Advisory Board

  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Peter Clarke
  • Barry Diller
  • IAC/InterActiveCorp
  • Fu Chengyu
  • China National Petrochemical Corporation (Sinopec Group)
  • Richard J. Gnodde
  • Goldman Sachs International
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V.
  • Jiang Jianqing
  • Industrial and Commercial Bank of China, Ltd. (ICBC)
  • Handel Lee
  • King & Wood Mallesons
  • Richard Li
  • PCCW Limited
  • Pacific Century Group
  • Liew Mun Leong
  • Changi Airport Group
  • Martin Lipton
  • New York University
  • Wachtell, Lipton, Rosen & Katz
  • Liu Mingkang
  • China Banking Regulatory Commission (CBRC)
  • Dinesh C. Paliwal
  • Harman International Industries
  • Leon Pasternak
  • BCC Partners
  • Tim Payne
  • Brunswick Group
  • Joseph R. Perella
  • Perella Weinberg Partners
  • Baron David de Rothschild
  • N M Rothschild & Sons Limited
  • Dilhan Pillay Sandrasegara
  • Temasek International Pte. Ltd.
  • Shao Ning
  • State-owned Assets Supervision and Administration Commission of the State Council of China (SASAC)
  • John W. Snow
  • Cerberus Capital Management, L.P.
  • Former U.S. Secretary of Treasury
  • Bharat Vasani
  • Tata Group
  • Wang Junfeng
  • King & Wood Mallesons
  • Wang Kejin
  • China Banking Regulatory Commission (CBRC)
  • Wei Jiafu
  • Kazakhstan Potash Corporation Limited
  • Yang Chao
  • China Life Insurance Co. Ltd.
  • Zhu Min
  • International Monetary Fund

Legal Roundtable

  • Dimitry Afanasiev
  • Egorov Puginsky Afanasiev and Partners (Moscow)
  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Johan Aalto
  • Hannes Snellman Attorneys Ltd (Finland)
  • Nigel P. G. Boardman
  • Slaughter and May (London)
  • Willem J.L. Calkoen
  • NautaDutilh N.V. (Rotterdam)
  • Peter Callens
  • Loyens & Loeff (Brussels)
  • Bertrand Cardi
  • Darrois Villey Maillot & Brochier (Paris)
  • Santiago Carregal
  • Marval, O’Farrell & Mairal (Buenos Aires)
  • Martín Carrizosa
  • Philippi Prietocarrizosa & Uría (Bogotá)
  • Carlos G. Cordero G.
  • Aleman, Cordero, Galindo & Lee (Panama)
  • Ewen Crouch
  • Allens (Sydney)
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Rachel Eng
  • WongPartnership (Singapore)
  • Sergio Erede
  • BonelliErede (Milan)
  • Kenichi Fujinawa
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Manuel Galicia Romero
  • Galicia Abogados (Mexico City)
  • Danny Gilbert
  • Gilbert + Tobin (Sydney)
  • Vladimíra Glatzová
  • Glatzová & Co. (Prague)
  • Juan Miguel Goenechea
  • Uría Menéndez (Madrid)
  • Andrey A. Goltsblat
  • Goltsblat BLP (Moscow)
  • Juan Francisco Gutiérrez I.
  • Philippi Prietocarrizosa & Uría (Santiago)
  • Fang He
  • Jun He Law Offices (Beijing)
  • Christian Herbst
  • Schönherr (Vienna)
  • Lodewijk Hijmans van den Bergh
  • De Brauw Blackstone Westbroek N.V. (Amsterdam)
  • Hein Hooghoudt
  • NautaDutilh N.V. (Amsterdam)
  • Sameer Huda
  • Hadef & Partners (Dubai)
  • Masakazu Iwakura
  • TMI Associates (Tokyo)
  • Christof Jäckle
  • Hengeler Mueller (Frankfurt)
  • Michael Mervyn Katz
  • Edward Nathan Sonnenbergs (Johannesburg)
  • Handel Lee
  • King & Wood Mallesons (Beijing)
  • Martin Lipton
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Alain Maillot
  • Darrois Villey Maillot Brochier (Paris)
  • Antônio Corrêa Meyer
  • Machado, Meyer, Sendacz e Opice (São Paulo)
  • Sergio Michelsen Jaramillo
  • Brigard & Urrutia (Bogotá)
  • Zia Mody
  • AZB & Partners (Mumbai)
  • Christopher Murray
  • Osler (Toronto)
  • Francisco Antunes Maciel Müssnich
  • Barbosa, Müssnich & Aragão (Rio de Janeiro)
  • I. Berl Nadler
  • Davies Ward Phillips & Vineberg LLP (Toronto)
  • Umberto Nicodano
  • BonelliErede (Milan)
  • Brian O'Gorman
  • Arthur Cox (Dublin)
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz (New York)
  • Sang-Yeol Park
  • Park & Partners (Seoul)
  • José Antonio Payet Puccio
  • Payet Rey Cauvi (Lima)
  • Kees Peijster
  • COFRA Holding AG (Zug)
  • Juan Martín Perrotto
  • Uría & Menéndez (Madrid/Beijing)
  • Philip Podzebenko
  • Herbert Smith Freehills (Sydney)
  • Geert Potjewijd
  • De Brauw Blackstone Westbroek (Amsterdam/Beijing)
  • Qi Adam Li
  • Jun He Law Offices (Shanghai)
  • Biörn Riese
  • Jurie Advokat AB (Sweden)
  • Mark Rigotti
  • Herbert Smith Freehills (Sydney)
  • Rafael Robles Miaja
  • Robles Miaja (Mexico City)
  • Alberto Saravalle
  • BonelliErede (Milan)
  • Maximilian Schiessl
  • Hengeler Mueller (Düsseldorf)
  • Cyril S. Shroff
  • Cyril Amarchand Mangaldas (Mumbai)
  • Shardul S. Shroff
  • Shardul Amarchand Mangaldas & Co.(New Delhi)
  • Klaus Søgaard
  • Gorrissen Federspiel (Denmark)
  • Ezekiel Solomon
  • Allens (Sydney)
  • Emanuel P. Strehle
  • Hengeler Mueller (Munich)
  • David E. Tadmor
  • Tadmor & Co. (Tel Aviv)
  • Kevin J. Thomson
  • Barrick Gold Corporation (Toronto)
  • Yu Wakae
  • Nagashima Ohno & Tsunematsu (Tokyo)
  • Wang Junfeng
  • King & Wood Mallesons (Beijing)
  • Tomasz Wardynski
  • Wardynski & Partners (Warsaw)
  • Xiao Wei
  • Jun He Law Offices (Beijing)
  • Xu Ping
  • King & Wood Mallesons (Beijing)
  • Shuji Yanase
  • OK Corporation (Tokyo)
  • Alvin Yeo
  • WongPartnership LLP (Singapore)

