Securities Mosaic® Blogwatch
March 21, 2017
Foreign Private Issuers May Begin Submitting Their Financial Statements in XBRL
by Alice Hsu & John Patrick Clayton

On March 1, 2017, the Securities and Exchange Commission (SEC) provided notice that the International Financial Reporting Standards (IFRS) taxonomy has been published on the SEC's website as provided for by the EDGAR Filer Manual. Foreign private issuers (FPIs) that prepare their financial statements in accordance with IFRS and are subject to Rule 405 may immediately begin submitting their financial statements in interactive data format using the eXtensible Business Reporting Language (XBRL). Indeed, existing Rule 405 would require FPIs to submit financial data in XBRL upon publication of the IFRS taxonomy (which would be as early as May 1, 2017, for an FPI with a fiscal year ending December 31, 2016, filing a Form 20-F). However, the SEC is giving FPIs time to comply with the requirement by allowing them to wait and submit financial data in XBRL with their first annual report on Form 20-F or 40-F for a fiscal period ending on or after December 15, 2017.

While the SEC adopted rules in 2009 to require FPIs that prepare their financial statements using IFRS as issued by the International Accounting Standards Board to provide their financial statements to the SEC and on their corporate websites, if any, in interactive data format using XBRL, the SEC had not specified an IFRS taxonomy on its website. Thus, FPIs using IFRS have not been able to submit their financial statement information to the SEC in XBRL. In 2011, the SEC staff, acknowledging the absence of IFRS taxonomy on its website, issued a no-action letter stating the SEC staff’s position that FPIs that prepare their financial statements in accordance with IFRS were not required to submit interactive data files to the SEC or post interactive data files on their corporate websites, if any, until the SEC actually specified a taxonomy on its website for use by such foreign private issuers in preparing their interactive data files.

March 21, 2017
SEC Proposes Amendments to Rule 15c2-12 to Expand Municipal Securities Disclosures
by Alice Hsu & John Patrick Clayton

On March 1, 2017, the Securities and Exchange Commission (SEC) published for comment proposed amendments to Rule 15c2-12 under the Securities Exchange Act of 1934 (Exchange Act) that would expand the list of events triggering a notice by issuers of municipal securities to the Municipal Securities Rulemaking Board (MSRB) through its Electronic Municipal Market Access (EMMA) system, which is the official source for municipal securities disclosures and related market data.

Proposed Amendments

The SEC is proposing amendments to Rule 15c2-12 that are intended to address its concern about investors and other market participants lacking adequate access to information about an issuer’s or obligated person’s financial obligations and financial difficulties as discussed below. Specifically, the proposed amendments would amend the list of events for which notice is to be provided to include:

- the incurrence of a financial obligation (e.g., debt obligation, lease, guarantee, derivative instrument or monetary obligation resulting from a judicial, administrative or arbitration proceeding) of the issuer or obligated person, if material, or agreements to covenant, events of default, remedies, priority rights, or other similar terms of a financial obligation of the issuer or obligated person, any of which affect security holders, if material

- default, event of acceleration, termination event, modification of terms or other similar events under the terms of the financial obligation of the issuer or obligated person, any of which reflect financial difficulties.

As is currently the case with event notices under Rule 15c2-12, the event notices for the incurrence of a financial obligation or financial difficulties would be required to be posted on EMMA in a timely manner not in excess of 10 business days. Issuers or obligated persons required by Section 13(a) or Section 15(d) of the Exchange Act to report certain events on Form 8-K would already make such information public in a Form 8-K and should consider whether any related EMMA posting needs to be made.

Event Notices Under Rule 15c2-12

Rule 15c2-12 is designed to address fraud and manipulation in the municipal securities market by prohibiting the underwriting of municipal securities and subsequent recommendation of those municipal securities by brokers, dealers or municipal securities dealers (collectively, “dealers”) for which adequate information is not available. Accordingly, under Rule 15c2-12, a dealer acting as an underwriter in a primary offering of municipal securities with an aggregate principal amount of $1 million or more is prohibited from purchasing or selling municipal securities in connection with such an offering, unless the underwriter has reasonably determined, among other things, that an issuer of municipal securities, or an obligated person for whom financial or operating data is presented in the final official statement, has agreed to provide the MSRB with timely notice of certain events listed in Rule 15c2-12. In order to comply with this provision, underwriters require issuers of municipal securities or obligated persons to enter into a continuing disclosure agreement to provide event notices to the MSRB in a manner that is consistent with the requirements of Rule 15c2-12.

According to the SEC, investors and other market participants may either have no access or delayed access to information about the incurrence of a financial obligation by an issuer or obligated person. The SEC is concerned that this lack of access or delay in access to disclosure results in investors making investment decisions and other market participants undertaking credit analyses without important information. Furthermore, even if financial obligations are disclosed and accessible to investors and other market participants, the SEC is concerned that such information may not necessarily include certain details about the financial obligations. For instance, in audited financial statements or an official statement, the disclosure about the financial obligation may be limited to the amount of such obligation and may not provide certain details, such as whether the financial obligation contains covenants, events of default, remedies, priority rights or other similar terms of a financial obligation, any of which affect security holders, if material. Finally, the SEC is concerned that investors and other market participants may lack information regarding the occurrence of events reflecting an issuer’s or obligated person’s financial difficulties, including a default, event of acceleration, termination event, modification of terms or other similar events under the terms of a financial obligation.

March 22, 2017
Board Gender Diversity: Good for Business
by John Jenkins

This blog from "The Conference Board" reports the results of a recent study on the impact of gender diversity on boards. Here's a summary of the conclusions:

Among the findings in the report, the authors concluded that the real value of adding women to boards came not from their gender per se, but from the fact that they were more likely to be outsiders. They were also more likely to be foreigners, have expertise in more diverse business issues and functions than their male counterparts, and to have risen through the ranks outside the traditional elite networks. The authors conclude that bringing these different perspectives can substantively improve the collective decision-making of a board.

