Monthly Archives: January 2024

Poison Bonds

Posted by Rex Wang Renjie (Vrije Universiteit Amsterdam) and Shuo Xia (Halle Institute for Economic Research), on
Thursday, January 18, 2024
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Rex Wang Renjie is an Assistant Professor of Finance at the Vrije Universiteit Amsterdam and Tinbergen Institute; and Shuo Xia is an Assistant Professor of Finance at Halle Institute for Economic Research and Leipzig University. This post is based on their paper. Related research from the Program on Corporate Governance includes Why Firms Adopt Antitakeover Arrangements by Lucian A. Bebchuk; Toward a Constitutional Review of the Poison Pill (discussed on the Forum here) by Lucian A. Bebchuk and Robert J. Jackson, Jr.; and What Matters in Corporate Governance? (discussed on the Forum here) by Lucian A. Bebchuk, Alma Cohen, and Allen Ferrell.

Corporate bonds with a poison put covenant, which we refer to as “poison bonds”, first appeared during the hostile takeover wave in the 1980s. A poison put covenant grants bondholders the right to demand immediate repayment of the bond in a change-of-control event. Originally designed to protect bondholders from potential wealth transfer following leveraged buyouts, this covenant soon became an effective takeover defense strategy, primarily used by high-yield issuers in the 80’s and 90’s (Billett, Jiang, and Lie, 2010). However, a significant shift has occurred in this market since the mid-2000s. As shown in Figure 1, the fraction of poison bonds among new issues increased substantially around 2005, predominantly driven by investment-grade (IG) issues. Before 2005, poison bonds accounted for less than 10% of IG issues, but after 2005, they represented over 60% of all new IG issues. In our paper, we investigate the cause behind this trend and examine its impact on shareholder value.

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2023 Disclosure Practices on Board Leadership and Structure

Posted by Matteo Tonello, The Conference Board, on
Thursday, January 18, 2024
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Merel Spierings is Senior Researcher at The Conference Board ESG Center in New York. This post relates to Corporate Board Practices in the Russell 3000, S&P 500, and S&P MidCap 400: Live Dashboard, a live online dashboard published by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with Debevoise & Plimpton, the KPMG Board Leadership Center, Russell Reynolds Associates, and The John L. Weinberg Center for Corporate Governance at the University of Delaware.

Board Leadership

Board Chair Independence

At larger companies, the trend toward board chair independence seems to have plateaued. Some 36% of S&P 500 firms have an independent chair, a percentage that hasn’t changed since 2021. At 44% of S&P 500 companies, the current CEO also serves as board chair (a slight increase from 42% in 2022), while at the same time, average shareholder support for proposals on CEO/chair separation remains around 30%. Finally, the share of chairs who are non-independent directors (other than the CEO) has remained at approximately 20%.

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Edgio, Match, and Trusting Delaware Judges to “Get It Right”

Posted by Mark Lebovitch (Penn Law School), on
Wednesday, January 17, 2024
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Mark Lebovitch is an Adjunct Professor at Penn Law School. This post was prepared for the Forum by Mr. Lebovitch and is part of the Delaware law series; links to other posts in the series are available here.

On November 8, 2023, I had the honor of guest lecturing Professor Jesse Fried’s Harvard Law School M&A Litigation Class.  The lesson title was “The Vitality of the Unocal Doctrine and In re Edgio, Inc. Stockholders Litigation.”  The presentation addressed various tactical issues in identifying and prosecuting breach of fiduciary duty suits, but focused on the Court of Chancery’s legally significant discussion of the interplay between the Corwin doctrine, Unocal standard, and form of relief sought.

When I was recently asked to turn that presentation into a note, I returned to a question the lecture left unanswered: Why did the Court feel compelled to address such complex – yet avoidable –issues?

The recent oral argument in In re Match Group, Inc. Derivative Litigation shed light, albeit indirectly, on the Edgio opinion’s complexity.  Wachtell Lipton legend Ted Mirvis told the Delaware Supreme Court that they could safely adopt his clients’ proposed bright-line and rigid rule requiring dismissal of most conflicted-controller transactions, since the Chancery Court judges “are not so easily fooled” and can avoid unjust outcomes.

Ted’s insight (ironic as applied to Match) may explain why the Edgio ruling grappled with the Corwin doctrine the way it did.  If so, perhaps the broader lesson is that Delaware should rely less on rigid dismissal doctrines and revert to trusting its judges.

