Three years ago we petitioned the SEC to modernize the beneficial ownership reporting rules under Section 13(d) of the Securities Exchange Act of 1934 (see our rulemaking petition, our memos of March 7, 2011, April 15, 2011, March 3, 2008 and our article in the Harvard Business Law Review). Since we filed our petition, activist hedge funds have grown more brazen in exploiting the existing reporting rules to the disadvantage of ordinary investors.
Posts Tagged ‘Adam Emmerich’
The Canadian Securities Administrators (CSA) recently proposed changes to Canada’s early warning regime for the disclosure of substantial blockholdings, including to lower the initial reporting trigger to 5% from 10%, to require disclosure no later than the opening of trading on the next business day, and to include equity equivalent derivatives and securities lending arrangements in the ownership calculation. Separately, the CSA proposed a new policy of greater flexibility as to rights plans, including in connection with unsolicited takeover bids. These proposals reflect sensible and necessary improvements to Canadian market regulation, to protect shareholders from the sorts of activist and takeover techniques and abuses that militate for changes in the U.S.’s Section 13(d) rules, and which, in the context of unsolicited takeover bids, the U.S. acceptance of rights plans have largely banished from the U.S.
In what can only be considered a form of extortion, activist hedge funds are preying on American corporations to create short-term increases in the market price of their stock at the expense of long-term value. Prominent academics are serving the narrow interests of activist hedge funds by arguing that the activists perform an important service by uncovering “under-valued” or “under-managed” corporations and marshaling the voting power of institutional investors to force sale, liquidation or restructuring transactions to gain a pop in the price of their stock. The activist hedge fund leads the attack, and most institutional investors make little or no effort to determine long-term value (and how much of it is being destroyed). Nor do the activist hedge funds and institutional investors (much less, their academic cheerleaders) make any effort to take into account the consequences to employees and communities of the corporations that are attacked. Nor do they pay any attention to the impact of the short-termism that their raids impose and enforce on all corporations, and the concomitant adverse impact on capital investment, research and development, innovation and the economy and society as a whole.
ISS, the dominant proxy advisory firm, recently unveiled its new ISS Governance QuickScore product, which will replace its Governance Risk Indicators (“GRId”) next month. ISS asserts that QuickScore is an improvement on the GRId product because it is “quantitatively driven” (with a “secondary policy-based overlay”). Using an algorithm purportedly derived from correlations between governance factors and financial metrics, QuickScore will rank companies in deciles within each of ISS’ existing four pillars—Audit, Board Structure, Compensation and Shareholder Rights – and provide an overall governance rating to “provide a quick understanding of a company’s relative governance risk to an index or region.” While one can understand, as a business matter, ISS’ desire to continually reinvent and “improve” its products, the constant shifting of goalposts creates uncertainty and inefficiency. More important, QuickScore will likely provide a no more complete or accurate assessment of corporate governance practices than its predecessors, and it may be worse.
When ISS adopted its GRId product three years ago, we cautiously noted that it offered greater transparency and granularity than the blunt one-dimensional CGQ ratings that it replaced. Unfortunately, in our view, going back to a system of opaque quantified ratings is a move in the wrong direction. After a substantial investment of management time and effort, companies have familiarity with the GRId “level of concern” approach, which at least helps them understand and address any legitimate issues or explain any divergences from ISS’ “best practices.” While ISS retains GRId’s formulaic approach, to the extent that it does not share the weightings it assigns to the various governance factors, it reduces transparency as companies would not be able to compute their own QuickScores.
NYSE Euronext, the Society of Corporate Secretaries and Governance Professionals and the National Investor Relations Institute have jointly filed a rulemaking petition with the SEC, seeking prompt updating to the reporting rules under Section 13(f) of the Securities Exchange Act of 1934, as well as supporting a more comprehensive study of the beneficial ownership reporting rules under Section 13. The petitioners urge the SEC to shorten the reporting deadline under Rule 13f-1 from 45 days to two business days after the relevant calendar quarter, and also suggests amending Section 13(f) itself to provide for reporting on at least a monthly, rather than quarterly, basis, to correspond with Dodd-Frank’s mandate for at least monthly disclosure of short sales. We applaud the petitioners for urging the SEC to modernize Section 13’s reporting rules, both with respect to Section 13(f) and more generally.
As we enter 2013, a number of signs – including the strong finish to 2012, macroeconomic factors that appear to be reducing business uncertainty, and intensifying competition in many critical sectors – provide cause for optimism that the breadth and depth of M&A activity will be significantly greater in the coming year than in 2012. Global M&A activity dropped 17.4% in the first three quarters of 2012 compared to the comparable period of 2011, reflecting the European sovereign debt crisis, political uncertainty in the United States and slower economic growth in China and India. But M&A activity turned sharply upward in the fourth quarter: Global announced deal volume for the quarter was the highest in four years, and a number of transformative transactions were announced, including Freeport McMoRan Copper & Gold’s $9 billion acquisitions of Plains Exploration Company and McMoRan Exploration, and ICE’s $8.2 billion acquisition of NYSE Euronext.
