In Corwin v. KKR Financial Holdings LLC, 125 A.3d 304 (Del. 2015), the Delaware Supreme Court held that a non-controlling stockholder transaction approved by informed, unaffiliated stockholders is protected by the business judgement rule and that any lawsuit challenging such a transaction should be dismissed absent well-pleaded allegations of corporate waste. Recognizing that today’s sophisticated stockholder body can and does protect its own interests, Corwin held that in the great run of cases, stockholders—rather than plaintiffs’ lawyers or courts—should have the last word.
The securities litigation and regulatory landscape in 2017 defies simple categorization. Plaintiffs filed 226 new federal class actions in the first half of 2017, more than double the average rate over the last 20 years, and an additional 99 federal class actions in the third quarter of 2017. In contrast, new SEC enforcement proceedings declined. After staying on pace with the prior two years with 45 new enforcement actions against public company-related defendants in the first half of fiscal year 2017, the SEC filed only 17 new enforcement actions against public company-related defendants in the second half of the year. The apparent decrease in initiation of enforcement proceedings coincides with the arrival at the SEC of Chairman Walter J. Clayton, who has expressed the view that enforcement actions against issuers rather than individual wrongdoers too often punish the very investors they seek to protect.
Corporate venture capital (CVC) refers to direct minority equity investments made by established, publicly-traded firms in privately-held entrepreneurial ventures. CVC investing differs from pure venture capital investing in that financial returns are not the primary consideration, but rather, strategic gains are often the driving motivation to invest. While established firms in the technology, industrial, and healthcare sectors such as Google, General Electric, and Johnson & Johnson have set up CVC subsidiaries to invest billions of dollars in startups, younger firms such as Twitter with relatively smaller cash balances are starting to engage in venture capital investing as well. According to data from CB Insights, firms’ CVC investments in the U.S. were $17.9B in 2015 and $16.1B in 2016, involving 1,603 deals that accounted for nearly one-fifth of overall venture capital deals. CVC investments are now at the highest levels since the dot com era. The motivating research questions we are interested in examining in this setting are: 1) how transparent are firms about their CVC investments, and 2) is CVC investing a productive use of a firm’s capital resources?
Investors and managers of publicly traded firms spend a considerable amount of time speaking privately. According to the consultancy Ipreo, the average publicly traded firm conducts more than 100 one-on-one meetings annually with investors. While growing body of research provides evidence that these offline interactions offer investors in attendance opportunities to make more informed trading decisions. what actually goes on during these interactions has largely been elusive to outsiders.
In this paper, we seek to better understand the content of private manager-investor interactions by exploring over 1,200 questions posed by investors during private meetings with firm managers from two publicly traded firms. We acquired access to this unique field data by embedding a confederate with extensive investor relations experience in two firms from 2015 to 2016.
A recurring theme in banking crises is the public backlash against bank supervisors for their failure to take prompt and decisive action to unearth and correct problems of weak banks. The latest crisis is no exception. A recent poll by the Initiative on Global Markets (IGM) at the Booth School of Business shows that leading economists view “flawed financial sector regulation and supervision” as the most important factor contributing to the 2008 Global Financial Crisis. Perceived regulatory failures in the past often play an important role in justifying interventions that overhaul the regulatory oversight of the banking system, including tighter rules and stricter monitoring of financial institutions (e.g., Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989; Dodd-Frank Act of 2010). Despite the importance of such interventions, we have limited evidence on the economic trade-offs associated with reforms that aim to limit regulatory forbearance and promote stricter bank supervision.
I am delighted to welcome all of you to the inaugural meeting of the Fixed Income Market Structure Advisory Committee, or “FIMSAC” as many of us like to call it. This is a significant day for the Commission. There are a few matters of importance to discuss, and I will try to be efficient, as I know we are all eager to kick off today’s [January 11, 2018] discussion on bond market liquidity. 
