Yearly Archives: 2021

Effective Delegation in Advisory Agreements

Posted by Ron S. Berenblat, Adrienne M. Ward, and Thomas J. Fleming, Olshan Frome Wolosky LLP, on
Wednesday, January 6, 2021
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Ron S. Berenblat, Adrienne M. Ward, and Thomas J. Fleming are partners at Olshan Frome Wolosky LLP. This post is based on an Olshan memorandum by Mr. Berenblat, Ms. Ward, Mr. Fleming, Kenneth M. Silverman, and John Moon.

In a recent court case captioned Packer ex rel 1-800-Flowers.com v. Raging Capital Management, LLC, 2020 WL 6844063, __ F.3d __ (2d Cir. Nov. 23, 2020), the United States Court of Appeals for the Second Circuit (the “Second Circuit”) vacated a grant of summary judgment to plaintiffs by the lower District Court, [1] which had previously held that Raging Capital Master Fund, Ltd. (“Master Fund”), a master fund within a typical master-feeder hedge fund structure, was the beneficial owner of more than 10% of the outstanding shares of 1-800-Flowers, Inc. (“1-800-Flowers”) and therefore required to disgorge alleged short-swing profits for violating Section 16(b) of the Securities Exchange Act of 1934, as amended (the “Act”). The crux of the issue on appeal was whether the Master Fund, which had effectively delegated all voting power and investment power to its advisor (the “Advisor”), could be exempt from Section 16(b) liability.

The Second Circuit answered the question in the affirmative, and its decision contains important guidance for hedge funds whose securities are managed by a registered investment advisor formed solely to service a fund or family of funds. First, it is vital that the advisor be retained through an investment management agreement that (1) delegates all voting and dispositive power over the fund’s portfolio to the advisor and (2) cannot be terminated by the fund on less than 61 days’ notice. Second, the hedge fund that retains the advisor must have a board that is not subject to the control of the advisor, namely, one with a majority of independent directors.

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Say-on-Pay Votes and Compensation Disclosures

Posted by Brian V. Breheny, Joseph M. Yaffe, and Caroline S. Kim, Skadden, Arps, Slate, Meagher & Flom LLP, on
Wednesday, January 6, 2021
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Brian V. Breheny and Joseph M. Yaffe are partners and Caroline S. Kim is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a memorandum by Mr. Breheny, Mr. Yaffe, Ms. Kim, and other Skadden attorneys. Related research from the Program on Corporate Governance includes Stealth Compensation via Retirement Benefits by Lucian Bebchuk and Jesse Fried.

Companies should also consider their recent annual say-on-pay votes and general disclosure best practices when designing their compensation programs and communicating about their compensation programs to shareholders. This year, companies should understand key say-on-pay trends, including overall 2020 say-on-pay results, factors driving say-on-pay failure (i.e., those say-on-pay votes that achieved less than 50% shareholder approval), say-on-golden-parachute results and equity plan proposal results, as well as recent guidance from the proxy advisory firms ISS and Glass Lewis.

Overall Results of 2020 Say-on-Pay Votes

Below is a summary of the results of the 2020 say-on-pay votes from Semler Brossy’s annual survey and trends over the last nine years since the SEC adopted its say-on-pay rules. Overall, say-on-pay results at Russell 3000 companies surveyed in 2020 were generally the same or slightly better than those in 2019, despite the impact of the COVID-19 pandemic on compensation.

