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.
Posts Tagged ‘Steven Rosenblum’
The years since the onset of the financial crisis have served to further increase the demands on and scrutiny of public company boards of directors. The assault on the director-centric model of corporate governance continues in the shareholder activist and political arenas, and the challenges of planning for and investing in the long-term health of the corporation have become more daunting. As the power and organization of both governance and hedge fund activists have increased, the pressure to produce short-term results has only grown stronger, regardless of whether the steps necessary to produce those results may be harmful to the corporation in the long run.
In this environment, the challenge for directors is to continue to focus on doing what they believe is right for their corporations while maintaining a sufficient understanding of shareholder sensitivities to avoid a targeted attack that could undermine their ability to act in their company’s best interest. The primary focus of a director, of course, should be on promoting and helping to develop the long-term and sustainable success of their company. This encompasses a wide range of activities, including working with management on the company’s business and strategies, planning for the succession of the CEO and other key executives, overseeing risk management, monitoring compliance, setting the appropriate tone at the top and being prepared to step in to address any corporate crises that arise. At the same time, the board needs to be aware of and address shareholder demands in a constructive manner, consider how a hedge fund or other activist may view the company and its strategic alternatives and try to ensure that the company maintains a shareholder relations program that clearly articulates the reasons for the company’s strategies and engenders support from the company’s major shareholders. In some cases, this may include direct communication between board members and institutional shareholders.
Recently, the SEC adopted controversial new rules that create significant financial incentives for whistleblower employees to report suspected securities law violations directly to the SEC, potentially circumventing company compliance programs in the process. Under the new rules, which were adopted pursuant to Section 922 of the Dodd-Frank Act, the SEC will pay awards to whistleblowers who voluntarily provide the SEC with original information about a violation of securities laws that leads to a successful enforcement action brought by the SEC and that results in monetary sanctions exceeding $1 million.
The size of potential bounty payments may range from 10% to up to 30% of the total monetary sanctions collected in successful SEC and related actions. In some cases, this could result in multimillion dollar cash payments to whistleblowers. The final rules set forth the SEC’s methodology for determining awards, with specified factors weighing in favor of an increase in the reward size and others weighing in favor of a reduction in the reward size. In addition, the rules provide that various persons will not be eligible for whistleblower payments, including compliance and internal audit personnel, but an exception is provided for such personnel if they believe disclosure “may prevent substantial injury to the financial interest or property” of the company or investors, and at least 120 days have elapsed since the whistleblower reported the information internally at the company or became aware of information that was already known to the company.
The Delaware Court of Chancery last week provided fresh guidance on the standards of director conduct applicable to part-cash, part-stock mergers and reaffirmed the rules of the road for board process and deal protection provisions in strategic mergers. In re Smurfit-Stone Container Corp. S’holder Litig., C.A. 6164-VCP (May 20, 2011).
In a merger agreement announced on January 23, Smurfit-Stone, a leading containerboard manufacturer, agreed to merge with Rock-Tenn Corporation. The agreement provides that Smurfit-Stone stockholders will receive consideration valued at $35.00 per share as of the date of the merger agreement, representing a 27 percent premium over the stock’s pre-announcement trading price, with 50 percent of the consideration payable in cash and the other 50 percent payable in Rock-Tenn common stock. Shareholder plaintiffs sought to enjoin the deal, alleging that the Smurfit-Stone board had improperly failed to conduct an auction and that the deal protection provisions in the merger agreement were impermissible as a matter of Delaware law.
In the coming year, boards of directors face a two-fold challenge: they must implement the various new legislative, regulatory and “best practice” mandates relating to corporate governance, while at the same time tailoring them to the needs of each corporation and implementing them in ways that will promote the board’s core mission of securing long-term value for shareholders. This challenge is complicated by the fact that many of the corporate governance provisions of the Dodd-Frank Act, new SEC regulations and other reforms require or put pressure on the board to adopt a one-size-fits-all approach to corporate governance. Thus, while the financial crisis and ensuing global recession have prompted boards to critically review their oversight role and consider ways in which they might function more effectively, their individualized action plans and “lessons learned” have to some extent been preempted by blunt regulatory mandates and best practices. Moreover, as boards work to craft strategies for sustainable economic recovery, they are increasingly vulnerable to shareholder activist demands for quick turnaround measures and short-term gains, particularly as hedge funds and other special interest shareholders seek to execute their own agendas for liquidity and financial recoupment.
