Some 25 years after the advent of LLCs, the SEC has proposed officially adding them to the list of entities that may qualify as “accredited investors” under Regulation D (see here at 45). Better late than never.
As a life long Cubs fan, I wanted to give a shout out to the Cubs who start their trek to the World Series tonight. Unfortunately for Cub fans who live in the Eastern time zone, it’s going to be a late night. The game does not start until 10:07pm EST. I look for the Cubs to follow the precedent set by the Cardinals last year, i.e., worst regular season record of any team in the playoffs but nevertheless World Series victors.
The Financial Times reports today on a Moody’s study that finds “[a]ctivist hedge funds and other short-term shareholders are almost always bad for the credit quality of their target companies . . . .” (See here for the FT article).
I’m interested in reading the Moody’s study but have been unable to find it online. If anyone has a link, please post it in the comments to this post. Thanks.
I recently posted on SSRN one of the two articles I have committed to write for the Entrepreneurial Business Law Journal. Itâ€™s entitled PIPEs (note that I went with a â€œmicro-titleâ€ and successfully resisted the urge (at least for now) of being “very punny,” e.g., PIPE bomb, Sewer PIPE, Burst PIPE, Smoking PIPE, PIPEline . . . .). You can download the piece here. Below is the abstract:
The Article examines Private Investments in Public Equity (PIPEs), an important source of financing for small public companies. The Article describes common characteristics of PIPE deals, including the types of securities issued and the basic trading strategy employed by hedge funds, the most common investors in small company PIPEs. The Article argues that by investing in a PIPE and promptly selling short the issuer’s common stock, a hedge fund is essentially underwriting a follow-on public offering while legally avoiding many of the regulations applicable to underwriters. This â€œregulatory arbitrageâ€ makes it possible for hedge funds to secure the advantageous terms responsible for the market-beating returns they have garnered from PIPE investments. Additionally, the article details securities law compliance issues with respect to PIPE transactions and explores recent SEC PIPE-related enforcement actions and regulatory maneuvers. The Article concludes that a more measured and transparent SEC approach to PIPE regulation is in order.
Iâ€™m hoping to have a related piece about reverse mergers up on SSRN next month.
The governor of North Dakota recently signed into law the North Dakota Publicly Traded Corporation Act (ht: Broc Romanek). The Act resembles a shareholder activist wish list including majority voting for the election of directors, elimination of staggered boards, advisory shareholder votes on executive compensation, shareholder proxy access, proxy contest reimbursement, poison pill restrictions, etc.
While the Act is certainly groundbreaking, my view is that it was enacted as a publicity stunt. The practical effect of it is likely to be zilch. The Act only applies to public companies incorporated in North Dakota that affirmatively opt-in through provisions in their articles of incorporation. Hence, shareholders cannot unilaterally opt-in a company since an articles amendment requires board and shareholder approval. Additionally, a grand total of two public companies are incorporated in North Dakota (Dakota Growers Pasta and Integrity Mutual Funds of Minot), and there is no reason to suspect that they will opt-in.
Even if a corporation wanted to grant shareholders the rights provided for in the Act, it seems highly unlikely it would do so by reincorporating in North Dakota and opting-in. Instead, it could simply tailor its governing documents to strike what it believes to be the appropriate balance between board and shareholder power for its particular business and continue to enjoy the benefits of Delaware incorporation (business savvy judiciary, responsive legislature, etc.).
Of course, the genius of American corporate law may ultimately prove me wrong, but I doubt it.
DealBook reports that Goldman Sachs has included the following shareholder proposal from Evelyn Davis in its 2007 proxy statement:
RESOLVED: “That the Board of Directors take the necessary steps so that NO future NEW stock options are awarded to ANYONE, nor that any current stock options are repriced or renewed (unless there was a contract to do so on some).”
REASONS: “Stock option awards have gone out of hand in recent years, and some analysts MIGHT inflate earnings estimates, because earnings affect stock prices and stock options.”
There are other ways to “reward” executives and other employees, including giving them actual STOCK instead of options.
Recent scandals involving CERTAIN financial institutions have pointed out how analysts CAN manipulate earnings estimates and stock prices.
I did a Westlaw search to see whether Goldman filed a no-action request with the SEC to exclude the proposal. It appears that it did not. However, Ms. Davis submitted the same proposal to Pfizer. Pfizer did file a no-action request arguing that the proposal is excludable under Rule 14a-8(i)(7) because it “pertains to matters of Pfizer’s ordinary business operations, namely general compensation matters.” The SEC concurred.
The whole idea behind majority voting for the election of directors, to paraphrase ISS, is that it transforms uncontested elections from symbolic to democratic. This is because majority voting in its purest form would give shareholders veto authority over management candidatesâ€”authority not afforded to shareholders under the traditional plurality voting standard.
Critics maintain that giving shareholders this power would be problematic. They argue such power has the potential to destabilize the board because it could result in the sudden removal of directors. This, in turn, could adversely impact a companyâ€™s ability to comply with listing standards or other requirements for retaining independent directors or directors with financial expertise, alter the consequences of having a staggered board, and changecontrol contest dynamics. Further, it could negatively impact the mix of skills and expertise possessed by the board. Critics also argue that majority voting would reduce the pool of qualified candidates willing to serve as directors because of the embarrassing possibility of a candidate failing to receive the requisite majority of votes to be elected even when running unopposed. Finally, they argue that majority voting is simply unnecessary because the traditional â€œwithhold authorityâ€ option provides an adequate avenue for shareholders to express dissatisfaction with the board.
You would think that these objections are falling on deaf ears based on the number of companies that have adopted majority voting in the last few years (see here for statistics). In reality, however, to my knowledge not a single company has enacted a majority voting system that actually gives shareholders veto power over director candidates. So none of the critics’ concerns are actually implicated. While numerous companies have changed their voting standards from plurality to majority, because of the statutory holdover rule, an incumbent director nonetheless remains on the board even if the director fails to garner the requisite majority vote (and a board can ensure that all directors up for election are incumbents by having a resigning director step down and appointing a new director to fill the vacancy prior to the election). For an elaboration of these points, see my paper, Majority Voting for the Election of Directors.
A question Iâ€™ve been contemplating as of late is why the activist shareholders who have been largely responsible for the current majority vote movement appear satisfied with the results given there are ways to give majority voting more teeth. For example, the following bylaw amendment submitted by Professor Bebchuk at General Dynamics last year would actually give shareholders a form of veto power over director candidates: â€œIn no event shall a director stand for election if that director was elected for an immediately preceding term in an uncontested election in which he or she received more â€˜withheldâ€™ votes than â€˜forâ€™ votes.â€ See Beth Young’s comment to this post for more ways.
My working hypothesis is that many activist shareholders are assessed by how successful they are in getting corporations to adopt reforms. If they pushed a real reform like the above bylaw amendment, chances are much greater that it wonâ€™t be adopted, and this wouldnâ€™t be good for the resume. Or is it that they believe that toothless majority voting reflects the appropriate balance of power between a corporationâ€™s board of directors and its shareholders (yeah, right)?
The answer is “yes” according to this MarketWatch article. Here’s a taste.
Forty-three percent of investors with a net worth of $5 million or more, not including a primary residence, say they prefer a guaranteed rate of return for the majority of their investments, according to a new report from Chicago-based Spectrem Group, a consulting firm. That percentage of investors compares with just 29% in 2003 and 38% in 2005 who said the same thing, according to the report “The Move Toward Investment Moderation.”