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Statement by Commissioners Lee and Crenshaw on Primary Direct Listings

Posted by Allison Herren Lee & Caroline Crenshaw, U.S. Securities and Exchange Commission, on
Tuesday, January 5, 2021
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Allison Herren Lee and Caroline Crenshaw are Commissioners at the U.S. Securities and Exchange Commission. This post is based on their recent public statement. The views expressed in the post are those of Commissioner Lee and Commissioner Crenshaw, and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [Dec. 23, 2020], the Commission approved a new listing rule from the New York Stock Exchange (“NYSE”) which fundamentally shifts how companies can access the public markets. [1] The new listing standard will allow primary direct listings of companies seeking to go public and, importantly, raise capital outside of the traditional initial public offering (“IPO”) process. [2] NYSE’s proposal represents what could have been a promising and innovative experiment. Unfortunately, the rule fails to address very real concerns regarding protections for investors. As a result, we are unable to support this specific approach. [3]

Before delving into the specifics, we believe it is important to acknowledge that the current IPO process is far from perfect. Among other things, the structure often imposes relatively high fees on issuers. Market participants and the Commission should continue to explore ways to innovate and modernize the IPO process, but it need not be at the expense of fundamental investor protections.

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Statement by Commissioner Roisman on NYSE Primary Direct Listing Proposal

Posted by Elad L. Roisman, U.S. Securities and Exchange Commission, on
Tuesday, January 5, 2021
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Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Roisman’s recent public statement. 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.

While many aspects of our equity markets have long benefited from innovation, innovation has managed to elude, to any significant extent, the primary offering process. Until today [Dec. 22, 2020]. NYSE’s proposal would provide an alternative means for companies listed on their exchange to raise equity capital in our public markets. I support the approval of the exchange’s proposed rule change.

A firm commitment underwriting may be the right option for many companies seeking to access the public markets. However, it is not necessarily the right option for every company. Nor does it need to be the only option. Primary direct listings represent an alternative way for companies to fairly and efficiently offer shares to the public in a manner that preserves important investor protections.

I recognize that a primary direct listing may not feature all of the services we have come to associate with traditional underwriting. This is certainly a change. However, we must keep in mind that these are still registered offerings, the anti-manipulation provisions of the federal securities laws will still apply, and there will be a variety of participants involved in the initial offering who will all be performing important gatekeeper functions, including an issuer’s financial adviser, which in the direct listings to date have been the same investment banking firms that are also involved in traditional initial public offerings (“IPOs”).

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Up or Out: Resetting Norms for Peer Reviewed Publishing in the Social Sciences

Posted by Campbell R. Harvey (Duke University) and David Hirshleifer (University of California), on
Tuesday, January 5, 2021
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Campbell R. Harvey is Professor of Finance at the Fuqua School of Business at Duke University, and David Hirshleifer is the Paul Merage Chair in Business Growth at the University of California Irvine Paul Merage School of Business. This post is based on their recent paper.

Papers in economics are three times the length that they were in the 1970s. This does not include internet appendices which push the total length of some papers to more than 100 pages. It takes years from submission to publication. We argue that editorial process in many of the social sciences has become dysfunctional. It is time to reset the norms.

Consider the current state of the peer review process. Authors have to deal with multiple rounds of reviews and sometimes the response document to the referees’ comments is longer than the manuscript itself. Some editors impose what we call the Union Heuristic. Under this “hands off” approach, the author has to satisfy all of the referee comments. Hence, papers become bloated with robustness checks, and the review process is unnecessarily extended.

We argue that this procedure has substantial social costs. Referees are often trying to impress editors by writing long reports with many comments not critical to the paper’s message. Authors need to invest considerable time dealing with long lists of comments. The time spent on frivolous robustness checks is time not spent on new research and developing innovative ideas.

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BlackRock’s 2021 Policy Guidance

Posted by Richard Fields, Timothy P. FitzSimons and Timothy M. Fesenmyer, King & Spalding LLP, on
Monday, January 4, 2021
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Richard Fields is counsel, and Timothy P. FitzSimons and Timothy M. Fesenmyer are partners at King & Spalding LLP. This post is based on a King & Spalding memorandum by Mr. Fields, Mr. FitzSimons, Mr. Fesenmyer, Elizabeth Morgan, Keith M. Townsend, and Cal Smith. 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); and The Specter of the Giant Three by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Each January, BlackRock typically previews its stewardship priorities in CEO Larry Fink’s annual letter to portfolio companies, followed soon thereafter by updated proxy voting guidelines. Given BlackRock’s position as the world’s largest asset manager, with nearly $8 trillion in assets under management, companies are prepared for this typical release of information. But as one more oddity of 2020, BlackRock is front-running its traditional proxy priority roll-out with yesterday’s release of a “2021 Stewardship Expectations” document that signals significant shifts in BlackRock’s priorities and approach, coupled with “Proxy Voting Guidelines” issued yesterday, to be effective January 2021. These holiday season gifts include a number of takeaways for public companies, a few of which we highlight below.