The conclusions are based primarily on interviews with directors & stakeholders of French companies conducted after France instituted a gender quota system for public company boards.

Gender Quotas on Boards?

Did that last sentence catch you off-guard? Me too – but I’ve recently learned that board gender quotas are actually pretty common in Europe. These quotas have been implemented through legal mandates (Germany, France, Belgium, Iceland, & Italy) or through the establishment of voluntary goals (Austria, Finland, the Netherlands, Spain, Sweden, & the UK). The quotas range from 25 to 40% of the board.

This Harvard Business Review article reports that quotas are popular among directors in countries where they’ve been implemented, but despised among directors in countries where they haven’t. That most definitely includes the good ol’ US of A:

One male director said that, with regards to quotas; "I think it is dumb and destructive - demeaning to people who are only on the board because they are in a specific category." Female directors also expressed doubts. "No one wants to be a second-class citizen," said one, explaining that she would not want to be on a board that had been mandated to have a female member. "Quotas are just anathema in the U.S. - I don’t think we will ever see quotas here," said another.

The willingness of European countries to force the issue through quotas has left the US as a laggard when it comes to the representation of women on boards. The article points out that women comprise only 18.7% of board members at S&P 500 companies. This figure hasn’t moved much in the last decade, and it pales in comparison to the figures in most of Europe.

"Just Vote No": State Street’s Alternative to Quotas

Many people will likely agree with the sentiments expressed by US directors of both genders – there’s something about the word "quota" that’s deeply offensive to American ears. So what’s the alternative for getting more women on corporate boards? State Street Global Advisors has an idea of its own – it’s giving 3,500 US public companies a year to get their act together and make tangible progress on gender diversity at the board level.

State Street’s initiative includes prescriptive guidance intended to "drive greater board gender diversity through active dialogue and engagement with company and board leadership." It’s also giving companies a potentially significant downside:

In the event that a company fails to take action to increase the number of women on its board, SSGA will use proxy voting power to influence change – voting against the chair of the board’s nominating and/or governance committee if necessary.

The 3,500 companies in which State Street invests represent $30 trillion in market value. Coupled with BlackRock’s decision to make gender diversity an engagement priority, this is an initiative that could well move the needle.

John Jenkins

March 22, 2017
Securities Class Action Settlements: Dollars, Numbers Are Up
by Tom Gorman

The trends in securities class actions are up. The number of cases filed last year was up as previously reported. The number of settlements in 2016 was up. The amount of those settlements was up. The number of mega settlements was up. These and other trends are detailed in the latest report from Cornerstone Research, Securities Class Action Settlements – 2016 Review and Analysis.

The trends in securities class action settlements are evidenced by key statistics. The largest settlement in 2016 was $1.575 billion compared to $982.8 million the prior year. The minimum settlement in 2016 was $0.9 million compared to $0.4 the prior year. Similarly, the average settlement amount increased to $70.5 million in 2016 from $38.4 million the year before. And, the number of settlements in 2016 increased to 85 compared to 80 the prior year.

Last year the number of mega settlements was the highest in 10 years. The number of settlements over $100 million almost doubled in 2016 compared to the prior year. Four of the ten approved mega settlement in 2016 were between $100 million and $250 million; four were between $250 million and $500 million; and two exceeded $1 billion. That is the first year since 2006 that there were two settlements over $1 billion in a single year. At the same time the number of what Cornerstone calls "nuisance settlements" those under $2 million) declined from 25% in 2015 to 12% in 2016.

Other key trends include:

  • Total value: The total settlement dollars in 2016 (in millions) increased to about $5,990 compared to $3,073 the prior year and $1,164 in 2014, although the 2016 amount did not exceed that of 2007 which was $8,377.
  • Restatements: Over 30% of the cases settled in 2016 involved a restatement of the issuer’s financial statement, although the number of actions alleging violations of GAAP declined slightly and there were no settlements involving accounting irregularities.
  • Third parties: Only 17% of the settled actions last year named an auditor as a defendant; the median settlement in those actions was lower than in the other settled cases; in contrast 79% of the cases based on Securities Act Section 11 named an underwriter, up compared to the prior year.
  • Institutional investor plaintiff: The median settlement amount for cases with an institutional lead plaintiff was more that two and one half times that of other cases; at the same time cases with a public pension plan serving as lead or co-lead plaintiff tended to have larger issuer defendants, longer class periods and were associated with longer time periods to reach settlement.
  • Derivative suits: In 2016 40% of the settled cases were accompanied by derivative actions, compared to 34% over the period since the Reform Act.
  • Parallel SEC action: In 2016 the median amount of the settlement in actions with a parallel SEC case at $8.6 million differed little from the $8.4 million in the other actions; traditionally, however, a corresponding SEC action is associated with a higher settlement amount – the actions tend to involve larger issuer defendants but they are also frequently delisted firms and tend to settle prior to the ruling on the first motion to dismiss.

Finally, Cornerstone found that median settlement amount tended to increase over the time the case was pending. For example, in 2016 the median settlement for cases settling within two years of filing was 70% lower than those which took longer to resolve, although the numbers were impacted by the mega settlements.

March 22, 2017
Anti-Activist Poison Pills
by Marcel Kahan and Edward Rock, NYU School of Law

Editor's Note: Marcel Kahan is George T. Lowy Professor of Law at NYU School of Law and Edward B. Rock is Professor of Law at NYU School of Law. This post is based on a recent paper by Professor Kahan and Professor Rock. This post is part of the Delaware law series; links to other posts in the series are available here.

