Monthly Archives: March 2021

A SPAC-tacular Distraction Compelling Opportunities in “Other” Event-Driven Investments

Doug Francis is Head of Event-Driven Strategies and Sam Klar is Portfolio Manager of Event-Driven Strategies at GMO LLC. This post is based on their GMO memorandum.

The combination of record-level SPAC issuance and a flood of non-SPAC M&A has created a supply-demand imbalance in the event-driven asset class. With SPACs garnering most of the limelight, we believe investors are missing an excellent opportunity to deploy capital into “other” event-driven investments, most prominently merger arbitrage.

A Wild Year

It’s certainly been an interesting 12 months in the event-driven asset class. From soft catalyst event situations upended by the onset of COVID in Q1 2020, to the March 2020 “Arbageddon” widening in merger arbitrage spreads, to countless instances of hedge fund repositioning causing atypical volatility in typically boring share class arbitrage. It’s been a truly wild ride.
The combination of Q1 2020 performance challenges for the asset class and slow-to-recover new merger volume last spring and summer led to the perception that there was “nothing to do” in event-driven. The record issuance of SPACs in 2020 and early 2021, accompanied by some high-profile bouts of outperformance in former SPACs like Nikola, amended that narrative slightly. Recent commentary has been willing to stipulate that there was nothing to do in event-driven, apart from SPACs.

The Current Opportunity

As experienced event-driven investors, we’ve often chafed at the notion that event-driven’s attractiveness waxes and wanes as much as commentators would suggest. Indeed, our team mantra is “there’s almost always something to do,” and our historical results have supported this claim’s veracity.


Activist Shareholder Proposals and HCM Disclosures in 2021

Mike Delikat is partner, Jessica James is senior associate, and Alex Mitchell is an associate at Orrick, Herrington & Sutcliffe LLP. This post is based on their Orrick memorandum. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

Since 2015, pay gap disclosure has been front and center on the activist shareholder proposal landscape from an employment and workforce perspective. Following closely on the heels of tragic events of last summer and the significant advancement of the Black Lives Matter movement, activist shareholder groups have pivoted away from proposals requiring disclosures of pay gap statistics and are instead focused on other dimensions of internal diversity, equity, and inclusion (“DEI”). These initiatives seek more broad-based disclosure of whether and how companies are managing gender and racial disparities in representation—including, for example, in the boardroom and at senior management levels within an organization. Combined with recent rule changes at the U.S. Securities and Exchange Commission (“SEC”) with respect to required Human Capital Management disclosures, public companies should prepare for how they will respond to proposals seeking different and new disclosures regarding steps they are taking to expand and maintain diversity within their workforces.

A Brief History Pay Gap Shareholder Proposals

Over the last five years, shareholder proposals on pay equity evolved to become an important issue at the operational and board level—particularly for companies in the technology and finance industries—with competitive, legal, and cultural implications. These proposals initially focused on undefined “pay gap” disclosures—meaning the overall percentage pay difference between male and female employees—as well as steps taken or proposed to address unexplained disparities. Over time, these proposals sought more granular gender and racial pay gap data, with an emphasis on median pay gap data—meaning a single, raw, unadjusted data point reflecting the middle compensation value among all female employees in a workforce compared to the same value for men. Critics of median pay gap disclosures point out that this measure of pay does not account for legitimate differences in compensation between employees or more nuanced information regarding a company’s highest and lowest earners.


2020 Developments in U.S. Securities Fraud Class Actions Against Non-U.S. Issuers

David H. KistenbrokerJoni S. Jacobsen and Angela M. Liu are partners at Dechert LLP. This post is based on a Dechert memorandum by Mr. Kistenbroker, Ms. Jacobson, Ms. Liu, Christine Isaacs and Siobhan Namazi, and Austen Boer.

Notwithstanding a year of unprecedented economic and societal change amidst a global pandemic, non-U.S. issuers continued to be targets of securities class actions filed in the United States. Indeed, despite widespread court closures due to the coronavirus pandemic, 2020 continued to see an uptick in the number of securities class action lawsuits brought against non-U.S. issuers. It is therefore imperative that, regardless of the economic climate, non-U.S. issuers stay vigilant of filing trends and take proactive measures to mitigate their risks.

In 2020, plaintiffs filed a total of 88 securities class action lawsuits against non-U.S. issuers.

