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Republic First Bancorp (FRBK) has postponed its 2022 annual shareholders meeting until Dec. 19 and said it continues to be in talks with parties, including Norcross-Braca Group, to assess potential strategic opportunities, including a possible capital raise. The postponement comes a month after the company saw its shares getting delisted from the Nasdaq after failing to file its 2022 annual report with the securities regulator. The shareholders meeting was previously scheduled for Oct. 5. A regulatory filing in late August by the Norcross-Braca group, led by investor George Norcross, said that Republic First was in talks with the group for an equity investment and a broader capital raise. While talks are ongoing, the group has agreed to suspend pending litigation against the bank holding company. The group previously launched a proxy fight against the company, which has seen its shares tumble 92% this year amid leadership changes and a failed capital raise over the summer. The Philadelphia-based regional lender has had a rough year, cutting jobs and exiting its mortgage origination business to cut costs and improve profitability. The stock soared 87% to 30 cents after the market opened before plummeting back to a negligible gain of 17 cents.
Glass Lewis on Friday urged Stratasys (SSYS) investors to vote against the 3D printer manufacturer's plans to buy Desktop Metal (DM) next week, becoming the second prominent proxy advisory firm to recommend against the deal. Glass Lewis argued that Stratasys should look at a revised bid it received from 3D Systems this month (DDD) but rejected, according to the Glass Lewis note, which was published on Friday. "The most recent 3D Systems offer warrants further evaluation by the Stratasys board," Glass Lewis wrote, adding "it would not be in shareholders' best interests to approve the Desktop Metal merger at this time in light of the outstanding competing interest and recent developments." On Wednesday, Institutional Shareholder Services, Glass Lewis' bigger competitor, also recommended against the Desktop Metal deal. Together the two firms carry significant weight with shareholders and their recommendations, coming only days before the Sept. 28 vote, mark the latest twist in a years-long drama over how the 3D printing industry may be consolidated. Glass Lewis wrote that the Desktop Metal merger "could be a reasonable transaction from the point of Stratasys." But the note added that Stratasys' "effort" in handling the most recent revised 3D Systems offer raises "concerns." Stratasys made its all-stock bid for Desktop Metal in May in a transaction valued at about $1.8 billion. 3D Systems made cash and stock bids later, which the company last week rejected when it also said it was terminating discussions with 3D. "In our view, the 3D Systems offer presents not only compelling value for Stratasys shareholders, but also lower regulatory hurdles and greater potential scale as composed to the Desktop Metal merger. The competing offer also includes the binding offer and $50 million termination fee, among other potential benefits," the note said.
Toshiba (TOSYY) said on Thursday that a $14 billion tender offer from private equity firm Japan Industrial Partners (JIP) had ended in success — a deal which paves the way for the industrial conglomerate to go private. The JIP-led consortium saw 78.65% of Toshiba shares tendered, giving the group a majority of more than two-thirds which would be enough to squeeze out remaining shareholders. The deal puts the 148-year-old electronics-to-power stations maker in domestic hands after years of battles with overseas activist investors. Toshiba is set to be delisted as early as in December. "Activist shareholders and Toshiba were stuck with each other for years. This takeover allows both sides to escape their mutual bearhug," said analyst Travis Lundy of Quiddity Advisors. Toshiba in March accepted the buyout offer valuing the industrial conglomerate at 2 trillion yen ($13.5 billion). Although some shareholders were unhappy with the price, Toshiba argued that there was no prospect of a higher offer or competing bid. "We are deeply grateful to many of our shareholders for being understanding of the company's position," Toshiba Chief Executive Taro Shimada said in a statement on Thursday. Toshiba "will now take a major step toward a new future with a new shareholder," he added. Toshiba has said its complex relationships with various stakeholders, including shareholders with different opinions, have hampered business operations and that a stable shareholder base would help the company pursue its long-term strategy centered on high-margin digital services. JIP plans to retain CEO Shimada. "I expect the prospect of management and new ownership alignment will improve morale. However, to succeed, management needs to be able to tell a better story to investors coming out of this," Lundy said. It will mark the largest M&A deal in Japan this year. Japan has been the only major market in Asia to have seen growth in mergers and acquisitions for the year to date, according to LSEG data.
Cisco (CSCO) has agreed to its largest acquisition ever, with a $28 billion purchase of U.S. software maker Splunk (SPLK). Cisco will pay $157 in cash for each Splunk share, or a 31% premium to the closing price on Sept. 20. The combined company will be one of the globe's biggest software groups. The transaction will help Cisco bolster its software business. Splunk President and CEO Gary Steele will join Cisco's executive leadership team after the transaction is completed. Steele said the transaction would deliver "immediate and compelling value to our shareholders." In the quarter ended July 21, Splunk's annual recurring revenue was $3.9 billion, up 16% from a year earlier. Its revenue for the quarter was $910 million, besting analyst forecasts. In recent years, big U.S. investors have engaged Splunk, betting on a turnaround of the company as it moved from selling licenses to recurring subscriptions, and increasing demand for its cybersecurity offerings. Starboard last year took a 5% stake in the company, saying in a presentation at the time that Splunk had been "plagued by mis-execution" but could realize a rise in valuation if operational performance improved. Private equity groups Silver Lake and Hellman & Friedman made significant investments in the company in 2021 and 2022, respectively, and each won a board seat. Cisco says it expects to complete the transaction by the third quarter of 2024. However, antitrust regulators in Washington could weigh in. They have been critical of large deals, especially in the technology sector.
Hellman & Friedman and Starboard Value are walking away with lucrative returns from their investments in Splunk Inc. (SPLK) after an agreement on Sept. 21 to sell the cybersecurity firm to Cisco Systems Inc. (CSCO) for $28 billion in cash. Hellman & Friedman spent $1.38 billion to acquire a 7.5% stake in Splunk, according to a statement in March 2022. That translates to $116 a share and yields a 35% return based on the Sept. 21 deal price of $157 a share. Starboard disclosed it was an investor in Splunk 12 months ago and urged changes to improve the company's growth and profitability, pointing out it was a valuable acquisition target. The hedge fund paid somewhere in the mid-$80s a share for its stake, according to sources, representing a near 85% return. Starboard's most recent disclosure shows it owned a 2.46% stake in Splunk as of the end of June, which would be worth $628 million at the Cisco deal price, although the exact amount of shares it had purchased and sold prior to Sept. 21 could not be ascertained. A big investor that did not do as well was Silver Lake. The private equity firm stands to break about even after spending $1 billion on a convertible bond in 2021 with a conversion price of $160 a share. It anticipates recording a small profit after adjusting for a customary make whole provision at deal closing as scheduled in 2024.
