Learn about the recent trends of corporations being influenced by "activist shareholders" and the ways they are shaping corporate decision-making.
Learn about the recent trends of corporations being influenced by "activist shareholders" and the ways they are shaping corporate decision-making.
Elon Musk, the eccentric billionaire and aspirant Tony Stark, could find himself back in court after Tesla shareholders have asked the Ninth Circuit Court of Appeals to reinstate their claims against him. (Peter Hayes, Bloomberg Law). The shareholders allege that Mr. Musk personally profited off of a short-swing trade involving Tesla’s acquisition of SolarCity. Id. In July, a federal trial court had dismissed the shareholder’s lawsuit on the grounds that Musk could not be sued under federal securities laws for his actions. Id. The shareholders subsequently filed an appeal the following month. Id. This post will examine Tesla’s acquisition of SolarCity, the role that Elon Musk holds in each company and what the shareholder lawsuit is challenging.
Five hundred eighty-one companies worldwide faced activist proposals in the first two quarters of 2019 (“H1”), also known as the “proxy season,” in which 80 percent of all public company annual meetings occur. (Activist Insight, Activist Insight Monthly June 2019). While shareholder activism in 2019 decreased relative to 2018, in general shareholder activism has been on the rise over the last decade. As the three largest asset managers in the United States, BlackRock, State Street, and Vanguard (the “Big Three”), are not to blame for this increase, this post explores who the most active shareholders are and the extent to which their goals were realized in the 2019 proxy season.
Eighty percent of all public company annual meetings are held during the first half of the year, from January 1 through June 30 (“H1”). (ProxyPulse, Broadridge). These first two quarters of the year are often referred to as the “proxy season” or “campaign season.” During this “season,” the majority of activist shareholder resolutions are proposed to management and, if resilient enough, are brought to a shareholder vote. Activist shareholders are individuals and institutional investors who initiate public campaigns as attempts to influence the management of companies in which they invest, typically in the realm of corporate governance, environmental, and social issues. Part I of this post will briefly summarize the activity by these shareholders in the 2019 season in relation to the record-breaking shareholder activism observed in 2018 and comment on the influence of the three largest asset managers in the United States. Part II will compare who the most active shareholders are, and what trends can be observed in the 2019 proxy season.
Libra is a forthcoming cryptocurrency offered by the Libra Association, a Swiss non-profit formed by 28 investors, including Facebook’s subsidiary Calibra, Visa, Mastercard, and Uber. Each investor pledged $10 million to the project. (Murphy & Bond, Financial Times). Since the announcement of the coin in June, Facebook has been Libra’s principal cheerleader. (Id.)In that time, Libra has faced criticism over regulatory concerns, and even its claim of being a cryptocurrency. Libra is unlike other cryptocurrenciesin that the Libra Association will have authority over the coin. Where other cryptocurrencies have decentralized blockchain ledgers and are not issued by a central authority, the Libra Association will issue Libra and validate Libra-coin transactions. (Canellis, NextWeb).
Pension fund’s assets in the United States amounted to $15.6 million (USD) in 2018, with these assets being bought with the contributions made to the pension plan and for the exclusive purpose of financing pension benefits. (Pension Funds in Figures,OECD). While the total dollar amount of assets and the number of beneficiaries and contributors has risen in both public pensions and private pensions there is a growing concern about these funds’ ability to deliver adequate returns. (Funded Pension Indicators, OECD). Delivering returns on investment to satisfy the pension obligations remains an issue because of the balancing between profit creation and the long-term sustainability of these funds.
Despite the increased number of women on corporate boards, it appears companies are not making the necessary changes to cultivate more female leadership. While the make-up of the Fortune-500 companies are becoming more diverse, many questions remain as to whether the composition of boards will have any impact on corporate culture. Over the last decade, the rise in female board membership has been substantial. As of 2023, it is estimated women will fill fifty percent of Fortune 500 board appointments. (Cassida Hogg, Heidrick & Struggles). Forty percent of the 462 board seats filled last year went to women, and currently, women account for 22.5 percent of all board members in Fortune 500 companies. Id. Many have praised companies’ more female centric direction, but significant skepticism remains as the changes don’t directly address companies’ culture.
