Forbes has published an interesting article that opens as follows:

Every CEO and every board member of every publicly traded company (and every thinking-about-being-publicly traded company) should drop whatever they are doing and read two short things right now:

  • This week’s annual letter to CEOs from BlackRock chief executive Larry Fink; and
  • The January 8

On December 5, 2017, the Financial Reporting Council launched a consultation on its proposal to significantly revise the UK Corporate Governance Code.

The amendments seek to encourage continued improvement in the quality of corporate governance in the UK and are centered around the themes of company culture and diversity, employee and other stakeholder representation, responding

Over the past couple of years, we have seen traditional, actively managed funds, such as Neuberger Berman, borrow activist tactics and push for changes to accelerate increases in share prices.  In parallel with this arguable trend toward convergence between actively managed funds and activist funds, a chasm appeared to be developing elsewhere in the investor landscape as pension and passive strategy funds increasingly focused on “social good” issues, while brand name activist funds remained primarily focused on nearer term financial performance and returns.  But the activists desperately need the support of the pension and passive strategy funds, as evidenced by the proxy contests over the past year where support from these funds was neither predictable nor easily locked up.  The announcement on January 6, 2018 by JANA Partners, a high profile activist fund, and CalSTRs, an outspoken pension fund, that they have teamed up to accumulate a $2 billion equity position in Apple for the purpose of launching a specific “social good” campaign is the strongest indication to date that the magnitude of assets under management focused on social good matters cannot be ignored and that even a successful activist fund like JANA needs to burnish its reputation in this area. 
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In a recently published decision of November 7, 2017, the German Federal Court of Justice (Bundesgerichtshof) has added another twist to the much debated acquisition of German Celesio AG by US pharma wholesaler McKesson.  McKesson had launched a takeover offer to the free float of Celesio in late 2013, and had entered into a purchase agreement with its then main shareholder Franz Haniel & Cie. to acquire its shareholding of slightly above 50% alongside the takeover bid.  The transaction attracted the interest of Paul Singer.  Elliott acquired a position of approximately 24% in shares and, in addition, convertible bonds of Celesio, and opposed the initial offer due to an alleged undervaluation.  As a result, the initial offer, which was subject to a minimum acceptance threshold of 75%, failed in early January 2014. The 75% acceptance threshold is key under German law, for a bidder to be in a position to exercise control over a German listed corporation and access the cash flows, prior to having effected a squeeze-out of all remaining minorities.
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  • The Impact of New Trends in Asset Management and Investor Expectations
  • The Relationship between the CEO and an Activist Director

The keynote presentation at the 2017 Tulane Corporate Law Institute featured a discussion among

  • Gerald Hassell, Chair and CEO of Bank of New York Mellon;
  • Ed Garden, CIO and Founding Partner of Trian Partners; and

As passive investing via funds that track market indices continues to grow, the terrain where investors are fighting battles over governance reform is now expanding beyond contested stockholder meetings and into debates over the criteria for eligibility of issuers for inclusion in these indices.  Indeed, in this era of index fund investing, a company focused on the future trading price of its shares should be much more concerned about gaining entry into and maintaining eligibility for indices than whether there will be a withhold vote recommendation on the members of its governance committee.  If this direction continues to gain traction, we could end up with a market dominated by passive strategy investing where the current importance of familiarity with the hot button governance concerns of proxy advisory firms and institutional investors becomes subsidiary to understanding how to navigate new, governance-related eligibility requirements of major equity indices.
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A settlement on July 12, 2016 by the DOJ with ValueAct for violations of the HSR Act’s notification requirements and an interpretation of the Exchange Act’s beneficial ownership reporting rules posted by the SEC staff on July 14, 2016 combine to provide new guidance that will have an immediate impact on shareholder activism and engagement.
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The filing by the DOJ of a complaint in federal court on April 4, 2016 against ValueAct — claiming that ValueAct’s purchase of shares of two public companies violated the HSR Act’s notification and waiting period requirements and seeking $19 million in civil penalties (based on the $16,000 per day penalty provisions of the HSR Act) – has the potential to have an immediate impact on the tactics used by brand name “activist hedge funds,” such as ValueAct, to accumulate shares without prior notice to either the issuers in question or the market generally.
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In February 2016, Blackrock CEO Laurence Fink issued his annual letter to the CEOs of S&P 500 companies.  In addition to repeating themes from prior years (the value of long-termism and the need for more thoughtfulness before allocating capital to buybacks and special dividends), this year’s letter had one notable omission and four of areas of specific emphasis that merit the attention of boards and managements.
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