Whitehaven Coal (WHITF) asserts that its desire to purchase coking coal mines "should come as no surprise to any of our investors" as it responds to Bell Rock Capital Management, a hedge fund seeking to halt Whitehaven's multi-billion dollar acquisitions. Bell Rock controls just under 5% of the mining company. Whitehaven says greater exposure to coking coal has been "a core pillar of our strategy for many years. Whitehaven would not contemplate an acquisition that is not value accretive for shareholders." Whitehaven is a short-listed party in the sales process for the Daunia and Blackwater metallurgical coal mines in Queensland that are being sold by BHP (BHPLF) and its partner, Japan’s Mitsubishi Development Corporation (MSBHF). The mines are expected to sell for more than US$3.5 billion. Meanwhile, London-based Bell Rock is engaging with Whitehaven to persuade it to pull out of the auction, concerned that it would lead to the "destruction" of value. In a Sept. 20 letter to Whitehaven's board, Bell Rock’s chief investment officer, Michael O’Mara, said the mines were "very high-risk investments" located "in an unattractive jurisdiction with the highest coal taxing regime in the world...Additionally, mining transactions are notoriously difficult and the operating environment in Australia is challenging, particularly in the coal industry." O’Mara also said the company should be compelled to put the transaction, if successful at the auction, to a shareholder vote and that the acquisition would represent approximately 90% of Whitehaven’s current market capitalization and an 80% increase in the company’s consolidated annual revenue. People familiar with the auction process say Whitehaven has been clear about raising its exposure to coking coal for several years, including the period during which Bell Rock owned shares. They noted that central Queensland was seen as a high quality metallurgical coal basin. In his letter, O’Mara said research conducted by an external company for Bell Rock indicated that 71% of Whitehaven shareholders believed that the purchase of the two mines should be subject to a shareholder vote. Those close to the company, however, said the polling was not statistically significant nor methodologically credible, and that Bell Rock likely was more interested in immediate capital returns than long-term value creation. Other groups are also interested in the two mines; shortlisted parties include Yancoal (YAKAF), Stanmore Resources (STMRF), and BUMA.
Cevian Capital AB is urging Nordea Bank Abp (NRDBY) to strengthen its profitability goals as the largest bank in the Nordic region sets new financial targets. Cevian Partner Gustav Moss believes that Nordea CEO Frank Vang-Jensen should pledge to return at least 15% on equity "regardless of the macroeconomic environment," adding that Nordea's current profitability should be "well above" that threshold as markets remain beneficial. In July, Vang-Jensen said he would present new financial goals in February and that he would raise the profitability outlook for this year to "comfortably above" 15%. The Helsinki-based lender's existing ROE target is more than 13%. Cevian owns about 4.4% in Nordea, making it the bank’s second-largest shareholder, according to the lender's website. However, data from Bloomberg show that Cevian reduced its stake in Nordea recently. Cevian bought into Nordea in 2018, and has recently been the bank's most outspoken shareholder. Similar to many other banks, Nordea has experienced an ample revenue boost from rising interest rates set by central banks. Net interest income increased by nearly 1 billion euros in the first six months of the year, an increase of 37%. Moss believes Nordea needs to do more to enhance efficiency, such as by slashing its cost-to-income ratio — which divides expenses by revenue — to roughly 40% over time; that metric was at 47.5% last year. Cevian supports Vang-Jensen and believes that the bank has "the best management team" among Nordic banks, according to Moss.
Long considered a takeover target, autoimmune disease specialist Aurinia Pharmaceuticals (AUPH) has stayed independent, to the consternation of some investors who think the Canadian company has not maximized its opportunity with lupus nephritis drug Lupkynis since its approval from the Food and Drug Administration in January 2021. On Sept. 21, Aurinia tamped down some of the agitation, naming its founder and former CEO Robert Foster to its board of directors. The appointment comes as part of an agreement with significant stockholder MKT Capital, which holds a 4.2% stake in the company. Aurinia has come to a “cooperation agreement” with the investment management firm, the company stated in a release. “He has a wealth of institutional knowledge, deep biotech leadership experience, and has led successful mergers, acquisitions, and commercialization deals,” Aurinia’s chairman Daniel Billen, noted of Foster. “These skills all will be helpful as we conduct our strategic review and continue the successful commercialization of Lupkynis.” The agreement comes four months after Aurinia Chairman George Milne and member Joseph Hagan quit the board under pressure from MKT at the company’s annual meeting. Then in June, the company disclosed that it was weighing a “sale, merger or other strategic transaction.” With the announcements, Aurinia saw its share price rise. “We are confident that meaningful value creation is on the horizon for Aurinia shareholders now that the board has initiated a strategic review and made significant governance enhancements,” MKT founder Antoine Khalife said in the Sept. 21 release. “We look forward to supporting Dr. Foster and the rest of the board as it oversees a comprehensive review of alternatives.” Foster currently is the CEO of Hepion Pharmaceuticals (HEPA). He discovered Lupkynis, also known as voclosporin, in the 1990s when he was CEO of Isotechnika Pharma. In 2002, Foster developed a $215 million licensing agreement with Roche (RHHBY) for voclosporin for kidney transplant immunosuppression. In August, Aurinia boosted its 2023 sales projection for Lupkynis from between $120 million and $140 million to a range of $150 million to $160 million, which is far from the blockbuster trajectory expected by Wall Street for the pharmaceutical. In 2021, soon after Lupkynis’ approval, Aurinia entertained buyout overtures from Bristol Myers Squibb (BMY). Other companies with a reported interest included GSK (GSK), Roche and Otsuka (OTSKY).
Medical supplies firm Danaher Corp. (DHR) is buying Abcam Plc (ABCM) for far less than it's worth, based on the latter's own recent financial forecasts and a longer-term plan, according to a letter to stakeholders from shareholder Headwaters Capital LLC. UK-based Abcam plc, which provides highly-specialized research antibodies, agreed to a sale to Danaher after a strategic review involving many interested parties. They agreed on a price of $24 a share, or nearly $6 billion. The trouble, according to the stakeholder letter from Headwaters, is that Abcam just a few months ago issued financial forecasts that don't line up with Danaher's. At the core of the issue is a forecast made previously by Abcam, which denotes a midpoint of 44% Ebitda margin. Using the same multiple put forth by Danaher in the deal announcement, a fair value for Abcam is $37 a share. Moreover, Headwaters Capital believes there is an opportunity for even greater margin improvement beyond 2024. Abcam's margins combined with DHR's projection for significant cost synergies imply that Abcam's 2024 targets are easily achievable, Headwaters says in the letter. One of the company's co-founders, Cambridge scientist Jonathan Milner, has also voiced opposition to the deal. Milner, who served Abcam as CEO from 1999 to 2014 and later as deputy chairman from 2015 to 2020, said the offer “falls significantly short” of Abcam's inherent worth.