The Strategic Hub for Innovation and Financial Technology (“FinHub”) of the Securities and Exchange Commission (“SEC”) released a framework for analyzing whether a contemplated sale of cryptocurrency, or tokens, is an “investment contract.” (FinHub Staff, SEC). The Securities Act of 1933 (“Securities Act”) and the Securities Exchange Act of 1934 (“Exchange Act”) both include investment contracts in their definition of securities. (15 U.S.C. §§ 77b(a)(1); 78c(a)(10)). If a cryptocurrency meets the requirements of an investment contract, it is a security subject to registration and regulation under the Securities Act and Exchange Act. The framework released by the SEC applies existing legal precedent to the cryptocurrency context. (FinHub Staff, SEC).
BlackRock, Inc. (“BlackRock”), the world’s largest asset manager, has called for its portfolio companies to increase their gender diversity on director boards. (Vanessa Fuhrmans, The Wall Street Journal). In a set of proxy voting guidelines posted in February of last year, the global investment company stated that they would “normally expect to see at least two women directors on every board.” Id.Blackstone’s public call-to-arms represents a significant shift in investment firms that, in the past, have only privately urged corporations to expand the role of women on boards of directors. While companies in the U.S. have been slow to respond, many European nations have introduced legislation that mandates gender diversity on corporate boards. This post will highlight Blackrock’s commitment to gender diversity, the emergence of EU legislation establishing gender quotas for director boards and scientific studies that support the increase of women on companies’ director boards.
In September of 2018, California was the first state in the U.S. to sign into law mandatory gender diversity on boards of public companies listed on a major U.S. stock exchange. (Richard Vernon Smith, Forbes). The California law went into effect at the close of 2019 calendar year. It requires any corporation with shares listed on a major U.S. stock exchange that is incorporated in or with a principal executive office in the state of California to have a minimum of one female on its board of directors. (SB No. 826, California Legislative Information). By the end of 2021, the law will increase the required minimum number of directors to two female directors if the corporation has five or three if the corporation has six or more directors.
In 2018, activist shareholder campaigns increased to a record high, with about 250 campaigns initiated over the year (up from about 210 campaigns initiated in 2017). (Gail Weinstein et al., Harvard LawSchool). Institutional investors – such as pension funds, insurance companies, endowments, banks, and hedge funds – have initiated public campaigns to attempt to influence companies and management. (Yuliya Ponomareva, Forbes). These institutional players typically own a greater percentage of companies relative to individual minority shareholders and have more leverage, capital, and incentive to pressure management to take certain actions. Such investors tend to focus on issues related to corporate governance, such as replacing management, dividend payouts, new board of director appointments and executive compensation; however, unlike previous cycles of shareholder activism, environmental and other social issues are also becoming common platforms.
After their founding in 2007 and 2008, respectively, rideshare market leaders Lyft, Inc. and Uber Technologies, Inc. have both decided to go public in 2019 (Lyft, Bloomberg; Uber, Bloomberg). With Lyft filing their S-1 on March 1stand Uber as recently as April 11th, the race for investors is hastily underway (Lyft S-1, Uber S-1). While Initial Public Offerings (“IPOs”) are one of many ways for companies to sell to investors, they allow for sales of stock to a much broader audience and mark the first time that company shares can be listed on an exchange.
“Don’t shoot the messenger.” This phrase was at the heart of the defense in Lorenzo v. SEC, one of the most recent Supreme court cases to consider whether an individual can be held liable under Rule 10b-5 for knowingly disseminating fraudulent statements in connection with the purchase or sale of securities. Lorenzo, the director of investment banking at an SEC-registered brokerage firm, sent two emails to investors that described a potential investment in a company with “confirmed assets” of $10 million.
