Yearly Archives: 2022

Annual Review of Shareholder Activism

Posted by Rich Thomas, Christopher Couvelier, and Leah Friedman, Lazard, on
Wednesday, January 26, 2022
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Rich Thomas is Managing Director and Head of European Shareholder Advisory, Christopher Couvelier is a Managing Director, and Leah Friedman is an Associate at Lazard. This post is based on a Lazard memorandum by Mr. Thomas, Mr. Couvelier, Ms. Friedman, Emel Kayihan, and Lauren Ortner. 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); 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).

Observations on the Global Activism Environment in 2021

U.S. Activity Leads Global Market

  • 173 campaigns launched globally in 2021, in line with 2020’s slower pace; capital deployed by activists was also roughly flat Y-o-Y ($42bn vs. $40bn)
    • New campaigns launched in the U.S. increased 14% Y-o-Y, and U.S. activity accounted for 55% of all global activism (up from 45% in 2020)
    • Numerous high-profile campaigns, including several launched in prior years, reached inflection points in 2021 – including ExxonMobil becoming the
      largest issuer to lose a proxy fight, Toshiba announcing a break-up following persistent activist criticism and Box prevailing in its proxy fight against
      Starboard following its controversial “white squire” investment from KKR
    • The year culminated with a very active Q4 that saw 50 new campaigns launched, resulting in numerous live situations heading into 2022
  • Elliott launched 17 campaigns, its most active year since 2018, including notable situations at GSK, Duke Energy, Citrix and Willis Towers Watson
    • JANA’s seven campaigns (including Treehouse and Zendesk) made it the next most prolific fund and matched JANA’s 2014 high-water mark for new launches

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Cybersecurity and Securities Laws

Posted by Gary Gensler, U.S. Securities and Exchange Commission, on
Tuesday, January 25, 2022
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Gary Gensler is Chair of the U.S. Securities and Exchange Commission. This post is based on his recent remarks before the Northwestern Pritzker School of Law’s Annual Securities Regulation Institute. The views expressed in the post are those of Chair Gensler, and do not necessarily reflect those of the Securities and Exchange Commission or the Staff.

Thank you. It’s good to be with the Annual Securities Regulation Institute. As is customary, I’d like to note that my remarks are my own, and I’m not speaking on behalf of the Commission or SEC staff.

As some of you may know, I often like to talk about the founding of our nation’s securities laws in the 1930s.

So again, today, I’d like to discuss the ‘30s — but this time, I actually mean the 1830s.

In 1834, exactly a century before the SEC was established, the Blanc brothers in Bordeaux, France, committed the world’s first hack. The two bankers bribed telegraph operators to tip them off as to the direction the market was headed. Therefore, they gained an information advantage over investors who waited for the information to arrive by mail coach from Paris.

The brothers weren’t convicted for their actions, as France didn’t have a law against the misuse of data networks. [1] The Blancs thus pocketed their francs, point-blank.

You may be wondering what all this has to do with the SEC. Well, I think it’s telling that the world’s first cybersecurity attack involved securities.

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Regulating Global Stablecoins: A Model-Law Strategy

Posted by Steven L. Schwarcz (Duke University), on
Tuesday, January 25, 2022
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Steven L. Schwarcz is Stanley A. Star Distinguished Professor of Law & Business at Duke University School of Law. This post is based on his recent paper.

In Regulating Global Stablecoins: A Model-Law Strategy, I examine the challenges of facilitating “retail” consumer payments by issuing digital currencies—monetary currencies that are evidenced electronically and not in physically tangible form.

Two types of retail digital currencies are likely to become feasible in the near future: central bank digital currencies (“CBDC”), which are sponsored by governmental central banks, and “stablecoins,” which are non-government issued digital currencies that are backed by “reference assets” having intrinsic value, such as government fiat currencies. In contrast, bitcoin and other privately issued cryptocurrencies that are not backed by reference assets are unlikely to become successful consumer currencies because of their unpredictably fluctuating value.

This paper focuses on stablecoins that become widely used internationally (“global stablecoins”). That widespread use is likely; according to the Financial Stability Oversight Council’s 2021 annual report, for example, the market capitalization of stablecoins already being used in the United States already well exceeds $100 billion dollars.

Global stablecoin use poses a host of cross-border legal issues. At the outset, that use would generate high costs if stablecoins are governed by multiple, and potentially conflicting, legal frameworks. Furthermore, the interaction of conflicting legal frameworks could create uncertainty about the enforceability of contractual obligations.

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It’s a New World for CFOs

Posted by Gina Gutzeit, David White, and Alan Numsuwan, FTI Consulting, on
Tuesday, January 25, 2022
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Gina Gutzeit is Senior Managing Director, David White is Senior Managing Director, and Alan Numsuwan is Managing Director at the Office of the CFO Solutions practice at FTI Consulting. This post is based on their FTI Consulting memorandum.