To start, I would like to extend a warm welcome to our two new Commissioners, Robert Jackson and Hester Peirce. With Commissioners Stein and Piwowar, we have benefited from intellect, experience, perspective and energy, as well as ongoing commitment to our mission. My interactions with Rob and Hester have made it clear that we will have more of these important attributes.
Limited partner agreements in private equity typically focus on three elements of compensation: Management fees, carried interest, and the timing provisions that govern when general partners receive carried interest. By now, the standard conventions in most Limited Partnership Agreements (LPAs) are well understood by most observers and students of the industry—most investment managers (general partners, or GPs) charge 1.5% to 2.5% management fees to their investors (the limited partners, or LPs), and take a 20% carried interest in the net return in the exited investments, resulting in the “2 and 20” compensation structure that is commonplace in private equity.
President Trump has signed into law the most sweeping changes to business-related federal income tax in over three decades. The new law, referred to as the Tax Cuts and Jobs Act (the “Act”), is expected to have far-reaching implications for domestic and multinational businesses as well as domestic and cross-border transactions, impacting the structure, pricing and, in some cases, viability of broad categories of deals. Among other things, the Act lowers tax rates on corporations and income from pass-through entities, permits full expensing of certain property, imposes additional limits on the deduction of business interest and adopts certain features of a “territorial” tax regime. By lowering tax rates, the new law makes conducting business in the United States more attractive. But, to pay for the reduced rates, the Act includes numerous revenue-raising provisions as well. The changes will shift transaction dynamics in complex and potentially unanticipated ways that will unfold over time, raising challenging interpretive questions that taxpayers and advisors will be grappling with for years to come. By vastly reducing the incentive for U.S.-parented multinationals to hold cash offshore, the new law is expected to free up cash for M&A activity, capital expenditures, debt repayment or stock buybacks.
The job of a corporate director has become increasingly time consuming. The Wall Street Journal recently reported that the director of a public firm spends an average of 248 hours a year on each board, up from 191 hours in 2005. In light of this growing time demand, corporate directors face increasing investor scrutiny regarding the number of boards on which a given director sits. Prior research has examined the firm-level performance implications of corporate boards that have a large proportion of “busy” directors. However, there are several difficulties in these studies. In particular, firm-level analysis masks important heterogeneity in the time constraints and the expertise benefits of busy directors. For example, sitting on three boards might be excessive for a director with a full-time job, but it might be reasonable, or even optimal, for an individual who is retired. Also, certain firms (e.g., less experienced firms) may benefit more from the expertise and advising of a busy director. Furthermore, there may be omitted firm-level characteristics that are driving both director busyness and firm performance, which suggests that an observed positive (negative) association between director busyness and good (poor) firm performance does not necessarily imply that busy directors are beneficial (detrimental) to shareholders.
