4/26/2024

Hedge Funds Under SEC Spotlight in Expanding WhatsApp Crackdown

Bloomberg Law (04/26/24) Bultman, Matthew

The SEC is expanding its crackdown on finance firms’ use of private messaging apps like Meta Platforms Inc.'s (META) WhatsApp, underscoring questions about what records hedge funds are required to keep. The agency earlier this month fined Senvest Management LLC, a New York hedge fund, $6.5 million. It was the first time the agency has brought a case as part of its messaging app enforcement against a standalone investment adviser. The move comes amid similar crackdowns against banks — and even the SEC’s own employees last week, after the agency banned third-party messaging apps from work mobile phones. It’s a harbinger of increased scrutiny around the records of private equity and hedge funds, which usually register with the SEC as investment advisers, attorneys say. “This is not going to go away,” K&L Gates LLP partner Lance Dial said. “This is going to be a perennial priority for enforcement.” Industry groups have told the SEC they’re uneasy about how the agency appears to view their obligations. They argue private funds shouldn’t be subject to the same requirements as banks. The SEC, the Commodity Futures Trading Commission, and the Financial Industry Regulatory Authority have fined dozens of firms for use of private apps, which regulators say interferes with their ability to investigate misconduct and violates rules requiring broker-dealers “retain all communications” relating to their business. Last year, several trade groups for private equity and hedge funds including MFA, formerly known as the Managed Funds Association, and the Securities Industry and Financial Markets Association said they’d gotten word that the SEC was seeking evidence of any off-channel business communications from various investment advisers. “The SEC should not hold investment advisers to the broad recordkeeping requirements applicable to broker-dealers because the regulations, as written, do not require investment advisers to preserve all business communications,” the groups wrote to SEC Chair Gary Gensler. Perhaps cognizant of those concerns, the SEC in its recent case against Senvest referred to the Advisers Act requirements and said that a number of the problematic messages “related to matters within the scope of the Advisers Act.” But the SEC also faulted Senvest for failing to implement procedures to monitor whether its employees were following the firm’s policies concerning work-related communications. “While the settlement is styled as a record-keeping case in the SEC’s press release, the actual settlement order is ultimately principally about compliance violations and supervision breakdowns,” Peter Altman, a former SEC attorney, said. That perhaps plays into a different critique industry groups have voiced, arguing that many firms have policies that are broader than the legal requirements, and the SEC shouldn’t turn employees’ non-compliance into legal violations. “It will penalize advisers’ good faith efforts to promote compliance by adopting a broader internal requirement, and will incentivize firms to adopt policies that narrowly circumscribe recordkeeping obligations consistent with the statutory requirements, which will introduce subjectivity in interpreting enumerated categories under the rule,” the groups said in their letter.

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4/25/2024

Accelerated Asset Sale Would be Challenging to Maximize Shareholder Value — I-RES REIT

RTE (04/25/24)

Ireland's largest private landlord has said that independent analysis from its advisors has found that a strategy that would require an accelerated sale of all its assets directly into the market would be challenging to maximise value for shareholders in the short-term. But publishing an update on the progress of its ongoing strategic review, I-RES REIT (RSHPF) said these options, alongside a potential sale of the company, will continue to be explored in detail as the review continues. "Shareholders should note that the company confirms that it has not received any proposals to acquire the assets, in whole or in part, or the entirety of the share capital of the company to date," the firm said. The company said the strategic review confirms the board's view that it has a market-leading platform which continues to deliver a strong operational performance. The analysis, which started on February 23, also found that the company's investment case is underpinned by a modern portfolio of high-quality residential assets in attractive growth locations. But the company added that against these attractive longer-term dynamics, the sector has recently been characterised by "shorter-term headwinds." These include higher interest rates, widening yields, restrictive regulation including in particular a cap on rental growth, a notable lack of liquidity in the direct market, and an upcoming election, which present challenges for delivering shareholder returns and have impacted growth. I-Res REIT also noted that levels of liquidity in European real estate assets, including Irish residential assets, remain at historically low levels. The business also said that the review to date has identified several initiatives with the potential to unlock value contained within its operating platform. This includes further potential of revenue generation from car parking, it added. I-RES also said that the board's focus remains on operational efficiency initiatives and the recycling of capital through opportunistic sales, and is exploring potential consolidation opportunities in the Irish market as part of the review. As part of the strategic review, I-Res REIT said it has conducted "extensive" tax analysis, including a review of the REIT structure. It noted that the Irish REIT structure provides liquidity and tax efficiency to shareholders within a regulatory framework and has significant advantages over non-REIT structures. But it also noted that certain elements of the Irish REIT framework remain restrictive when compared to other European jurisdictions. The outcome of this review is expected to be published in the second half of 2024. In February, shareholders of I-RES REIT rejected proposals from Canadian activist shareholder Vision Capital to remove five directors from the board and to pursue a strategic review that could have led to the sale of the company or some of its assets. The result was a major boost for the embattled board of the business which owns 3,734 units around Dublin. However, earlier this month, I-RES agreed to back the appointment of two director nominees that were being proposed by Vision Capital in a compromise.