Donerail Group, which owns shares in Stratasys (SSYS), on Thursday said it will vote down the company's plan to buy Desktop Metal (DM) next week, the latest twist in a years-long drama over consolidation of the 3D printing industry. Donerail Group's managing partner William Wyatt, who cemented his activist investment skills at Starboard Value, made his firm's voting plan public one day after influential proxy advisory firm Institutional Shareholder Services on Wednesday urged shareholders to reject the deal on Sept. 28. He also said his firm would prefer a proposed plan by 3D Systems (DDD.N) to buy Stratasys and criticized the Stratasys board for rejecting that proposal. "We intend to vote AGAINST" the Stratasys deal "given the multitude of clear value-creating options that do exist," Wyatt said in a release. In a letter written in June, Wyatt said his firm owned 2.3% of Stratasys. Stratasys last week turned down 3D Systems' s (DDD) bid to buy the company, sticking instead with plans to make its own acquisition. ISS on Wednesday surprised many investors and analysts when it weighed in on a rival offer that had been rejected, saying the stock and cash offer from 3D Systems for Stratasys would be a more convincing route to value creation. Donerail agreed, writing "ISS questioned critical matters that, we believe, speak to the Board’s inability to act as fiduciaries and properly oversee Stratasys management." Stratasys investor Nano Dimension, which owns 14.1% of the company, said last week that it would vote against the merger.
A $14 billion tender offer to take Toshiba Corp. (TOSYY) private is set to succeed, private equity firm Japan Industrial Partners (JIP) said on Wednesday, clearing the way for Japan's biggest deal this year. JIP's tender offer, which closed on Wednesday, ends Toshiba's 74-year history as a listed firm and puts the electronics-to-power stations maker in domestic hands after years of battles with overseas activist shareholders. "It is forecasted that the tender offer will be successful," JIP said in a statement, suggesting that at least two-thirds of shareholders have tendered their shares. The final results of the tender offer will be announced once they are finalized, JIP added. Now that JIP has gained a two-third majority, the remaining shareholders would be squeezed out upon a vote at a planned emergency shareholder meeting. Toshiba shares would then be delisted by as early as December. The odds of JIP's bid succeeding increased last week when it was revealed that Toshiba's largest shareholder, Effissimo Capital Management, had decided to tender its 9.9% stake. Japan is the only major market in Asia that has seen growth in mergers and acquisitions for the first nine months of this year. The total value of deals involving Japanese firms this year through mid-September has increased 25% from the same period last year.
Kioxia Holdings’ banks intend to submit a commitment letter in October for the refinancing of ¥2 trillion ($14 billion) in loans to help fund the merger with Western Digital’s (WDC) flash memory business that’s still under discussion, according to sources. The letter being prepped is from banks such as Sumitomo Mitsui Financial Group (SMFG), Mizuho Financial Group (MFG) and Mitsubishi UFJ Financial Group (MUFG), the sources said. Such a move would mark a step forward in the merger, which has encountered months of delays. Of the ¥2 trillion refinancing, ¥400 billion will likely be funded via loan commitments. For the ¥1.6 trillion loan, ¥1.3 trillion will probably be equally split among the three lenders' megabanks, while the Development Bank of Japan will provide the remaining ¥300 billion loan. A portion of the loan will be used to pay special dividends to Kioxia’s existing shareholders, they noted. Bain Capital currently owns roughly 56.24% of Kioxia, and Toshiba holds about 40.64%. Under the terms of the transaction being discussed, Western Digital will hold about 50.5% of the combined holding company, and the remaining 49.5% will be held by Kioxia. Western Digital’s hard drive business is expected to remain separate and is not part of the transaction. Western Digital and Kioxia initially aimed to reach a decision on a merger in August, but discussions have dragged and the transaction could slip further or fall apart altogether, the sources warned. If the merger is called off, the lenders wouldn’t proceed with the loan under discussion. One element complicating the talks is the planned buyout of Toshiba (TOSYY). A consortium led by investment fund Japan Industrial Partners launched a tender offer last month that ends Wednesday. The companies, which have a joint venture that manufactures flash chips, have been circling each other for years. Joining forces would aid them with taking on market leader Samsung Electronics. Last year, Western Digital announced a review of strategic alternatives after discussions with Elliott Investment Management. Bloomberg News reported in January that Western Digital and Kioxia had revived merger talks, after talking about a pairing in 2021.
Ericsson AB (ERIC) and Deutsche Telekom AG (DTEGY) announced a partnership to offer communication and network application programming interface (APIs) to developers and enterprises, in what the Swedish company called a milestone in its goal to help operators make money from network investments. The deal will let Deutsche Telekom offer a portal for APIs, which are programs that allow different applications or systems to communicate, from Vonage, Ericsson said in a statement on Wednesday. “This is a US$20 billion market,” said Ericsson chief executive officer Borje Ekholm, who is under pressure to justify his company’s US$6.2 billion acquisition of Vonage in 2022. The managing partner of Cevian Capital, Lars Forberg, said last month that the deal “added nothing” from a strategic or financial perspective. “Which operator does he work for?” Ekholm said of Forberg, whose firm is one of Ericsson’s largest shareholders. “It’s always hard when you do something that nobody has done before. We are focused on creating this market.”