In August 2018, Tesla CEO Elon Musk oddly and fatefully tweeted that he had secured funding to take Tesla private. (Alexander Stein, Forbes). Shortly after, the Securities and Exchange Commission (the “SEC”) filed suit against Musk and Tesla, alleging that Musk made materially false and misleading statements in violation of Section 10(b) of the Securities Exchange Act of 1934 and Rule 10b‑5. (SEC Complaint, Sept. 27, 2018). The SEC argued that Musk “knew or was reckless in not knowing that his statements were false and misleading” and that he omitted material facts in his statement. (Id.) According to the SEC, Musk’s statements “caused market chaos and harmed Tesla investors.” (Id.) In September 2018, the SEC and Musk reached a settlement on these charges which required Musk to step down as chairman of Tesla for three years, pay a $20 million fine, and consent to independent directors monitoring his communications to investors. (Matthew Goldstein, N.Y. Times).
The SEC requires public companies to disclose information and data that may be important to potential investors and shareholders of the company. On February 6, 2019, the SEC’s Division of Corporation Finance released two Compliance and Disclosure Interpretations ("CDIs")that discussed disclosure requirements for instances when board nominees or directors self-identify with specific diversity characteristics such as, race, gender, ethnicity, religion, sexual orientation, nationality, disability, and cultural background. In such instances, the SEC expects the public company to identify those characteristics and include how they were considered as long as the director or nominee consents to such disclosures.
On March 14, 2019, the Securities and Exchange Commission (“SEC”) charged Volkswagen AG,two of its subsidiaries, and its former CEO, Martin Winterkorn, with fraud in connection with a 2015 scandal commonly known as “dieselgate.” (SEC, Press Release). “Dieselgate” was a fraudulent scheme, masterminded by Winterkorn, under which Volkswagen marketed environmentally-friendly diesel engine vehicles that, in reality, emitted pollutants at levels 40-times greater than the legal limit in the United States. (SEC, Complaint). The parties were charged with violating the following federal securities laws: Sections 10(b) and 20(a) of the Securities Exchange Act of 1934, SEC Rule 10b-5(b), and Sections 17(a)(2) and 17(a)(3) of the Securities Act of 1933. (Id.).
On April 2, 2019 the founder and former Chief Executive Officer of Jumio Inc., Daniel Mattes, agreed to settle with the Securities Exchange Commission (SEC) for more than $17 million for defrauding investors. (Govind, Bloomberg). According to the SEC, Mattes “grossly overstated” Jumio’s 2013 and 2014 revenues before selling his personal shares to private investors. (Press Release, SEC). Mattes’ settlement with the SEC followed shortly after another SEC settlement with Jumio’s former Chief Financial Officer, Chad Starkey. Starkey also settled charges for failing to exercise reasonable care concerning the company’s financial statements and signing stock transfer agreements that falsely implied Jumio’s board of directors had agreed to Mattes’ sale of his private shares. Id. After Mattes’ shares were sold, Jumio restated its financial results in 2015, which showed depleted revenues and led to the company filing for bankruptcy. (Govind, Bloomberg).
In Freedom Watch, Inc. et al., v. Google, Inc. et al, No. 1:18-cv-02030, 2019 WL 1201549 (D.C. Cir. 2019), Freedom Watch, Inc., a non-profit public interest organization (“Freedom Watch”) and Laura Lommer, a social media user (collectively, the “Plaintiffs”) brought an action in the United States District Court for the District of Columbia against Google, Inc., Facebook, Inc., Twitter, Inc., and Apple, Inc. (collectively, the “Defendants”) alleging that Defendants worked together to intentionally and willfully suppress politically conservative content. The Defendants filed a motion to dismiss for lack of standing and for “failure to state a claim upon which relief can be granted.” The court granted the motion, stating that the Plaintiffs have failed to tie their concerns to colorable legal claims.
Are the search results we see on the Internet the actual result of our inquiry, or is each search curated to the individual’s preferences and beliefs? Biased Google searches and social media ads, and the power of Big Tech to influence results became a concern in the wake of the 2016 presidential election after reports surfaced that Russia pushed propaganda to social media users to influence voters. (NBC News). Further, politicians from Ted Cruz to Elizabeth Warren have also voiced broader concerns about Big Tech being able to silence free speech and suppress freedom of information by selectively targeting users with ads biased toward their beliefs. (The Verge). Public officials and social media moguls recognize there is a problem, but the question is how to regulate this data that is collected from users to create biased ads. Proposals have ranged from creating consumer privacy regulations to breaking up Big Tech’s market power or regulating them like utilities. Much of the focus in recent years has been on the former.