  • As was the case in 2019, the Second Circuit continues to be the jurisdiction of choice for plaintiffs to bring securities claims against non-U.S. issuers. More than 50% of these 88 lawsuits (49)3 were filed in courts in the Second Circuit. A clear majority (35) of these 49 lawsuits were filed in the Southern District of New York. The next most popular circuit was the Third Circuit, with 22 lawsuits initiated in courts there. The Ninth and Tenth Circuits followed with 15 and two complaints, respectively.
  • Of the 88 non-U.S. issuer lawsuits filed in 2020, 28 were filed against non-U.S. issuers with a headquarters and/ or principal place of business in China, and 12 were filed against non-U.S. issuers with a headquarters and/or principal place of business in Canada.
  • As was the case in 2018 and 2019, the Rosen Law Firm P.A. continued to be the most active plaintiff law firm in this space, leading with most first-in-court filings against non-U.S. issuers in 2020 (25). However, departing from the trend of the last several years, Pomerantz LLP was appointed lead counsel in the most cases in 2020 (14); the Rosen Law Firm closely followed with 13 appointments as lead counsel.
  • Remarkably, the majority of the suits (28) were filed in the 2nd quarter, at the height of the coronavirus pandemic for most areas throughout the United States, particularly in the Southern District of New York.
  • While the suits cover a diverse range of industries, the majority of the suits involved the biotechnology and medical equipment industry (14), followed by the software and programming industry (9), the consumer and financial services industry (7), and the communications services industry (7).
  • Of the 22 lawsuits brought against European-headquartered companies, five were filed against firms headquartered in the United Kingdom and four were filed against firms headquartered in Germany.


Are Women Underpriced? Board Diversity and IPO Performance

P. Raghavendra Rau is Sir Evelyn de Rothschild Professor of Finance at the University of Cambridge; Jason Sandvik is Assistant Professor of Finance at Tulane University; and Theo Vermaelen is UBS Professor of Investment Banking at INSEAD. This post is based on their recent paper. 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).

Over the past two decades, academic research has found little evidence that gender diversity on the boards of directors has a positive impact on firm value. In recent years, however, practitioners have increasingly argued that diversity among the board of directors has a positive economic impact on firms. In January 2020, the Nasdaq Stock Market filed a proposal with the Securities and Exchange Commission to adopt Rule 5605(f) (Diverse Board Representation) which argued for mandatory diversity on boards of firms listed on NASDAQ, based on economic arguments that diverse boards were positively associated with improved corporate governance and financial performance. In the same month, Goldman Sachs announced it would stop financing the Initial Public Offerings (IPOs) of companies in the U.S. and Europe with only white male board members again on the basis of superior performance by firms with gender-diverse boards.

In our paper Are Women Underpriced? Board Diversity and IPO Performance, we examine the economic impact of gender diversity on the performance of IPOs from 2000–2018. IPOs are an appropriate venue to study the effect of shareholder preferences on gender diversity because it is the only type of corporate transaction where investors can express their opinions about company valuation. Specifically, the book-building process provides a unique opportunity for investors to give feedback on the valuation range proposed by the investment bank. Investors can show that they value stocks differently from traditional valuation methods, such as discounted cash flows and earnings multiples, by incorporating a premium for diversity, for example. Because the underpricing of IPO shares reflects the difference between market valuations and the valuations by the investment bank, such a premium can be measured directly. There is no other event where this is empirically feasible. In addition, investment banks have an outsized impact on the terms of the offering and the structure of the firm. For example, the insistence by Goldman Sachs that it would not consider taking public a firm that did not have a gender-diverse board is unique. Investors can invest in any type of publicly listed firm, such as “sin stock” firms, depending on their preferences. However, if a non-gender-diverse firm is unable to go public, investors are necessarily constrained in expressing their preferences. Finally, IPO underpricing is likely to be less subject to the endogeneity problems that plague many studies that find a positive relation between gender diversity and stock market or operating performance. Indeed, it is not obvious whether diversity causes performance or vice versa. On the other hand, it is implausible that underpricing encourages firms to put women on the board.


Delaware Supreme Court Holds That Fraud Is Insurable Under D&O Policy

Andrew J. Noreuil and Michael J. Gill are partners at Mayer Brown LLP. This post is based on their Mayer Brown memorandum, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court unanimously affirmed a trial court judgment requiring a directors and officers (D&O) excess insurer to pay a claim for losses predicated on fraudulent conduct of the director and CEO of a corporation, holding that such losses are insurable under Delaware law and coverage is not barred by Delaware public policy.

