Call me a “Luddite” if you want, but I’m uncomfortable with the idea that my toaster may be telling Google or Vladimir Putin about my Pop-Tart preferences. Despite my reservations, the market for Internet-connected devices – the “Internet of Things” (IoT) – is growing rapidly. However, the security & privacy risks of these IoT devices are significant, and those risks are beginning to attract significant attention from state & federal lawmakers.
This Shearman & Sterling memo discusses the explosive growth in the IoT market & developments on the legislative front. It also highlights key considerations & best practices for evaluating the privacy & security risks of IoT investments. Specific issues that an investor should consider when conducting due diligence on a potential acquisition target include:
– Do the target’s devices incorporate “reasonable security features?”
– How much and what types of data are collected by the target’s devices?
– Do the target’s devices provide reasonable notice to the consumer about the data being collected?
– Is the data collected by the target’s devices shared with any third parties?
The memo goes on to detail best practices in dealing with each of these specific issues that should be factored in to a buyer’s due diligence assessment.
About this time last year, I blogged about activists’ use of “placeholder” nominees as an end-run around nomination deadlines in advance notice bylaws. The tactic gained notoriety in 2016, when activist hedge fund Corvex Management used it in a proxy contest involving The Williams Companies.
This Skadden memo says that since that time, more than 50 public companies – including 19 in the S&P 500 – have amended their bylaws to address the potential for a “placeholder slate” of directors. Here’s an excerpt that addresses the features of those bylaws:
By our count, in the past year, 54 companies have amended their bylaws in the wake of the threatened Corvex-Williams proxy fight, including Williams itself. Our survey of the market shows:
– With minor variations, the language used in the amended bylaws is mostly standard: A director nominee must provide a written representation that he or she “intends to serve” as a director.
– The majority of the amendments (45) specify that the individual must intend to remain a director for the “full” or “entire” term, and two companies add that the director must intend to serve until a successor is elected and/or deemed qualified.
– 17 companies explicitly state that the nominee must “currently” intend to serve a full term (i.e., at the time of nomination); the remaining bylaws do not specify a particular time frame during which the intention must exist.
– One company’s bylaws take the intent-to-serve requirement a step further by requiring that it be “genuine.”
– Only a minority of companies make clear that the qualification applies to all directors and not just stockholder nominees.
The memo points out that neither the use of placeholder nominees nor these “intent-to-serve” bylaws has yet been tested in court. It reviews applicable provisions of Delaware law relating to director qualifications & says that case law would suggest that director qualifications that apply equally to all director nominees are more defensible than those aimed solely at shareholder nominees.
ISS policies generally frown on the board’s unilateral adoption of restrictive director qualification bylaws – but the memo says that ISS has not yet adjusted its corporate scorecard for these “intent-to-serve” bylaws or even addressed them publicly.
Whether staggered boards are good or bad for shareholder value has been hotly debated in corporate governance circles for a long time. Now, a new study claims to have settled the debate. Here’s an excerpt from the abstract:
We address the heated debate over the staggered board. One theory claims that a staggered board facilitates entrenchment of inefficient management and thus harms corporate value. Consequently, some institutional investors and shareholder rights advocates have argued for the elimination of the staggered board. The opposite theory is that staggered boards are value enhancing since they enable the board to focus on long-term goals. Both theories are supported by prior and conflicting studies and theoretical law review articles.
We show that neither theory has empirical support and on average, a staggered board has no significant effect on firm value. Prior studies did not include important explanatory variables in their analysis or account for the changing nature of the firm over time. When we correct for these issues in a sample of up to 2,961 firms from 1990 to 2013 we find that the effect of a staggered board on firm value becomes statistically insignificant after controlling for variables that affect both value and the incidence of a staggered board.
Well, I’m glad that’s settled. Of course, it’s probably fair to say that this one’s already been settled on the battlefield – 90% of S&P 500 and 65% of S&P 1500 companies have eliminated staggered boards.
Most public companies have a fair share of busy executives from other businesses on their boards. This Norton Rose Fulbright blog cites a recent study by Arizona State’s Luke Stein & Hong Zhao addressing a downside of having busy execs on a corporate board – the problem of distracted directors.
The study said that distracted directors were less effective in their advisory and monitoring roles – and that distraction concerns were most significant when their primary employer was performing poorly. It turns out that distracted directors are a particular problem for M&A:
Of particular interest is the impact that distracted directors may have on a company’s acquisition decisions. Directors often take on an advisory role when selecting and negotiating mergers and acquisitions. When directors are not actively engaged in the process as a result of outside obligations, Stein and Zhao found there to be lower returns around the announcement of acquisitions. When directors with M&A experience in particular were distracted during this period – those who the company would presumably turn to for valuable advice – the returns were significantly lower.
The study’s authors suggest that the answer to the distracted director problem is larger boards comprised of directors from more diverse industries.
This Reuters article talks about how the biggest proxy fight in history – the one involving Procter & Gamble – might come down to the retail shareholder:
The majority of votes for or against the nomination of Peltz, chief executive and founding partner of Trian Partners, to P&G’s board will be cast by massive index investors such as Vanguard Group and BlackRock. But small shareholders could tip the balance in a tight vote.
As a result, both P&G and Trian are spending unprecedented amounts of money and effort courting Neubecker and his fellow retail holders; by email, old-fashioned paper mail and even social media. Like most individual shareholders who vote in corporate elections, Neubecker is backing management.
Meanwhile, Equilar has conducted this analysis of P&G’s current board composition in context with broader issues shareholders and investor advisors take into account when choosing how to vote, including diversity, age, tenure and other board commitments.
