This “Forbes” interview with Skadden’s Rich Grossman discusses the implications of an increasingly popular activist tactic – targeting CEOs for removal from the board through proxy contests. Here’s an excerpt from Rich’s comments:
I think most practitioners and governance experts would agree that one of the most important responsibilities of a board is the selection of the CEO, and the removal of the CEO from the board sends a very strong message, especially a board made up of a majority of independent directors.
While shareholders do not have the right to directly remove board-selected officers, if a CEO gets removed from the board in a contest, it’s a vote of no confidence. In those circumstances, I can’t imagine a board not looking at the situation and saying, “should we rethink our decision regarding the CEO?” It certainly makes for an awkward situation.
Why are CEOs being targeted? The approach ISS takes toward proxy contests seeking minority board representation is a big part of the reason:
Under the current ISS analytical framework, recommendations are made depending on whether the dissident is seeking a minority or a majority position on the board, with the standard for a dissident seeking minority representation being significantly easier to meet than if control is sought. The ISS minority contest standard — what I’ll call the “what’s the harm” standard — for replacing directors seems to apply regardless of whether the CEO is targeted.
There’s a lot to chew on in the GOP’s tax reform legislation, but many dealmakers may choke on this morsel – in its current form, the legislation would limit the amount of interest that a business could deduct to 30% of its adjusted taxable income. This Bloomberg article discusses the potential consequences of that cap for M&A transactions. Here’s an excerpt:
Private equity titans, beware: The tax bill House Republicans unveiled on Thursday could have seriously negative implications for buyout firms.
The legislation includes a provision that would cap interest deductibility at 30 percent of adjusted taxable income, a dramatic shift from the 100 percent allowed now. While the shift would be a concern for any company that issues loans and bonds, it would be particularly worrisome for private equity firms that rely on large levels of debt to finance their transactions. These borrowings — and the way they are treated for tax purposes — are crucial in helping firms achieve their targeted annual returns of 20 percent or more.
Many M&A professionals have anticipated that a reduction in corporate rates might prompt a boom in deals – but limiting the deductibility of interest on debt incurred to pay for those deals could dampen those expectations.
In the short term, the article notes that one potential consequence of the deductibility cap might be a shift in private equity investment toward more capital intensive businesses. The proposed legislation would temporarily allow capital expenditures on machinery & equipment to be expensed immediately, instead of depreciated over time. That provision would be phased out after five years – but that coincides with many private equity funds’ typical investment horizon.
This Weil Gotshal blog gives a heads-up to US private fund sponsors – the EU’s new “General Data Protection Regulation” may well apply to you. This excerpt explains:
One of the most significant changes under the GDPR is to extend the jurisdictional application of the new law to non-EU fund sponsors holding or using data about individuals located in the EU, even in the absence of any EU presence. Accordingly, non-EU based private fund sponsors which are not caught by the current regime would be well advised to consider whether the forthcoming changes in laws will bring them within the scope of the GDPR.
Where the extra-jurisdictional provisions do apply, non-EU based sponsors are required to comply with the entirety of the GDPR or face potential fines up to the greater of €20m and 4% of worldwide revenue for the most serious infractions.
The blog points out that full compliance with the GDPR is pretty burdensome. Entities to which it applies will be required to rapidly report data breaches to EU authorities, provide disclosures about data usage to individual EU investors, comply with various rights granted to individuals, appoint an EU representative & maintain detailed internal records.
The blog also addresses the circumstances that may trigger the GDPR’s applicability to US sponsors, and also flags some of the practical impediments that EU regulators may face in attempting to enforce compliance against a non-EU sponsor.
Here’s an excerpt from this note by Glass Lewis’ Colin Ruegsegger:
The post-meeting tangle now shifts to a more granular vote certification process, with participants including Trian, P&G and P&G’s independent inspector of elections. The underlying effort—which will involve, among other things, an evaluation of whether proxies have been appropriately executed and whether the most recent proxy for each investor was counted—is expected to take roughly two months. In the interim, the remainder of P&G’s unaffiliated investors have few alternatives beyond simply waiting for the certification process to conclude.