Hedge funds have become active in corporate governance. They push for changes in strategy, including making very specific proposals, and sometimes seek (and secure) board representation. They do this by buying shares, conducting public campaigns, lobbying managers and other shareholders, and sometimes running a proxy contest. In response, boards of directors have adopted a variety of "defensive measures" including deploying the "poison pill" shareholder rights plan against activists.

We provide a comprehensive policy and doctrinal analysis of the use of poison pills again activists in corporate governance contests. Although pills have been in common use as anti-takeover devices since the 1980s, it is only now -- in the context of anti-activist pills—that many design features of pills start to matter. The reason lies in the different sources of gains derived by the raiders of yore and today’s activists. In takeovers, the bidder’s primary gains are expected to come from acquiring the company and improving it. As a result, bidders neither need to nor, it turns out, in fact buy substantial blocks of shares before they offer to buy a company. Hence, pill features such as the trigger threshold, the types of ownership interests that count towards the threshold, and the rules on aggregation of shares held by other investors turned out to be largely irrelevant. By contrast, many of today’s most prominent activists expect to profit from an increase in the stock price of the target generated by their activism and a corresponding increase in the value of their stakes. For activists, therefore, the ability to acquire a stake in the target -- and the limitations on that ability created by a pill -- is of great significance.

Under Delaware law, the validity of a pill hinges on whether the pill is a reasonable response to a cognizable threat. In the activist context, we identify two threats that may justify a pill: a threat that the activist is trying to obtain control (“creeping control”); and a threat to a fair election process caused by a contestant having an excessive voting stake. By contrast, we argue that the possibility that shareholders will support an activist in the mistaken belief that its proposals are in the best interest of the company or the possibility that the activist intends to focus on short-term profits are not cognizable threats from a doctrinal and policy perspective. The possibility that the activist may cause disruption by activism or obtain disproportionate influence, while possibly cognizable under existing doctrine, do not justify a pill as a reasonable response.

Importantly, the nature of the threat must justify the design features of the pill. Thus, for example, the threat of creeping control will generally not justify pills with a trigger threshold below 20%; and the threat posed to a fair election process requires a response that is evenhanded and does not favor one of the contestants. On our analysis, synthetic equity—which confers on an activist an economic interest but not voting rights—generally poses no cognizable threat and thus should not count towards the pill trigger because the cognizable threat posed by an activist derives from its power to vote its shares, and not from a pure economic stake. On the other hand, permitting an activist to accumulate an economic stake through synthetic equity is desirable as it enables the activist to benefit if the activism results in an increase in the value of the company and lends credibility to the claim that the activist is motivated to generate such an increase.

Similarly, it is generally not justified for pills to “grandfather” an existing shareholder friendly to management at a higher stake than an emerging activist. In the presence of existing large shareholders allied with management, it is unclear why permitting an activist to accumulate an equivalent stake would present a threat of creeping control; and permitting an activist to accumulate such a stake may enhance, rather than undermine, a fair election process. Different pill thresholds for active and passive shareholders, however, may be justified on the grounds that large stakes by passive shareholders do not pose threats to the fair election process or to control equivalent to large stakes by active shareholders.

One of the most difficult problems with respect to the terms of anti-activist pills is whether and how a company may consider “wolf-packs” (several hedge funds taking sizeable positions in a target and acting in what critics claim is a parallel manner, but without having any explicit or implicit agreements with each other). One approach is to aggregate the holdings of the entire pack to determine whether the pill threshold is exceeded. Thus, some pills aggregate the holdings of all shareholders who “act in concert” to change or influence the control of the target company if there is an “additional plus factor”, such as an exchange of information and attendance of the same meeting, that supports a determination that they intended to act in concert.

In our view, such wolf-pack provisions suffer from two fatal flaws. First, because triggering a pill would have severe adverse consequences, vague and potentially overbroad standards of aggregation are likely to have a chilling effect on an activist’s ability to communicate with other shareholders. Second, wolf-pack provisions would impede normal interactions among shareholders—such as meetings in which shareholders exchange and discuss their views about the company and management—that sound corporate governance depends upon and that decades of reform have sought to encourage.

On the other hand, it may be more legitimate for a company to take account the presence of a wolf pack in setting the pill threshold. Even if there is no formal or informal agreement between members of the wolf-pack at the time, all members of a wolf-pack may share a self-interested goal. If one accepts our view that preserving a fair election process may be a legitimate board goal, the detail of what this means will have to be worked out in the factual context of actual contests. While our thoughts on this issue are still preliminary, we can envision circumstances where there is a substantial likelihood that a member of a wolf pack will vote their shares not based on the “merits”—their assessment of the best interest of the company—but based on a self-interest that is aligned with the interest of the activist. In such circumstances, the goal of preserving a fair election process may be served by adjusting the pill threshold—and thereby limiting the voting stake of an activist—to take account of the presence of other shareholders whose votes are not up for grabs.

March 22, 2017
Paul Weiss Offers M&A at a Glance for February
by Angelo Bonvino, Ariel J. Deckelbaum, Jeffrey D. Marell, Matthew W. Abbott and Scott A. Barshay

M&A activity generally declined in February 2017, both globally and in the U.S. Total deal volume, as measured by dollar value, decreased globally by 30.1% to $202.45 billion, and in the U.S. by 3.7% to $106.47 billion. The number of deals followed similar trends, decreasing globally by 8.4% to 2,858 and decreasing in the U.S. by 10.2% to 828. These declines were primarily driven by declines in strategic M&A activity. Globally, strategic deal volume decreased by 40.6% to $144.56 billion and the number of deals decreased by 10.4% to 2,520. In the U.S., strategic deal volume decreased by 2.7% to $77.63 billion, and the number of deals decreased by 16.0% to 666. Sponsor-related activity generally fared better than strategic activity, with global increases both in deal volume (by 25.3% to $57.88 billion) and in number of deals (by 10.1% to 338). Although U.S. sponsor-related deal volume decreased slightly (by 6.3% to $28.84 billion) the number of sponsor-related deals in the U.S. increased significantly (by 25.6% to 162). Figure 1 and Annex Figures 1A-4A.