This Semler Brossy article provides an overview of compensation issues that potential sellers should address early on in the M&A planning process. Here’s an excerpt covering questions sellers should ask about their comp plans in advance of a sale:
– Are our change-in-control provisions and policies competitive with market practice? Is our cash severance appropriate? What about the equity acceleration provisions in our equity plans?
– Do we really understand all of the factors that could trigger a change in control? Are they the same across agreements? Are there scenarios where a change in control could be unintentionally triggered?
– Are the right people covered by severance or change-in-control plans? Are there any critical talent areas where we would be exposed?
– What is the total value of the potential severance if someone is terminated following a change in control?
– What about equity awards — and, in particular, performance-based shares? How are those treated in a change in control?
– Are our most senior executives subject to golden-parachute taxes under IRC Section 280G and 4999?
– What if we have a major transaction but a change in control is not triggered? What happens then?
The article also identifies key M&A provisions & considerations for different comp plans, and addresses the comp issues that should be considered once the M&A process has begun.
Tune in tomorrow for the webcast – “Cybersecurity Due Diligence in M&A” – to hear Andrews Kurth Kenyon’s Jeff Dodd, Lowenstein Sandler’s Mary Hildebrand and Cooley’s Andy Lustig discuss how to approach cybersecurity due diligence, and how to address and mitigate cybersecurity risks in M&A transactions.
California is notoriously tough on non-competes. Sometimes, buyers try to work around California’s hard line approach by including the desired non-competes in a shareholders agreement governed by the laws of a less restrictive state – like Delaware. This Cooley blog reviews a recent Delaware Chancery Court decision refusing to enforce such a work-around. Here’s an excerpt:
In EBP Lifestyle Brands v. Boulbain, the Delaware Court of Chancery declined to enforce covenants not to compete or solicit employees against Yann Boulbain, a former vice president of The Ergo Baby Carrier, Inc., a company based in California, due to lack of personal jurisdiction. Specifically, the court found that although the restrictive covenants were contained in a stockholders agreement that was governed by Delaware law, and the company’s ultimate parent and party to the agreement was incorporated in Delaware, such “contacts” between the former employee and the State of Delaware were not, in and of themselves, sufficient to establish personal jurisdiction over the former employee in a Delaware court.
Perhaps more importantly, the Court said that even if it had personal jurisdiction, Delaware conflicts of law principles would require dismissal of the case because California had a materially greater interest in the dispute. Here’s the key takeaway from the case:
The decision serves as a clear warning to parties that, regardless of choice of law, it will be very difficult to enforce a non-compete against an individual in California in a simple stockholder purchase agreement under a statutory exception where (as here) the individual is merely purchasing, and not selling, stock. This is especially true where the person has no meaningful ties to or contacts with Delaware. Whether there are sufficient Delaware contacts will be a highly fact-specific inquiry for the Delaware court.
Most public company M&A disclosure documents include a section addressing the forecasts provided to the board and the company’s financial advisors in connection with their evaluation of the transaction. These forecasts typically include non-GAAP financial information, but Rule 100(d) of Reg G provides an exemption from its requirements that applies to disclosures summarizing “the bases for and methods of arriving at” a fairness opinion.
While these forecasts appear to be well within the scope of the exemption, plaintiffs – and in some cases the Staff – have challenged this assumption in the case of non-GAAP information disclosed under a separate heading (typically captioned “Forecasts” or “Projections”) from the discussion of the banker’s fairness opinion. Some have also called into question the applicability of this exemption to tender offer filings.
This Cleary blog sets forth a detailed argument that these distinctions are inappropriate – and that the reconciliation requirements of Reg G do not apply to this information, regardless of what type of disclosure document it appears in or where it appears. Here’s an excerpt summarizing the argument:
It is true that the projections in the “Forecasts” section of M&A disclosure documents include projections that are not GAAP. Indeed, projected unlevered free cash flows are a central input into any discounted cash flow analysis. But in our view the contention that these projections are subject to Regulation G is incorrect.
The provision of a GAAP reconciliation for these forecasts would not serve the purpose for which Regulation G was adopted – namely, to prevent a company from misleading investors by providing NGFMs that obscure its GAAP results and guidance. No such concern applies to the “Forecasts” section of M&A disclosure documents, where the data are being provided solely to enable shareholders to understand the specific, projected financial metrics that the company’s financial advisor used in its financial analyses to support a fairness opinion.
The blog notes that the Staff has sometimes issued comments to the effect that Reg G applies to these disclosures, and recommends that the Staff issue interpretive guidance confirming that the exemption applies to forecasts included in M&A disclosure documents.
This Wachtell memo addresses where things stand today in the world of shareholder activism. New capital continues to flow into activist hedge funds, & attacks on large companies have increased – but efforts to promote a more long-term focus among institutional investors are also gaining traction.
Here are some of the key takeaways on how activist strategies are evolving:
– While an activist attack on a large successful company to force acceptance of a financial engineering strategy has generally failed, e.g., GM’s resounding defeat of Greenlight Capital’s attempt to get shareholder approval of converting common stock into two classes, there has been an increase in attacks to obtain a change in a company’s CEO.
– There has been an increase in attacks designed to force the target into a merger or a private equity deal with the activist.
– There has been a significant increase in “bumpitrage” — buying a block of stock in a merger partner seeking shareholder approval to use the block to defeat approval, unless the merger price were increased.
– Several major funds have converted from classic activism to a form of merchant banker approach of requesting board representation to assist a company to improve operations and strategy for long-term success.
The memo highlights efforts to promote long-termism among investors, and points out that BlackRock, State Street and Vanguard have continued to express support for sustainable long-term investment. These investors have been active in sharing their governance and engagement expectations with public company boards and CEOs. Shareholder engagement is increasingly critical – failure to engage effectively has resulted in the loss of proxy contests, or in “Pyrrhic” victories followed by a change in management.