Monthly Archives: January 2022

It’s a New World for CFOs

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.


A Second Look at SPACs: Is This Time Different?

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.


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

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:


Proposed Rules on Disclosure of Security-Based Swap Positions

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”).


Equity Outlook: Get Ready for Another Year of Surprises

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.


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

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.


Four Trends Shaping Corporate Governance in 2022

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.


Cross-Border M&A: 2022 Checklist for Successful Acquisitions in the U.S.

Adam O. Emmerich and Robin Panovka are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Emmerich, Mr. Panovka, Jodi J. Schwartz, David A. Katz, Ilene Knable Gotts, and Andrew J. Nussbaum. 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).

2021 was the most active year for M&A on record. There can be no other headline for the relentless boom in M&A over the twelve months ended December 31, 2021, during which global M&A volume exceeded $5.8 trillion, the highest annual volume on record. Each of the four quarters of 2021 placed in the top six most active quarters in global M&A by volume since the beginning of 2010. As always, however, the headline figures do not tell the whole story, as M&A in 2021 was not only historically robust, but also as complex and multi-faceted as ever.

Record-breaking M&A volume in 2021 was driven by a surge in large deals of $1 billion to $10 billion. There was $2.8 trillion in large deals in 2021, an 81% increase relative to the volume of such deals in 2020 ($1.5 trillion) and a virtual doubling relative to 2019 ($1.4 trillion), the last full year prior to the onset of the Covid-19 pandemic. Private equity buyers, and their “dry-powder” in need of deployment, participated in the large deal boom in a significant way, with $1.3 trillion in large buyouts in 2021, increases of 114% and 162% relative to volumes in 2020 and 2019 ($589 billion and $479 billion, in aggregate value in 2020 and 2019, respectively).

At the same time, while mega-mergers were more abundant in 2021 than in 2020, the largest deals in 2021 were not as large as in prior years. There were 16 transactions in excess of $20 billion in 2021, totalling $565 billion (an average deal size of $35 billion), compared to 12 such transactions in 2020, totalling $498 billion (an average deal size of $41 billion), and 20 such transactions in 2019, totalling $900 billion (an average deal size of $45 billion). While some industry observers have suggested that dealmakers’ uncertainty as to the approach of the new antitrust regime in the United States (headwinds that do not blow as strongly against private equity) put the very largest deals on hold, there are signs of increasing confidence in strategic tie-ups, including Oracle’s $28.3 billion acquisition of Cerner announced at the end of December.


Presidential Address: Corporate Finance and Reality

John R. Graham is the D. Richard Mead, Jr. Family Professor at Duke University’s Fuqua School of Business. This post is based on his Presidential Address, delivered at the 2022 meeting of the American Finance Association.

In a traditional corporate finance framework, managers maximize shareholder value, form rational expectations, optimize corporate investment intertemporally, and invest in positive net present value projects, among other things. These principles only partially align with real-world decision-making. This gap between academic research and the practice of finance is reflected in the modest statistical fit of traditional corporate finance models and the even more modest ability to predict outcomes out-of-sample or provide quantitative guidance for specific companies. In a capital structure context, for example, Graham and Leary (2011) show that standard academic models explain about 10% of within-firm variation in leverage; analysis in this paper shows explanatory power is even worse out-of-sample.

To address the research-practice gap, it is important to start by understanding in detail what real-world companies do. In a corporate finance setting, we can use surveys to directly gather this information from the expert practitioners who choose actual corporate outcomes. A clear understanding of practice helps researchers understand whether the gap between research and practice might be caused by practitioner mistakes, deficiencies in academic models, or both. And when research and academic models do align, a clear understanding of practice helps us understand the mechanisms behind the corporate outcomes we usually study.


Stakeholder Governance and Purpose of the Corporation

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. RosenblumKaressa L. Cain, and Hannah Clark. 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).

BlackRock CEO Larry Fink’s highly regarded annual letter to CEOs highlights stakeholder corporate governance: “In today’s globally interconnected world, a company must create value for and be valued by its full range of stakeholders in order to deliver long-term value for its shareholders. It is through effective stakeholder capitalism that capital is efficiently allocated, companies achieve durable profitability, and value is created and sustained over the long-term.” Fink also calls attention to the importance of centering corporate purpose in this context, stating, “Putting your company’s purpose at the foundation of your relationships with your stakeholders is critical to long-term success.”

Fink’s endorsement of stakeholder governance, ESG, sustainability and long-term growth in value of the corporation reflects the now-widespread abandonment of a myopic focus on shareholder profits and the efforts of the past two decades to achieve inclusive capitalism, while preserving the benefits of the market economy. Key recent developments began with The New Paradigm of Corporate Governance, which the International Business Council of the World Economic Forum approved in 2016, and the subsequent 2020 Davos Manifesto, and include the abandonment of shareholder primacy and adoption of stakeholder governance by the Business Roundtable, the British Academy’s Future of the Corporation Project, the Enacting Purpose Initiative, the UK Financial Reporting Council and the Investor Stewardship Group and its associated Framework for U.S. Stewardship and Governance.


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