Founding Directors

  • William T. Allen
  • NYU Stern School of Business
  • Wachtell, Lipton, Rosen & Katz
  • Nigel P.G. Boardman
  • Slaughter and May
  • Cai Hongbin
  • Peking University Guanghua School of Management
  • Adam O. Emmerich
  • Wachtell, Lipton, Rosen & Katz
  • Robin Panovka
  • Wachtell, Lipton, Rosen & Katz
  • Peter Williamson
  • Cambridge Judge Business School
  • Franny Yao
  • Ernst & Young

Issues

Spotlight on Boards

Editor’s Note: This article was authored by Martin Lipton of Wachtell, Lipton, Rosen & Katz.

Spotlight on Boards

The ever-evolving challenges facing corporate boards prompt periodic updates to a snapshot of what is expected from the board of directors of a major public company—not just the legal rules, or the principles published by institutional investors and various corporate and investor associations, but also the aspirational “best practices” that have come to have equivalent influence on board and company behavior. Today, boards are expected to:

  • Recognize the heightened focus of investors on “purpose” and “culture” and an expanded notion of stakeholder interests that includes employees, customers, communities, the economy and society as a whole and work with management to develop metrics to enable the corporation to demonstrate their value;
  • Be aware that ESG and sustainability have become major, mainstream governance topics that encompass a wide range of issues, such as climate change and other environmental risks, systemic financial stability, human capital management, worker retirement, supply chain labor standards and consumer and product safety;
  • Oversee corporate strategy (including purpose and culture) and the communication of that strategy to investors, keeping in mind that investors want to be assured not just about current risks and problems, but threats to long-term strategy from global, political, social, and technological developments;
  • Work with management to review the corporation’s strategy, and related disclosures, in light of the annual letters to CEOs and directors, or other communications, from BlackRock, State Street, Vanguard, and other investors, describing the investors’ expectations with respect to corporate strategy and how it is communicated;
  • Set the “tone at the top” to create a corporate culture that gives priority to ethical standards, professionalism, integrity and compliance in setting and implementing both operating and strategic goals;
  • Choose the CEO, monitor the CEO’s and management’s performance and develop and keep current a succession plan;
  • Have a lead independent director or a non-executive chair of the board who can facilitate the functioning of the board and assist management in engaging with investors;
  • Together with the lead independent director or the non-executive chair, determine the agendas for board and committee meetings and work with management to ensure that appropriate information and sufficient time are available for full consideration of all matters;
  • Determine the appropriate level of executive compensation and incentive structures, with awareness of the potential impact of compensation structures on business priorities and risk-taking, as well as investor and proxy advisor views on compensation;
  • Develop a working partnership with the CEO and management and serve as a resource for management in charting the appropriate course for the corporation;
  • Oversee and understand the corporation’s risk management and compliance efforts and how risk is taken into account in the corporation’s business decision-making; respond to red flags if and when they arise;
  • Monitor and participate, as appropriate, in shareholder engagement efforts, evaluate corporate governance proposals, and work with management to anticipate possible takeover attempts and activist attacks in order to be able to address them more effectively, if they should occur;
  • Meet at least annually with the team of company executives and outside advisors that will advise the corporation in the event of a takeover proposal or an activist attack;
  • Be open to management inviting an activist to meet with the board to present the activist’s opinion of the strategy and management of the corporation;
  • Evaluate the individual director’s, board’s and committees’ performance on a regular basis and consider the optimal board and committee composition and structure, including board refreshment, expertise and skill sets, independence and diversity, as well as the best way to communicate with investors regarding these issues;
  • Review corporate governance guidelines and committee workloads and charters and tailor them to promote effective board and committee functioning;
  • Be prepared to deal with crises; and
  • Be prepared to take an active role in matters where the CEO may have a real or perceived conflict, including takeovers and attacks by activist hedge funds focused on the CEO.

To meet these expectations, major public companies should seek to:

  • Have a sufficient number of directors to staff the requisite standing and special committees and to meet investor expectations for experience, expertise, diversity, and periodic refreshment;
  • Compensate directors commensurate with the time and effort that they are required to devote and the responsibility that they assume;
  • Have directors who have knowledge of, and experience with, the corporation’s businesses and with the geopolitics developments that affect it, even if this results in the board having more than one director who is not “independent”;
  • Have directors who are able to devote sufficient time to preparing for and attending board and committee meetings and engaging with investors;
  • Provide the directors with the data that is critical to making sound decisions on strategy, compensation and capital allocation;
  • Provide the directors with regular tutorials by internal and external experts as part of expanded director education and to assure that in complicated, multi-industry and new-technology corporations, the directors have the information and expertise they need to respond to disruption, evaluate current strategy and strategize beyond the horizon; and
  • Maintain a truly collegial relationship among and between the company’s senior executives and the members of the board that facilitates frank and vigorous discussion and enhances the board’s role as strategic partner, evaluator, and monitor.

Martin Lipton

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

U.S. UPDATE – 2019 Checklist for Successful Acquisitions in the United States

Editors’ Note: This submission updates a checklist co-authored by Messrs. Emmerich and Panovka, members of XBMA’s Legal Roundtable, with their colleagues at Wachtell Lipton, Jodi J. Schwartz, Scott K. Charles, David A. Katz, Andrew J. Nussbaum, Ilene Knable Gotts, Mark Gordon, Joshua R. Cammaker, William Savitt, Andrea K. Wahlquist, Karessa L. Cain, T. Eiko Stange, Joshua M. Holmes, Eric M. Rosof, Gordon S. Moodie, Emil A. Kleinhaus, Edward J. Lee, Raaj S. Narayan and Matthew T. Carpenter.