FTI Consulting’s annual CFO Survey offers insights from business leaders on the challenges they face and their expectations for 2022. The CFO Survey includes organizations across all major industries. Respondents include chief financial officers, financial planning and analysis leaders, finance vice presidents as well as directors, controllers, treasurers and others with financial decision-making roles.

FTI Consulting’s 2020-21 survey, Leading the Way Through Critical Times, highlighted the tremendous resolve and strategic leadership that CFOs and finance leaders demonstrated as they navigated through the COVID-19 pandemic. The exceptional performance by finance to take on a more enterprise-wide view of their organizations has led to greater responsibilities and expectations. This year, CFOs and finance leaders will find themselves confronting greater challenges, with their soft skills put to the test.

One notable aspect of this new environment is the evolving finance talent landscape. Last year, our survey revealed that most CFOs were experiencing personnel setbacks in their finance functions. At the time, CFOs may have presumed that downsizing and/or avoiding hiring new talent was an appropriate response during a period of uncertainty. However, the impact of hiring freezes or downsizing that occurred in 2020 may have been exacerbated by significant employee turnover this year, often referred to as the “Great Resignation.” In response, CFOs and finance leaders will need to focus more on team culture, employee retention and recognition and training and development. But talent is only one challenge that has evolved for CFOs. In this new world, CFOs will need to prioritize and allocate their time and resources effectively to make the most impact in both their finance organizations and across the enterprise, including in the areas below.

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A Second Look at SPACs: Is This Time Different?

Posted by Michael Klausner (Stanford University), Michael Ohlrogge (NYU), and Emily Ruan (Stanford University), on
Monday, January 24, 2022
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Michael Klausner is the Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School; Michael Ohlrogge is Assistant Professor of Law at NYU School of Law; and Emily Ruan of Stanford University. This post is an update to their previous post on the Forum here.

About a year ago, we wrote a post on this blog, entitled A Sober Look at SPACs, which summarized an article we had written with the same title. Our research showed, among other things, that SPAC shares were highly diluted, that their post-merger performance was quite poor, and that sponsors’ returns were extraordinarily high. We have now updated that article here. In our update, we include a “Postscript” that responds to the most common criticism we received on our initial paper: that our data from January 2019 through June 2020 was outdated, that SPACs have changed (in a matter of months), and as a result “this time is different.” As Carmen Reinhart and Kenneth Rogoff have said in their book on financial crises, “More money has been lost because of these four words than at the point of a gun.”

In the months since we initially posted our research, the SPAC market experienced an extraordinary bubble. Much of what looked different during that time has since reversed itself. In this post, we summarize what has been different and what remains the same. On the whole, we conclude that this time is not different. SPACs remain highly diluted, and their returns remain poor.

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ESG and M&A in 2022: From Risk Mitigation to Value Creation

Posted by Andrew R. Brownstein and Carmen X.W. Lu, Wachtell, Lipton, Rosen & Katz, on
Monday, January 24, 2022
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Andrew R. Brownstein is partner and Carmen X.W. Lu is counsel at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Brownstein, Ms. Lu, David M. Silk, Mark F. Veblen, Sabastian V. Niles, and Ram Sachs. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

In the past twelve months, ESG investments have hit new records and attracted heightened regulatory focus on disclosure and enforcement. With stakeholder impacts, climate change, biodiversity, human capital management, diversity and inclusion and cybersecurity continuing to be top of mind for investors and regulators alike, this coming year will likely see ESG increasingly influence deal-making.

In early 2020, we foreshadowed the potential impact of ESG on the selection of targets, company valuations and assessments of deal risk. Going forward, ESG will not simply be a tool for identifying and mitigating risks, but also a lever for value creation. Acquirors and targets alike will be increasingly expected to demonstrate their ESG credentials. The impact of ESG on M&A could be further amplified by anticipated ESG disclosure rules from the U.S. Securities and Exchange Commission (“SEC”) and if the Biden Administration’s Build Back Better Act makes further headway. The continued convergence of market-led ESG disclosure frameworks, including the formation of the International Sustainability Standards Board which is expected to issue global disclosure standards this year, will further assist investors and businesses in quantifying the ESG impact of their investments.

Many critical aspects of M&A will be affected by the integration of ESG into investor decision-making; we highlight some of the key trends below:

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Proposed Rules on Disclosure of Security-Based Swap Positions

Posted by Andrew Freedman, Elizabeth Gonzalez-Sussman, and Ron Berenblat, Olshan Frome Wolosky LLP, on
Monday, January 24, 2022
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Andrew Freedman, Elizabeth Gonzalez-Sussman, and Ron Berenblat are partners at Olshan Frome Wolosky LLP. This post is based on their Olshan memorandum.