Crossborder deal volume in February 2017 showed mixed results. Global crossborder activity decreased both in deal volume (by 30.7% to $81.68 billion) and in number of deals (by 5.8% to 761). Outbound U.S. activity also decreased both in deal volume (by 70.9% to $11.84 billion) and in number of deals (by 17.9% to 133), however, inbound U.S. deal volume increased both in deal volume (by 92.3% to $39.73 billion) and in number of deals (by 11.5% to 155). Figure 1 and Annex Figures 5A-7A. Germany claimed the lead for monthly outbound U.S. activity by volume in February 2017 ($2.73 billion) and the U.K. maintained the top spot as the 12-month leader ($62.96 billion). For the first time since the inception of this publication (April 2012), Saudi Arabia was among the top 5 countries of destination for monthly outbound U.S. activity by volume (ranking 3rd, with $2.21 billion in volume, which is attributable to Tronox Ltd’s offer to acquire the titanium dioxide (TiO2) business of National Titanium Dioxide Co Ltd.). As for U.S. inbound activity, the U.K. was the leading country of origin in deal volume ($19.11 billion for February 2017 and 103.64 for the past 12 months), while Canada was the leading country of origin by number of deals (36) in February 2017, and maintained its 12-month lead (415 deals). Figures 3 and 5.

Oil & Gas was the most active target industry by deal volume, as measured by dollar value, in the U.S. in February 2017, at $22.03 billion. Computers & Electronics was the most active target industry by number of deals in the U.S. in February 2017 (205 deals) and maintained its position as the most active target industry for the last 12 months, as measured by both volume ($297.08 billion) and number of deals (2,455). Figure 2.

With respect to U.S. public mergers, average deal value increased by 39.1% to $2.49 billion. Figure 6. The average of target break fees remained near its 12-month figure at 3.7%, while the average of reverse break fees was at 4.4% (below the 12-month average of 5.4%). Figures 6 and 7. The use of cash consideration in February 2017 (62.5%) remained close to its 12-month average (64.2%). Figure 9. The incidence of tender offers as a percentage of U.S. public mergers (18.8%) was below its 12-month average (23.8%). Figure 11. Finally, the percentage of hostile offers as a percentage of U.S. public mergers (5.9%) was also below its 12-month average (12.8 %). Figure 12.

The figures referenced above are all available here.

March 21, 2017
Hold the Phone: SEC Takes One Last Stand Before the Tenth Circuit regarding the Constitutionality of the SEC's Administrative Law Judges
by Blake Osborn, James Grohsgal and Robert Varian

Last week, the United States Securities and Exchange Commission filed a >petition for rehearing en banc with the Tenth Circuit Court of Appeals, imploring the court to reconsider a divided panel’s ruling on the unconstitutionality of its administrative law judges in Bandimere v. SEC. In that ruling (detailed here), the Tenth Circuit overturned the Commission’s sanctions against Mr. Bandimere because the SEC administrative law judge ("ALJ") presiding over Mr. Bandimere’s case was an inferior officer who should have been constitutionally appointed (rather than hired) to the position, in violation of the Appointments Clause of the United States Constitution.

Primarily relying on its prior submissions and Judge Monroe G. McKay’s dissent in the panel’s original ruling, the SEC argues that the original decision reflects a fundamental misunderstanding of the role of ALJs and Supreme Court precedent, and risks throwing essential features of the agency into disarray. In particular, the SEC questioned the majority’s opinion that Freytag v. Commissioner, 501 U.S. 868 (1991), was dispositive in equating special trial judges of tax court to the ALJs to find that the ALJs are inferior officers who must be constitutionally appointed. The SEC distinguishes the roles of its ALJs from those of the special tax court trial judges by noting differences in their power and function. First, the special trial judges are vested with authority, including the power to enforce compliance with their orders, that is different in degree and kind from the powers given to ALJs. For example, both the special trial judges and ALJs have the power to issue subpoenas, but unlike the special trial judges, ALJs have no authority to enforce subpoenas. ALJs can only request the Commission to seek enforcement of the subpoenas in district court. In addition, unlike the special trial judges, ALJs cannot use contempt power—a hallmark of a court—to enforce any order it may issue. Second, the function between the special trial judges and ALJs differ because the Tax Court in Freytag was required to defer to the special trial judge’s factual finding unless "clearly erroneous, whereas the SEC decides all questions of fact and law de novo.

The SEC also contends that its use of ALJs strongly reflects Congress’s judgment in enacting the Administrative Procedure Act, which codified the use of hearing examiners and similar employees to act as aides to politically accountable agency heads, because ALJs assist agency heads in their adjudicative functions. Since the SEC is essentially reasserting its original arguments for an en banc hearing, it appears the potential rehearing will be determined by each circuit judge’s own interpretation of the roles of the SEC ALJs.

The Tenth Circuit’s decision at the end of 2016 created a circuit split with the D.C. Circuit’s ruling in Raymond James Lucia Cos. Inc. v. SEC, No. 15-1345 (D.C. Cir. Aug. 9, 2016). There, the D.C. Circuit rejected defendant-appellant’s position that the SEC ALJs violated the Appointments Clause. However, the D.C. Circuit recently vacated that opinion and agreed to rehear the case en banc. The Tenth Circuit’s decision on whether to rehear the case, therefore, could be crucial to fate of the SEC ALJs. If the D.C. Circuit reverses its original decision and the Tenth Circuit refuses to rehear this case, then the only two circuit courts to have reached the issue of the constitutionality of the SEC ALJs on the merits would have ruled against the SEC.