Cross-Border M&A –
2019 Checklist for Successful Acquisitions in the United States

M&A in 2018 began with a bang, with more than $350 billion of deals in January 2018 – a January level not seen since 2000 – and much chatter that M&A volume for the year could hit an all-time record. As it turned out, 2018 was a tale of two cities, with M&A continuing at a torrid pace during the first half of the year, and falling off markedly during a second half of geopolitical tension and market volatility. Overall, M&A volume for 2018 reached a very robust $4 trillion, but fell short of overtaking deal volume in 2007 and 2015. M&A being lumpy and unpredictable as ever, 2019 has opened with a number of notable deals, not least the sale of Celgene to Bristol-Myers Squibb for $95 billion, somewhat defying gloomy predictions for the year.

As for cross-border deals, interestingly, a record $1.6 trillion (39%) of last year’s deals (including six of the 10 largest deals) was cross-border M&A, despite growing trade tensions and anti-globalist rhetoric.

Acquisitions of U.S. companies continued to dominate the global M&A market in 2018, representing 43% of global M&A volume ($1.7 trillion), higher than the average over the last decade. Approximately 16% of U.S. deals involved non-U.S. acquirors. German, French, Canadian, Japanese and U.K. acquirors accounted for approximately 60% of the volume of cross-border deals involving U.S. targets, and acquirors from China, India and other emerging economies accounted for approximately 10%.

Whatever 2019 does bring – in addition to trade tensions and protectionist rhetoric, cyber insecurity, slowdowns in China and a number of other emerging economies, gloom about the interest rate and debt financing pictures in the U.S., geopolitical risks all around the world, and inevitable but as-yet-unknown curve balls from politicians – we expect the pace of cross-border deals into the U.S. to remain strong. And, as always, transacting parties who are smart and well prepared – particularly when engaging in cross-border deals with all of their cultural, political and technical complexity – will do better. Advance preparation, strategic implementation and deal structures calibrated to anticipate likely concerns will continue to be critical to successful acquisitions in the U.S. In light of the recent changes to the CFIUS regime (discussed below), careful attention to CFIUS, well in advance of any potential acquisition, is obviously essential.

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The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

Dealing with Activist Hedge Funds and Other Activist Investors

Editors’ Note: This article was co-authored by Martin Lipton, Steven A. Rosenblum, Karessa L. Cain and Sabastian V. Niles of Wachtell, Lipton, Rosen & Katz.

Dealing with Activist Hedge Funds and Other Activist Investors

Introduction

Regardless of industry, size or performance, no company should consider itself immune from hedge fund activism. No company is too large, too popular, too new or too successful. Even companies that are respected industry leaders and have outperformed the market and their peers have come under fire. Activists set new records in 2018, targeting the largest number of companies (nearly 300), deploying more capital and winning a greater number of board seats (161) than ever before.

Campaigns by the most well-known activist hedge funds are surging, and there are more than 100 hedge funds currently engaged in activism. Activist hedge funds have significantly more than $100 billion of assets under management, and remain an “asset class” that attracts investment from major traditional institutional investors.

Although a number of institutional investors are beginning to question whether hedge fund activism should be supported or resisted, and will act independently of activists, the relationships between activists and more traditional investors in recent years have encouraged increasingly frequent and aggressive activist attacks. Several mutual funds and other institutional investors have on occasion also deployed the same kinds of tactics and campaigns as the dedicated activist funds. A number of hedge funds have also sought to export American-style activism abroad, with companies throughout the world now facing classic activist attacks. Many activist attacks continue to be designed to force a takeover, sale or breakup of the target, or a change in management, either immediately or over time.

Elliott Management was the most active and, in many cases, aggressive activist of 2018. The Wall Street Journal noted that Elliott publicly targeted 24 companies in 2018, with Carl Icahn and Starboard runners-up with nine public targets each. These numbers do not include the increasing number of non-disclosed activist situations against major companies. The New Yorker published a lengthy profile of Paul Singer and Elliott in August, “Paul Singer, Doomsday Investor,” noting “Singer has excelled in this field in part because of a canny ability to discern his opponents’ weaknesses and a seeming imperviousness to public disapproval.”

It has become increasingly evident that the activism-driven corporate world is relatively fragile and is proving to be unsustainable, particularly when viewed in the broader context of rapidly changing political and social norms and increasing divisiveness across many planes of the social contract. A number of initiatives have been underway to establish a modern corporate governance framework that is calibrated to the current environment. For our part, at the request of the World Economic Forum, we prepared a paper titled, The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, which was issued in September 2016. We updated The New Paradigm and discussed it in our memo, Some Thoughts for Boards of Directors in 2019.

In essence, The New Paradigm conceives of corporate governance as a collaboration among corporations, shareholders and other stakeholders working together to achieve long-term value and resist short-termism. While we have seen considerable interest in The New Paradigm and similar initiatives from major institutional investors and other key stakeholders (for example, the Investor Stewardship Group), until such a framework is widely adopted and in the absence of legislation, it is unlikely that there will be any significant decrease in activism. Accordingly, companies should regularly review and adjust their plans to avoid an activist attack and to successfully deal with an activist attack if one should occur. Effective engagement with major shareholders is the essential element of activist defense, and the support of major investors, including the largest index funds, cannot be taken for granted.

