Monthly Archives: April 2020

The Impact of COVID19 on Shareholder Activism

Keith Gottfried and Sean Donahue are partners at Morgan, Lewis & Bockius LLP. This post is based on a Morgan Lewis memorandum by Mr. Gottfried and Mr. Donahue. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

The ultimate impact of the coronavirus (COVID-19) pandemic on shareholder activism remains largely uncertain and comparisons with the surge in activism that followed the 2008 global financial crisis are tempting, but suspect as it remains questionable whether activists can continue to rely on the same forces that were driving activism prior to COVID-19. In any case, companies that have had their valuations recently upended should assume that they may be targeted by an activist investor, either alone or in concert with others, and take steps to prepare accordingly.

As much of the world’s economy has come to a standstill in the wake of government-mandated social distancing to stem the spread of the coronavirus (COVID-19) pandemic, global financial markets continue to experience unprecedented volatility and numerous public companies have seen their stock prices plunge to unfathomable levels. At first blush, with so many companies trading at more than 50% off of their 52-week highs, it may appear that activist investors may have an endless supply of potential targets to choose from. However, even looking back at the experience of the 2008 financial crisis and the surge in shareholder activism that followed shareholder activism is in unchartered waters and the ultimate impact of COVID-19 on shareholder activism is largely uncertain.


Government Ownership in the Post Virus World

Alissa Kole Amico is the Managing Director of GOVERN. This post is based on a GOVERN memorandum by Ms. Amico.

Arguably the single most awaited economic event of 2019 was the public listing of the Saudi national oil company, Saudi Aramco, which swiftly became the largest listed company globally, overtaking Apple. Only half a year later, the privatisation of any state-owned company appears unthinkable. Indeed, the privatization mantra that has underpinned liberal economic thinking and policy guidance of multilateral institutions since the 1980s, has come to an abrupt, yet firm halt.

Over the last week, we have witnessed exactly the opposite tendency take hold all over the world and most notably in Europe—most hard-hit by the current pandemic—as governments in Spain, France, and the UK have rushed to announce nationalizations. Faced with a choice of lending to or investing in failing national champions, a number of governments have opted for the latter, nationalizing airlines, hospitals, automotive firms and other “crown jewels”.


Poison Pills and Coronavirus: Understanding Glass Lewis’ Contextual Policy Approach

Aaron Bertinetti is Senior Vice President of Research and Engagement at Glass, Lewis & Co. This post is based on his Glass Lewis 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.

Companies around the world are grappling with the substantial challenges of the COVID-19 pandemic, which continues to wreak havoc on our daily lives and the global economy. The financial outlook changes daily, with an unprecedented number of companies impacted by supply chain disruption, suppressed revenues, limited cash flows and sharply depressed stock prices. These dire conditions have prompted many companies to consider the added risk of opportunistic activism.

Many companies and their advisors are now considering the adoption of shareholder rights plans (“poison pills”) as an effective mitigator of unsolicited and potentially damaging corporate takeovers. While Glass Lewis remains generally skeptical of poison pills, our current policy is designed to apply a nuanced, contextual assessment of these provisions.

In our ongoing market engagements, it has come to Glass Lewis’ attention that some are misinformed or incorrect in their assertions about Glass Lewis’ position on poison pills. In this policy note, we seek to clarify our existing policies on poison pills and how they will be applied during the current unprecedented circumstances.


ISS Signals: More Understanding for Poison Pills and Skepticism for Activist Campaigns During the COVID-19 Crisis

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

In the midst of the COVID-19 pandemic, shareholder rights plans or “poison pills” continue to be a hot topic in Corporate America. As explained in our previous Sidley Update (Should Boards Adopt a Poison Pill in the COVID-19 Crisis?), the combination of high trading volumes and extreme levels of market volatility, along with the use of derivatives, makes it difficult for stock watch services to detect rapid stock accumulations. These factors make it easy for activists and hostile bidders to scoop up large stakes undetected at a time when most companies’ share prices are severely depressed as a result of the recent stock market crash. In response to these extraordinary circumstances, many companies are considering adopting a poison pill to establish a ceiling on share ownership (typically 10 percent or 15 percent for “regular” poison pills and 4.9 percent for rights plans adopted to protect tax net operating losses (NOLs)). In fact, since March 1, 2020, at least 28 U.S. public companies have adopted a poison pill, the highest number of new adoptions in such a short time period in over 20 years. To further put this number in perspective, only 25 S&P 1500 companies had a poison pill in place at the end of 2019 (Source: FactSet).