It should be noted this razor’s-edge outcome is not unfamiliar territory for Trian. A similar campaign at E.I. Du Pont de Nemours in 2015 left Mr. Peltz narrowly short of election, with his candidacy grabbing 46% of votes cast at the meeting. This degree of support, combined with an expressed intention to acquire more Du Pont shares and remain engaged, arguably left Trian and Mr. Peltz in a position to continue pressing their agenda from outside the board room. It is noteworthy, then, that Du Pont CEO Ellen Kullman departed just five months after the contested meeting, with her replacement, Ed Breen, quickly pursuing a cost cutting campaign and, ultimately, a combination with The Dow Chemical Company.
Given the similarities between the Du Pont vote and the reported outcome at P&G, we consider it unlikely Trian will be compelled to walk back its position here. To the contrary, with a cogent set of arguments and a vote outcome that will certainly land at the very margins of P&G’s voting base, we expect Trian will leverage a patient approach and strong investor support to continue advocating— publicly or privately—for changes to the status quo.
This recent Norton Rose Fulbright blog flags a UK study that says that a solid public relations strategy can increase the likelihood that a deal will close. Here are some of the study’s conclusions:
– Proactive announcements count: 84% of deals announced as actual offers are completed, compared with just half of those which were announced in response to a leak
– Leadership matters: announcements with statements from both companies’ chairman/CEO are associated with significantly higher levels of success than those without
– Markets reward uncertainty – in the short-run: leaked M&A deals, or announcements lacking information about the underlying strategic rationale, are actually rewarded by the markets in the very short term
– PR firms earn their fees: deals involving PR firms have a higher chance of completion than those without
– Nail down the narrative: a clear message can be obscured in the process of crafting a deal announcement – it’s important to ensure key players are on board with the deal narrative from the start.
The blog says that a good public relations strategy can also help reduce the risk that opposition from consumers or other constituencies might cause regulatory problems for the deal:
The importance of a well thought-out public relations strategy can go beyond just getting the deal closed. Increasingly consumers are paying attention to combinations of large corporations and how such mergers or acquisitions may affect them in their day-to-day lives. In the past, consumers have been mobilized by corporations opposing a proposed merger between competitors by taking out advertisements and using social media campaigns that claimed the proposed transaction would lead to higher service fees or less choice for consumers.
Such campaigns have led to consumers protesting such mergers and writing to regulatory bodies in opposition of the proposed deal. Starting a public relations campaign early that shows the benefits of a proposed transaction can prevent such anti-merger campaigns from taking hold and creating regulatory and PR problems down the road.
This Akin Gump blog describes Nasdaq’s proposal for changes in its listing rules for Special Purpose Acquisition Companies. Here’s an excerpt highlighting the proposed changes:
Initial Listing Requirements in Connection with Initial Public Offering
Round Lot*
– Existing: 300 round lot holders
– Proposed: 150 round lot holders
* A round lot means 100 shares of a security.
Net Tangible Assets Requirement
– Existing: no net tangible assets requirement
– Proposed: $5 million in net tangible assets
Proposed Continued Listing Requirements and Post-Business Combination Requirements
Continued Listing
– Existing: 300 public holders
– Proposed: No holder requirement
Net Tangible Assets Requirement
– Existing: no net tangible assets requirement
– Proposed: $5 million in net tangible assets
Post-Business Combination Requirement
– Existing: Meet all initial listing requirements following the business combination
– Proposed: Meet all initial listing requirements within 30-day transition period following the business combination
SPACs that are already listed would not be required to satisfy the $5 million net tangible assets requirement, so long as they continued to meet the public holders requirement. If the rule proposal is approved, Nasdaq will publish a daily list of SPACs that don’t meet the net tangible assets requirement and don’t satisfy any other criteria for exclusion from the penny stock rules.
I recently blogged about Corp Fin’s new “M&A Forecasts” CDI – which says that forecasts provided for the purpose of rending a fairness opinion & disclosed in order to comply with Item 1015 of Reg M&A or state law disclosure requirements would not be regarded as “non-GAAP measures” subject to Reg G.
The blog noted that the new CDI didn’t cover the entire waterfront of situations that might prompt disclosure of forecasts in connection with a deal. Along those lines, here are some thoughts I received from a member about one scenario where the CDI’s applicability may be unclear:
Commentators have pointed out that historically, the Staff has taken the position that projections provided by the target company to the buyer in connection with tender offers need to be disclosed because they “crossed the table” raising 10b-5 concerns. Because the buyer is seeking to purchase shares directly from stockholders via a tender offer while in possession of material non-pubic information (e.g., target management’s projections), a summary of those projections must be disclosed to the target’s stockholders as well so that they are on an equal informational footing as the buyer.