The Attack Devices Used by Activists

  • Aggressively criticizing a company’s governance, management, business and strategy and presenting the activist’s own recommendations and business plan.
  • Proposing a precatory proxy resolution for specific actions prescribed by the activist or the creation of a special committee of independent directors to undertake a strategic review for the purpose of “maximizing shareholder value.”
  • Recruiting candidates with industry experience (including retired CEOs of major companies or even former executives of the target) to serve on dissident slates, and conducting (or threatening to conduct) a proxy fight to get board representation at an annual or special meeting or through action by written consent (solicitation for a short slate is very often supported by ISS and, if supported, is often, though not always, successful, in whole or in part).
  • Orchestrating a “withhold the vote” campaign.
  • Seeking to force a sale by leaking or initiating rumors of an unsolicited approach, publicly calling for a sale, acting as an (unauthorized) intermediary with strategic acquirers and private equity funds, taking positions in both the target and the acquirer, making their own “stalking-horse” bid or partnering with a hostile acquirer to build substantial stock positions in the target to facilitate a takeover.
  • Rallying institutional investors and sell-side research analysts to support the activist’s arguments.
  • Using stock loans, options, derivatives and other devices to accumulate positions secretly or increase voting power beyond the activist’s economic equity investment.
  • Using sophisticated public relations, social media and traditional media campaigns to advance the activist’s arguments.
  • Investing in significant diligence and third-party consulting services to analyze the target’s business.
  • Seeking to create divisions within the boardroom or between the board and management.
  • Reaching a company’s retail shareholders with weekly mailings, telephonic outreach, local newspaper advertisements and user-friendly infographics.
  • Hiring private investigators to create dossiers on directors, management and key employees and otherwise conducting aggressive “diligence.”
  • Litigation.

Current SEC rules do not prevent an activist from secretly accumulating a more than 5% position before being required to make public disclosure and do not prevent activists and institutional investors from privately communicating and cooperating.

Prevention of, or response to, an activist attack is an art, not a science. There is no substitute for preparation. The issues, tactics, team and approaches to an activist challenge will vary depending on the company, the industry, the activist and the substantive business and governance issues in play. To forestall an attack, a company should regularly review its business portfolio and strategy and its governance and executive compensation issues. In addition to a program of advance engagement with investors, it is essential to be able to mount a defense quickly and to be agile in responding to changing tactics. A well-managed corporation executing clearly articulated strategies can still prevail against an activist, even when the major proxy advisory firms support the activist.

Given the risks and potential harm of a full-blown battle, in certain situations the best response to an activist approach may be to seek to negotiate with the activist and reach a settlement on acceptable terms, if such a settlement is feasible, even if the company believes it could win a proxy fight. However, when a negotiated resolution is not achievable on acceptable terms, whether because the activist’s proposals are inimical to the company’s business goals and strategy or because the activist is unwilling to be reasonable in its negotiation, the ability to wage an effective campaign will depend on advance preparation, proactive action, good judgment and effective relationships and engagement with shareholders. This outline provides a checklist of matters to be considered in putting a company in the best possible position to prevent, respond to or resolve a hedge fund activist attack.

Advance Preparation

Create Team to Deal with Hedge Fund Activism:

  • A small group of key officers plus legal counsel, investment banker, proxy soliciting firm, and public relations firm.
  • Continuing contact and periodic meetings of the team are important.
  • A periodic fire drill with the team is the best way to maintain a state of preparedness; the team should be familiar with the hedge funds and other investors that have made activist approaches generally and be particularly focused on those that have approached other companies in the same industry and the tactics each fund has used; the team should also use that familiarity to be alert to any contacts or interest shown by known activists.
  • Periodic updates to the company’s board of directors.

Shareholder Relations:

  • The investor relations officer is critical in assessing exposure to an activist attack and in a proxy solicitation. The credibility the investor relations officer has with the institutional shareholders has been determinative in a number of proxy solicitations. Candid assessment of shareholder sentiment should be appropriately communicated to senior management, with periodic briefings provided to the board.
  • Review capital return policy (dividends and buybacks), broader capital allocation framework, analyst and investor presentations and other financial public relations matters (including disclosed metrics and guidance).
  • Monitor peer group, sell-side analysts, proxy advisors, active asset managers, and internet commentary and media reports for opinions or facts that will attract the attention of activists.
  • Be consistent with the company’s basic strategic message while updating the strategy as circumstances warrant.
  • Objectively assess input from shareholders and whether the company is receiving candid feedback. The company should make sure that major investors feel comfortable expressing their views to the company and believe that the company honestly wants to hear any concerns or thoughts they have.
  • Proactively address reasons for any shortfall versus peer benchmarks. Anticipate key questions and challenges from analysts and activists, and be prepared with answers. Monitor peer activity and the changes peers are making to their businesses, as well as key industry trends.
  • Build credibility with shareholders and analysts before activists surface.
  • Monitor changes in hedge fund and institutional shareholder holdings on a regular basis; understand the shareholder base, including, to the extent practical, relationships among holders. Pay close attention to activist funds that commonly act together or with an institutional investor.
  • Maintain regular contact with major institutional investors, including both portfolio managers and proxy voting/governance departments; CEO, CFO and independent director participation is very important. Consider engagement with proxy advisory firms.
  • Major institutional investors, including BlackRock, Capital, Fidelity, State Street, TIAA, T. Rowe Price, Vanguard and Wellington, have established significant proxy departments that make decisions independent of ISS. It is important for a company to know the voting policies and guidelines of its major investors, who the key decision-makers and point-persons are and how best to reach them. It may be possible to defeat an activist attack supported by ISS by gaining the support of major institutional shareholders.
  • Consider whether enhancements to company disclosures or changes to governance practices are appropriate in light of evolving shareholder expectations.
  • Monitor third-party governance ratings and reports and seek to correct inaccuracies.
  • Maintain up-to-date plans for contacts with media, regulatory agencies, political bodies and industry leaders and refresh relationships.
  • Monitor investor conference call participants, one-on-one requests and transcript downloads.