Posted by Bo Becker and Ramin Baghai (Stockholm School of Economics), on Friday, January 5, 2018 Tags: Conflicts of interest, Financial crisis, India, International governance, Ratings agencies Tax Reform Implications for U.S. Businesses and Foreign Investments
Posted by Philip Wagman, Richard Catalano, and Alan Kravitz, Clifford Chance, on Friday, January 5, 2018 Tags: Cross-border transactions, Foreign firms, International governance, Inversions, Mergers & acquisitions, Tax avoidance, Taxation Industry Tournament Incentives and the Product Market Benefits of Corporate Liquidity
Posted by Jian Huang (Towson University), Bharat A. Jain (Towson University), and Omesh Kini (Georgia State Unviersity), on Saturday, January 6, 2018 Tags: Agency model, Behavioral finance, Capital allocation, Executive Compensation, Incentives, Management, Market efficiency, Product markets, Risk, Risk-taking, Shareholder value Damage Quantification in Delaware for Breaches of Contract in Post-Merger Litigation
Posted by Arthur H. Rosenbloom (Consilium ADR), on Sunday, January 7, 2018 Tags: Contracts, Delaware cases, Delaware law, Merger litigation, Mergers & acquisitions, Securities damages, Shareholder suits Ineffective Stockholder Approval for Director Equity Awards
Posted by Joseph Penko, Robert Saunders, and Audrey Murga, Skadden, Arps, Slate, Meagher & Flom LLP, on Sunday, January 7, 2018 Tags: Boards of Directors, Business judgment rule, Delaware cases, Delaware law, Director compensation, Equity-based compensation, Fiduciary duties, Say on pay, Securities litigation, Shareholder suits Does Size Matter? Bailouts with Large and Small Banks
Posted by Eduardo Dávila (New York University) and Ansgar Walther (University of Warwick), on Monday, January 8, 2018 Tags: Bailouts, Banks, Financial crisis, Financial institutions, Financial regulation, Leverage, Moral hazard Delaware Court Ruling on Dual-Class Recapitalization Involving Controlling Stockholders
Posted by David J. Berger, Wilson Sonsini Goodrich & Rosati, on Monday, January 8, 2018 Tags: Boards of Directors, Controlling shareholders, Delaware cases, Delaware law, Dual-class stock, Recapitalization, Securities litigation, Shareholder suits, Shareholder voting Raising the Stakes on Board Gender Diversity
Posted by Brianna Castro, Glass, Lewis & Co., on Monday, January 8, 2018 Tags: Board composition, Boards of Directors, Diversity, Institutional Investors, Proxy advisors, Shareholder proposals Managing the Family Firm: Evidence from CEOs at Work
Posted by Andrea Prat (Columbia University), on Tuesday, January 9, 2018 Tags: Agency costs, Corporate forms, Firm performance, International governance, Management, Manager characteristics, Skin in the game Analysis of SEC Ruling on Apple Shareholder Proposal
Posted by Arthur H. Kohn, Sandra Flow, and Mary E. Alcock, Cleary Gottlieb Steen & Hamilton LLP, on Tuesday, January 9, 2018 Tags: Boards of Directors, Disclosure, Human rights, No-action letters, Rule 14a-8, SEC, Securities regulation, Shareholder proposals, Shareholder voting Compensation Season 2018
Posted by Jeannemarie O’Brien, Adam J. Shapiro, and Andrea K. Wahlquist, Wachtell, Lipton, Rosen & Katz, on Tuesday, January 9, 2018 Tags: Boards of Directors, Bonuses, Compensation committees, Director compensation, Dodd-Frank Act, Equity-based compensation, Executive Compensation, Institutional Investors, ISS, Pay for performance, Proxy advisors, Say on pay, Stock options, Taxation Pay-for-Performance Mechanics
Posted by Subodh Mishra, Institutional Shareholder Services, Inc., on Wednesday, January 10, 2018 Tags: CD&A, Executive Compensation, Firm performance, Institutional Investors, ISS, Long-Term value, Management, Pay for performance, Performance measures, Proxy advisors, Shareholder voting, TSR CEO Gender and Corporate Board Structures
Posted by Melissa B. Frye (University of Central Florida) and Duong T. Pham (Georgia Southern University), on Wednesday, January 10, 2018 Tags: Behavioral finance, Board composition, Board monitoring, Boards of Directors, Decision making, Diversity, Firm performance, Management, Manager characteristics, Managerial style, Oversight Activist Investing in Europe—2017 Edition
Posted by Armand Grumberg, Scott Hopkins, and Lorenzo Corte, Skadden, Arps, Slate, Meagher and Flom LLP, on Wednesday, January 10, 2018 Tags: Boards of Directors, Brexit, EU, Europe, Executive Compensation, France, Germany, Hedge funds, Italy, Management, Mergers & acquisitions, Proxy fights, Public firms, Say on pay, Shareholder activism, Shareholder proposals, Shareholder voting, Switzerland, UK Political Uncertainty and Cross-Border Acquisitions