In ordinary times, we typically advise companies to refrain from adopting a poison pill in the absence of a specific activist or takeover threat and instead keep it “on the shelf” (i.e., fully drafted and ready for adoption). That is because ISS, Glass Lewis and many institutional investors generally frown upon the adoption of poison pills in the absence of such a specific threat. What was unclear until ISS issued new guidance yesterday was whether the proxy advisory firms would consider market conditions due to the COVID-19 pandemic the type of threat that may justify the adoption of a poison pill.


The Importance of Disclosure For Investors, Markets and Our Fight Against COVID-19

Jay Clayton is Chairman and William H. Hinman is Director of the Division of Corporation Finance at the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s and Mr. Hinman’s recent public statement. The views expressed in this post are those of Mr. Clayton and Mr. Hinman and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

The SEC’s three part mission—maintain market integrity, facilitate capital formation and protect investors—takes on particular importance in times of economic uncertainty. Disclosure—providing the public with the information necessary to make informed investment decisions—is fundamental to furthering each aspect of our mission. [1]

In the coming weeks, our public companies will be issuing earnings releases and conducting analyst and investor calls. We urge companies to provide as much information as is practicable regarding their current financial and operating status, as well as their future operational and financial planning. In an effort to facilitate robust disclosure and engagement, we provide the following observations and requests (discussed in more detail below):


Protecting Investors in a Time of Crisis: A Response to Those Who Would Utilize COVID-19 to Eviscerate Investor Protection

Mark LebovitchJeroen van Kwawegen, and Greg Varallo are partners at Bernstein Litowitz Berger & Grossmann LLP. This post is based on their BLB&G memorandum. This post responds to an earlier post on the Forum, The Crisis and the Activists and Raiders.

We live in troubled times. The current pandemic crisis poses challenges to all of us and more broadly to the system of justice in which we collectively work. But it is precisely at times such as these when ideas like “access to justice” and “investor protection” become more, not less relevant.

On March 23, 2020, a leading corporate law firm posted a memo decrying a supposed “flood of filings,” which it characterized as “in support of imagined and plainly non-exigent derivative lawsuits.”[1]  The memo asserted that “deadlines created by litigation of this sort” should not be permitted to burden an overtaxed legal system. No evidence for this “flood of filings” was offered beyond the firm’s say-so. A day later, the author of the memo told Reuters that it is “implausible,” “impracticable” and even “unethical” for investors to pursue their claims at this time. [2] On March 25, the same firm issued a client memo describing activist stockholders as a “menace to American companies.” [3] Other firms have taken a more balanced view, recognizing that it is a “mistake” to “dismiss or defer concerns about….investor litigation,” which is often more active in periods of “market volatility and uncertainty.” [4] However, the fact that leading members of the corporate bar would suggest shutting the door on litigation brought to protect investors is more than troubling.


Weekly Roundup: April 3–9, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 3–9, 2020

SEC–Exempt Offerings

Executive Compensation Programs & COVID-19

COVID-19 as a Material Adverse Effect (MAC) Under M&A and Financing Agreements

Federal Forum Selection Bylaws for Securities Act Claims

The Atmosphere for Climate-Change Disclosure

Rewriting the Poison Pill Prescription: Consider Active Defenses During COVID-19

Postponing/Adjourning Annual Meetings Following COVID-19

Federal Forum Provision Possible Impact on D&O Insurance

Thoughts for Boards of Directors in the COVID19 Crisis

Fiduciary Duties During a Time of Volatility

ESG Disclosures and Litigation Concerns

Corp Fin Disclosure Guidance: Topic No. 9 Coronavirus

Director Oversight in the Context of COVID-19

Purchasing Portfolio Company Debt—Threshold Issues for Private Equity Sponsors

Proactively Adopting a Poison Pill in Response to the COVID-19 Crisis

Accounting Class Action Filings and Settlements: 2019 Review and Analysis

Annual General Meetings & COVID-19

Are Corporate Payouts Abnormally High in the 2000s?