The Court also held that Delaware law applied to the insurance policy in the case, stating that a choice of law analysis for a D&O policy will most often reveal that a corporation’s state of incorporation has the most significant relationship to the insurance policy.


The insurance coverage at issue in RSUI Indemnity Company v. Murdock (March 3, 2021) [1] involved claims for breach of fiduciary duty and federal securities law violations under a $10 million excess D&O liability insurance policy issued by RSUI Indemnity Company to Dole Food Company, Inc. In November 2013, affiliates of David Murdock, the CEO and a director of Dole, completed a transaction to take Dole private for $13.50 per share. In 2015, the Delaware Chancery Court issued a memorandum opinion finding, among other things, that Murdock had breached his duty of loyalty and engaged in fraud in connection with the transaction, which drove down Dole’s premerger stock price, undermining it as measure of value and affecting the Dole Special Committee’s negotiating position. The Chancery Court awarded damages to unaffiliated stockholders in an amount equal to $2.74 per share (approximately $148 million in the aggregate). Dole then informed its insurers it was engaging in settlement negotiations, to which all responded by reserving their rights regarding coverage. Thereafter, Dole negotiated a settlement without further involvement of its D&O insurers, and Murdock paid the settlement amount in full.


BlackRock’s 2021 Engagement Priorities

Sandra Boss is Global Head of Investment Stewardship and Michelle Edkins is Managing Director of Investment Stewardship. This post is based on a BlackRock Investment Stewardship memorandum by Ms. Boss, Ms. Edkins, Giovanni Barbi, Victoria Gaytan, Hilary Novik-Sandberg, and Ariel Smilowitz.

BlackRock Investment Stewardship (BIS) undertakes all investment stewardship engagements and proxy voting with the goal of advancing the economic interests of our clients, who have entrusted us with their assets to help them meet their long-term financial goals. Our conviction is that companies perform better when they are deliberate about their role in society and act in the interests of their employees, customers, communities and their shareholders. We use our voice as a shareholder to urge companies to focus on important issues, like climate change, the fair treatment of workers, and racial and gender equality, as we believe that leads to durable corporate profitability.

2021 Priorities

Engagement is core to our stewardship efforts as it enables us to provide feedback to companies and build mutual understanding about corporate governance and sustainable business practices. Each year, we set engagement priorities to focus our work on the governance and sustainability issues we consider to be top of mind for companies and our clients as shareholders. We believe an intensified focus on these issues advances practices and contributes to companies’ ability to deliver the sustainable long-term financial performance on which our clients depend.


Common Ownership and Competition in the Ready-to-Eat Cereal Industry

Matthew Backus is the Philip H. Geier Jr. Associate Professor at Columbia Business School; Christopher Conlon is Assistant Professor of Economics at NYU Stern School of Business; and Michael Sinkinson is an Assistant Professor of Economics at the Yale School of Management. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here); New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here); and Horizontal Shareholding by Einer Elhauge (discussed on the Forum here).

An exciting and controversial idea at the intersection of corporate governance, economics, and finance is what is known as the “Common Ownership Hypothesis”. Simply put, it states that because investors hold portfolios of stocks which include horizontal competitors, for managers to do right by their investors, they may want to internalize some of the effects their actions have on their competitors. This is in many ways an old idea, with its roots going back to the 1980’s and the analysis of joint ventures, but there is renewed interest today for several reasons: (a) that investors have become increasingly diversified and hold portfolios that are similar both to the index and to one another; and (b) the largest institutional investors (Vanguard, BlackRock, and State Street) are often among the largest investors in most publicly traded firms—holding 4-6% of most S&P 500 constituents.