Prepare the Board of Directors to Deal with the Activist Situation:

  • Maintaining a unified board consensus on key strategic issues is essential to success in the face of an activist attack; in large measure, an attack by an activist hedge fund is an attempt to drive a wedge between the board and management by raising doubts about strategy and management performance and to create divisions on the board, which may include advocating that a special committee be formed.
  • Keep the board informed of options and alternatives analyzed by management, and review with the board basic strategy, capital allocation and the portfolio of businesses in light of possible arguments for spinoffs, share buybacks, increased leverage, special dividends, sale of the company or other structural or business changes.
  • Schedule periodic presentations by the legal counsel and the investment banker to familiarize directors with the current activist environment and the company’s preparation.
  • Directors should guard against subversion of the responsibilities of the full board by the activists or related parties, and should refer all approaches to the CEO.
  • Boardroom debates over business strategy, direction and other matters should be open and vigorous but stay confidential and be kept within the boardroom.
  • Recognize that psychological and perception factors may be more important than legal and financial factors in avoiding being singled out as a target.
  • Scrutiny of board composition is increasing, and boards should self-assess regularly. In a contested proxy solicitation, institutional investors may particularly question the “independence” of directors who are older than 75 or who have lengthy tenures, especially where the board has not recently appointed new directors, in addition to more broadly assessing director expertise and attributes. Directors may also be criticized for “overboarding” or attendance issues. Meaningful director evaluation is now a key objective of institutional investors, and a corporation is well advised to undertake it and talk to investors about it. Regular board renewal and refreshment, and having longer-term board development and succession plans, can be important evidence of meaningful evaluation.
  • A company should not wait until it is involved in a contested proxy solicitation to offer its key institutional shareholders the opportunity to meet with its independent directors. Many major institutional investors have recommended that companies offer scheduled meetings with some (or in unusual circumstances even all) of a company’s independent directors. A disciplined, thoughtful program for periodic meetings and other engagement initiatives is advisable. See Shareholder Engagement: Succeeding in the New Paradigm for Corporate Governance.

Monitor Trading, Volume and Other Indicia of Activity:

  • Employ stock watch service and monitor Schedule 13F filings.
  • Monitor Schedule 13D and Schedule 13G and Hart-Scott-Rodino Act filings.
  • Monitor parallel trading and group activity (the activist “wolf pack”).
  • Monitor activity in options, derivatives, corporate debt and other non-equity securities.
  • Monitor attendance at analyst conferences, requests for one-on-one sessions and other contacts from known activists.

The Activist White Paper:

The activist may approach a company with an extensive, and in many cases high-quality, analysis of the company’s business and strategy that supports the activist’s recommendations (demands) for:

  • Return of capital to shareholders through share repurchase or special dividend.
  • Change in capital structure (leverage).
  • Sale or spin-off of a division.
  • Change in business strategy, including ESG.
  • Change in cost structures.
  • Improvement of management performance or replacement of management (e.g., replace CEO).
  • Change in executive compensation.
  • Merger or sale of the company.
  • Change in governance: add new directors designated by the activist, separate the positions of CEO and Chair, declassify the board, remove poison pill and other takeover defenses, permit shareholders to call a special meeting (or lower thresholds for same) and act by written consent.

Responding to an Activist Approach

Response to Non-Public Communication:

  • Assemble team quickly and determine initial strategy. Response is an art, not a science.
  • No duty to respond, but failure to respond may have negative consequences, and in most cases response is desirable.
  • No duty to discuss or negotiate, but usually advisable to meet with the activist and discuss the activist’s criticisms and proposals (company participants in any such meeting should prepare carefully with the company’s activist response team); no outright rejection absent study, try to learn as much as possible by listening and keep in mind that it may be desirable to at some point negotiate with the activist and that developing a framework for private communication may avoid escalation.
  • Generally no immediate duty to disclose; determine when disclosure may be required, or desirable.
  • Response to any particular approach must be specially structured; team should confer to decide proper response. Consider whether the activist’s claims or demands have merit and/or are consistent with the company’s own pending or proposed initiatives.
  • Keep board advised; in some cases it may be advisable to arrange for the activist to present its white paper to the board or a committee or subset of the directors.
  • Be prepared for public disclosure by activist and have public response contingencies ready in the event of any disclosure.
  • Be prepared for the activist to try to contact directors, shareholders, sell-side analysts, business partners, employees and key corporate constituencies. Make sure directors understand that any contacts should be referred to CEO or other designated officer.
  • Assess whether there are sensible business actions that can be taken or accelerated to preempt or undercut the activist attack and the extent to which the activist may attempt to publicly claim credit for such actions.
  • Consider whether negotiations with the activist and settlement should be pursued and at what point in time.

Response to Public Communication:

  • Initially, no response other than “the board will consider and welcomes input from its shareholders.”
  • Assemble team; inform directors.
  • Call special board meeting to meet with team and consider the communication.
  • Determine board’s response and whether to meet with activist. Even in public situations, consider pursuing disciplined engagement with the activist. Failure to meet may also be viewed negatively by institutional investors. Recognize that the activist may mischaracterize what occurs in meetings.
  • If the activist includes a demand – e.g., replace the Chair or CEO – that the board finds unacceptable or non-negotiable, it may be advisable to make the board’s position on that item clear earlier rather than later, even if there is willingness to consider and negotiate other aspects of the activist’s platform.
  • Avoid mixed messages and preserve the credibility of the board and management.
  • Continuously gauge whether the best outcome is to agree upon board change and/or strategic, business or other action in order to avoid (or resolve) a proxy fight.
  • Be prepared and willing to defend vigorously.
  • Recognize that a proxy fight will entail a meaningful time commitment from both management and directors, and work in advance to coordinate availability for key meetings with shareholders and proxy advisory firms.
  • Engage with other shareholders, not only the activist, to take investor temperature, solicit feedback and assess whether actions may (should) be taken by the company to secure support (if an activist identifies a legitimate issue, the company may propose its own plan for resolving any shortcomings that is distinct from the activist’s solutions).
  • Appreciate that the public dialogue is often asymmetrical; activists may make personal attacks and use aggressive language, but the company should not respond in kind.
  • Remain focused on the business; activist approaches can be very distracting, but strong business performance, though not an absolute defense, is one of the best defenses. When business challenges inevitably arise, act in a manner that preserves and builds credibility with shareholders. Maintain the confidence and morale of employees, partners and constituencies.
  • A significant number of major institutional investors are increasingly skeptical of activists and activist platforms even as they closely scrutinize targeted companies as well. Investors can be persuaded not to blindly follow the recommendations of ISS in support of a dissident’s proxy solicitation. When presented with a well-articulated and compelling plan for the long-term success of a company, investors are able to cut through the cacophony of short-sighted gains promised by activists touting short-term strategies. As a result, when a company’s management and directors work together to clearly present a compelling long-term strategy for value creation, investors will listen.

