Unprecedented levels of shareholder activism in recent years have resulted in significant changes to the composition of many public company boards. This recent IRRC study looked at the impact that activism has had on board demographics among S&P 1500 companies. Here are some of the key findings:
– Activism drives down director ages. Dissident nominees & directors appointed via settlements were younger, on average, than board appointees in connection with shareholder activism.
– Dissident directors & board appointees were general younger than their counterparts across the broader S&P 1500 index.
– While dissident directors generally reflected a wider range of ages, insurgent investors & incumbent boards both favored individuals in their 50s when picking candidates – a preference that was shared by the broader S&P 1500 index.
– Activism does not promote gender diversity. Less than 10% of the directors of companies included in the study were women. The rate at which women were selected as dissident nominees or board appointees in contested situations increased over the course of the study, but it trailed the rate of increase among the S&P 1500.
– Activism does not promote racial or ethnic diversity. Less than 5% of directors at companies in the study were ethnically or racially diverse. This also trailed the broader S&P 1500 universe.
– Activism boosts boardroom independence. Directors at companies in the study were generally more independent than their counterparts at other S&P 1500 companies. Dissident nominees and board appointees were likely to be more independent than directors appointed unilaterally by the board in response to activism.
The study also found that prior board experience wasn’t a prerequisite for dissident nominees – only about half were members of other boards. Interestingly, the study did find a number of overboarded “usual suspects” showing up repeatedly on dissident slates – raising questions about their independence from their activist sponsors. Financial professionals & corporate executives accounted for the bulk of board nominees or appointees in activist situations.
Intralinks’ annual “M&A Leaks Report” makes for interesting reading – it analyzes deal leaks over the period from 2009-2016, and breaks them down by world region, country & business sector. The report also looks into the effect of leaks on the premiums paid, emergence of rival bidders & time to closing.
This recent blog scopes out the report’s conclusions on which business sectors’ deals leaked most frequently. In 2016, consumer deals were the leakiest (16%), with retail deals (12%) & real estate deals (9%) following behind. Real estate deals were the leakiest during the prior two years, and have the highest overall rate of leaks over the eight years covered by the report. The healthcare (5%), energy & power (5%) and industrials (7%) sectors were the most tight-lipped last year.
This blog excerpt speculates on what may account for the differences between the various sectors when it comes to leaks:
– Sellers/targets in sectors which have a lot of M&A activity with significant competition for assets may be using deal leaks as a strategic tool to try to flush out the “optimal” acquirer, i.e., the one who has the greatest synergies with the target and who can therefore pay the highest price, hence the higher target takeover premiums in leaked deals. This conclusion is borne out by data from Thomson Reuters on target valuations. According to Thomson Reuters, over the past nine years the Real Estate sector has the highest average target EV/EBITDA exit ratio, at 18.1x.
– Sellers/targets in sectors which traditionally have lower valuation multiples may also be more tempted to use deals leaks to try to increase the valuations for their deals. According to the Thomson Reuters data, the Industrials and Materials sectors, which have among the lowest average target EV/EBITDA exit ratios over the past nine years, are the number three and number four ranked sectors for deal leaks over the same period.
The report also found that leaked deals have significantly higher premiums & a higher rate of rival bids in comparison to non-leaked deals.
ISS announced yesterday that it’s changing hands – for the fifth time in 15 years or so. Genstar Capital, a San Francisco-based private equity firm, is buying the company from the previous PE owner – Vestar Capital Partners – for $720 million.
The ISS press release gives a few details on expected timing & transition plans:
The transaction is expected to close by early fourth quarter, subject to customary closing conditions.
ISS will continue to operate independently once the transaction is completed and the current ISS executive leadership team will remain in place.
Based on the press release, Genstar has some experience in backing service providers in the financial services sector – and plans to continue ISS’s strategic infrastructure & ESG initiatives.
This September-October issue of the Deal Lawyers print newsletter has been posted – & also sent to the printers – and includes articles on:
– Revenue Recognition Representations: Impact of FASB’s New Standard
– Tilting the “Proxy Contest” Playing Field: The Latest Tactic
– Dissident’s Disclosure Lawsuit Leads to ISS Recommendation Change
– DFC Global: A Few Observations from Delaware
– 29 Tips for Young Deal Lawyers
Remember that – as a “thank you” to those that subscribe to both DealLawyers.com & our Deal Lawyers print newsletter – we are making all issues of the Deal Lawyers print newsletter available online for the first time. There is a big blue tab called “Back Issues” near the top of DealLawyers.com – 2nd from the end of the row of tabs. This tab leads to all of our issues, including the most recent one.
And a bonus is that even if only one person in your firm is a subscriber to the Deal Lawyers print newsletter, anyone who has access to DealLawyers.com will be able to gain access to the Deal Lawyers print newsletter. For example, if your firm has a firmwide license to DealLawyers.com – and only one person subscribes to the print newsletter – everybody in your firm will be able to access the online issues of the print newsletter. That is real value. Here are FAQs about the Deal Lawyers print newsletter including how to access the issues online. Try a “Free for Rest of ’17” no risk trial now!
Companies employ a variety of strategies in response to shareholder activism, but this “Institutional Investor” article says that, according to a new study, withholding negative forecasts & managing earnings sometimes play a part. Here’s an excerpt:
When activist hedge funds intervene at portfolio companies, company managers often take defensive action.
