July 19, 2019

Shareholder Proposals: Corp Fin Considering Changing Approach to No-Action Requests

Every proxy season, Corp Fin responds to somewhere between 200-400 no-action requests about shareholder proposals. Earlier this year, we blogged several times about how the government shutdown upended the process. And even though the Staff got back to “business as usual” when the shutdown ended, they had to be even more efficient given the time constraints – and that experience might have contributed to Corp Fin considering whether to rethink their approach to Rule 14a-8 no-action requests.

As you can hear at the 29-minute mark of this taping of a Chamber event a few days ago, SEC Chair Clayton & Corp Fin Director Hinman commented that they’re considering changing some aspects of their “referee” role (my word, not theirs) – so that, like other types of no-action requests, Corp Fin wouldn’t respond to every Rule 14a-8 submission. Rather, they’d focus on requests that involve “novel” issues and encourage companies & proponents to work things out themselves. Bill says they’re seeking input from the community on how they might change their approach.

As I blogged during the shutdown, companies continue to be very cautious about excluding proposals without first obtaining Staff no-action relief. Some speculate that we’ll see more litigation if Corp Fin does change their role and isn’t as involved – especially on matters that involve tough judgment calls. Any changes in Corp Fin’s role is bound to have a variety of views as this area is always contentious when change is considered, particularly if the SEC’s role might change.

How Asset Managers Feel About “Activists”

John’s blogged on that activist hedge funds don’t actually do much to improve company performance. But according to this SquareWell Partners survey (download required), the perception – at least among “active” asset managers – is that these funds are a useful market force, even if they have a short-term, selfish interest.

For that reason, it’s becoming more common for asset managers to align with activists on proxy fights and proposals if they agree with the substance of the activist’s argument – especially on governance & strategic matters. Here’s some interesting takeaways that can help you form alliances when you need them (this was also a topic covered earlier this week in our webcast – “How to Handle Hostile Attacks” – stay tuned for the transcript):

– 81% of investors expect companies to engage after they’ve analyzed the analyst’s arguments & formed a strategic response – i.e. don’t rush into a “PR War” – but also know that investors will engage with an activist even before the campaign is public

– 64% of active managers expect to engage with independent directors

– Investors consider a number of factors when assessing a targeted company – the top ones are company performance versus peers, management & board quality, and engagement history – they also look to broker reports, proxy advisors, media outlets & social media

– Investors are mixed on whether poor TSR is a dealbreaker – they’ll also consider ratios that show profitability, efficiency, debt & liquidity

– In addition to capital allocation decisions, active managers are most attuned to governance issues such as collective board expertise, board independence, chair quality and executive pay

Convertible Debt: Still a Good Way to Raise a Buck (or a Million)

This Fenwick survey looks at the terms of 100 convertible debt deals last year – for first-money and early- and late-stage bridge deals. Here’s some key findings:

– Year over year, deal sizes have continued to increase. The median overall deal size this year is up 14%, from $1.4 million to $1.6 million

– Conversion discounts are increasingly common, even in later-stage debt issuances, as is the practice of pairing the discount with a valuation cap

– In change-of-control situations, such as the sale of a company, most deals provide for a premium payout that is a multiple on top of the repayment of the principal balance. The number of deals giving a premium, as well as the median premium amount has remained steady year over year; however, this year the low end of the premium spectrum dropped from 25% to 10%

– Only 11% of deals used a valuation cap as a standalone provision in the absence of a conversion discount

Liz Dunshee