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4/25/2024

Preparing for Conflict: Activism Trends in North America, Europe and Asia

IR Magazine (04/25/24) Riches, Adam

Shareholder activism is increasing. 2023 saw activist situations reach a four-year worldwide high, with nearly 1,000 companies subjected to activist demands publicly, according to a study by Diligent. However, if this trend is set to continue — almost a quarter of Russell 3000 companies disclosed the potential for activism in their 10K reporting — executives must understand the precise threats they’re likely to face. Alliance Advisors explores what executives across a range of geographies should anticipate, and how they can keep shareholders at bay. In North America, the U.S. Securities and Exchange Commission in March 2024 published its rules on climate disclosure. Among other things, companies are now expected to report both direct and indirect carbon emissions, in addition to how they plan to manage climate risk. Although the final mandates are somewhat less strict than some insiders feared, the prospect for environmental activism remains. As sustainability nonprofit Ceres has reported, a record 263 climate-related shareholder resolutions have been filed across North America so far in 2024, with JPMorgan (JPM) and Citigroup (C) among the companies under pressure. Other regulatory changes, notably SEC Rule 14a-19, presage more ESG activism in other areas, as well. Triggered when a shareholder intends to solicit at least 67% of voters, the universal proxy card rule obliges both executives and dissidents to list every board nominee on a single slate. That makes activism easier, especially for remote voters, as seen by the long-running dispute between unions and Starbucks (SBUX). Europe has traditionally seen a lot of boardroom activity, a trend that’s likely to continue through 2024. As a poll by Skadden found, over half of European respondents expect an increase in shareholder activism over the next year, and two thirds of activists expect their organization to be involved in at least three engagements. And if financial and political uncertainty thwarted some proxy fights last year, that looks likely to change, too, with a full 98% of executives forecasting a resurgence in visible, public disputes. For example, between tepid economic performance and concerns for social justice, stakeholders across the continent are less likely to tolerate big executive pay deals, especially when needing to compete with dynamic U.S. competitors. Concerned European executives could embrace pay performance schemes, an increasingly popular tactic across the continent. They also could leverage external expertise to understand exactly what shareholders are planning — then acting to stop opposition prior to it crystallizing. Meanwhile, activism is ramping up in Asia. In March, for example, the Federation of Korean Industries reported that boardroom battles in the East Asian country have increased nine-fold since 2019. Markets as diverse as Singapore and Japan are moving in the same direction and, though the details vary across borders, executives should nonetheless be conscious of common themes such as governance reform. In Japan, the Stewardship Code and Corporate Governance Code are geared to align shareholder and corporate interests, for instance by discouraging cross-shareholdings. That’s echoed by similar pushes in China and India, with the results already affecting individual boardrooms.

