Monthly Archives: October 2020

“Bump-Up Exclusion” Bars Coverage of Settlement of Deal Litigation Claims

William Savitt and Ian Boczko are partners and Corey J. Banks is an associate at Wachtell, Lipton, Rosen & Katz LLP. This post is based on their Wachtell memorandum.

A California court has held that a D&O insurance policy’s “bump-up” exclusion permitted the carrier to disclaim coverage for sums paid to settle a class action against target-side directors arising from a corporate sale. Onyx Pharmaceuticals Inc. v. Old Republic Insurance Co., Case No. CIV 538248 (Cal. Super. Ct., San Mateo Cty. Oct. 1, 2020).

The decision centered on Amgen’s 2013 acquisition of Onyx Pharmaceuticals. A class of Onyx stockholders sued, alleging that the Onyx board breached its fiduciary duties by agreeing to an unacceptably low sale price. That case settled, with Onyx agreeing to pay the class $26 million. The primary carrier insurer paid its full $10 million policy limit, but the excess carriers refused coverage, invoking a “bump-up” exclusion in the policy for claims “alleging that the price or consideration paid or proposed to be paid for the acquisition . . . of an entity is inadequate.”


Investing Responsibly: Company Interaction

Carine Smith Ihenacho is the Chief Corporate Governance Officer, Jonas Jølle is Head of Governance, and Dyveke Rogan is a Senior Sustainability Analyst at Norges Bank Investment Management. This post is based on their NBIM memorandum. A related video is available here: NBIM Talk: Investing responsibly.

We have 3500 company meetings every year. Our starting point is to support the company while being clear about our expectations.

The fund’s approach to company interaction has developed over the years. However, some premises have been in place from the outset. First, we have maintained that company dialogue contributes to the protection of shareholder interests and supports the fund’s objective of achieving the highest possible return. Second, we have sought to be principled and transparent about the matters that we discuss with companies. Third, we have preferred to interact with a number of companies within a sector on the same issues rather than engage in individual company dialogue. Fourth, we have been mindful about the fund’s characteristics when interacting with companies, considering our ownership share, our global presence and our nature as a sovereign investor.

We integrate corporate governance and responsible business conduct into our investment decisions to support the fund’s objective of achieving the highest possible return with moderate risk. We have integrated governance expertise into the management of the fund, making sure that corporate governance analysts and equity analysts work together.


The Persistence of Fee Dispersion among Mutual Funds

Michael J. Cooper is Professor of Finance at the University of Utah David Eccles School of Business; Michael Halling is Associate Professor of Finance at the Stockholm School of Economics and a Research Fellow at the Swedish House of Finance; and Wenhao Yang is Assistant Professor of Finance at the Chinese University of Hong Kong School of Management and Economics. This post is based on their recent paper, forthcoming in the Review of Finance.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).

Almost 15 years ago, Elton, Gruber, and Busse (2004) and Hortacsu and Syverson (2004), documented substantial price dispersion for essentially identical S&P 500 index funds. These results were surprising because in competitive markets, prices for close to identical products should have similar prices. In the case of mutual funds, however, substantial deviations in fees might arise because of (i) the inability to arbitrage away such differences (i.e., one cannot short sell open-ended mutual funds whose fees are too high), (ii) investors that do not pay attention to fees, (iii) search frictions, as the number of mutual funds is large, and (iv) nonfinancial fund differentiation. The conclusion of this earlier literature focusing on index funds is that mutual fund markets are not perfectly competitive and that fees do matter to investors.

At the same time, Berk and Green (2004) proposed a partial-equilibrium model of the mutual fund industry that became very influential and was labelled the neoclassical model of mutual funds. This framework argues that percentage fees are irrelevant, as fund size will adjust in equilibrium such that net alphas (i.e., abnormal fund performance after fees) are equal to zero. The apparent conflict between the model’s predictions and the evidence on index funds has usually been attributed to measurement problems of abnormal performance and to the focus of the empirical evidence on a specific subset of funds, namely passive, index funds.