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Learning by Investing: Entrepreneurial Spillovers from Venture Capital

Posted by Josh Lerner (Harvard Business School), Jinlin Li (Harvard Kennedy School), and Tong Liu (MIT Sloan School of Management), on
Wednesday, January 17, 2024
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Josh Lerner is the Jacob H. Schiff Professor of Investment Banking at Harvard Business School; Jinlin Li is a Postdoctoral Research Fellow at Harvard Kennedy School and Harvard Business School; and Tong Liu is the Judy C. Lewent (1972) and Mark Shapiro Career Development Assistant Professor of Finance and an Assistant Professor of Finance at the MIT Sloan School of Management. This post is based on their recent paper.

The academic literature on entrepreneurial finance has largely treated investors and entrepreneurs as distinct identities. But the boundaries between investors and entrepreneurs have become increasingly blurred, primarily due to the growing importance of angel groups, crowdfunding, venture funds, and other types of financial intermediation.

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Insights From Delaware Litigators: What We’re Watching in 2024

Posted by Edward B. Micheletti and Arthur R. Bookout, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, January 16, 2024
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Edward B. Micheletti is a Partner and Arthur R. Bookout is Counsel at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden memorandum and is part of the Delaware law series; links to other posts in the series are available here.

Key Points

  • In a key ruling, the Delaware Chancery Court held that corporate officers, as well as directors, may owe Caremark duties of oversight.
  • In two cases, the court held that acquirers were justified in terminating deals because the “bring-down” terms in the respective merger agreements — which required representations and warranties to be reaffirmed at closing — were not qualified by a materiality provision, and the representations and warranties were not strictly satisfied.
  • In five rulings involving breach of fiduciary duty claims arising from de-SPAC transactions, the court refused to grant motions to dismiss, finding in each case that the plaintiffs had adequately alleged that fiduciary duties had been breached.
  • The court, in the context of a mootness fee decision, commented on a novel issue involving a common merger provision that allows target companies to seek “lost premium” damages from a buyer in the event of a “busted deal” where specific performance is unavailable, strongly indicating that the target company was not able to seek such damages, and that stockholders likely had third-party standing to pursue lost premium damages directly.

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Strategic Compliance

Posted by Geeyoung Min (Michigan State University), on
Tuesday, January 16, 2024
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Geeyoung Min is an Assistant Professor of Law at Michigan State University. This post is based on her recent article published in the UC Davis Law Review.

Corporate compliance is at an inflection point, putting pressure on companies to reinforce their compliance programs more than ever before. Corporate policies serve as a blueprint for company-wide compliance programs, implementing compliance efforts into companies’ daily operations. Various internal and external factors have contributed to this increased formalization and disclosure of corporate policies, including the Department of Justice (DOJ)’s corporate enforcement policy, Caremark duties, shareholder proposals and litigations, and the Securities and Exchange Commission (SEC)’s disclosure requirement. Corporate policies have evolved from relatively informal internal documents meant primarily for employees into critical sources of information for various stakeholders and government authorities.

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ESG Performance Metrics in Executive Pay

Posted by Matteo Tonello, The Conference Board, on
Monday, January 15, 2024
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Matteo Tonello is Managing Director of ESG Research at The Conference Board ESG Center in New York. This post is based on CEO and Executive Compensation Practices in the Russell 3000 and S&P 500: Live Dashboard, a live online dashboard published by The Conference Board and ESG data analytics firm ESGAUGE, in collaboration with compensation consulting firm FW Cook. Related research from the Program on Corporate Governance includes The Perils and Questionable Promise of ESG-Based Compensation (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Paying for Long-Term Performance (discussed on the Forum here) by Lucian A, Bebchuk and Jesse M. Fried; and Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay (discussed on the Forum here) by Jesse M. Fried.

Companies have crossed the Rubicon in integrating environmental, social & governance (ESG) performance into their executive incentive plans. With three-quarters of S&P 500 index companies embedding some type of ESG metric into their leadership compensation policies, the practice is now deeply ingrained. But there is an opportunity to move beyond generic goals and tailor ESG performance measures in a way that contributes to competitive advantage and long-term growth.

The Conference Board and ESGAUGE conducted a thorough analysis of executive incentive plans described in 2023 proxy statements, and the following are our key findings and insights on the use of ESG performance metrics.