Posted by Chunfang Cao (Sun Yat-sen University), Xiaoyang Li (Shanghai Jiao Tong University), and Guilin Liu, (Huatai Property & Casualty Insurance Co., Ltd.), on Thursday, January 11, 2018 Tags: Cross-border transactions, International governance, Legal systems, Mergers & acquisitions, Presidential elections, Risk, Shocks The Most Important Developments in M&A Law in 2017
Posted by Gail Weinstein, Philip Richter, and Steve Epstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on Thursday, January 11, 2018 Tags: Appraisal rights, Boards of Directors, Business judgment rule, Controlling shareholders, Corwin, Delaware law, Disclosure, Duty of good faith, Fair values, Financial advisers, Liability standards, Mergers & acquisitions, Shareholder activism, Shareholder suits SEC Guidance on Tax Reform Reporting
Posted by Catherine M. Clarkin, Robert W. Downes, and Brian D. Farber, Sullivan & Cromwell LLP, on Thursday, January 11, 2018 Tags: 401(k), Compliance and disclosure interpretation, Disclosure, Financial reporting, Form 8-K, SEC, Securities regulation, Taxation
On December 22, 2017, the Securities and Exchange Commission’s Division of Corporation Finance released Form 8-K Compliance and Disclosure Interpretation 110.02 and its Office of the Chief Accountant published Staff Accounting Bulletin No. 118, which provide guidance on reporting accounting impacts of the recently enacted tax reform legislation. The new C&DI clarifies that disclosure under Item 2.06 of Form 8-K (Material Impairments) is not triggered by the re-measurement of deferred tax assets due to a change in tax rates or tax laws. New SAB 118 provides guidance on reporting the income tax effects of U.S. tax reform for issuers that are not able to complete the accounting for certain tax effects by the time financial statements are issued covering the reporting period that includes the date of the enactment of the Tax Cuts and Jobs Act (December 22, 2017). 
Below, we (i) outline the key developments in M&A law in 2017; (ii) review the transformation that has occurred since 2014; and (iii) summarize the Delaware courts’ major 2017 decisions.
Cross-border acquisitions have become increasingly popular as more firms expand their businesses across national borders. Yet, politicians frequently make decisions that alter the environment in which firms operate, which creates a significant amount of uncertainty for acquisition decisions. Business executives often cite uncertainty as a major threat to investments and growth. Considering the rising importance of cross-border acquisitions and executives’ concerns over heightened political uncertainty, the authors investigate how political uncertainty affects such decisions.
By the end of September, 2017 had seen more than 100 European-based companies publicly subjected to shareholder demands. Reached slightly later this year than last, and much earlier than in 2015, that milestone signals that if activism in Europe has lost its capacity to shock, its future also looks secure.
Activity is still a long way behind the U.S., where the annual number of companies publicly targeted has ranged from more than 300 to nearly 500 over the last four years. And at least part of the increase in European activism in recent years has been due to a higher incidence of foreign activists looking for opportunities as the U.S. market has become increasingly picked-over. Often the most high-profile of situations, campaigns by U.S. activists at European companies this year have included Third Point Partners at Nestlé, Elliott Management at AkzoNobel, and Corvex Management at Clariant.
In our article, CEO Gender and Corporate Board Structure (forthcoming in the Quarterly Review of Economics and Finance), we investigate the relationship between the gender of the CEO and corporate board structures. In recent years, women have made strides in cracking the glass ceiling in leadership positions in corporate America. Female CEOs have been appointed not only in female-friendly industries such as healthcare and consumer products but also in fields that are traditionally dominated by their male counterparts such as energy, utilities or automotive. The number of female CEOs leading S&P 500 companies reached a record high in 2016 with 27 women at the helm of these firms. However, women CEOs only make up 5.4% of the total S&P 500 CEO positions.