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4/25/2024

As the 2024 Proxy Season Gets Underway, Climate Action 100+ Investors Call on Companies to Improve Climate Lobbying, Accounting, and Governance

Climate Action 100+ (04/25/24)

With the start of the 2024 proxy season, Climate Action 100+ investors are highlighting key shareholder proposals at the initiative’s high-emitting focus companies to inform other investors about priority votes and other issues as they manage the material financial risks of climate change. Signatories of Climate Action 100+, the world’s largest investor engagement initiative on climate change, engage with companies and evaluate climate-related financial risks as part of a responsible investment approach to protect and enhance long-term value; therefore, fulfilling their fiduciary duties. This includes encouraging greater action by heavy emitters to align their businesses with the goal of reaching net zero emissions by 2050 or sooner. All investor engagements are focused on the initiative’s three common goals: cutting greenhouse gas emissions, improving corporate climate governance, and strengthening climate-related financial disclosures. Seeking to increase long-term shareholder value, the initiative flags key shareholder proposals and other votes for investors to consider as they decide how to vote during proxy seasons. This year includes calls for companies to report on climate lobbying practices, the impact of climate transition plans on asset requirement obligations, and progress on decarbonization goals. “The flagging process signals to investors proposals which may be important to their own goals in addressing material risk due to climate change,” said Kirsten Spalding, vice president of the Ceres Investor Network at Ceres, a founding member of Climate Action 100+. “Climate risk is financial risk and investors are taking the necessary steps to reduce that risk in their portfolios and for their clients. They have a fiduciary duty to do so. This is why they are evolving in their asks of companies to report on lobbying activities and put in place corporate climate transition action plans to reach their decarbonization goals.” Investors are increasingly utilizing the shareholder proposal process to advance climate-related goals. Analysis by Ceres, whose Investor Network members include Climate Action 100+ signatories, has found that investors in North America have filed a record 263 climate-related shareholder resolutions this year. In 2023, there was a record 259 climate-related resolutions filed.

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4/23/2024

Opinion: ValueAct's Reputation Gamble in Japan Pays Off

Reuters (04/23/24) Daga, Anshuman

ValueAct Capital prefers to engage with underperforming companies in private, but it turned heads last year when it publicly criticized Seven & i (SVNDY). The Japanese company's recent decisions to change its structure vindicates the fund's unusual move, though the financial value of its engagement remains poor. The $34 billion company led by CEO Ryuichi Isaka has promised enough change to set the scene for a friendly investor day on Tuesday. The owner of 7-Eleven convenience stores said this month that it is considering an IPO of its loss-making superstores and announced it is separating the role of chairman and CEO. ValueAct now says it will support Seven & i's board nominees. The investor ratcheted up engagement in 2023 when it took its fight directly to shareholders — a tactic it tried for the second time in its history, two years after revealing it held a 4.4% stake in the company. It called out the conglomerate's "dysfunctional management" and won support from proxy adviser ISS for all four of its board nominees, including a replacement for Isaka. Ultimately, Seven & i's investors voted down the nominees and the fund resumed engaging with the company behind closed doors. ValueAct sought a spinoff of the convenience store business, rather than the superstores. But Seven & i has been gradually reshaping itself since the fund joined its register. It exited its apparel business and sold its Sogo & Seibu department store unit last year. What's more, the majority of the board's directors are independent. At one point, ValueAct reckoned 7-Eleven alone could be worth some 40% more than the entire group's value per share by 2024. Over three years, Seven & i has delivered an annualized total return of 13% compared with 21% for peer Pan Pacific International (DQJCY) and 16% for Topix (TOPIX). Things might improve as Seven & i moves forward but the market isn't buying it yet. The investor's Japan fund, started in late 2022, has at least fared well. By playing nice again with Seven & i, ValueAct has repositioned itself on the spectrum of activists as an engagement fund rather than greenmailer. That's important in a country where management is highly guarded, and where there are huge opportunities still to unlock.

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4/22/2024

Q1 2024 Review of Shareholder Activism

Harvard Law School Forum on Corporate Governance (04/22/24) Rossman, Jim; Ludwig, Chris; Pitcher, Quinn