Weekly Roundup: October 9–15, 2020

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 9–15, 2020.

2020 Proxy Season Review

New Law Requires Diversity on Boards of California-Based Companies

Reclaiming “Value” in the True Purpose of the Corporation

Board Diversity: No Longer Optional

Short-Termism Revisited

SEC Increases Rule 14a-8 Thresholds

Treasury Issues Final Rule Updating CFIUS Regulations

Why and How Capitalism Needs to Be Reformed

Virtual Shareholder Meetings in the 2021 Proxy Season

The Impact of the Pandemic on Executive Compensation

The New SEC Regulation S-K Rules

Reporting Threshold for Institutional Investment Managers

2021 Proxy and Annual Report Season

Investing Responsibly: Voting

Does Shareholder Activism Split the Pie or Grow the Pie?

Alex Edmans is professor of finance at London Business School. This post is based on his recently published book Grow the Pie. 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); 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).

Activist investors are often seen as the epitome of all that’s wrong with capitalism. They cut investment, fire employees, and break contracts to boost the short-term stock price—and cash out before the long-term value destruction comes to light.

The basis of this concern is sound. Investors wish to maximize shareholder value; many of them are mandated by clients, such as pension funds, with financial obligations that need to be satisfied. One way—indeed, arguably the simplest way—to do so is to extract value from other stakeholders. However, this implicitly assumes that the value that a company creates is a fixed pie, so the only way to increase shareholder value is to take from society. In a recent post, I summarized the pie-growing mentality that’s the subject of a new book, Grow the Pie: How Great Companies Deliver Both Purpose and Profit. Investors might instead increase shareholder value by growing the pie—improving productivity, innovation, and focus—thus benefiting society as well.

Which is it? We need to turn to the evidence. It’s certainly possible to find examples of pie-splitting. Renowned activist Bill Ackman—through his hedge fund Pershing Square—took a stake in retailer JC Penney, which then laid off workers and ended its famous customer discounts. This actually ended up harming long-term value for investors, including Pershing Square itself.


Investing Responsibly: Voting

Carine Smith Ihenacho is the Chief Corporate Governance Officer, Jonas Jølle is Head of Governance, and Vegard Torsnes is a Lead Governance Analyst at Norges Bank Investment Management. This post is based on their NBIM memorandum. A related video is available here: NBIM Talk: Investing responsibly.

Shareholder meetings are the main opportunity for shareholders to influence companies and hold the board to account. We use our voting rights to promote the fund’s long-term interests.

We own a small slice of more than 9,000 companies. As a minority shareholder, we are one of many contributors of equity capital to a company. We rely on the board to set the company’s strategy, oversee management performance and be accountable for its decisions. For stock companies to function effectively, most decision-making power is delegated to the board. Shareholders have the right to choose who will sit on the board and act in their best interests. Shareholders also have the right to approve fundamental changes to the company, such as amendments to governing documents, issuance of shares, and mergers and acquisitions.

The fund has come a long way since it initially avoided using its voting rights for fear of getting involved in difficult decisions. Today, the fund actively uses its voting rights at nearly all shareholder meetings. The fund has a principled approach to corporate governance that is applied consistently across the portfolio. The fund publishes all its votes the day after the meeting. In cases when we vote against the board’s recommendation, we provide an explanation. From 2021, we will publish our votes before the shareholder meeting and explain any votes against the board’s recommendation. We want to be fully transparent about how we exercise our ownership.


2021 Proxy and Annual Report Season

Laura D. Richman is Counsel, Michael L. Hermsen is Senior Counsel, and Anna T. Pinedo is Partner at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Hermsen, Ms. Pinedo, Robert F. Gray, Jr., and David A. Schuette.

Preparations are key to a successful proxy and annual report season, and autumn is not too early to begin. While work on proxy statements, annual reports and annual meetings typically kicks into high gear in the winter, advance planning will make the process go more smoothly. This is especially true for the 2021 season, as companies evaluate the ramifications of COVID-19 that need to be discussed in various contexts in annual filings with the US Securities and Exchange Commission (SEC).

