Monthly Archives: April 2022

Shareholder Activism in the Regulated Utility Sector

Audra Cohen is partner and Tia Barancik is special counsel at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell memorandum by Ms. Cohen, Ms. Barancik, George Sampas, Matthew Goodman, and Lauren Boehmke. 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).

Regulated utilities have historically been more insulated from the scrutiny of activists than companies in other industries. Starting in the late 1970s, however, the regulated utility industry began to restructure in response to political pressure for energy independence following the Arab Oil Embargo and rising environmental concerns. As a consequence, the many smaller companies that each separately produced and sold electricity or natural gas at retail in local markets no longer exist as public companies. First, these companies separated their business into wholesale production and retail distribution divisions, and then they started merging with one another and reconfiguring their business lines. Today, there are fewer and larger, multistate-competitive wholesale electricity producers; fewer and larger, multistate gas pipelines; and a few very large, publicly traded holding companies with multiple single-state electric and gas retail distribution company wholly owned subsidiaries, as well as some smaller, single-state retail utilities. Just as this restructuring is coming to a settling point, new technologies, consumer driven demand for renewable energy and fuel choice and rising inflation are catalyzing more change. These industry changes, together with changes in laws in the mid-2000s, eliminated the types of legal and regulatory restrictions that had previously limited the ability of activists to crash the regulated utilities’ private party.

Acquisition of control of a regulated public utility through the acquisition of its publicly traded common stock (in regulatory terms, the “voting securities” conferring upon the holder thereof the right to vote for the election of directors) will almost always require approval from both federal and state utility regulators. The Federal Energy Regulatory Commission (“FERC”) presumes “control” to exist at a level substantially below 51% of common stock (or “voting securities”). Thus, FERC approval for “change of control transactions” under the Federal Power Act will be required even if no equivalent shareholder approval under state corporate law is required. Under the Federal Power Act, FERC presumes “control” to exist at ownership of 10% of the voting securities of a public utility, and can be found to exist even absent direct ownership of voting securities. [1] In the 1997 Enova Corp. Order, FERC stated that “control” means:


The SEC’s Proposed New Short Disclosure/Sale Requirements

Kevin J. Campion is partner at Sidley Austin LLP. This post is based on a Sidley memorandum by Mr. Campion, James A. Brigagliano, Katie Klaben, Erin Kauffman, and Charles Sommers.

On February 25, 2022, the U.S. Securities and Exchange Commission (SEC) published and requested comment on proposed new Rule 13f-2 (the Rule) under the Securities Exchange Act of 1934 (Exchange Act) and Form SHO, which would require institutional investment managers (as such term is defined under Section 13(f)(6)(A) of the Exchange Act (Institutional Investment Managers)) to report to the SEC extensive information on certain “large” short positions and short sale and other transactions on a monthly basis. The SEC would then use this data to make publicly available aggregate data about short positions and short sale activity in individual securities.

The SEC also proposed a new Rule 205 of Regulation SHO to require broker-dealers to mark purchase orders as “buy to cover” when purchasing to cover short positions for the broker-dealer’s own account or for the accounts of customers and require the reporting to the consolidated audit trail (CAT) of such “buy to cover” order marking information as well as situations where short sales are effected in reliance on the “bona-fide market maker exception” to the Regulation SHO “locate” requirement.

Notably, although the SEC indicated that the new proposals were designed to meet the mandates provided by Section 13(f)(2) of the Exchange Act, which was enacted as part of Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) initiatives, they actually impose requirements likely beyond the Section 13(f)(2) mandate to prescribe rules providing for the public disclosure of short sales. Indeed, in certain respects the requirements of proposed Rule 13f-2 and Form SHO would be much more substantial than the current disclosure of long positions by certain Institutional Investment Managers under Rule 13f-1 and Form 13F as well as beneficial ownership reporting under Section 13(d) and Schedule 13D/G.


Statement by Commissioner Peirce on Proposal on SPACs, Shell Companies, and Projections

Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you, Chair Gensler, Renee [Jones], Charles [Kwon], and Jessica [Wachter] for the presentation. The Commission’s 2022 budget request includes additional resources to address “an unprecedented surge in non-traditional IPOs by special purpose acquisition companies.” [1] If we adopt the rule that we are voting on today, we will not need additional resources to deal with Special Purpose Acquisition Companies (“SPACs”). The proposal—rather than simply mandating sensible disclosures around SPACs and de-SPACs, something I would have supported—seems designed to stop SPACs in their tracks. The proposal does not stop there; it also makes a lot of sweeping interpretations of the law that are not limited in effect to the SPAC context. Accordingly, I dissent.

The latest SPAC boom, which began in 2020 and continues today, has generated a number of legitimate disclosure concerns. We and others, including our Investor Advisory Committee, [2] have asked whether investors are getting the type of information they need to understand conflicts of interest, sponsor compensation, and dilution. Over the past two years, the Division of Corporation Finance staff have poured countless hours into reviewing SPAC IPO and de-SPAC transactions. In addition to improving disclosures in individual transactions, the staff’s tireless efforts have shed light on ways our rules could be bolstered to generate better disclosures across the board. I could have supported a proposal that was rooted in the Division’s good work and focused on addressing disclosure concerns.


Social Contagion and the Survival of Diverse Investment Styles

David Hirshleifer is the Robert G. Kirby Chair in Behavioral Finance and Professor of Finance and Business Economics at the University of Southern California Marshall School of Business; Andrew W. Lo is the Charles E. and Susan T. Harris Professor at MIT Sloan School of Management; and Ruixun Zhang is Assistant Professor and Boya Young Fellow at Peking University School of Mathematical Sciences, Center for Statistical Science, and Laboratory for Mathematical Economics and Quantitative Finance. This post is based on their recent paper.

There is evidence of social contagion of investment behavior in financial markets that does not derive from rational information processing. Given recent developments in information technology and the growth of social networks, it is important to incorporate the influence of contagion via social interactions when studying economic and financial behavior. To better capture these dynamics, the Efficient Markets Hypothesis can be complemented by the Darwinian perspective of natural selection on investment strategies.

In a recent working paper, we model bias in the transmission of ideas among investors to analyze the evolutionary consequences of competing investment styles. We consider a market in which each investor has a propensity to invest in one of two investment styles. We refer to this propensity as the investor’s investment philosophy. Investors with higher realized returns produce more “offspring” in the next period of the model by transmitting their ideas to other investors via social interaction. Selection results in differential survival of investors’ behavioral traits, i.e., their investment philosophies.

A basic stylized fact about modern financial markets is that numerous competing investment styles coexist. Examples include value versus growth, momentum versus contrarianism, large-cap stocks versus small-cap stocks, diversification versus stock-picking, domestic versus global, technical versus fundamental, and so on. The rapidly evolving hedge fund sector is a good example of an industry with widely varying investment styles. We show that the survival of diversity is a consequence of general principles of evolution in the face of risk.


Weekly Roundup: March 25-31, 2022

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 25-31, 2022.

Board Leadership and Performance in a Crisis

Implications of Lee for a Board’s Decision to Reject a Nomination Notice

How to Make Your 2022 Climate Resolutions Stick

Recent SEC Enforcement Developments

Board Oversight of ESG: Preparing for the 2022 Proxy Season and Beyond

BlackRock’s 2022 Engagement Priorities

SPAC Disclosure of Net Cash Per Share: A Proposal for the SEC

Recent Delaware Court of Chancery SPAC Opinions

Post-Pandemic? What to Look For in the 2022 Proxy Season

The COVID-19 Pandemic’s Fleeting and Lasting Impact on Executive Compensation

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