March 22, 2017
The Rise of Settled Proxy Fights
by Merritt Moran, FTI Consulting

Editor's Note: Merritt Moran is a Business Analyst at FTI Consulting. This post is based on an FTI publication by Ms. Moran, Jason Frankl, and Steven Balet. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr., and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Shareholder activists showed no signs of slowing down in 2016. These investors continue to instill fear in corporate board rooms across America and bring their concerns to the public as illustrated by the growing number of proxy fights; 110 in 2016 alone, a 43% surge over 2012. [1] In that time, companies have more frequently succumbed to these investors and at times, accepted unfavorable settlement terms instead of pushing forward and fighting through a proxy contest.

In 2016, activists’ objectives shifted from primarily business strategy and balance sheet activism to board-related governance. In 2013, board-related governance was one of the less common objectives, but it outpaced M&A actions this past year, which has been a dominant objective of activism since the corporate raider era of the 1980s. The surge of proxy access campaigns was a primary driver for the prevalence of board related activism. This bylaw provides certain shareholders the ability to nominate board candidates, and was voted on and adopted by over 75% of S&P 100 companies. [2] This fact alone demonstrates the strength of demand from shareholders for companies to refresh their boards and in some cases take on a “shareholder representative,” also known as a dissident board candidate. One of the most prolific activists, Starboard Value, obtained eight board seats at its targets in 2016 and five board seats in 2015. [3]

Furthermore, M&A volume was down in 2016, likely due to uncertainty surrounding the administration change in the U.S., possible changes in U.S. corporate tax policy and anticipation of continued rate hikes. The combination of an uncertain investing environment and continued aggression from activists has certainly affected management decision making when engaging with activists as well. Perhaps that broadly explains why companies were much more willing to concede to activist demands to avoid public proxy fights. Perhaps it does not.

Of the 110 proxy fights in 2016, 50 ended in settlement, the most we have ever seen in a given year. Only 36 companies were willing to take the dispute to a vote in 2016, and agreed to settle in 45% of fights. The remainder of contests from 2016 are either pending or were withdrawn. This marks a significant increase over 15 years ago, when only 17.5% of fights were settled prior to a vote. [4] Additionally, these statistics only take into account the fights that reached proxy contest phase, which suggests that even more settlements occurred in private negotiations, well before shareholder meetings.

However, of the 37 proxy fights that did make it to a vote this year, 27 were won by management; seemingly pretty good for the incumbents. Yet when examined deeper, this statistic further illustrated how willing companies have been to settle with activists. Maybe this statistic shows that companies only held their ground when a win was a near certainty. The average time to settlement, from the first campaign announcement to reaching a settlement, decreased to 56 days. In 2013, that same statistic was 146 days. [5] Together, these trends indicate the strength investors have been able to exert on target companies. An example from this year was when QLik Technologies,a $2.9 billion market cap technology company, held out for only eight days prior to settling with Elliott Management.

Reasons Companies Settle

It is not surprising that companies fear public proxy fights these days as institutional investors and the media are increasingly siding with activists. At a minimum, companies take on heavy uncertainty and risk by engaging with activists. The perception change of activist investors has given the strategy a boost in popularity and media following, causing many moves companies make in proxy fights to hit front-page news. These fights can be damaging to long-term company credibility, especially those with difficult facts to defend. For example, in Starboard’s fight against Yahoo!, Jeff Smith’s team secured four board seats and pushed to remove CEO Marissa Mayer upon completion of the Verizon merger. Other activists have followed a similar playbook with accompanying public disclosures that highlight operational weakness and threaten credibility of existing management and boards of directors.

Beyond avoidance of public scrutiny from activist funds, some companies may settle in order to avoid the distraction and costs associated with a proxy campaign. Many companies targeted by shareholder activists are underperforming, and therefore, it can be alluring to quietly accept one or more activist nominated board members in order to quickly initiate a standstill agreement and force the activist to be silent while management executes existing strategies. This position leaves companies in a vulnerable position.

Risks of Pre-mature Settlement

Disproportionate voting rights

In many settlement scenarios, activists gain outsized influence for the amount of investment put into company stock. Consider a company with 10 board seats. Until a shareholder owns 10% of outstanding shares, it is unreasonable to expect that shareholder should receive one board seat and receive the influence of 1/10th of the board. When a board of directors has even fewer total directors, and an activist owns less than the corresponding percentage of outstanding shares, it is effectively gaining outsized influence to the long-held corporate governance principle of one share, one vote, which continues to be embraced by Nasdaq and NYSE listing standards. For example, in Carl Icahn’s insurgency at Hertz, he helped name the new CEO and three of the seven directors. Icahn reportedly held 9% of Hertz at the time and simultaneously, three non-dissident directors stepped down.

By accepting dissident board nominees, management teams are handing over a disproportionate amount of control -- contrary to the one share, one vote principle, at least until the next shareholder meeting. This could introduce a harsh new reality for management teams. At the beginning of Icahn’s activist engagement, he negotiated three board seats in exchange for not running a proxy contest. Two years later, Hertz’s then-CEO, John Tague, was replaced by Kathryn Marinello. Activist engagement preceded CEO departures many other times in 2016.

CEO Turnover Rate after Activist Engagement -- A History Lesson

FTI Consulting’s Activism and M&A Solutions group looked at more than 300 activist campaigns between 2012 and 2015 and found that CEOs were three times as likely to be replaced within 12 months after an activist received a board seat compared to our baseline. Even when activists engaged a company and did not receive a board seat, CEOs were twice as likely to be replaced within the same period. Once an activist gains a board seat, his or her influence to find a new shareholder-friendlyCEO increases. Our baseline includes a broad array of companies both underperforming and outperforming; therefore, these turnover statistics cannot be credited to activist investors in every case. Regardless, the jump in CEO turnover rate after an activist joins a company’s board should be cause for concern for management teams.