Martin Lipton
Steven A. Rosenblum
Karessa L. Cain
Sabastian V. Niles

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

CHINESE UPDATE – Brief Commentary on the Foreign Investment Law

Contributed by: Adam Li, JunHe LLP (Shanghai)

Editors’ Note: Contributed by Adam Li, a partner at JunHe and a member of XBMA’s Legal Roundtable.  Mr. Li is a leading expert in international mergers & acquisitions, capital markets and international financial transactions involving Chinese companies.  This article was authored by Mr. Zheng Yu, a partner at JunHe. Mr. Zheng has broad experience advising multinational companies on their business and investment projects in China, including complex foreign direct investments, cross-border M&A, dispute resolution (arbitration and litigation), corporate compliance, employment issues and tourism real estate projects in China.  Xiao Wang, an associate at JunHe, also contributed to the article.

Brief Commentary on the Foreign Investment Law (Draft)
Changes, Highlights and Expectation

On December 26, 2018, the National People’s Congress published the Foreign Investment Law of the People’s Republic of China (Draft) (the “New Draft”) in order to solicit public opinion. The New Draft is a revised version of an earlier draft of the Foreign Investment Law, originally issued by the Ministry of Commerce for public comment almost four years ago (the “First Draft”). The New Draft is significantly shorter than the earlier version, comprising just 39 articles, compared with the 170 articles that made up the First Draft. This would seem to indicate that the overall legislative goal for the Foreign Investment Law has shifted from its previous highly detailed operational approach to one that is now focused on principles and guidance.

This article provides an overview of the structure of the New Draft, particularly in relation to the major changes since the First Draft, analyzes some key elements, and provides comments and suggestions as to how the New Draft might be improved.

1.  – Structure of the New Draft

1.1 – Sections

The New Draft comprises five main sections:

  1. Definition and scope of foreign investment
  2. Investment promotion
  3. Investment protection
  4. Investment administration
  5. Legal liability

1.2 – Major Differences from the First Draft

The following table provides a summary of the content of each of the five main sections of the New Draft and highlights the key differences when compared with the First Draft.

Main Content

New Draft

Major Differences

from First Draft

Definition

The New Draft defines foreign investment (Article 2) as “any investment activity directly or indirectly carried out by foreign natural persons, enterprises or other organizations (“foreign investors”) within the territory of China”.

Specifically, the New Draft describes three types of investment activities that represent foreign investment:

  1. Foreign investors, separately or jointly, investing in new construction projects, establishing foreign-invested enterprises, or increasing investment in invested enterprises, in mainland China;
  2. Foreign investors acquiring, by means of merger and acquisition, shares, equity interests, shares of property or other similar interest in enterprises in mainland China; and
  3. Foreign investors making investments in mainland China through other means as provided by laws, administrative regulations or State Council provisions.

Whereas in the First Draft, foreign investors included “governments of other countries or regions as well as their affiliated departments or offices”, they are not mentioned in the New Draft, and so it is not clear whether they will be permitted to conduct foreign investment in the updated version.

Compared with the First Draft, the scope of foreign investment in the New Draft is significantly narrower, and, with the exception of the “catch-all clause”, is limited to foreign investors’ establishment of foreign-invested enterprises in mainland China by means of new set-up (i.e. greenfield investment) or merger/acquisitions.

The activities included in the First Draft listed below are no longer classified as foreign investment under the New Draft:

  1. Provide financing with a term of more than one year to an enterprise in China in which it owns shares, equity interests, shares of property or other similar interests;
  2. Obtain concession rights to (a) explore and exploit natural resources, or (b) construct or operate infrastructure within the territory or jurisdiction of mainland China;
  3. Acquire real estate rights, such as land use rights or building ownership in mainland China;
  4. Control or own interests of domestic enterprises by contract, trust or other means; and
  5. Transactions conducted outside mainland China shall be considered a foreign investment if such transactions will result in the transfer of the de facto control of a domestic enterprise to a foreign investor.

Investment Promotion

The New Draft emphasizes the aim of establishing a stable, transparent and predictable investment environment (Article 3), and clarifies that national policies in support of the development of enterprises shall apply to foreign-invested enterprises consistently with how they are applied to domestic-invested ones (Article 9). It was not clear in the First Draft whether national policies in support of the development of enterprises would be consistently applied to foreign-invested enterprises.

Investment Protection

The New Draft provides protection for investment in respect of state expropriation, profit remittance, intellectual property rights protection, technology transfer, administrative interference, governmental commitments and foreign investors’ complaints, namely that:

  1. The state shall not expropriate foreign investments. Should expropriation be required in the public interest, such expropriation shall be conducted in accordance with legal procedures and fair and reasonable compensation should be provided (Article 20);
  2. Foreign investors’ capital contributions, profits and capital gains may be freely remitted outside China in RMB or foreign currency (Article 21);
  3. The intellectual property rights of foreign investors and foreign-invested enterprises shall be protected in accordance with the law. The terms for any technology cooperation shall be determined through negotiation between the parties to the investment. Administrative means shall not be used to compel the transfer of technology (Article 22);
  4. Foreign investment rules formulated by the Chinese government and its relevant departments shall be in compliance with laws and regulations, and shall not illegally (i) impair the legitimate rights of or impose additional obligations on foreign-invested enterprises; (ii) set any conditions for market access or exit, or (iii) intervene or influence normal production and operation activities of foreign-invested enterprises (Article 23);
  5. Local governments and their relevant departments shall strictly abide by all policy commitments made in accordance with law, and contracts concluded according to law. If any amendment to such commitments or contracts is required in the national or public interest, such amendment must be conducted through legal procedures and within authorized jurisdiction. Any loss to foreign investors or foreign-invested enterprises incurred thereof shall be compensated (Article 24); and
  6. The complaint submission and handling mechanism for protecting rights of foreign-invested enterprises shall be improved (Article 25).
Compared with the First Draft, the New Draft points out and emphasizes for the first time the following responsibilities of governments to protect foreign investment:

  1. Administrative means shall not be employed to compel the transfer of technology;
  2. Foreign investment rules shall be formulated in compliance with laws and regulations; and
  3. Government shall strictly keep all policy commitments made in accordance with law, and perform all contracts concluded according to law.