On March 11, 2019, the Securities and Exchange Commission (“SEC”) filed a complaint containing a multitude of charges related to an alleged illegal stock distribution and market manipulation scheme against David Foley and others. See complaint. The complaint identifies four groups of defendants: David R. Foley, Lisa L. Foley, and Jeffrey A. Foley (collectively, the “Stock Issuers”); Nanotech Entertainment, Inc. (“NTEK”) and Nanotech Gaming, Inc. (“NTGL”), affiliates of the Stock Issuers; Bernnie L. Blankenship (the “Stock Promoter”); and River North Equity LLC, Edward M. Liceaga, and Michael A. Chavez, the unregistered broker-dealers.
On March 25, 2019 car rental giant Hertz Corporation filed a complaint against its former CEO (Mark Frissora), CFO (Elyse Douglas), and General Counsel (John Zimmerman) pursuant to its Compensation Recovery Policy (“Hertz Clawback Provisions”).Hertz Corp. v. Frissora, No. 2:19-cv-08927 (D.N.J. Mar. 25, 2019). In the complaint, Hertz invoked its Hertz Clawback Provisions against its three former executives to recover incentive compensation that was paid to the executives between 2011 and 2013. Id. at 1. Specifically, the Hertz Clawback Provisions, which were denoted in all three of the prior executives’ employment contracts, required its former executives to forfeit any previously awarded incentive compensation if their “gross negligence and misconduct” resulted in a restatement in the company’s financial statements.
The Delaware Chancery court, per Vice Chancellor Glasscock, issued an opinion in Vintage Rodeo Parent, LLC v. Rent-A-Center, Inc., 2019 WL 1223026 (Del. Ch. Mar. 14, 2019), which discussed the implications of Vintage’s inadvertent failure to meet a merger extension deadline. At stake was a $126.5 million breakup fee. The court held that the target, Rent-A-Center, had no duty to warn Vintage of the impending deadline. While the decision, which focuses on a strict reading of contractual duties is understandable, it fits uneasily with a prominent previous decision; it also seems to be missing a full analysis of the duty of good faith.
The Responsible Sourcing Network’s 2018 report on commercial efforts to disclose reliable data when purchasing conflict minerals illustrated a concerning trend.(Andrea Vittorio, Bloomberg). The current trend indicates that many companies who deal in conflict minerals are receiving lower grades for their efforts and abilities to provide transparency on the origins of those minerals. Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 directs the Securities and Exchange Commission (“SEC”) to enforce reporting requirements for companies that manufacture products with conflict minerals. Conflict minerals are those that originate from mines controlled by armed groups in areas like the Democratic Republic of Congo and its neighboring countries.
On March 12, 2019, executives of T-Mobile US Inc. (“T-Mobile”) and Sprint Corporation (“Sprint”) testified in the third round of Congressional Hearings concerning the merger of the two companies. T-Mobile’s purchase of Sprint for $26 billion was announced almost a year ago on April 29, 2018 and continues to endure questioning from regulators. (Victoria Graham, Bloomberg). The Federal Communications Commission (“FCC”) and the Democratic-controlled House Subcommittee on Antitrust are reviewing the merger under the Communications Act of 1934 to ensure it promotes “the public interest, convenience, and necessity.” (47 U.S.C. §310(d); Chairman Frank Pallone, Jr., Committee on Energy and Commerce). While the U.S. Department of Justice’s (“DOJ”) antitrust division does not consider U.S. industrial policy in merger reviews like the House Subcommittee, it is looking at whether the deal harms competition. (Todd Shields et al., Bloomberg).
