for the CEO and his team and boards of directors to consider:


The Activism Vulnerability Report Q4 2019

Jason Frankl and Brian Kushner are Senior Managing Directors and Carl Jenkins is a Managing Director at FTI Consulting Inc. This post is based on a FTI memorandum by Mr. Frankl, Mr. Kushner, Mr. Jenkins, Kurt Moeller, Wyatt Friedman, and Walker Spier.

Introduction and Market Update

In this Activism Vulnerability Report, FTI has identified the industries that are most susceptible to shareholder activism in the U.S. and Canada according to the Activism Screener’s results. The Activism Vulnerability Report, and the Activism Screener itself, are intended to assist our public company clients and their outside advisors in determining the extent to which their business and underlying industry are vulnerable to pressure from activist investors. It provides a starting point for identifying and addressing the factors and dynamics that could invite activist investors to seek material changes in the business, management team and/or board of directors.

The Report summarizes the Activism Screener’s results and evaluates 25 well-known industries, enabling us to understand which of those industries are most vulnerable to shareholder activism each quarter, based upon an average of the aggregate vulnerability scores of the components of each industry. FTI publishes the Report quarterly as financial data and other common publicly disclosed information become available. While FTI will not release a complete list of companies and their scores, FTI welcomes company representatives to contact our Activist and M&A Solutions team members to discuss their individual vulnerability score and the key contributing factors.


Corporate Governance Through Exit and Voice

Marco Becht is the Goldschmidt Professor of Corporate Governance at the Solvay Brussels School for Economics and Management at Université libre de Bruxelles; Julian R. Franks is Professor of Finance at London Business School; and Hannes F. Wagner is Associate Professor at Bocconi University. This post is based on their recent paper. 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); and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

A Clinical Study of Investment Manager Stewardship

In a series of previous posts Bebchuk, Cohen and Hirst (discussed on the Forum here, here and here) have argued that investment managers have little incentive to monitor and engage with their portfolio companies. They present evidence collected from public sources to show that index funds in particular devote limited resources to stewardship. The authors argue that such asset managers communicate with only a small minority of portfolio companies, focus their attention on governance and pay, and only devote limited attention to issues that could be significant for beneficiaries, like strategy. In addition, asset managers are said to vote with management. This assessment has been challenged by some industry representatives and academic studies (discussed here).

Prior lack of empirical evidence

To the best of our knowledge none of these studies provide empirical evidence on the internal workings of asset managers and their engagements with companies, particularly private engagements.

Large sample evidence using proprietary data

In a recent ECGI Working Paper we present large sample evidence of the internal organisation and private engagements of a large UK asset manager, Standard Life Investments (SLI), that became Aberdeen Standard Investments in 2017 following the merger of Standard Life Plc and Aberdeen Asset Management Plc. The study covers the period 2007-2015. It suggests that the asset manager derives substantial tangible benefits from monitoring and its investment in stewardship.


Issuance of Equity to the US Government in Exchange for Aid—Considerations for Boards

Ethan Klingsberg and Paul Tiger are partners and Andrea Basham is counsel at Freshfields Bruckhaus Deringer US LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Mr. Tiger, Ms. Basham and Tomas Rua.

Amid the growing economic fallout of the COVID-19 pandemic, the White House’s top economic adviser, Larry Kudlow, signaled earlier this month that the Trump Administration was considering taking equity stakes in coronavirus-impacted companies as a condition to providing economic assistance—“equity for a bailout” in the common parlance. Though contrary to established conservative orthodoxy, which has traditionally eschewed government ownership of private companies, President Trump was quick to publicly endorse the idea, and this concept has now been authorized under the economic stimulus package passed by Congress and signed into law by the President on March 27. Of note, the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”) includes a $500 billion appropriation for the Treasury Department to provide “loans, loan guarantees and other investments” to states, municipalities and certain eligible companies, including, among others, passenger air carriers, cargo air carriers and “businesses critical to maintaining national security.” In the case of any passenger air carrier, cargo air carrier or “business critical to maintaining national security” that has publicly listed securities, the CARES Act requires the Treasury Department to receive warrants or other equity interests in connection with extending any loan or loan guarantee. In addition, while disbursements under the CARES Act are subject to oversight by a special committee of the Congress as well as an inspector general to be appointed by the President and confirmed by the Senate, the Secretary of the Treasury (and therefore Mr. Trump) nonetheless has significant discretion to structure aid and we believe in some cases—even where not required by the CARES Act—the Administration may condition any aid on receiving preferred stock, warrants, options and/or other equity instruments.


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