Furthermore, of the 50 companies that negotiated settlement agreements in 2016, 11 had a management change later on in the year. These 11 situations were not all classic activist investor campaigns, however, many of the settlement agreements that CEOs accepted last year preceded their job loss. It is well understood that most management changes at that level are complicated and take time to execute. Private negotiations within the company, and between the activists and companies, may provide more insight into whether the CEO departure was planned even prior to activist engagement.


In the current environment, it is not always clear whether it is institutional investors or activist funds seeking change. The highest profile activist investors often seek out institutional support prior to launching their campaigns. In the 1980s, this type of partnership was unheard of (or at least unspoken). Today, activist investors depend upon institutional support in campaigns and have been successful in attaining it. However, when it comes to settling with activists, institutional funds have recently held a more pro-management stance. Funds like State Street Global have voiced concern that the shortened period from campaign launch to settlement is causing companies to accept too harsh of settlement terms that do not take into account the prerogative of other shareholders. [6]

Institutional funds like BlackRock and Vanguard have additionally pointed out that the short-term focus of activist investors directly contradicts the best interest of institutional funds whose focus is longer-term. [7] The holding period of hedge funds is often much shorter than that of institutional funds, creating the possibility that the activist influence will negatively impair the institutional fund’s interest in the long-term.

Investors in hedge funds almost always demand relatively rapid returns whereas shareholders of a public company, especially pension funds and institutional investors are more interested in building long-term, sustainable value. This conflict may not immediately materialize, especially during initial negotiations, however, the short-term perspective of the activist might manifest. Often, the demands cited are immediate in nature, such as a sale of assets or subsidiaries, share buybacks or changes in management and/or the board. Activists seldom demand investment in plants, property, and equipment over share buybacks.

Suggestions for Companies

The best defense against activist investors will always be preparedness. Our report on the basic steps companies can take to prepare and defend against activist investors dives deeper into this subject. However, aggressive activist campaigns do not always afford companies enough time to make proper preparations. When a company is in this position, management should remain reluctant to welcome dissident directors onto the board. The increased likelihood of management ouster should stand as encouragement to remove board seats as a bargaining chip in discussions with activists and seek a pro-management outcome.

Activist suggestions are not always negative, so it is in the company’s best interest to listen to activists’ suggestions and, in some cases, adopt recommendations, but not give away board seats as easily as companies have this past year. Companies need to have more confidence in their ability to negotiate with activists in ways that support long-term shareholder value.


1 FactSet SharkRepellent.

2 FactSet SharkRepellent.

3 FactSet SharkRepellent.

4 FactSet SharkRepellent.

5 FactSet SharkRepellent.

6 See State Street Press Release Dated 10/10/16:

7 Letters from Blackrock and Vanguard: and

March 22, 2017
Majority Voting: Latest Developments in Canada
by Stephen Erlichman, Fasken Martineau DuMoulin LLP

Editor's Note: Stephen Erlichman is partner at Fasken Martineau DuMoulin LLP and Executive Director at the Canadian Coalition for Good Governance. This post is based on a Fasken Martineau publication by Mr. Erlichman.

A previous post on this site was written about (i) the Toronto Stock Exchange ("TSX") adopting a majority voting listing requirement, effective June 30, 2014, which requires each director of a TSX listed issuer (other than those which are majority controlled) to be elected by a majority of the votes cast, other than at contested meetings (the "TSX Majority Voting Requirement") and (ii) Bill C-25 which was introduced by the federal Canadian government on September 28, 2016 and proposes amendments to the Canada Business Corporations Act ("CBCA") that include true majority voting (i.e., by requiring shareholders to cast their votes "for" or "against" each individual director’s election and prohibiting a director who has not been elected by a majority of the votes cast from serving as a director except in prescribed circumstances) (the "Bill C-25 Amendments"). This post explains the latest developments in Canada with respect to both of these initiatives, as well as a further development with respect to majority voting in the Province of Ontario.

TSX Majority Voting Requirement

On March 9, 2017, the TSX issued a notice providing guidance with respect to the TSX Majority Voting Requirement. The notice stated that the TSX’s Majority Voting Requirement “was introduced to improve corporate governance standards in Canada by providing a meaningful way for security holders to hold individual directors accountable”. The notice indicated that the TSX conducted a review of 200 randomly selected majority voting policies adopted by TSX-listed issuers pursuant to the TSX Majority Voting Requirement (the “Reviewed Policies”) in order to assess issuers’ compliance with the TSX Majority Voting Requirement. The TSX stated that in its review and based on its experience from the 2015 and 2016 proxy seasons, the TSX “identified a number of deficiencies in the Reviewed Policies, as well as inconsistencies with the policy objectives” of the TSX Majority Voting Requirement.

The TSX stated its key findings as follows:

- certain Reviewed Policies did not have the effect of requiring a director to tender his or her resignation immediately if he or she was not elected by a majority of votes cast;

- certain Reviewed Policies did not provide a time frame for the board of directors to render a decision as to whether or not to accept a resignation or the time frame was outside the 90 day period permitted by TSX;

- certain Reviewed Policies did not specifically require the board of directors to accept the resignation of a director who was not elected by a majority of votes cast, absent exceptional circumstances;

- a number of the factors identified as exceptional circumstances in the Reviewed Policies were inconsistent with the policy objectives of the [TSX] Majority Voting Requirement;

- very few of the Reviewed Policies contained the requirement to provide a copy of the news release with the board of directors’ decision to TSX; and

- certain Reviewed Policies contained additional requirements that may have the effect of circumventing the policy objectives of the [TSX] Majority Voting Requirement.”