Investment Administration

The New Draft specifies three investment administrative systems for foreign investment:

  1. Pre-establishment National Treatment and Negative List administrative system (Article 27);
  2. Foreign Investment Information Reporting system (Article 31); and
  3. Foreign Investment National Security Review system (Article 33).
The New Draft sets out only the principles that underlying the three administrative systems for foreign investment. The First Draft, by contrast, provided highly detailed, practicable provisions for each of the three systems in respect of specific content, conditions, application requirements, elements for review, review procedures, time limits, etc. The implementation of the three systems under the New Draft will be dependent upon the concurrent formulation and implementation of any relevant supporting regulations.

Legal Liability

The New Draft stipulates the following legal consequences for any violation of the negative list or laws and regulations:

  1. Violation of the Negative List
    Foreign investors shall be ordered to make rectification or stop investment activities, or dispose of shares and assets within the prescribed time limit, or take other necessary measures to restore to the original state prior to investment. If there have been any gains derived from such investment, such gains shall be considered illegal and confiscated by the government.
  2. Violation of laws and regulations
    Foreign investors shall be subject to investigation in accordance with laws, blacklisted in credit information systems, and subject to sanctions taken by relevant authorities.

Compared with the First Draft, the New Draft does not stipulate any legal consequences for the violation of Information Reporting or the National Security Review system. In addition, administrative sanctions are also removed from the possible legal consequences of a violation of the negative list. Under the First Draft, this could have resulted in a fine of between RMB 100,000 and RMB 1,000,000, or up to 10% of the illegal investment amount.

 

2. – Highlights of the New Draft

Among the highlights of the New Draft are the clear responses to various long-held concerns from foreign investors and foreign-invested enterprises, which should go some way to improving the environment for foreign investment and shoring up foreign investors’ confidence in investing in China. They include:

2.1 – National treatment: Unless otherwise stipulated by laws or administrative regulations, national policies to support of the development of enterprises will apply in the same way to foreign-invested enterprises as they do to domestic-invested ones (Article 9);

2.2 – Prevention of compulsory technology transfer: The terms of any technology cooperation associated with foreign investment shall be determined by all investment parties through negotiation. Administrative means should not be used by administrative agencies or their officers to compel the transfer of technology transfer (Article 22); and

2.3 – Governmental commitment: Local governments and their relevant departments shall strictly keep all policy commitments made according to law, and perform contracts concluded according to law (Article 24).

3. – Comments and Suggestions to Improve the New Draft

While the New Draft incorporates various advances, we believe there remain further opportunities for improvement or clarification in order to ensure the clear operability of the New Draft after its formal issue:

1. – Definition of “Foreign Investor” and “Foreign Investment” (Article 2, Paragraph 2) For the purpose of this law, foreign investment refers to any investment activity directly or indirectly carried out by foreign natural persons, enterprises or other organizations (“foreign investors”) within the territory of China”, including…

Comments/Suggestions

We believe that the current definitions of “foreign investor” and “foreign investment” are insufficiently clear, and that as they stand, they may cause confusion in practice. The main issues are:

(i)       It is not clear whether “foreign investors” includes foreign or regional governments, and international organizations.

(ii)     Since, in addition to direct investment, the definition of investment includes “indirect investment”, it is not clear whether for an investment in China, the identity of its foreign investor shall be determined by such investor’s ultimate controlling shareholder.

(iii)   It needs to be clarified whether an investment made in China by an overseas company that is controlled by a Chinese company will be classified as “foreign investment”.

We believe that it is necessary to clarify in the New Draft whether the identity of a “foreign investor” will be determined by the place of registration of the foreign investor that directly holds shares, equity or interest of the invested enterprise in China, or by the place of registration of the ultimate controller of such foreign investor. If it is the latter, a definition of “control” is also required.

Given the increasing number of overseas investments emanating from China, a lack of such criteria may lead to severe confusion regarding whether investment in China conducted by overseas companies directly or indirectly controlled or wholly-owned by Chinese enterprises or natural persons will be governed by the Foreign Investment Law.

Moreover, with increasing numbers of Chinese citizens migrating overseas and foreign citizens becoming resident in China, we suggest that there is a need for clarification as to whether an enterprise invested in China by foreign individuals that acquire Chinese nationality or by Chinese citizens that obtain foreign nationality shall be governed by the Foreign Investment Law.

2. – Disclosure of Judicial Awards (Article 10, Paragraph 2) Regulatory documents and judicial awards in relation to foreign investment shall be timely disclosed to the public pursuant to laws.

Comments/Suggestions

We suggest the need to clarify that the disclosure of judicial awards related to foreign investment shall not apply to cases involving state secrets or business secrets.

3. – Negative List (Article 27)

Foreign investors shall not invest in prohibited areas on the negative list for foreign investment access.  

Foreign investors investing in restricted areas in the negative list for foreign investment access shall comply with the conditions provided by the negative list.  

Foreign investment in areas outside the negative list for foreign investment access shall be administered under the principle of consistent treatment for domestic and foreign investment.

Comments/Suggestions

Since the scope of foreign investment negative lists applied in free trade zones is different from that of the national version, we suggest there is a need to clarify that the negative list of the relevant free trade zone shall prevail if it is different from the national version.

4. – National Security Review (Article 33) China shall establish a foreign investment national security review system to perform security reviews on foreign investment that affects or may affect national security. National security decisions made according to the law shall be final.

Comments/Suggestions

The New Draft only provides that there shall be a foreign investment national security review system, without further specifying any detailed rules, such as in terms of the scope and content of the review, requirements of application documents, procedure or time limit of the review, etc. Currently, the only rules that regulate a national security review of foreign investment are the Notice of the General Office of State Council on the Establishment of a Security Review System Pertaining to Mergers and Acquisitions of Domestic Enterprises by Foreign Investors[1] and the Notice of the General Office of State Council on the Promulgation of the Trial Measures on National Security Review for Foreign Investments in Pilot Free Trade Zones[2]. There is no clear legal basis for a national security review of foreign-invested enterprises that will be newly incorporated outside free trade zones. We suggest that an ancillary foreign investment national security review regulation shall be formulated and implemented simultaneously with the Foreign Investment Law.