France-based Pernod Ricard (PDRDF), the second-largest wine and spirits producer globally, has instructed investment banks JPMorgan (JPM) and Morgan Stanley (MS) to evaluate its Australia and New Zealand business, which could potentially result in a change of oversight of the unit before the end of the year. Pernod Ricard's Australian portfolio includes the Jacob's Creek, St Hugo, and George Wyndham brands. The portfolio also includes Brancott Estate and Stoneleigh in New Zealand. According to people familiar with the matter, sale flyers are likely to reach inboxes in late October. Pernod Ricard earlier attempted to offload its Australian portfolio in 2019 in reaction to the actions of Elliott Management. Pernod Ricard proposed to sell such wine labels as Jacob's Creek using the services of the two banks it has currently tapped. At that time, the unit represented roughly 5% of the company's overall sales and was expected to have a $1 billion price tag. The process generated considerable interest, with Carlyle Group's Accolade Wines (ACCD) hiring Credit Suisse (CS) and Bank of America (BAC); European buyout firm PAI Partners tapping Rothschild (PIEJF); and Penfolds owner Treasury Wine Estates (TSRYY) relying on Goldman Sachs (GS). KKR (KKR) and TPG Capital (TPG) also expressed interest. At present, however, Accolade is facing a high debt load and has turned to Rothschild & Co to examine ways to refinance. The Australian and New Zealand portfolio represents a small portion of Pernod Ricard operations. The company posted a 13% rise in reported net sales to €12.14 billion ($20.11 billion) in the last financial year. Its other assets include the whiskey brands Chivas Regal, The Glenlivet, and Jameson; vodka brands Absolut and Wyborowa vodkas; and its internal pastis products Pernod and Ricard. The famous Jacob's Creek label was established in 1847 in South Australia's Barossa Valley and has grown to be an international brand. It is ASX-listed as Australian Vintage (AUVGF), the company behind the Tempus Two, McGuigan, and Nepenthe wine brands, which is conducting a strategic review of its $100 million business amid the struggling wine market. Meanwhile, Accolade has sold its House of Arras sparkling wines brand and vineyards, the Bay of Fires winery, and cellar door in Tasmania to boutique player Handpicked Wines for an undisclosed price.
UK-based chemical company Elementis (EMNSF) is dismissing calls by Franklin Mutual Advisers, a major shareholder, to sell the company, asserting there is "substantial value still to be realized." Franklin Mutual Advisers has held a 9.8% stake in Elementis since December 2020, and said its call was persuaded by feedback from other shareholders. In a letter, Franklin said that the company's "stagnant" share price is "unacceptable" to shareholders and recent "value destructive acquisitions" have affected confidence in management's ability to spur growth. Elementis stock has gained only 3.8% this year, but was 12.3% higher at 125.4 pence on Sept. 20, making it the top percentage gainer on the FTSE 250 index. Elementis said: "Our board does not believe that Franklin's request to initiate an immediate sale of the company is currently in the best interests of its shareholders." The company also said it is advancing toward its medium-term objective of 17% adjusted operating margin and its target of below 1.5 times net debt and core profit. Franklin asserted that Elementis "is not of a sufficient size to accomplish its targets," according to a letter signed by portfolio managers Steve Raineri and Chris Meeker.
Investor support for proposals from both management and activist shareholders is at a five-year low, a new report finds. This is due in part to a decline in market valuations – support for directors and say-on-pay (executive remuneration) proposals generally tracks stock price movements, according to Broadridge Financial Solutions’ 2023 ProxyPulse report, which looks into shareholder voting trends in U.S. publicly listed companies over the past five proxy seasons. There is also a general decrease in support for ESG proposals because many companies have taken steps to be more proactive and transparent, Broadridge says. At the same time, the number of individual shareholders entering the market has increased. As a group, they held 31.5% of the shares this year, up from 29.6% five years ago, and more of them are voting, says Chuck Callan, Broadridge senior vice-president for regulatory affairs, who co-authored the report. Individual investors cast only 16% of their votes in favor of environmental and social proposals while institutions cast 25.5% in favor. In fact, support for ESG proposals in general decreased to 25.5%, from 30% in the prior season – the lowest in five years. A total of 654 directors failed to secure majority support, the greatest number in five years. And while there were more shareholder proposals (588) than at any time over the past five years, shareholder support fell to 24.6% on average, a drop of 10 percentage points from the last season. Meanwhile, support for say-on-pay proposals at 86.3% on average was the lowest in five years.
Shareholder proposals for diversity, equity, and inclusion (DEI) programs in the U.S. have faced a backlash of late, with opponents using the shareholder proposal process for annual meetings in an attempt to undermine or eliminate such programs. Among the resolutions that saw significant declines this year in terms of both number and support were those focused on racial equity/civil rights audits. Anti-environmental, social, and governance proposals on this same subject were also filed for the first time for the 2023 proxy season. Resolutions to address the gender/racial ethnic pay gap disparity increased, but few were passed while average support decreased slightly. A similar trend was observed for proposals to remedy racism in company culture, with no resolutions passing in 2022 or 2023. A significant decrease in the number of board diversity proposals was also witnessed this year, with no proposals passing despite a rise in average support. Many large institutional investors have backed DEI programs and signaled in their voting guidelines that they may vote for diversity proposals. The overall decline in support for DEI proposals and softened language on these topics in guidelines indicates that many institutional investors will likely support only resolutions designed to address the most appalling situations where diversity is absent or DEI policies and practices are significantly below market standards. Nevertheless, various stakeholders still strongly support such proposals, and companies and their boards are recommended to continue monitoring developments in this area, including litigation and investor activism.
Across the United States, over 70% of chief executives took home at least their target remuneration in 2022 – a figure that is largely unchanged over a five-year research period from 2018 to 2022. Median payouts for CEO annual incentives at S&P 500 firms in 2022 were $1.41 million. Looking at CEO pay across the S&P 1500 between 2018 and 2022, researchers discovered that, despite major market volatility during the study period, payout rates were consistently above the 50% to 60% range "considered best practice by consultants, academics and practitioners." "The findings call into question whether boards and compensation committees are setting sufficiently rigorous targets for their CEOs," comments ISS, which published the findings, in a statement. "Despite significant variability in economic conditions over the last five years, the percentage of CEOs achieving payouts at or above target has remained relatively unchanged," according to the report authors. Although the 2022 median is down from 2021’s $1.75 million as companies rebounded from a host of pandemic-related challenges, ISS says that despite the difference in absolute dollars, all market caps across the S&P 1500 have realized CEO pay growth. "Company size significantly impacts the size of payouts, with S&P 500 companies reporting a median of $2.3 million in incentive payouts last year, compared with $925,000 for the S&P 600. But each S&P 1500 market cap grouping has exhibited similar payout growth, with median payouts rising by 19% since 2018," states ISS in the report. "The trend of CEOs receiving at or above-target payouts, while consistent with results in recent years, may raise concern with investors in the context of ongoing recession fears and a challenging operating environment for many companies," says Roy Saliba, managing director at ISS Corporate Solutions. "When payout rates consistently stray beyond the range of what is considered best practice, it often indicates an underlying issue with the design of the performance plan, whether with the metric selection, the formulation of the payout curve or goals that are either too easy or too hard to achieve." Referencing best practice related to incentive payouts, ISS notes that: threshold payouts should be reached eight to nine times out of every 10 years, or an 80% to 90% achievement rate; target payouts should be reached five to six times out of every 10 years, or 50% to 60%; and maximum payouts should be reached once or twice every decade, a 10% to 20% rate. This was not realized across the S&P 1500 during the research period. Rather, from 2018 to 2022, more than 90% of CEOs with an annual incentive award got a payout of at least threshold – the minimum payout that can be reached. "The exception is 2020, when the unexpected pandemic wreaked havoc on many companies’ incentive plans. Even then, only 12% of companies reported no payout on their short-term incentive plans," according to researchers. "At the time, many companies resorted to award modifications, goal changes and discretionary adjustments to account for external circumstances. That led to lower, but not drastically different, payout levels compared with other recent years." The ISS report is titled "Annual incentive payouts: Are target goals too modest?"