Support for More Shareholder Proposals—Perhaps most eye-catching is BlackRock signaling an increased willingness to vote against companies in the coming year, whether in respect of shareholder proposals or in director elections. This is a significant shift with regard to shareholder proposals. BlackRock writes: “We see voting on shareholder proposals playing an increasingly important role in our stewardship efforts around sustainability. Accordingly, where we agree with the intent of a shareholder proposal addressing a material business risk, and if we determine that management could do better in managing and disclosing that risk, we will support the proposal. We may also support a proposal if management is on track, but we believe that voting in favor might accelerate their progress,” going on to note that supporting shareholder proposals significantly increases the likelihood of a company implementing the requested actions. Later, they write “Where our analysis and engagement indicate a need for improvement in a company’s approach to an issue, we will support shareholder proposals that are reasonable and not unduly constraining to management.”

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Appraisal Waivers

Posted by Jill Fisch (University of Pennsylvania), on
Monday, January 4, 2021
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Jill Fisch is the Saul A. Fox Distinguished Professor of Business Law at the University of Pennsylvania Law School. This post is based on her recent paper, and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Appraisal has long been a controversial topic. The courts have struggled to determine the most appropriate valuation methodology and the extent to which that methodology should depend on vary based on case-specific factors. The Delaware Supreme Court continues to face an active docket of appraisal cases and to resolve them through opinions that are highly context-dependent. For example, in Brigade Leveraged Capital Structures Fund Ltd. v. Stillwater Mining Co., C.A., 2020 Del. LEXIS 335 (Del. Oct. 12, 2020) the court upheld the use of deal price as a reliable indicator of fair value despite significant flaws that were identified in the deal process. In Verition Partners Master Fund Ltd. v. Aruba Networks, Inc., 210 A.3d 128 (Del. 2019), the Supreme Court reversed the Chancery court’s valuation based on unaffected market price in favor of deal price minus synergies, and, at the same time, adjusted the lower court’s calculation employing that methodology. Yet in Fir Tree Value Master Fund, L.P. v. Jarden Corp., 236 A.3d 313 (Del. July 9, 2020) the court affirmed the use of unaffected trading price despite warning that “it is not often that a corporation’s unaffected market price alone could support fair value.” Variation in both the valuation method that the courts will employ and the implementation of that method create substantial uncertainty. The challenges are magnified by the heavy dependence on expert testimony and the potential for opportunistic litigation pejoratively described as appraisal arbitrage.

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Preparing for Shareholder Activism in 2021

Posted by Paul Tiger, Sebastian Fain, and Elizabeth K. Bieber, Freshfields Bruckhaus Deringer LLP, on
Monday, January 4, 2021
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Paul Tiger and Sebastian Fain are partners and Elizabeth K. Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Tiger, Mr. Fain, Ms. Bieber, and Ethan Klingsberg. 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).

Although the level of publicly reported activism has decreased this past year, boards and management teams continue to be occupied by a regular flow of “private” activism—i.e., aggressive non-public, inbound communications calling for changes in strategic direction, operational focus, public commitments to long-term metrics and changes to board and management composition, all made without launching a public campaign.

Meanwhile, we are witnessing the business model of activism evolve. Activists increasingly work with private equity funds or adopt a private equity model themselves that can be deployed in parallel with an activist campaign (e.g., as a provider of PIPEs to finance operational changes or as members or leaders of consortia to acquire all or a portion of the targeted company). At the same time, we are also seeing convergence in the other direction as traditional private equity sponsors accumulate non-passive, minority positions in publicly traded companies.