The TSX also provided specific guidance with respect to the key findings. For example, the TSX stated that it does not consider the following factors to be “exceptional circumstances” that would permit a board to not accept a resignation from a director who did not receive a majority of the votes cast:

- the director’s length of service;

- the director’s qualifications;

- the director’s attendance at meetings;

- the director’s experience; or

- the director’s contributions to the issuer.

The TSX also stated that it considers the following requirements to be inconsistent with the TSX Majority Voting Requirement:

- a higher quorum requirement for the election of directors compared to the quorum requirement for other resolutions; and

- majority voting policies that exclude certain nominees, such as insider nominees or incumbent directors, from certain requirements or that otherwise treat certain nominees more favourably than other nominees.

The TSX advised its non-compliant issuers that they should amend their majority voting policies “as soon as practicable and sufficiently in advance of the next meeting of security holders at which directors are elected to allow nominees to comply”. The TSX also stated that it is conducting another review of majority voting policies adopted by TSX-listed issuers to assess compliance and that the TSX will “continue to monitor the corporate governance landscape in Canada and internationally, as well as the effects of the TSX Majority Voting Requirement on its issuers and the marketplace”.

Bill C-25 Amendments to the Canada Business Corporations Act

The Canadian federal government has been moving forward to modernize the CBCA via Bill C-25. Bill C-25 was published on September 28, 2016 and proposed regulations under the Bill were published on December 14, 2016. The proposed majority voting requirement under Bill C-25 would apply to all public CBCA companies and its key features would be as follows:

- shareholders would be able to vote “for” or “against” each director individually and a director would not be elected at an uncontested meeting if he or she failed to receive a majority of the votes cast

- a board of directors would not have discretion to reappoint the non-elected director, unless necessary to satisfy the Canadian residency requirement or the requirement that at least two directors not be officers or employees of the corporation

- if the number of directors elected is less than the minimum required by the company’s articles, the powers of the board of directors would be held by the elected directors provided there is a quorum. If there is not a quorum, a special meeting would have to be called for another director election.

On December 9, 2016 Bill C-25 had second reading in the House of Commons and then was referred to the House’s Standing Committee on Industry, Science and Technology (the “Committee”) for review. The Canadian Coalition for Good Governance (“CCGG”) appeared before the Committee on February 16, 2017 to provide views on the Bill. In response to another witness’ view that the TSX Majority Voting Requirement was sufficient and thus the CBCA should not be amended to require majority voting, CCGG noted that:

- the TSX Majority Voting Requirement, which requires its issuers to adopt a majority voting policy, is merely a work-around the problem that majority voting is not a legal requirement in corporate statutes in Canada

- the TSX Majority Voting Requirement does not apply to the over 1,600 public companies listed on the TSX Venture Exchange

- the TSX could decide in the future to change this listing requirement.

The Committee’s clause by clause consideration of the Bill commenced on March 7.

After the Committee completes its deliberations and recommendations, the Bill will go back to the House of Commons for third reading and then will be considered by the Senate. In light of the majority Liberal government in power, as well as the fact that the other major political parties are supportive of the majority voting provisions in Bill C-25, majority voting is expected to be adopted in the CBCA this year.

Ontario’s Business Corporations Act

In February 2015 an expert panel was convened by Ontario’s Minister of Government and Consumer Services in order to provide advice to the Minister on the priorities for reform of Ontario’s business legislation. The summary of recommendations from the panel’s June 2015 report stated that “[p]riority” should be given to …[a]llowing shareholders to effectively determine the composition of their boards of directors by eliminating certain legislative requirements” and the report went on to state that “[s]hareholders should have the ability to effectively choose their boards. For example, they should be entitled to vote against candidates for election to the board.”

In March 2016 the Ontario government formed a Business Law Advisory Council (the “Council”) to advise on priorities and recommendations for reform of Ontario’s business legislation. The Council provided its initial report in November 2016 (the “November Report”). The November Report was totally silent as to whether the Ontario Business Corporations Act (“OBCA”) should be amended to adopt majority voting, notwithstanding that federal Bill C-25 had been brought forward two months earlier and was proposing to amend the CBCA to adopt majority voting. CCGG and various CCGG members made written submissions critical of the November Report’s omission of majority voting. On March 7, 2017 the Ministry of Government and Consumer Services stated that following the Council’s consideration of the various comments received on the November Report, the Council finalized its report on February 3. The finalized report, which the Ontario government publicly posted on March 7, contained a new section entitled “Issues for Future Consideration” and made the following statement under the sub-heading “Majority Voting”:

There are many who do not believe that the TSX requirement is enough. Among other things, it leaves with the board of directors the authority to decide whether a director who has not received a majority of votes in favour of his or her election should remain on the board. Moreover, the TSX provisions do not apply to public companies that are listed on the TSX Venture Exchange. In September 2016, the federal government introduced proposed amendments to the CBCA which would result in director candidates who have not received a majority of votes cast in favour of their election not being elected (subject to certain exceptions).

Majority voting is an important priority for the Council. We are reviewing the approach in the proposed amendments to the CBCA and whether improvements could be made to this approach in developing proposals for the OBCA.

Accordingly, it is expected that the Ontario government will continue to monitor what transpires with respect to the majority voting amendments to be adopted in the CBCA via Bill C-25 in order to consider whether it will adopt similar amendments to the OBCA.

March 22, 2017
Board Evaluations and Boardroom Dynamics
by Taylor Griffin, David Larcker, Stephen A. Miles and Brian Tayan

The New York Stock Exchange requires that the board of each publicly traded corporation "conduct a self-evaluation at least annually to determine whether it and its committees are functioning effectively." The purpose of this exercise is to ensure that boards are staffed and led appropriately; that board members, individually and collectively, are effective in fulfilling their obligations; and that reliable processes are in place to satisfy basic oversight requirements.