On December 15, 2021, the Securities and Exchange Commission (“SEC”) proposed for comment new rules that would require any person or group of persons who owns security-based swap positions that exceed a specified reporting threshold amount to publicly report on a new Schedule 10B the positions and certain related information within one business day following execution of the security-based swap transaction that triggers the reporting requirement. The proposed rules would prevent investors from building significant economic positions in companies (as measured by the proposed rules) through cash-settled swaps without triggering an SEC filing. The deadline for submitting comments to the SEC is 45 days after publication of the proposed rules in the Federal Register.

High-Level Summary for Shareholder Activists

Proposed Section 10B of the Securities Exchange Act of 1934, as amended, is structured as a large trader position reporting rule that would be broadly applicable to security-based swap positions, including positions in equity-based swaps, debt-based swaps, security index-based swaps and various combinations thereof. The proposed rules would create a new reporting regime outside the current Schedule 13D reporting system that would require prompt reporting of security-based swap positions, including cash-settled swap positions, that exceed an applicable threshold amount. The applicable threshold amount that would trigger a filing would be different for positions in equity-based swaps, debt-based swaps and credit default swaps (“CDSs”).

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Equity Outlook: Get Ready for Another Year of Surprises

Posted by Chris Hogbin, AllianceBernstein, on
Sunday, January 23, 2022
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Chris Hogbin is Head of Equities at AllianceBernstein. This post is based on his AllianceBernstein memorandum.

Global equities surged in 2021 during a year full of surprises. As the new year begins, perhaps the only sure thing is that there will be more surprises to come in 2022. So how can investors prepare for unexpected developments driven by macroeconomic forces, the pandemic and geopolitical risk?

Despite bouts of volatility, the MSCI World Index advanced by 24.2% in 2021, in local currency terms. US large-caps led the gains and weren’t derailed in late December after the Federal Reserve unveiled plans to accelerate monetary policy tightening in 2022. Developed markets outperformed emerging markets, as Chinese stocks struggled. Energy, technology and financial stocks outperformed, while defensive sectors such as utilities lagged.

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A Director’s Duty of Oversight after Marchand in “Caremark” Case

Posted by Gregory A. Markel, Daphne Morduchowitz, and Matthew C. Catalano, Seyfarth Shaw LLP, on
Sunday, January 23, 2022
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Gregory A. Markel and Daphne Morduchowitz are partners and Matthew C. Catalano is an associate at Seyfarth Shaw LLP. This post is based on their Seyfarth Shaw memorandum, 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 Monetary Liability for Breach of the Duty of Care? by Holger Spamann (discussed on the Forum here).

Fundamental Delaware corporate governance principles provide directors with the ultimate authority to manage corporations. Delaware’s business judgement rule protects directors who exercise that authority in good faith and with reasonable care, from liability, even if with the benefit of hindsight the actions taken resulted in an unfortunate result. This rule encourages directors to operate in good faith in the interests of the corporation and its shareholders and with reasonable care under the facts and circumstances as then known and also incentivizes highly competent individuals to serve as company directors by minimizing the litigation risks of being a director if he or she operates in good faith.

In order to achieve these purposes and to encourage the success of Delaware corporations, the board must create or approve a reasoned approach to maintaining a reasonable system for causing information to be transmitted to the board concerning material issues for the business of the company and significant risks to that business. If such a reasonable system is created in good faith, and monitored in good faith, under Delaware law, the board will be protected from claims of lack of oversight.

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Four Trends Shaping Corporate Governance in 2022

Posted by Maria Castañón Moats and Paul DeNicola, PricewaterhouseCoopers LLP, on
Saturday, January 22, 2022
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Maria Castañón Moats is Leader and Paul DeNicola is Principal at the Governance Insights Center, PricewaterhouseCoopers LLP. This post is based on their PwC memorandum. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) and Will Corporations Deliver Value to All Stakeholders?, both by Lucian A. Bebchuk and Roberto Tallarita; For Whom Corporate Leaders Bargain by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita (discussed on the Forum here); and Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy—A Reply to Professor Rock by Leo E. Strine, Jr. (discussed on the Forum here).

2021 threw companies and their boards curveball after curveball. They started the year on a hopeful note sparked by the COVID-19 vaccine rollout, but ended it in the midst of new outbreaks caused by the Omicron variant. Companies saw energy disruptions and high prices, unprecedented weather events, a SPAC boom and bust, record highs in the housing and stock markets, and rising inflation.

When it came to governance, diversity concerns dominated discussions in many boardrooms. Beefed-up board diversity requirements in California, a new NASDAQ listing standard, and strengthening calls from investors made real the need for boards to have gender, racial, and ethnic diversity. 2021 saw the most diverse class of S&P 500 directors ever and signs point to that trend continuing.

The SEC also signaled potentially big changes on the disclosure front. New requirements are likely on the way for environmental, social, and governance (ESG) reporting early in 2022. Not far behind, we expect updates to cybersecurity risk oversight disclosure.

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