The editorial team at Diligent Market Intelligence notes that activists are becoming increasingly focused on how to maximize profits at companies while streamlining their operations. In Carl Icahn's efforts to gain three board seats at gene sequencing company Illumina (ILMN), he concentrated on Illumina CEO Francis deSouza and Chair John Thompson. In May, Icahn wrote in a letter to shareholders: "We wonder how Thompson and deSouza can continue with straight faces to minimize their extensive relationship," and expressed opposition to the board's decision to award deSouza an 87% pay increase to $27 million, despite Illumina's stock declining by over 60% in 2022. However, a May 2 short report by Hindenburg Research accused Icahn Enterprises (IEP) of using a "Ponzi-like" economic structure to pay dividends, resulting in a 50% fall in its market capitalization. Yet, shareholders largely ignored the matter and voted in Icahn lieutenant Andrew Teno to the board at the May 25 annual meeting, while voting out Chair Thompson. Meanwhile, on June 2, Hologic CEO Stephen MacMillan and Edwards Lifesciences CFO Scott Ullem joined the board, and 10 days later, deSouza said he would step down as CEO. In July, it was revealed that Illumina may be subject to an EU fine of up to $453 million because of the Grail acquisition's inadequate regulatory approval. Trian Partners' engagement with Walt Disney Co. (DIS) was predicted to be a major campaign but was halted after Disney launched a robust restructuring plan seeking to achieve $5.5 billion in savings. Trian Partners sought to nominate founder Nelson Peltz to the company's board, asserting that Disney was "in crisis" after losing $120 billion in market value last year and its earnings per share declining by 50% since 2018. Disney tried to appease Peltz by appointing Mark Parker as independent chair, but was unsuccessful. On February 8, Disney published better-than-expected financial results for Q1 2023, along with plans to reinstate its dividend by the end of 2023 and a reorganization under three core businesses. Peltz ultimately halted his efforts, and deemed the proposed changes "a win for all shareholders" that coincided with Trian's thinking. Another notable activist effort was the swarm of five companies around Salesforce (CRM), which avoided a proxy engagement with Elliott Management after delivering better-than-expected fourth quarter results and adding ValueAct Capital Partners CEO Mason Morfit to its board.
Artemis Investment Management Ltd. is owned by Miles Nadal, an entrepreneur, philanthropist, and former CEO of MDC Partners (MDCA), from where he resigned after U.S. regulators accused him of gathering millions in undisclosed perks in 2017. Artemis currently oversees two small vehicles that trade on the Toronto Stock Exchange: Citadel Income Fund (CCTL) worth about $33 million, and Energy Income Fund, with a market value of about $4 million. The funds have not performed well in the long term, and have been costly for their investors. Certain investors are now hoping to boost profit by compelling change. The Citadel fund has been engaged by Saba Capital Management LP, a U.S. investor that acquired 20% of the fund’s units and started publicly objecting in February. Meanwhile, Toronto’s Symetryx Corp., which oversees funds for a single family, said on May 15 it owned 12.2% of the Energy Income Fund, and sought to engage with management and the board "to enhance unitholder value." Its methods could include "unitholder proposals and requisitions," according to Symetryx. Symetryx’s chief investment officer, Eric Ebert, said in a Sept. 15 email that Artemis has been "very responsive to us and very willing to work with us to maximize stakeholder value in the fund in the best way possible." Both of the Artemis vehicles are closed-end funds, indicating that investors can buy and sell their units as stocks, unlike conventional mutual funds, but the market could potentially value the units at less than the underlying value of the investments the funds hold. The Citadel fund traded at a discount to a net asset value (NAV) of at least 20% per year for the decade Artemis has managed it. The average annual discount exceeded 30% starting in 2020. The Energy fund’s average annual discounts ranged from 18% to slightly below 28% for the decade, with an average discount of 23.55% in 2022. Artemis' investment manager, Vestcap Investment Management Inc., is actually a related company "under common control" with Artemis, according to the funds’ annual reports. Records show that Artemis and Vestcap have collected sizable fees for their management of the two funds—a total of $11.2 million from 2014 to 2022, with nearly 80% of that coming from Citadel. And as the funds shrink in size from their poor performance, investors pay more. Citadel’s management expense ratio (MER) was 3.12% in 2022, while the Energy fund’s MER reached 5.82% in 2021. When Saba announced its 20% stake, it suggested that the best way for Citadel unitholders to achieve value would be to wind up the fund. As of Sept. 14, Citadel settled with Saba and announced a new offer to allow the redemption of 70% of units outstanding. Saba would support and vote for Citadel's new strategic plan, which would see the fund invest solely in Canadian residential real estate properties and move away from investing in publicly traded stocks and bonds. Saba is slated to make a healthy return on its investment, and is required to tender all its Citadel units in the redemption offer. The best outcome would be a wind-up to both of the Artemis two funds.
The Taskforce on Nature-Related Financial Disclosures issued its final nature-reporting framework to help companies assess their impact on and risks from the world's natural systems. For now, the framework is voluntary and builds on the 2015 climate emission framework, the Task Force on Climate-Related Financial Disclosures, which could serve as the foundation for mandatory climate reporting standards in the future. The World Economic Forum estimates that $44 trillion of global economic value is moderately or highly dependent on nature, and the World Bank has warned that the collapse of natural systems could wipe $2.7 trillion a year from the global economy by 2030. David Craig, TNFD's Co-Chair, warned, "Businesses today are inadequately accounting for nature-related dependencies, impacts, risks, and opportunities. Nature-risk is sitting in company cash flows and capital portfolios today. The costs of inaction are mounting quickly." Consulting firm Capgemini estimates that 20% of companies have studied the effects their operations have on biodiversity, and even fewer have assessed the impact of their entire supply chains despite growing awareness of the catastrophic effects of biodiversity loss. In the European Union, many companies are already facing obligations to report their impact on nature under the bloc's Corporate Sustainability Reporting Directive. By 2024, they will also have to prove that commodities such as coffee, wood, and palm oil they import into the EU weren't produced in ways that brought about forest loss or they will face substantial fines.