The adoption of these models is consistent with the increased focus of activism on optimizing M&A activity (wholeco sales, accretive acquisitions, multiple-improving divestitures and alternatives to M&A transactions endorsed by the incumbent board), alongside advocacy relating more generally to capital allocation choices.

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Shareholder Activism at Closed-End Funds in the Wake of Covid-19

Posted by Keith E. Gottfried, Morgan, Lewis & Bockius LLP, on
Sunday, January 3, 2021
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Keith E. Gottfried is partner at Morgan, Lewis & Bockius LLP. This post is based on his Morgan Lewis memorandum. 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); Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

Shareholder activism in the United States and worldwide was noticeably down in 2020 when compared to 2019, and that decline was largely due to the impact of the coronavirus (COVID-19) pandemic. However, for US Securities and Exchange Commission (SEC) registered closed-end investment funds, COVID-19 had the opposite effect. In the wake of the market dislocations that were driven by the COVID-19 pandemic, shareholder activism at closed-end funds was up noticeably in 2020, with closed-end funds experiencing more activist campaigns and proxy contests than in any other year between 2008 and 2020.

While shareholder activism at closed-end investment funds is not a new development and can be traced back to at least the early 1990s, it has historically been a niche area of shareholder activism dominated by a very small group of activist investors that target closed-end funds for the primary purpose of unlocking the discount between a fund’s share trading price and its per-share net asset value (NAV).

The COVID-19-driven market dislocations that occurred in March 2020 resulted in a significant, though relatively short-lived, widening of the discounts between a closed-end fund’s share trading price and its per-share NAV. This widening of the average NAV discount for US closed-end funds, which came close to the previous all-time record high set in the wake of the 2008 financial crisis, created an attractive opportunity for activist investors to accumulate large positions in the closed-end funds most impacted by the market dislocations and, thereby, lay the groundwork for activism campaigns to pressure closed-end funds to pursue liquidity events like self-tender offers that would allow activist investors to monetize such NAV discounts.

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Preparing Your 2020 Form 20-F

Posted by Michael Willisch, Reuven B. Young, and Connie Milonakis, Davis Polk & Wardwell LLP, on
Saturday, January 2, 2021
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Michael Willisch and Reuven B. Young are partners and Connie Milonakis is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Willisch, Mr. Young, Ms. Milonakis, Maurice Blanco, Michael Kaplan, and James C. Lin.

This post highlights some considerations for the preparation of your 2020 annual report on Form 20-F. As in previous years, we discuss both disclosure developments and continued areas of focus for the U.S. Securities and Exchange Commission (SEC). In addition, we highlight certain U.S.-related enforcement matters and other developments of interest to foreign private issuers (FPIs).

Disclosure Developments for 2020 Form 20-F

There have been a few updates to the Form 20-F requirements this year, including those stemming from the SEC’s guidance on COVID-19 disclosure.

SEC Guidance on COVID-19 Disclosure

The staff of the SEC’s Division of Corporation Finance issued new Disclosure Guidance Topics No. 9 and 9A in March and June 2020, respectively, providing the SEC’s views regarding disclosure that companies should consider with respect to COVID-19 and related business and market disruptions. Please see our Client Memorandum covering Disclosure Guidance Topic No. 9 and our Client Memorandum covering Disclosure Guidance Topic No. 9A.

As a general matter, the guidance “encourage[s] companies to provide disclosures that allow investors to evaluate the current and expected impact of COVID-19 through the eyes of management and to proactively revise and update disclosures as facts and circumstances change.” The guidance also includes a detailed list of questions for companies to consider when preparing disclosure and which are described in detail in the above-mentioned Client Memoranda, including questions relating to the impact of COVID-19 on a company’s financial condition, operations, liquidity and capital resources, assets, material impairments, business operations, and ability to continue as a going concern. The issues outlined in Disclosure Guidance Topics No. 9 and 9A are likely to be an area of focus when reviewing annual reports this season.

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