Companies may also want to spend time this fall considering whether to expand proxy disclosures beyond what is required in order to address issues that are garnering increased attention, such as human capital, diversity and other environmental, social and governance (ESG) matters. This post provides an overview of key issues that companies should consider as they get ready for the 2021 proxy and annual report season (2021 Proxy Season), including:


Reporting Threshold for Institutional Investment Managers

Granville J. Martin is General Counsel at the Society for Corporate Governance. This post is based on a comment letter by the Society for Corporate Governance to the U.S. Securities and Exchange Commission. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

The Society for Corporate Governance (the “Society” or “we”) appreciates the opportunity to provide comments to the U.S. Securities and Exchange Commission (the “SEC” or the “Commission”) on the proposed changes to the reporting threshold for Form 13F reports by institutional investment managers (the “Proposed Rules”). We respectfully submit this letter in opposition to the Proposed Rules.

Founded in 1946, the Society is a professional membership association of more than 3,500 corporate and assistant secretaries, in-house counsel, outside counsel, and other governance professionals who serve approximately 1,600 entities, including 1,000 public companies of almost every size and industry. Society members are responsible for supporting the work of corporate boards of directors and the executive managements of their companies on corporate governance and disclosure matters.

I. Introduction

Congress enacted Section 13(f) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), to increase the public availability of information regarding the securities ownership of institutional investors and to increase investor confidence in U.S. securities markets. When the final rules relating to the filing and reporting requirements of institutional investment managers were announced in 1979, the SEC made clear that “[t]he reporting system required by Section 13(f) is intended to create in the Commission a central repository of historical and current data about the investment activities of institutional investment managers, in order to improve the body of factual data available and to facilitate the consideration of the influence and impact of institutional investment managers on the securities markets and the public policy implications of that influence.” Accordingly, as the SEC has recognized, the goals of the Section 13(f) disclosure program are to (i) aggregate data in respect of the investment activities of institutional investment managers, (ii) improve public insight into the holdings of institutional investment managers in order to facilitate the assessment of such managers’ impact on the securities markets, and (iii) increase investor confidence in the integrity of the U.S. securities markets.


The New SEC Regulation S-K Rules

Andrew R. Brownstein, John L. Robinson, and Elina Tetelbaum are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Brownstein, Mr. Robinson, Ms. Tetelbaum, Erica E. BonnettAlbertus G.A. Horsting, and Andrea K. Wahlquist.

The SEC’s amendments to Regulation S-K will come into effect on November 9, 2020 and apply to 10-Qs, 10-Ks and registration statements filed on or after that date as applicable. November 9, 2020 is also the filing deadline for quarterly reports by large accelerated and accelerated filers with quarters ended on September 30, 2020. As we previously noted, the amendments alter requirements concerning the description of business (Item 101), legal proceedings (Item 103) and risk factors (Item 105) by, among other things, adopting a principles-based approach to disclosure. The amendments also require new descriptions, where material to an understanding of the business, of (1) a company’s “human capital resources” and (2) “any human capital measures or objectives that the registrant focuses on in managing the business (such as, depending on the nature of the registrant’s business and workforce, measures or objectives that address the development, attraction and retention of personnel).”

We developed the below Frequently Asked Questions to provide practical guidance as companies work to revise their annual and quarterly reports in light of the new disclosure requirements.


The Impact of the Pandemic on Executive Compensation

Joseph E. Bachelder is special counsel at McCarter & English LLP. This post is based on an article by Mr. Bachelder published in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of the article.

Pandemic Consequences to Executive Pay in 2020

1. Employer actions in response to the pandemic during the first half of 2020.

During the first half of 2020, many companies took actions to reduce executives’ salaries. (For example, as indicated in the Stanford Corporate Governance Research Initiative study noted below, 424 Russell 3000 companies reduced CEO salaries during this period.) Most companies did not take steps to modify their annual and long-term incentive programs, which will generally be adversely impacted by the economic consequences of the pandemic.


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