This article lists observations on the global activism environment in the first quarter of 2024, with 13D Monitor cited as a source under several of the graphics. There have been 63 campaigns launched through Q1, down 19% versus the 78 launched YTD in 2023. Activity in the U.S. and APAC has remained steady, with 29 and 20 campaigns YTD vs. 30 and 17 in 2023, respectively. European activity is down 52% (11 campaigns YTD vs. 23 in 2023) as top global activists such as Elliott, TCI, and ValueAct focused on existing campaigns or other markets. More dispersed activity among activists, with the top 10 busiest activists accounting for 33% of campaigns YTD vs. 46% in 2023. Approximately 29% of campaigns this year have been launched by first-timers, well above the multi-year average of 16%. Nevertheless, familiar names such as Elliott, Icahn, Land & Buildings, Oasis, and Starboard have been most active YTD. There have been 39 Board seats won YTD, below last year's pace of 51 won. U.S. time-to-settlement has fallen 29% vs. 2022 (86 days vs. 61 days) in 2024 as campaigns settle more quickly in the universal proxy card (UPC) era. Activists are also taking a more surgical approach in their U.S. Board seat campaigns, demanding 30% fewer seats but winning nearly 80% of seats demanded, up from two-thirds historically. Board change has been the most common demand, appearing in 49% of campaigns YTD. M&A demands have appeared in 29% of campaigns YTD, well below last year's rate of 9%. Likely explanations include a relatively greater focus on Board change in the U.S. as nomination windows have opened, as well as a primary focus on capital return in APAC (45% of campaigns vs. 16% ex-APAC). Pushing for a whole company sale has been the most popular M&A demand YTD, suggesting activists are pushing to proactively catalyze processes in anticipation of interest rate cuts. The Miller and Moelis Delaware court cases have disrupted long-held practices around stockholder and settlement agreements. Activists including Elliott and Third Point have adjusted language in recent settlement agreements, subjecting the Board's recommendation to shareholders of a settlement-related Director nominee to the “good faith exercise” of the Board's fiduciary duty. Section 122(18) of the General Corporation Law of the State of Delaware is expected to be enacted to resolve uncertainty caused by the Moelis decision, enabling shareholder agreements. Companies and shareholders continue to litigate advanced notice deadline changes adopted in response to the UPC. The SEC's long-awaited 13D/G rule amendments and climate change disclosure rules respectively went into effect and were adopted.

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4/19/2024

Japan’s Retail Investors Care About Governance Too, Poll Shows

Bloomberg (04/19/24) Sano, Hideyuki; Duan, Eddy

Japan’s retail investors are paying closer attention to corporate governance, citing it as a key consideration when investing in stocks, a survey by J.D. Power showed. Shareholder rights, timely disclosure, board oversight and cooperation with a wide range of stakeholders made up about 40% of the issues that stockholders care about in a survey of 6,088 investors conducted in March. “That weight was higher than we had expected,” said Kiichi Umezawa, J.D. Power Japan’s managing director. “It indicates strong interest in ESG, particularly among the younger generation,” he said. The government, and the Tokyo Stock Exchange in particular, have been pushing for better governance among the country’s 3.7 million companies, betting that more accountability will lead to more investment activity. The poll by J.D. Power suggests that retail investors are also increasingly aware of the need to hold corporate boards and executives to high standards. That may come as a surprise considering that individual investors in Japan have a reputation for making big contrarian bets in markets like equities and currencies. Carmakers saw the biggest gaps in terms of investor satisfaction, with Toyota Motor Corp. (TM) topping the list among five automakers that had enough of an investor sample size. Honda Motor Co. (HMC) ranked second, while Nissan Motor Co. (NSANY) and Mitsubishi Motors Corp. (MMTOF) were almost tied for worst. Investors cited low profitability and shareholder return as the main reason behind the low ranking, according to Umezawa. In three other surveyed sectors, the gap between companies was smaller. Their satisfaction was generally tied to stock performance over the past year except for brokerages. Among banks, Sumitomo Mitsui Financial Group Inc. (SMFG) won the top post while Japan Post Bank Co. (7182) was ranked worst among five institutions. As for brokerages, SBI Holdings Inc. (SBHGF) was No. 1 ranked while Nomura Holdings Inc. (NMR) was the lowest among six firms, despite its stock making hefty gains over the past year. Among insurers, investors were the most satisfied with Tokio Marine Holdings Inc. (TKOMY) and the least with Japan Post Insurance Co. (7181). J.D. Power plans to conduct a retail shareholder satisfaction survey annually. “There has been little data-based discussion on corporate governance, making it difficult to make comparisons and limiting incentive for each company to compete,” Umezawa said. “We hope this survey will help promote better governance.”

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