More than 40% of global M&A in 2012 involved acquirors and targets in different countries, including $170 billion of acquisitions in the U.S. by non-U.S. acquirors. Given the continuing accumulation of U.S. Dollars in emerging economies, many expect the trend to continue as Dollars are re-invested in the U.S. Natural resources will continue to be an important part of this story, including in the U.S., where substantial non-U.S. investment has been an important trend, as well as in resource-rich developed nations such as Canada and Australia, where non-domestic investment has lately been highly controversial.
Despite the empty election-year protectionist rhetoric in the U.S. last year, and continuing global concern over access to resources and technology by non-domestic actors, U.S. deal markets continue to be some of the most hospitable markets to off-shore acquirors and investors. With careful advance preparation, strategically thoughtful implementation and sophisticated deal structures that anticipate likely concerns, most acquisitions in the U.S. can be successfully achieved. Cross-border deals involving investment into the U.S. are more likely to fail because of poor planning and execution rather than fundamental legal or political restrictions.
Following is our updated checklist of issues that should be carefully considered in advance of an acquisition or strategic investment in the United States. Because each cross-border deal is different, the relative significance of the issues discussed below will depend upon the specific facts, circumstances and dynamics of each particular situation:
A small but influential alliance of activist investor groups, academics and trade unions continues — successfully it must be said — to seek to overhaul corporate governance in America to suit their particular agendas and predilections. We believe that this exercise in corporate deconstruction is detrimental to the economy and society at large. We continue to oppose it.
The Shareholder Rights Project, Harvard Law School’s misguided “clinical program” which we have previously criticized, today issued joint press releases with eight institutional investors, principally state and municipal pension funds, trumpeting their recent successes in eliminating staggered boards and advertising their “hit list” of 74 more companies to be targeted in the upcoming proxy season. Coupled with the new ISS standard for punishing directors who do not immediately accede to shareholder proposals garnering a majority of votes cast (even if they do not attract enough support to be passed) — which we also recently criticized — this is designed to accelerate the extinction of the staggered board.
Activist investors continue to aggressively exploit a variety of techniques — including hedging, securities borrowing, total return swaps and other contractual arrangements — to avoid public disclosure of their investments and to obtain governance rights out of proportion with their economic stakes. We have long warned against these abuses, which are not confined to the U.S. market but are truly a global phenomenon. Courts, including the Supreme Court of Delaware, have emphasized that corporate voting rights and economic interests should not be “uncoupled” but should travel together. The SEC is considering regulating the use of derivatives in its “proxy plumbing” initiative, and we have encouraged it to focus on “empty voting” abuses.
A recent case in Canada illustrates the problems with the current system. In TELUS Corp. v. CDS Clearing and Depository Services Inc., a U.S.-based hedge fund, Mason Capital, amassed a voting position of almost 20% in TELUS, a Canadian telecommunications provider with a dual-class capitalization. Mason hedged its entire position by shorting TELUS’s non-voting shares. Although Mason was the company’s largest voting shareholder, it would be unaffected whether TELUS shares increased or decreased in value, but rather stood to profit if the price differential between the voting shares and the non-voting shares widened. Mason used its (empty) voting position to defeat TELUS’s plan to collapse its dual class share structure, and sought to call a shareholder meeting to approve resolutions requiring a minimum premium for any conversion of non-voting shares into voting common, which would be advantageous for Mason, but not necessarily for other shareholders whose economic interests are aligned with their voting rights.
In our article Fair Markets and Fair Disclosure: Some Thoughts on The Law and Economics of Blockholder Disclosure, and the Use and Abuse of Shareholder Power forthcoming in Harvard Business Law Review, Spring 2012, and available at SSRN, we discuss the debate that has ensued following the March 2011 petition by our law firm, Wachtell, Lipton, Rosen & Katz, to the Securities and Exchange Commission to modernize the blockholder reporting rules under Section 13(d) of the Securities Exchange Act of 1934.
The petition sought to ensure that the reporting rules would continue to operate in a way broadly consistent with the statute’s clear purposes that an investor must promptly notify the market when it accumulates a block of publicly traded stock representing more than 5% of an issuer’s outstanding shares, and that loopholes that have arisen by changing market conditions and practices since the statute’s adoption over forty years ago could not continue to be exploited by stockholder activists, to the detriment of market transparency and fairness to all security holders. Among other things, the petition proposed that the time to publicly disclose such block acquisitions be reduced from ten days to one business day, given activists’ current ability to take advantage of the ten-day window to accumulate positions well above 5% prior to any public disclosure, in contravention of the clear purposes of the statute.