The Dodd-Frank Act mandates a variety of changes to the governance, disclosure and compensation practices of all public companies. Many of the provisions of the Act require further SEC rulemaking and interpretation before definitive responses can be implemented, but companies should become familiar with the pending changes and take preparatory steps where possible. The purpose of this memo, which we will periodically update, is to provide a framework for our recommendations by highlighting certain actions companies should consider taking immediately, as well as certain key provisions of the Act which will require responses in the longer term. (Links to our earlier memos are embedded throughout and in the attached index.)
As we described in our recent memo, the SEC has adopted rules affording shareholders access to company proxy statements for the nomination of director candidates. The new regime, which includes new access Rule 14a-11 and amendments to Rule 14a-8, is expected to become effective in early November and will be applicable for the 2011 proxy season for most companies. It is now time for companies to take action to prepare for these sweeping changes. We opposed proxy access as an unnecessary and imprudent step. However it is now law and companies need to implement structures and procedures designed to make the proxy access regime work with minimum damage to the ability of boards to build long-term value for all shareholders. This memo highlights some of the major actions companies should consider:
The numerous legislative and regulatory initiatives adopted or proposed in response to the economic crisis, and the increased corporate governance activism by shareholders and their advisory organizations, raise the question of what are the key matters that a board should be considering on a regular basis. As a supplement to our recent post on the Forum, entitled Some Thoughts for Boards of Directors in 2010, we developed the following list of matters. Some matters could be visited once a year; and some should be visited at each meeting. Some companies will need to add matters to this list in view of relevant business, corporate governance or other issues specific to their companies. Boards should also consider the extent to which some of these matters should be addressed more fully by board committees. Each company should tailor the scope of, and the allocation of time to, the matters, and the frequency of their consideration, to its particular circumstances.
- Performance of the business, including comparison to budget and peers
- CEO succession and exposure of senior executives to the board
Never before in the history of American business has the role of the corporate director been more important or more challenging. Boards today must navigate a tremendously difficult business environment featuring intense competition from foreign manufacturers, weak consumer confidence, growing unemployment, volatility in financial and commodity markets and a host of other complex challenges. At the same time, directors are currently undergoing intense public and political scrutiny of their basic role and functioning at the helm of public companies. As we begin to emerge from the worst recession since the Great Depression, the search for root causes of the economic crisis and second-guessing of corporate decisions has generated a multitude of corporate governance reform proposals, legislative initiatives and rule-making that seek to shift decision-making authority from boards to institutional shareholders and shareholder activists. Despite the stated intention of these initiatives, this shift will impede the ability of boards to resist pressures for short-term gain and tie their hands at a time when the need for effective board leadership is particularly acute.
Balancing risk and reward has never been more challenging than it is today. Companies face risks that are more complex, interconnected and potentially devastating than ever before. Over the past two years, a perfect storm of economic conditions has triggered an extraordinary downward spiral from which we are only recently beginning to emerge: the subprime meltdown, liquidity crises, extreme market volatility, controversial government bailouts, consolidations of major banking institutions and widespread economic turmoil both in the U.S. and around the world. Against the background of the global financial crisis and the still uncertain global economy, companies are re-assessing their strategies for responding to the challenges and pressures of the new environment. Risk—and in particular the risk oversight function of the board of directors—has taken center stage in this re-assessment, and expectations for board engagement with risk are at all-time highs. Risk from the financial services sector has contributed to large-scale bankruptcies, bank failures, government intervention and rapid consolidation. And the repercussions have spread to the broader economy, as companies in nearly every industry have suffered from the effects of a global constriction of the credit markets, sharply reduced consumer demand and volatile commodity prices, currencies and stock prices.