The Staff takes the view that the same 10b-5 issue exists in long form mergers and generally requires the disclosure of a summary of the projections that have crossed the table in connection with the negotiation of long form mergers. By way of example, the lead-in to the section disclosing a summary of the target’s projections in a merger proxy statement or a Schedule 14D-9 typically explains that the summary is being provided because, in addition to having been provided to the target’s board and the target’s financial advisor, the projections were provided to the counterparty to the transaction.
But the interpretive exemption provided by the new C&DI doesn’t on its face provide an exemption from Reg G if the non-GAAP measures disclosed in a proxy statement or Schedule 14D-9 are being disclosed in part in order to address a 10b-5 issue and not solely because of Item 1015 (which the Staff interprets to require the disclosure of a material input underlying the opinion of the target’s financial advisor) or state law disclosure requirements (which the Delaware courts have have often (but not always) interpreted to require the disclosure of reliable projections in the possession of the target board and/or that the target board has authorized the target’s financial advisor to rely upon for purposes of its opinion). In contrast to the Staff of the SEC, neither Item 1015 nor state law require the disclosure of projections because they crossed the table and potentially raise a 10b-5 issue.
Yesterday, ISS released draft policy changes for comment in 13 areas spanning the globe (based on these survey results from constituents) – the deadline for comment is November 9th. It’s expected that ISS will release its final policies in late November (although burn rate thresholds & pay-for-performance quantitative concern thresholds are typically announced through updated FAQs in mid-December; here’s info about the ISS policy process).
These are the three main areas up for consideration in the US:
For the poison pills draft policy, here’s how Wachtell Lipton describes it: “ISS’s current policy provides that if a company maintains a long-term (>1 year) shareholder rights plan that has not been approved by shareholders, ISS will recommend voting against all nominees every year if the company’s board is classified. However, if the board is annually elected, ISS will recommend voting against the entire board once every three years.
ISS proposes changing its policy to recommend voting against all directors of such companies at every annual meeting. In addition, commitments to put a long-term rights plan to a vote the following year would no longer be considered a mitigating factor by ISS (but may still be relevant to individual shareholder voting decisions). ISS would also eliminate the exemption for 10-year rights plans adopted prior to November 2009, which would affect approximately 90 companies. ISS notes that short-term rights plans would continue to be assessed on a case-by-case basis, but states that the updated policy would focus more on the rationale for the rights plan’s adoption than on the company’s governance and track record.”
In this note, Carl Hagberg – independent tabulator & editor of “Shareholder Service Optimizer” – writes plenty on the Procter & Gamble proxy fight. Here’s an interesting excerpt:
AN ACE IN THE HOLE FOR P&G – OR RATHER, A BIG WILD-CARD IN THE DECK – APPEARS TO BE THE EMPLOYEE OWNERSHIP PLAN VOTING, which reportedly comprises 7 ½% of the outstanding shares, and where the Plan Trustee appears to have voted the entire position “proportionately.” This surely gave management a huge edge in what is, apparently, a dead heat – even after the big boost.
As close observers of proxy fights, the OPTIMIZER has repeatedly pointed out the “wild-card aspect” of proportional voting, and why, as a result – and also because one cannot cite a sensible rationale for having it, other than to give management an added edge most times – we hate it and feel it should be abandoned: In this case, as is normally the case, it seems to have worked to skew the vote very much in P&G’s favor. But before you look to have proportional voting in your own employee plans, please remember the Walt Disney election a few years back, when the small number of employee owners who bothered to vote, voted against Michael Eisner – and where proportional voting took him down.
We would not be at all surprised to see Peltz challenge the propriety of the Plan Trustee voting proportionately in such a close election – even though they may have had the right to do so. One could argue, of course, that the non-voters were, ipso facto, “indifferent” – but that, in our opinion, is a very different thing than having a significant number of them being automatically recorded as voting for the management slate by a Plan Trustee – especially in an election where the overall vote seems close to a 50:50 split. A very bad governance provision say we.
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