Deutsche Bank’s merger with Commerzbank could make Deutsche Bank the fourth largest bank in Europe with the potential to make Germany instrumental in the international market. With Deutsche Bank (“Deutsche”) getting support from key German government officials to proceed with negotiations to merge with Commerzbank, it seems likely a merger between the two will succeed. Although a merger between the banks is probable, the banks face a great amount of opposition, and logistical issues, which may hinder the merger and any future success Deutsche could enjoy. The acquisition serves as a strategy to improve Deutsche’s competitiveness by giving Deutsche the necessary size and resources to compete in the global market.
The Blackstone Group (“Blackstone”), a New York-based financial services firm, announced on March 15, 2019, that it had signed a definitive agreement to purchase Japanese drug maker AYUMI Pharmaceutical Corporation (“AYUMI”). (Lisa Du, Bloomberg Law). This deal marks Blackstone’s first investment in a growing Japanese private equity market. (Matt Anderson et al., Blackstone). AYUMI produces drugs for rheumatic and orthopedic disorders and is valued at around $1 billion. The company is currently owned by Japanese private equity firms Unison Capital Inc. (“Unison”) and M3 Inc. (“M3”). (Lisa Du, Bloomberg Law).
The Committee on Foreign Investment in the United States (“CFIUS”) is a multi-agency committee comprised of members from executive agencies related to the economy, national security, and foreign intelligence. The agency was created during Gerald Ford’s presidency and its mandate is to review any transaction (called “covered transactions”) that might have an impact on U.S. national security (Keeler, Mayer Brown).A covered transaction is a merger, acquisition, or takeover in which a foreign national, entity, or government acquires an interest in a U.S. business that has an impact on U.S. national security (Jaramillo, Foley Hoag).This system of review was designed to be voluntary. Even so, CFIUS maintains the ability to block transactions when no notice of filing is submitted through the CFIUS system.
With Blockchain technology becoming more prevalent worldwide, particularly as it relates to cryptocurrencies and initial coin offerings (“ICOs”), regulators continue their struggle to develop appropriate legislation that embodies an ideal balance between regulation and innovation. In an effort to help shape these new regulations and encourage legislation that is favorable to the crypto industry, many crypto leaders have increased their presence in Washington, primarily through lobbying efforts. (Lydia Beyoud, Bloomberg Law). In fact, lobbying efforts increased significantly during 2018 with larger crypto groups spending six-figures per quarter on lobbying alone, and crypto-specific companies filing twice as many lobbying reports in 2018 as 2017. (Id.).
Cryptocurrency and the technology it relies on, blockchain, revolutionized both the tech and finance world. A blockchain is a distributed record of transactions, usually managed by a peer-to-peer network of computers that validates the transactions. With companies racing to take advantage of this new industry, it was only a matter of time before some companies would try to take advantage of unsuspecting investors. This is what happened with a company called Compcoin LLC. (“Compcoin”).
In Plumbers & Steamfitters Local 773 Pension Fund v. Danske Bank A/S, No. 19-cv-235 (S.D.N.Y. Jan. 19, 2019), Plumbers & Steamfitters Local Pension Fund (“Plaintiffs”) filed a class action suit against Danske Bank A/S (“Defendant”). The complaint was filed on behalf of all purchasers of Defendant’s American Depositary Receipts (“ADRs”) between January 9, 2014 and October 23, 2018. Plaintiffs claimed Defendant engaged in a series of untrue and misleading statements in response to allegations of illicit banking activities stemming from Defendant’s Estonia branch during the class period, thereby violating Rule 10b-5 of the Securities Exchange Act of 1934 (“the Act”).
On January 7th Coinbase paused trading on Ethereum Classic (ETC) after it fell victim to a 51% attack. The attack resulted in over $500,000 of ETC being spent twice (Olga Kharif, Bloomberg Law). To appreciate what this means for the ETC mining community, two things must be understood: Hash rates and a 51% attack.
“Hash rates” or “hash power” refers to the total computing power of a decentralized network. Proof of Work (PoW) blockchains, like Bitcoin and Ethereum, are driven by miners “hashing,” which is essentially solving complicated math problems. (Bisade Asolo, MyCryptopedia).
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