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Corporate Social Responsibility

Posted by Harrison G. Hong and Edward P. Shore (Columbia University), on
Monday, January 15, 2024
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Harrison G. Hong is the John R. Eckel, Jr. Professor of Financial Economics and Edward P. Shore is an Economics PhD student at Columbia University. This post is based on their article forthcoming in the Annual Review of Financial Economics. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; Does Enlightened Shareholder Value add Value? (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita; and Corporate Purpose and Corporate Competition, (discussed on the Forum here) by Mark J. Roe.

In recent years, shareholder support of Corporate Social Responsibility (CSR) has increased considerably. The period from 2012 to 2020 saw a threefold increase in assets under management considering environmental and social impacts (left panel of Figure 1). Investment strategies now often involve screening for compliance with specific environmental and social standards. Additionally, the frequency of majority-supported shareholder proposals on firm responsibility has risen, from a mere fraction pre-2015 to about 20% currently (right panel of Figure 1). In contrast, governance-focused proposals, previously passing at a 30% rate, now see less than 20% approval. Do these shifts reflect shareholders’ willingness to pay for the mitigation of societal externalities such as global warming — a non-pecuniary motive? Or do shareholders increasingly believe investments in CSR will increase in shareholder wealth— a pecuniary motive?

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Seven Key Trends in ESG for 2023—and What to Expect in 2024

Posted by Leah Malone and Emily Holland, Simpson Thacher & Bartlett LLP, on
Sunday, January 14, 2024
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Leah Malone is a Partner and Leader of ESG and Sustainability Practice and Emily Holland is a Counsel at Simpson Thacher & Bartlett LLP. This post is based on a Simpson memorandum by Ms. Malone, Ms. Holland, Matt Feehily, May Mansour, and Alicia Washington. Related research from the Program on Corporate Governance includes The Illusory Promise of Stakeholder Governance (discussed on the Forum here) by Lucian A. Bebchuk and Roberto Tallarita; How Twitter Pushed Stakeholders Under The Bus (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Anna Toniolo; Restoration: The Role Stakeholder Governance Must Play in Recreating a Fair and Sustainable American Economy – A Reply to Professor Rock (discussed on the Forum here) by Leo E. Strine, Jr.; and Stakeholder Capitalism in the Time of COVID (discussed on the Forum here) by Lucian A. Bebchuk, Kobi Kastiel, and Roberto Tallarita.

After years of buzz in business circles, ESG seemed to have lost some of its shine in 2023. We saw a host of new state laws looking to limit its use. Mentions of ESG on earnings calls dropped to their lowest level since 2020. Governors from 19 states joined an anti-ESG coalition and conservative members of Congress dubbed July “ESG month” as they held hearings and advanced bills aimed at limiting ESG-based investing. A major asset manager and traditional advocate of investment stewardship publicly took a step back from its ESG focus. Investor demand for ESG products cooled, as the third quarter of 2023 saw the fourth consecutive quarter of net outflows from sustainable funds in the United States.

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Private Equity in 2023—A Year (Not) to Remember

Posted by Steven A. Cohen, Karessa L. Cain, and John R. Sobolewski, Wachtell, Lipton, Rosen & Katz, on
Saturday, January 13, 2024
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Steven A. Cohen, Karessa L. Cain, and John R. Sobolewski are Partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell memorandum by Mr. Cohen, Ms. Cain, Mr. Sobolewski, Andrew J. Nussbaum, Victor Goldfeld, and Alon B. Harish.

In our memo early last year, we noted that private equity investors and dealmakers faced considerable uncertainty heading into 2023 following a challenging 2022. Indeed, the headwinds that slowed private equity in 2022—among others, rising interest rates, persistent inflation, widely divergent valuation expectations, market and geopolitical upheavals and heightened regulatory scrutiny—endured in 2023, and new challenges emerged. Private equity continued to show resilience, however, as sophisticated dealmakers deployed innovative approaches to fill financing gaps and get deals done, and as a number of sponsors continued their transformation from buyout shops to alternative asset managers offering a broad range of capital solutions both in the M&A context and beyond, including private credit.

Financial sponsors are likely to face many of the same challenges as 2024 begins—but where it ends is anyone’s guess. Not many would have predicted the rebound in equity markets in the second half of 2023 or the rising (for now) prospects of a soft landing for the broader U.S. economy, and 2024 is similarly unpredictable. Some sponsors are hopeful for an uptick in activity this year amid a more favorable borrowing environment, as interest rate increases wane and recession fears subside, while others are resigned to another year of relatively low activity. In such an environment, flexibility and careful planning will continue to be essential to creating and exploiting opportunities.

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