While data are generally available on how much investors hold in various stocks via SEC 13f filings, less is known about how corporate governance actually works, and how managers choose which investors to pay attention to (and which to ignore). This is particularly challenging when investors disagree about the direction they wish management to pursue (such as expanding output and reducing price or reducing output and increasing prices). Our previous work examines how to map assumptions on corporate governance into “profit weights” which measure how one firm values the profits of another firm relative to $1.00 of its own profits. To frame ideas, a merger of two firms would be represented by a profit weight of one on a rival’s profits. In that work, we showed that typical S&P500 constituents might value $1.00 of competitor profits as close to $0.20 of their own in 1980, but closer to $0.70 in 2017 given the rise in common ownership. At the same time, we documented substantial asymmetries in these relationships: Kellogg’s might value the profits of General Mills as $0.22 of their own profits, but General Mills might simultaneously treat one dollar of Kellogg’s profits as $0.60 of their own. In some sense these asymmetric relationships are one of the unique predictions of the theory of common ownership.


Corporate Officers Face Personal Liability for Steering Sale of the Company to a Favored Buyer

Gail Weinstein is senior counsel, and Philip Richter and Steven Epstein are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Ms. Weinstein, Mr. Richter, Mr. Epstein, Warren S. de Wied, Brian T. Mangino, and Roy Tannenbaum, 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 Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? by John C. Coates, Darius Palia, and Ge Wu (discussed on the Forum here); and The New Look of Deal Protection by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

In In re Columbia Pipeline Group, Inc. Merger Litigation (Mar. 1, 2021), the Delaware Court of Chancery held that the CEO-Chairman and the CFO (“Skaggs” and “Smith,” respectively; together, the “Officers”) of Columbia Pipeline Group, Inc. (the “Company”) may have breached their fiduciary duties in connection with the $13 billion merger in 2016 of the Company with TransCanada Corporation (the “Merger”).

Vice Chancellor Laster found it reasonably conceivable, at the pleading stage of litigation, that the Officers had tilted the sale process to favor TransCanada, and that they were motivated by their plans to retire and their desire to receive their change-in control benefits that would be triggered on the Company’s sale. The court held that Corwin “cleansing” of the breaches was not available because the disclosure to stockholders relating to the Merger was inadequate. In addition, the court held that TransCanada may have aiding and abetting liability as it was reasonably conceivable that it knew that the Officers were violating their fiduciary duties in connection with the sale process and it “exploited the resulting opportunity.”


Speech by Commissioner Roisman on ESG Regulation

Elad L. Roisman is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on his 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.

AMAC’s Careful and Collaborative Approach

Thank you, Ed [Bernard] and members of this Committee, not only for your work, but for the thoughtful process you have undertaken to develop recommendations for the Commission. AMAC’s approach has been methodical, iterative, and transparent: discussing complex issues, developing subcommittee recommendations in draft form, presenting those ideas to the full Committee, and inviting a lot of engagement. While such an approach may not yield quick results—and it likely demands increased time and attention from each of you—it provides opportunities to consider new perspectives and new information. Ultimately, I believe it should make any final recommendations you adopt more comprehensive and useful for the Commission itself.


Poison Pills After Williams: Not Only for When Lightning Strikes

Ethan Klingsberg and Paul Tiger are partners and Elizabeth K. Bieber is counsel at Freshfields Bruckhaus Deringer LLP. This post is based on a Freshfields memorandum by Mr. Klingsberg, Mr. Tiger, Ms. Bieber, and Victor Ma, 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 Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

The board of The Williams Companies (“Williams”), in March 2020, became the only board among the S&P 500 companies to respond to the volatility of the pandemic by adopting a shareholder rights plan (also known as a poison pill). [1] On February 26, 2021, Vice Chancellor McCormick of the Delaware Court of Chancery enjoined the Williams poison pill in her post-trial opinion in The Williams Companies Stockholder Litigation. [2] Vice Chancellor McCormick’s thorough opinion about the extraordinary pill adopted by the Williams board is worth reflecting upon from the perspective of over three decades of poison pill litigation.

Background and key terms of the Williams pill

The Williams board adopted the shareholder rights plan with a one-year term when the Williams stock price was hitting an all-time low, although the company’s market cap remained above $10 billion and there were no indications of hostile actors in the stockholder profile or on the takeover front. The pill provided that if an “acquiring person” were to either “beneficially own” more than 5% of Williams stock or commence a tender offer to increase its beneficial ownership in excess of 5%, then the acquiring person would be subject to the massive dilution that results from the triggering of a poison pill. Pills adopted by other companies to protect their NOLs from being unwound by a change of control under the federal tax laws have had thresholds in the 5% range. But, as the Court observed, a pill with a threshold as low as 5% is otherwise virtually unheard of. The Williams board wanted to be different.


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