Two competing complaints by institutional investors against Fox Corp. (FOXA) directors, including controlling shareholders Rupert and Lachlan Murdoch, were unsealed last Friday in Delaware Chancery Court. One was brought by pension funds for public employees of Oregon and New York City. The other was brought by eight public pension and union welfare funds. The complaints are detailed, showing not just evidence from the Dominion Voting Systems election fraud defamation lawsuit that Fox settled in April for $787.5 billion but also information the funds obtained directly from Fox under a Delaware law that allows shareholders to access corporate books and records. Both sets of shareholders are represented by eminent plaintiffs' attorneys. New York and Oregon have Friedlander & Gorris; Lieff Cabraser Heimann & Bernstein; and Cohen Milstein Sellers & Toll. The other funds have attorneys from five shareholder firms, including Bernstein Litowitz Berger & Grossmann; Robbins Geller Rudman & Dowd; and Labaton Sucharow. In addition, two previously filed breach-of-duty suits against Fox directors have been consolidated before the judge, including a lengthy complaint filed by a group of plaintiffs' firms led by Prickett, Jones & Elliott. Delaware Chancery Court judge Travis Laster has ordered everyone who wants to be appointed to lead the case to file briefs detailing why by Sept. 21. It’s likely there will be at least three competing bids to run the breach-of-duty case, according to this commentary by Alison Frankel. Laster has scheduled a Nov. 9 hearing on the matter. Judges overseeing Chancery Court derivative suits, in which a shareholder sues board members for allegedly harming the corporation, do not have to adhere to the stringent framework for lead plaintiff appointments in securities class actions in federal court. In those class actions, judges consider first which applicant has suffered the largest loss because of the alleged fraud. The largest loser is usually appointed to lead, unless a competing candidate raises serious issues about its fitness to head up the case. In Delaware derivative suits, courts also consider the size of a prospective lead plaintiff’s stake in the company. But judges weigh intangible factors as well, including the quality of an applicant’s pleading; the vigor of candidates’ pre-suit investigation; and the reputation of their attorneys. In other words, Chancery Court judges have more leeway. In this commentary Frankel says, "I don’t think Laster will find a whole lot of difference among the Fox candidates on the ability of their lawyers to prosecute the case. All of these firms have excellent track records." Frankel continues, "All of the lead plaintiff candidates obtained books and records from Fox, and all painstakingly documented in their voluminous complaints the alleged oversight failures of officers and directors who stand accused of disregarding red flag warnings — including defamation claims that predated the 2020 election — and neglecting to adopt control and information systems to assure the quality of Fox’s journalism, a mission-critical duty. All of the complaints assert that shareholders could not rely on board members to bring their own breach-of-duty case since those very board members are at risk of being held liable for failing to protect Fox’s interests." Frankel notes that there are "variations among the complaints, of course." The multifund filing, for example, concentrated on the Fox board’s alleged abandonment of a compliance system that was implemented as part of the 2013 settlement of a shareholder derivative suit against a Fox corporate predecessor. Meanwhile, the New York and Oregon complaint asserts a theory of liability that Frankel didn’t find in the other complaints, alleging that Fox’s entire business model “treats potential tort claims and settlements as unlikely or as a cost of doing business,” according to the complaint. The complaint cited a 2011 decision in a shareholder derivative case against Massey Energy, in which then-vice chancellor Leo Strine warned that board members can't be considered loyal to their company if they knowingly lead the company “to seek profit by violating the law.” Frankel says that if the judge's decision comes down to which plaintiffs have the largest stake in the company, the New York and Oregon funds may have the advantage: Between them, according to their complaint, those funds hold more than 720,000 Fox shares, worth approximately $33 million as of Aug. 31. "The other complaints do not specify the holdings of the prospective lead plaintiffs — an omission that may prove telling," Frankel concludes.
ISS Corporate Solutions (ICS) annually collects and evaluates proxy season data from Russell 3000 company filings. This year, ICS researchers found that boards continued to diversify while director support levels trended slightly lower. Other key findings include a decline in failed Say-on-Pay proposals as well as a decline in median support levels. Moreover, one year Say-on-Pay frequency is rapidly becoming the norm among smaller companies, and ESG-related performance metrics are gaining popularity in executive compensation packages. While environmental and social shareholder proposals are gaining prevalence, support has weakened. Researchers also found that women and ethnic minorities have increased their presence among corporate boards by 5% and 6%, respectively, since 2020. Approximately 11% of U.S. companies have no ethnic minorities, down from nearly 32% four years ago. Female board leaders are also gaining authority, particularly among large-cap companies, where 16% serve in such a capacity compared to just 11% among the broader Russell 3000. While pay for women CEOs increased in fiscal year 2021, the prevalence of female CEOs remains low (7%) despite growing 2% in four years. Say-on-pay support has declined each year, down 1% since 2019, despite steady support from Institutional Shareholder Services (ISS). Rising from an all-time low in 2017, the number of say-on-pay failures reached a record last year. This year about 2% failed, close to the historic average. ISS supported about 88% of say-on-pay proposals this year, up from last year and in line with 2021. Say-on-Pay failure rates dropped this year, but the number of companies facing significant opposition (50%-80% support) is largely unchanged from 2022. Equity plan proposal volume rebounded from last year and was in line with the previous two years. While shareholder proposals to limit severance payment have increased significantly, they remain relatively rare and have not gained traction among investors. In 2023, total shareholder proposals declined, and the percentage landing on the ballot also fell; median vote support fell by nearly one-third compared to last year. As a proportion of the total, environmental and social shareholder proposals increased from just over one-half to over two-thirds since 2020. Median support for environmental proposals dropped further, now down by almost two-thirds since 2021 when popularity peaked. Climate-related proposals are on the rise since 2021, in sharp contrast to the median support level. Diversity, equity, and inclusion proposals dropped from their 2022 peak as support wanes significantly. Human rights proposals are back up to 2020 levels while support rose meaningfully in the past year. Anti-ESG shareholder proposals continued to rise sharply despite minimal investor support. Finally, shareholders rights proposals have dropped significantly, down by more than one-half since 2020.