Managers at these firms are likely to strategically change voluntary disclosure practices and earnings management strategies in order to protect against heightened career and reputational risks, according to forthcoming research in academic journal Management Science.
The study’s authors said companies embroiled in these types of battles become more likely to withhold bad news and use earnings management techniques to inflate their reported performance. The research was based on a study of 510 companies targeted by 191 activist hedge funds, using data from U.S. regulatory financings and management earnings forecasts.
The study found that the practice of withholding bad news was more pronounced when hedge fund activists posed greater threats to management & where their interventions were short-term in nature.
This Cleary memo reviews M&A litigation during the first half of what’s been a very eventful 2017. In addition to addressing developments under Corwin, MFW & appraisal actions, the memo discusses how plaintiffs have responded to Trulia & the decline of disclosure-only settlements. Here’s an excerpt:
Plaintiffs have responded to Trulia in several ways. First, some plaintiffs have attempted to file suits in other fora that they hope will be more receptive to approving disclosure-only settlements. Certain state courts have indicated that they will adopt Trulia’s enhanced scrutiny of such settlements, but the response has been mixed. These attempts have been hampered by exclusive forum bylaws, which have been widely adopted by corporations and require challenges to mergers and acquisitions to be brought in a designated forum. Although some observers speculated that certain corporations may be willing to waive an exclusive forum bylaw in the hope of securing a quick, disclosure-only settlement in another forum, early research has found no evidence of such willingness thus far.
Second, some plaintiffs have attempted to file claims in federal court under the Exchange Act. Consequently, the number of securities class actions alleging federal disclosure violations skyrocketed in 2016, and this trend continued in the first half of 2017. Exclusive forum bylaws cannot require the filing of these claims in the Court of Chancery because the claims are based on federal law.
The memo notes that based on how federal courts have responded to Trulia, they may turn out not be any more receptive to disclosure-only settlements than Delaware courts – and that these developments have encouraged plaintiffs to agree to quickly dismiss their individual claims in exchange for supplemental disclosures & the payment of a small mootness fee to plaintiffs’ counsel.
One of the first items on the agenda for any transaction is picking a data room provider. This Westwicke Partners blog discusses a number of different service providers and provides advice about what dealmakers should consider when making a selection. Here’s an excerpt on issues to think about when data security is the key consideration:
If data is extremely sensitive and you are very concerned about security, some companies offer digital rights management. An example is Blackberry Workspaces (which, despite the name, does not require users to have Blackberry devices). With this offering, you can place controls into the file itself. This means that people who have access to the document cannot print, edit, or forward it, allowing you tight control over sharing of your information. This generally is very cumbersome for the user, who often has to install software and might be unable to view on a mobile device. Digital rights management has not seen wide adoption yet because it’s not easy to use.
This an interesting decision because it upholds a claim that the controllers of a Delaware corporation breached their fiduciary duties by having their corporation make a self-tender at a knowingly low price all the while intending to sell it for much more, which they in fact did a short while later. The facts illustrate how not to do a self-tender in terms of acting fairly. While tender offers, even self-tenders, are often thought of as mere offers that stockholders are free to accept without later recourse or complaint, this decision shows why that might not always be true if the facts are bad enough.
In upholding the minority’s fiduciary duty claims, Vice Chancellor Glasscock noted the following facts:
– The controlling shareholders collectively owned more than 90% of the common stock of Polk;
– Directors allied with the controlling shareholders exercised that collective power as a control block;
– The controlling shareholders engineered a self-tender in a way that maintained their degree of control; and
– The tender offer price was set through a financial advisor that also did work for affiliates of the controlling shareholders.
Those facts aren’t great, but here’s the clincher – within roughly two years of the self-tender, the remaining stockholders had received extraordinary dividends amounting to 1/3rd of the self-tender price, along with merger consideration equal to 300% of the self-tender price.
As a result, Vice Chancellor Glasscock declined to dismiss the claims & determined that the controlling shareholders had the burden of proving entire fairness.
Compensation issues in spin-offs can be very complicated. Matters that need to be addressed include the terms of SpinCo’s compensation & benefit programs, treatment of outstanding parent company awards, & whether special awards will be made as part of the transaction.
This PayGovernance memo provides an overview of compensation considerations that need to be taken into account when planning a spin-off. Here’s an excerpt addressing potential transaction-related special awards:
Many spin-‐offs include “Founders’”grants of SpinCo stock and/or stock options to SpinCo’s senior management team both to provide support for team retention during an initial post-spin period and to help establish ownership of SpinCo stock by the new team. The special grants are typically determined by RemainCo’s Board, and are included in the offer letters for SpinCo’s senior management.
Some companies also provide “success” or “completion” award opportunities – either in cash or stock — to staff who will play a key role in executing the spin-off; in doing so, they may be required to take on additional responsibilities beyond those core to their role. Participants may include staff who will transition to SpinCo and/or staff who will stay with RemainCo. These awards are typically designed to support retention by vesting after the spin-off is completed and to incentivize excellence in execution of the spin-off (e.g., by linking payouts to the achievement of cost or timing goals).
In addition to discussing employee compensation, the memo also addresses factors to take into account in establishing compensation arrangements for SpinCo’s outside directors.