Research evidence suggests that, while many directors are satisfied with the job that they and their fellow board members do, board evaluations and boardroom performance fall short along several important dimensions. In particular, board evaluations do not appear to be effective at the individual level. Only half (55 percent) of companies that conduct board evaluations evaluate individual directors, and only one third (36 percent) believe their company does a very good job of accurately assessing the performance of individual directors.

Directors also have only modest satisfaction with boardroom dynamics. Only two thirds (64 percent) of directors strongly believe their board is open to new points of view; only half strongly believe their board leverages the skills of all board members; and less than half (46 percent) strongly believe their board tolerates dissent. Forty-six percent believe that a subset of directors has an outsized influence on board decisions (a dynamic referred to as "a board within a board"). The typical director believes that at least one fellow director should be removed from their board because this individual is not effective.

These are troubling statistics that suggest that many companies do not use board evaluations to optimize the contribution of their members.

Board Evaluations

A board evaluation typically starts with a review of board structures and processes, and is often performed by the general counsel or outside legal counsel. It includes a checklist of items that public companies are required to review and the standards associated with them. The more difficult but also more value-producing part of the board evaluation process is to review the contribution of individual directors and the interpersonal and group dynamics among board members.

Key elements should include the following:

How You Lead

This section evaluates the effectiveness of board leadership, including the lead independent director (or independent chairman) and committee chairs. It examines how the leader was chosen, the skills and experiences that this individual brings to bear, and his or her leadership style. The company should develop criteria for these roles and evaluate the available skill sets of its members to determine who is most suitable. Companies should avoid appointing a leader by default (i.e., the person who volunteers to do the job or the most senior member of the board) or solely looking to the required background (such as a qualified financial expert) because temperament is often key to effectiveness in the role. These individuals are the interface with management and need a communication style that is clear, concise, and constructive. A successful board leader needs to be adept at translating the voice of the board to management, and the voice of management to the board. The lead director, for example, should facilitate the board in a way that earns respect from its members. He or she is responsible for encouraging broad participation, cajoling if necessary, and bringing the right people into the conversation at the right time. This requires effort both within and outside the boardroom itself and requires a range of leadership styles to line up effectively with the board’s diverse members. Finally, the lead director can also be responsible for managing the evaluation processes and delivering feedback or arranging coaching for directors that require it.

The inadequacy of leadership among many boards is evident from survey results. Only 72 percent of directors believe their leader is effective in inviting the participation of all directors, and only 68 percent believe the leader is effective in inviting the participation of new members. Only 60 percent believe their lead director "asks the right questions." Worse, only a quarter (26 percent) believe that director is very effective in giving direct, personal, and constructive feedback to fellow directors.

How You Manage

This section evaluates the manner in which board meetings are conducted, including whether they are organized for maximum productivity and the honest exchange of ideas, and whether they encourage the full participation of all members. Particular attention should be paid to committee meetings and executive sessions. According to many directors, the "real work" of the board takes place in committees. The evaluation process should determine whether clear expectations are established for the work conducted by committee members and whether committee reports are effective in keeping the full board informed about key issues facing the company. The evaluations should also review executive sessions, which take place outside the presence of management and include only the non-executive (i.e., outside) directors on the board. When structured properly, executive sessions ensure that the day’s meetings are productive and serve as an important forum for framing and reviewing discussion topics. Non-executive directors meet at the beginning of the day, before the CEO joins, to discuss key topics and identify areas where directors want to learn more information from management. They then meet again at the end of the day to review and contextualize the information they learned and bring closure to the discussion. When effective, these sessions last no more than 10 to 15 minutes. Long meetings can be a red flag, indicating that board members do not feel comfortable expressing their honest opinions in front of management and instead wait until management is not present to speak freely. This dynamic is detrimental to decision-making.

Survey evidence indicates that this can be a problem for many companies. Only two-thirds (68 percent) of board members say they have a very high level of trust in their fellow directors, and only 63 percent believe their board very effectively challenges management. Half (53 percent) believe that their fellow directors do not express their honest opinions in the presence of management.

How You Contribute

Finally, board evaluations stand to improve by rigorously reviewing the manner in which board members interact, including which directors participate and how decisions are made. Leadership, coaching, and feedback are critical in this regard. Directors have important functional knowledge but are generally not instructed on how best to contribute this knowledge in a boardroom setting. Many come from executive, managerial, or professional backgrounds where they hold positions of leadership. They are brought onto the board to contribute this expertise, but not in a manner that stifles debate and shuts down discussion. They are not recruited to boards to provide the last word on topics, with other directors deferring to their opinion. They are recruited to contribute knowledge that the group as a whole can use to make better decisions. In truth, there is no reason to believe that forming a board from a group of successful CEOs will produce a high-functioning board.

Research evidence demonstrates that many boards suffer from poor group dynamics. Three-quarters of directors believe their fellow directors allow personal or past experience to dominate their perspective. A significant minority (44 percent) say that their fellow directors do not understand the boundary between oversight and actively trying to manage the company. Thirty-nine percent report that their fellow board members derail the conversation by introducing issues that are off topic.

All publicly traded companies are required to conduct an annual evaluation. The evaluation process can be greatly improved by treating the board as a high-performing group of individuals and evaluating its leadership, management, and group dynamics, as illustrated above.

This post comes to us from Taylor Griffin, David Larcker, Stephen A. Miles and Brian Tayan. Ms. Griffin is the Chief Operating Officer of The Miles Group. Professor Larcker is the James Irvin Miller Professor of Accounting and Senior Faculty at the Rock Center for Corporate Governance at Stanford University. Mr. Miles is the founder and Chief Executive Officer of The Miles Group. Mr. Tayan is a researcher in the center.

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3/22/2017 posts

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The Harvard Law School Forum on Corporate Governance and Financial Regulation: Majority Voting: Latest Developments in Canada
CLS Blue Sky Blog: Board Evaluations and Boardroom Dynamics

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