American companies are painting the bleakest picture in decades regarding doing business in China, as tensions between Beijing and the West are compounded by a deteriorating environment for their operations. Slightly more than 50% of 325 members polled recently by the American Chamber of Commerce in Shanghai were optimistic about their five-year business outlooks, the lowest since the annual survey was launched in 1999. As recently as 2021, that figure stood at 78%. While such sectors as pharmaceuticals and retail posted slightly higher levels of optimism, they were lower in logistics, management consulting, and technology thanks to factors like China’s crackdown on due-diligence firms. Less than half of respondents saw their 2022 revenue rise compared with 2021, the lowest in more than 15 years. Some 68% of respondents said they were profitable in 2022, the lowest rate since the survey began, while just 37% saw their operating margins advance from the previous year, the lowest since 2008. The European Union Chamber of Commerce in China voiced many of the same sentiments in a position paper released Tuesday that reflected the perspectives of its more than 1,700 member companies. The group mentioned concerns about the country’s anti-espionage and data-security laws, among other challenges. China’s government has said that it is committed to protecting foreign companies' lawful rights and interests and creating a favorable environment for foreign investment in China and that all foreign companies adhering to Chinese laws and regulations enjoy full business autonomy in their operations. However, China has been ratcheting up data-security demands on foreign companies and cracking down on firms engaged in corporate due diligence. In July, Beijing imposed about $1.5 million in financial penalties on the Beijing arm of the U.S. due-diligence firm Mintz Group for allegedly conducting unapproved statistical work, months after local authorities detained the company’s employees. Among the problems is that China’s policy environment is highly inconsistent, according to Jens Eskelund, the European chamber’s president. He referenced uncertainty about what constitutes violations of the nation’s anti-espionage laws, confusion about data-security rules and the government’s suspension of issuing economic data, such as the youth unemployment rate. The red lines pertaining to what is and isn’t allowed are “blurred,” he said, adding that some of the chamber’s social-media postings on Chinese platforms have been censored, though he doesn't know why.
Executives from several financial companies have released guidelines intended to help businesses disclose the risks they face from shrinking ecosystem resources. The guidelines were developed by the Task Force for Nature-related Financial Disclosures (TNFD), which includes BlackRock Inc. (BLK), UBS Group AG (UBS), HSBC Holdings Plc (HSBC), and more as members. The guidelines could prove to be very important for many global companies. According to S&P Global Inc. (SPGI), about 85% of the world's largest firms are dependent on nature throughout their businesses. However, the initiative faces challenges, namely nature risks can apply to land and marine habitats. Nature risk is also location- and activity-specific, which makes reliable data hard to obtain. Currently, TNFD is voluntary and long-term success will depend on how quickly firms adopt it. This adoption process may occur faster if countries make TNFD disclosure mandatory. Officials say TNFD will begin tracking voluntary market adoption in 2024.
Happenings with the Sogo & Seibu Co. department store chain reflect larger trends resonating across Japan, writes Gearoid Reidy. Last month Sogo workers went on strike to protest the company's sale to U.S. fund Fortress Investment Group, which Reidy says "encapsulates the changes afoot in Japanese business. A once-cherished national asset, whose fate wasn't so long ago debated in parliament and entwined with the fortunes of premiers, is now sold with relatively little outcry to what might once have termed a 'vulture fund' in the press. Furthermore, the pressure to sell came from another foreign investor, the activist ValueAct Capital Management LP, which forced the board of owner Seven & i Holdings Co. [SVNDY] to let its treasured but troubled asset go." Reidy notes this is not the first time Sogo has found itself at the epicenter of Japanese business restructuring. "The Sogo Co.'s bankruptcy in 2000 was one of the biggest stories during Prime Minister Yoshiro Mori's frenetic reign," he explains. "Like so many firms in the 1980s, Sogo had taken on debt that it expected to be backed by its overvalued assets. When its balance sheet was exposed, Mori initially pledged to use taxpayer money to salvage the chain. But he backtracked amid increasing opposition to rescues of 'zombie' companies." Reidy writes that this marked the end of the era of government-driven corporate bailouts for the most part, and Seibu subsequently merged with Sogo. Other companies followed this pattern, but since then the department store experience has been largely taken over by electronic retailers. Apparel sales at department stores fell from 3.9 trillion yen in 1990 to 1.1 trillion yen in 2020. "That's one reason the number of department stores located outside the 10 biggest cities has dropped by 30% in the past decade," Reidy posits. Yet some of the largest stores are seeing better-than-anticipated sales, with Isetan Mitsukoshi Holdings Ltd.'s flagship Shinjuku Isetan posting its best-ever yearly sales last fiscal year, to name one. "That success, then, might be a reflection of where wealth has shifted firmly to the biggest urban hubs," Reidy suggests. "And as more of Japan eschews the 'job for life' model and toward rewarding performance, this two-track economy is likely to accelerate."
Bloomberg columnist Matt Levine notes the shareholders of publicly traded hedge fund management firm Sculptor Capital Management Inc. (SCU) have a choice between two options: Sculptor has signed a merger agreement to sell itself to Rithm Capital Corp. for $11.15 per share. It is asking shareholders to approve that deal. If they vote yes, according to Levine, then they will almost certainly get cashed out at $11.15 per share. A group led by Boaz Weinstein of Saba Capital Management and including Bill Ackman (Pershing Square Capital Management), Marc Lasry (Avenue Capital Management), and Jeff Yass (Susquehanna International Group), has offered to buy Sculptor for $12.76 per share. Sculptor’s board of directors says that this offer is too risky: Its financing is uncertain, and this offer (like Rithm’s) is conditional on at least a majority of Sculptor’s hedge fund clients approving the new owner. Sculptor’s board says that the clients might not approve the new owner, in which case the $12.76 deal would fall apart and shareholders would be left with nothing. They get to pick between a pretty certain $11.15 per share and a riskier $12.76 per share. Sculptor’s board wants them to pick the safer $11.15. Last Thursday, Sculptor filed a revised proxy statement, again making the case for the $11.15 Rithm deal. Weinstein’s deal would require 50.1% of Sculptor’s hedge-fund clients to consent to the deal; if a majority of clients say no, then Weinstein can walk. Meanwhile the Rithm deal requires 85% of clients to consent, which is more, but the board argues that it is more likely to get 85% with Rithm than 50.1% with Weinstein. The reason for this is pretty straightforward: If Sculptor sells to Weinstein, he will be in charge, whereas if it sells to Rithm, Sculptor’s current boss, Jimmy Levin, will remain in charge of its hedge funds. Sculptor’s board thinks that its clients are happy with Levin and will consent to a deal that leaves him in charge of their money, but that they will not consent to a deal that puts someone else — Weinstein and friends — in charge of their money. According to Levine, Sculptor’s board proposed a way for Weinstein to solve this issue, which is not to make the deal conditional on consents. "I would be very nervous, if I were the board, about turning down Weinstein’s offer," says Levine. "For one thing, it’s higher: $12.76 is more than $11.15, and my job as a director is to get the highest price for shareholders. For another thing, it looks really bad: The board isn’t just turning down a higher offer for a lower one; it’s turning down a higher offer for a lower one that preserves Jimmy Levin’s job."