In addition, with the New Draft indicating that a review decision shall be “final”, we suggest there is a need to clarify whether “final” should be taken to mean that a decision cannot be appealed, whether through administrative reconsideration or administrative litigation.

Furthermore, as a national security review is an important element in the administrative system for foreign investments, in order to ensure its effective compliance and implementation, we suggest that the legal consequences of any violation of the national security review filing obligation be provided in the Foreign Investment Law.

5. – Transition from the Laws on FIEs This law shall come into force as from MM/DD/YYYY, on which the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures, the Law of the People’s Republic of China on Wholly Foreign-owned Enterprises and the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures shall be repealed simultaneously.

Comments/Suggestions

Following the reforms to the system for filing foreign-invested enterprises and the introduction of the negative list, foreign-invested projects outside the scope of the negative list have been required only to file, with the set-up of such enterprises governed by the Provisional Measures on Administration of Filing for Establishment and Change of Foreign-Invested Enterprises (Amended version)[3]. Foreign-invested projects that fall within the negative list shall still be subject to approval and governed by the three separate laws that apply to the three kinds of foreign-invested enterprises (FIEs), and to the respective implementation regulations.

With the three laws on FIEs and their implementation regulations due to be repealed simultaneously upon the effectiveness of the Foreign Investment Law, it will be necessary to issue a regulation for approval of foreign investment projects that are subject to approval under the negative list. This will provide a clear legal basis for implementing the relevant approval requirements, procedures, time limit, etc. applicable to foreign investment projects under the negative list after the three laws on FIEs have ceased to be effective.

6. – Governing Law of Joint Venture Contract and Cooperative Contract N/A

Comments/Suggestions:

Article 12 of the Implementing Regulation of the Law of the People’s Republic of China on Sino-foreign Equity Joint Ventures provides that, “the formation of a joint venture contract, its validity, interpretation, execution and the settlement of disputes under it shall be governed by the Chinese law.” Article 55 of the Implementing Regulation of the Law of the People’s Republic of China on Sino-foreign Cooperative Joint Ventures provides that, “the formation of a cooperative contract, its validity, interpretation, execution, and the settlement of disputes under it shall be governed by Chinese law.”

The above regulations shall be repealed once the Foreign Investment Law comes into effect. In the absence of any rules in the New Draft regarding the law governing joint-venture contracts, cooperative contracts or relevant share transfer contracts, it remains unclear whether the parties to joint venture or cooperation contracts will be free to choose themselves which is the governing law, pursuant to the PRC Contract Law. We suggest that this point be further clarified in the Foreign Investment Law.

7. – Applicability of Foreign Investment Law to Investors from Hong Kong, Macau and Taiwan N/A

Comments/Suggestions:

The definition of “foreign investor” in the New Draft does not cover investors from Hong Kong, Macau or Taiwan, whose investments in mainland China were previously considered to be “foreign investment”. Therefore, we suggest that the Foreign Investment Law clarify whether the law shall apply, by reference, to investment in mainland China made by investors from Hong Kong, Macau and Taiwan.

 

4. – Outlook

President Xi Jinping announced at the 2018 Annual Meeting of Boao Forum for Asia that China will take major measures to expand its opening up and create a more attractive investment environment. The issuance of the Foreign Investment Law will be an important step in China’s ongoing objective to open up and to attract more foreign investment. We hope the New Draft can be further improved in order to ensure that the Foreign Investment Law is able to support the attainment of these goals.

JunHe will closely follow the progress of this important legislation and provide relevant updates accordingly.

[1] Guo Ban Fa [2011] No. 6

[2] Guo Ban Fa [2015] No. 24

[3] 2017 Decree No. 2 of Ministry of Commerce, July 30, 2017

 

The views expressed herein are solely those of the author and have not been endorsed, confirmed, or approved by XBMA or any of the editors of XBMA Forum, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

GLOBAL M&A Statistical Update – XBMA Annual Review for 2018

Editors’ Note: The XBMA Review is published on a quarterly basis in order to facilitate a deeper understanding of trends and developments. In order to facilitate meaningful comparisons, the Review has utilized generally consistent metrics and sources of data since inception. We welcome feedback and suggestions for improving the XBMA Review or for interpreting the data.
Executive Summary/Highlights:
  • Global M&A volume in 2018 reached US$4.0 trillion, a level achieved only once before in the last decade (2015).
  • 2018 was a notably strong year for cross-border M&A, despite escalating trade tensions and anti-globalist rhetoric. US$1.6 trillion (39%) of deals in 2018 were cross-border transactions, approximating recent highs in terms of both dollar value and percentage of global deal volume.
  • Takeda Pharmaceutical’s US$77 billion cross-border acquisition of Shire was the largest deal of the year in global M&A. 2018’s other cross-border mega-deals included T-Mobile and Deutsche Telekom’s US$60 billion deal with Sprint and Comcast’s US$48 billion acquisition of Sky.
  • M&A was propelled by strong economic growth and an abundance of corporate cash (including from tax reform in the U.S.), the continued availability of inexpensive debt through Q3, and strategic imperatives to address or anticipate technological disruption. In the second half of 2018, however, global trade tensions, rising interest rates in the U.S., and equity market volatility combined to slow global M&A activity from its record-setting pace.
  • With Bristol-Myers Squibb’s US$95 billion acquisition of Celgene announced just after year end, M&A in 2019 looks to be off to a promising start, although it is too early to tell if the torrid pace of M&A over the past few years will continue unabated in 2019.

Click here to see the Review.

The views expressed herein are solely those of the authors and have not been endorsed, confirmed, or approved by XBMA, nor by XBMA’s founders, members, contributors, academic partners, advisory board members, or others. No inference to the contrary should be drawn.

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