Following the implementation of mandated advisory shareholder votes on executive compensation under the Dodd-Frank Act of 2010, investors have regular opportunities to opine on executive pay programs. Investor feedback on the issue of pay-for-performance has indicated a preference for a focus on long-term alignment, board decision-making, and pay relative both to market peers and company performance. As a result, ISS’ approach to evaluating pay-for-performance comprises an initial quantitative assessment and, as appropriate, an in-depth qualitative review to determine either the likely cause of a perceived long-term disconnect between pay and performance, or factors that mitigate the initial assessment.
The initial quantitative screens are designed to identify outlier companies that have demonstrated significant misalignment between CEO pay and company performance over time. The screens measure alignment on both a relative and absolute basis, and over multiple time horizons. The screening process applies to constituents of the Russell 3000E Index, a collection of the largest 3,500 (approximate) equity securities traded on U.S. stock exchanges. Beginning with annual meetings on or after Feb. 1, 2018, the quantitative screen includes a new financial performance assessment that measures on a long-term basis the relative alignment between CEO pay and key financial metrics. Before this 2018 model change, the financial performance assessment was limited to ISS’ qualitative evaluation.
Boards of directors and their compensation committees will soon shift attention to the 2018 compensation season. Key considerations in the year ahead include the following:Tax Cuts and Jobs Act Implications.
The new tax law has significantly altered the compensation design landscape. Notable implications of the new tax law include:
No Performance-Based Exception to §162(m). The new law eliminates the performance-based exception to the $1 million per-executive annual limit on the deductibility of compensation for certain public company executives under §162(m) of the tax code. This change will result in a significant increase in disallowed tax deductions. Nevertheless, we expect that companies will accept this result as a necessary consequence of the competitive marketplace for talent. Ultimately, it remains within the business judgment of the board of directors to set compensation at the levels and in the manner that it determines to be appropriate to attract and retain the executives the board believes will best serve the needs of the corporation.
On November 1 2017, the Securities and Exchange Commission (“SEC”) released guidance (Staff Legal Bulletin No. 14I (“SLB 14I”)) clarifying the scope and application of the ordinary business and economic relevance grounds for excluding a shareholder proposal under Rule 14a-8 of the Securities Exchange Act of 1934, as amended (the “Exchange Act”) from a company’s proxy statement.  On November 20, Apple Inc. became the first corporation to attempt to use this guidance in a request for no-action relief from the staff of the SEC’s Division of Corporation Finance (the “Staff”), in response to governance activist Jing Zhou’s proposal that Apple create a board committee focused on human rights (the “Proposal”). On December 21, 2017, the Staff responded, denying Apple’s request to exclude the Proposal from its proxy materials.
Family firms are often seen as an engine of growth. For instance, the exceptional economic success of many European countries in the post-War period was characterized by the wide presence of family firms across the Continent. Particularly in countries like Germany and Italy, family ownership came to be seen as the best guarantee of economic and social development. However, the consensus that family firms are good for growth has come under scrutiny in recent years.
An emerging body of evidence indicates that family management is actually detrimental for performance. Exploiting a remarkable natural experiment, Bennedsen et al (2007) estimate a 4% profitability loss for Danish firms due to having a family manager rather than a professional one. Lippi and Schivardi (2014) find that family firms have worse executive selection (because they prefer to hire a less qualified family manager rather than an external professional manager) and this accounts for a 6% productivity loss as compared to conglomerate-owned firms. Given the magnitude of the estimated effect, family ownership might be a serious obstacle to productivity growth in Europe.
2017 has seen interest in board composition intensify. Investors have long scrutinized individual directors’ qualifications; however, increasingly they are asking how those individuals complement each other, and whether the overall board reflects a diverse mix of backgrounds, skills and qualifications. Investors want to know how boards ensure that they are recruiting directors whose expertise aligns with company strategy, and numerous investment firms have updated their proxy voting policies to punish boards that lack diversity.