During the annual Climate Week NYC, the Taskforce on Nature-related Financial Disclosures (TNFD) unveiled its final framework intended to identify risks linked to nature. The taskforce's 14 recommendations have been in development for nearly two years regarding investors' and regulators' requirements for disclosures from companies about how their activities affect the natural world. TNFD said the framework corresponds with recommendations released by the Taskforce on Climate-related Financial Disclosures (TCFD), and is in alignment with the newly released International Sustainability Standards Board (ISSB) standards and the approach used by the Global Reporting Initiative (GRI). TNFD also issued guidance to assist companies with corporate reporting, and has urged voluntary market adoption, to be monitored via a yearly status update report starting in 2024. David Craig, co-chair of TNFD, said: "Building on the language, structure, and approach of the TCFD and consistent with the ISSB's sustainability reporting baseline, the adoption of the TNFD recommendations represents a step-change in the momentum and capacity for business and finance to identify, assess, and disclose their exposure to nature-related issues in a manner consistent with climate-related reporting." Sue Lloyd, vice chair of ISSB, said TNFD has reached a "major milestone," adding that: "We are pleased to note the high level of consistency within the finalized TNFD recommendations and the ISSB Standards, which both incorporate the architecture of the TCFD recommendations." Approximately three months after the release of International Financial Reporting Standard 1 and Standard 2, ISSB said it will assess the work of TNFD to "deliver consistent, comprehensive sustainability-related disclosure for investors." GRI CEO Eelco van der Enden said his group worked with TNFD "with the aim to simplify and align the TNFD recommendations and GRI standards." TNFD said the delivery of its final recommendations follows intense global engagement by market participants, scientific groups, standards organizations, and other stakeholders during its design and development phases. TNFD said it received feedback from more than 1,200 entities as part of the TNFD forum, and that the framework has been pilot-tested by more than 200 companies. Furthermore, its prototype framework received more than 3,000 responses from science experts, policymakers, regulators, and the market. S&P Global (SPGI) has also praised the new framework. Dr. Richard Mattison, vice chair at S&P Global Sustainable1, said: "This is a significant milestone in providing clarity to business and investors that wish to assess and mitigate their exposure to nature-related risks. S&P Global Sustainable1 data shows that 85% of the world's largest companies have a significant dependency on nature across their direct operations, illustrating the importance of nature to corporates and investors. These recommendations address a vital need as, quite simply, nature risk is financial risk."
Activist shareholders are becoming more vocal in South Korea, reflecting discontent with low price-to-book ratios (PBRs), as the key financial ratio of many South Korean companies does not break 1x — lower than that of Japanese counterparts. In the first half of 2023, 60 South Korean companies received shareholder proposals, an increase of approximately 50% from a year earlier, according to research company Insightia. Some proposals have led to dividend hikes, influencing the so-called "Korea discount," which values South Korean companies at a lower multiple to earnings than foreign peers. The number of companies that received shareholder proposals was 49 in 2022, up from 10 in 2020 and 27 in 2021. The continued increase suggests that activist shareholders are rapidly growing in South Korea, even when compared with Japan. South Korean stocks have long been undervalued due to local companies' reluctance to accept shareholder proposals. "Ground for enabling shareholder activists to assert their claims is being developed, as views about corporate governance have changed," said Park Sangin, a Seoul National University professor familiar with corporate governance. The Korea Stock Exchange has been urging companies to promote dialogue with shareholders, leading big conglomerates to establish mechanisms to incorporate minority shareholders' opinions into management. Activist shareholders are becoming commonplace in Japan, where a large number of stocks are seen as underperforming. Stocks in South Korea may hit a tipping point if they are subject to more intervention by activist shareholders.
The European Union (EU) this year adopted the Corporate Sustainability Reporting Directive (CSRD) and the European Sustainability Reporting Standards (ESRS) in January and July, respectively, setting extensive sustainability reporting requirements that will affect many EU and non-EU companies. For some companies, CSRD reporting periods will begin from Jan. 1, 2024. The CSRD will require in-scope companies to publish various sustainability-related information, such as a description of the company's business model, strategy, and sustainability risks and opportunities; ESG-related objectives and yearly advances in achieving them; and separate sustainability statements included in the company's management reports of sector-agnostic, sector-specific, and company-specific information, in accordance with the ESRS. The CSRD also requests disclosures on companies' deployment plans related to migrating to a more sustainable economy, including measures to restrict global warming in line with the Paris Agreement, achieving climate neutrality by 2050, and exposures to coal, oil, and gas-related activities. Other CSRD reporting addresses sustainability matters that affect the company and the effect of the company on sustainability matters (the so called “double materiality” perspective); greenhouse gas emission targets; policies in relation to sustainability (including incentive schemes linked to sustainability matters); EU taxonomy alignment data; and due diligence processes implemented by the company in relation to sustainability matters and the actual and potential adverse impacts of the company's operations and value chain. Meanwhile, the ESRS calls for including information about two cross-cutting standards (ESRS 1 and ESRS 2) that provide general reporting concepts, including double materiality and reporting boundaries alongside overarching disclosure requirements. ESRS also includes 10 topical standards with specific disclosure requirements for ESG matters. Non-EU companies that will need to report under the CSRD include those with securities listed on an EU regulated market, that have an annual net turnover at the consolidated or individual level in the EU exceeding EUR 150 million for each of the last two consecutive financial years, and that have a qualifying EU subsidiary or a branch in the EU that generated an annual net turnover in excess of EUR 40 million in the preceding financial year, known as the EU Turnover Test. Potential exemptions to CSRD include "wholesale debt" under the EU Transparency Directive, indicating that non-EU companies that only have debt securities listed on a regulated market with a denomination of more than EUR 100,000 (or equivalent) may be considered out of scope of the CSRD. Exemptions are also available for non-EU companies whose parent company adheres to the CSRD via a consolidated group report. The application of the CSRD will take place in four phases from 2024 to 2028. The CSRD requires more details compared with the U.S. Securities and Exchange Commission's proposed Climate Change Disclosure Rules, including risks related to water and marine resources, biodiversity and ecosystems, and workers in the value chain. Disclosures will also need to account for a range of local and international standards, such as the International Sustainability Standards Board (ISSB) standards.