A Turn Back to “Poison Pills” in Response to the Coronavirus Pandemic

A Turn Back to “Poison Pills” in Response to the Coronavirus Pandemic

Gail Weinstein is senior counsel, and Philip Richter and Warren S. de Wied are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. de Wied, Steven G. Scheinfeld, Steven Epstein, and Amber Banks (Meek). 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.

The Coronavirus pandemic has been both a public health and an economic disaster. Stock prices have declined precipitously. As a result, many companies are turning their attention to whether their corporate governance structures enable them to protect their long-term shareholders from those who may seek to exploit the current situation by amassing a significant position in the company, at an extraordinarily low price, with the objective of pursuing goals that may not be in the long-term best interests of the company and its shareholders. Of note, in just the past several days, four large companies have adopted shareholder rights plans (so-called “poison pills”) to protect against unauthorized accumulations of their stock. A total of ten companies have adopted rights plans in the last few weeks.


Are Corporate Payouts Abnormally High in the 2000s?

Kathleen Kahle is the Thomas C. Moses Professor of Finance at Eller College of Management at the University of Arizona 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. Related research from the Program on Corporate Governance includes Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay by Jesse Fried (discussed on the Forum here).

At the turn of the century, financial economists worried about “disappearing dividends” (Fama and French, 2001). Times have changed. In recent years, the media and politicians have been increasingly concerned about the magnitude of corporate payouts. These concerns are primarily focused on the size of stock buybacks rather than dividend payments. For example, Senator Marco Rubio complains that “At present, Wall Street rewards companies for engaging in stock buybacks, temporarily increasing their stock prices at the expense of productive investment” and suggests taxing repurchases. Senators Chuck Schumer and Bernie Sanders want to restrict repurchases because they are a form “corporate self-indulgence.”

In our paper titled Are corporate payouts abnormally high in the 2000s?, we investigate whether payouts are abnormally high in the 2000s. By abnormally high, we mean payouts that are higher than expected given the payout policies of firms before 2000. In other words, if a firm in the 2000s makes the same payouts as an identical firm in the same situation before the 2000s, its payouts in the 2000s are not abnormally high. Abnormally high payouts can be a good development if funds retained within the firm would otherwise have been wasted, or a bad development if the funds would have been better employed within the firm.  However, if payouts in the 2000s are consistent with how firms paid out in earlier years, then payout policies have not changed. In that case, the explanation for the high payouts in the 2000s is simply that firm characteristics in the 2000s are different from firm characteristics in earlier years.


Annual General Meetings & COVID-19

Michael Laff is a Senior Associate at Institutional Shareholder Services, Inc. This post is based on his ISS memorandum.

In response to the COVID-19 pandemic, securities regulators in several countries have published guidance that affords publicly listed companies greater flexibility regarding the type of annual general meeting (AGM) they can hold as well as when it can be held.

As of March 31, the total number of meetings postponed or cancelled globally because of COVID-19 was approximately 557 while the number of meetings that will be virtual-only or proxy-only stood at 560. By comparison, that number stood at 286 for all of calendar 2019. These figures, as tracked by ISS and as illustrated below, are changing by the day as the pandemic is pushing into the traditional AGM season for many markets in the northern hemisphere.

Figure 1: Count of Virtual Meetings by Market as a Result of the Pandemic

Source: Institutional Shareholder Services; as of March 31, 2020; data is compiled based on alerts issued due to COVID-19 as disclosed by companies after the meetings had entered the ISS Global Meeting Services queue.; includes extraordinary and non-equity meetings. Does not necessarily include all meetings that have been announced as virtual in a market.


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