The week in GRC: Activist investor eyes taking Barnes & Noble private, and P&G proxy vote count to go on

Nov 17, 2017

Bloomberg reported that Qualcomm rejected Broadcom’s $105 billion acquisition offer, sparking what would be the largest technology takeover battle in history. Qualcomm recommended that shareholders reject the deal, saying it’s an opportunistic move by Broadcom to buy the wireless chip maker cheaply. Qualcomm also said the transaction may face regulatory scrutiny that would cast doubt on its completion.

‘It is the board’s unanimous belief that Broadcom’s proposal significantly undervalues Qualcomm relative to the company’s leadership position in mobile technology and our future growth prospects,’ said Paul Jacobs, executive chair and chair of the Qualcomm board.

Reuters said that, according to a person familiar with the matter, the Financial Stability Board (FSB) has decided to ditch a ‘too big to fail’ gauge for assessing the riskiness of insurers – a major success for companies such as American International Group and Prudential Financial. The FSB, which co-ordinates financial regulation across the G20, is expected to announce in coming weeks a switch in focus from insurers’ size to their activities when deciding whether to subject them to increased regulatory scrutiny, the person said. An FSB spokesperson declined to comment.

– Big US banks are drawing up stop-gap Brexit plans in an effort to avoid moving hundreds of jobs out of London once the UK leaves the EU and before they have had time to recruit specialist staff in the region, according to the Financial Times. A number of US lenders are planning to use London branches of their EU subsidiaries to smooth the process of building new headquarters on the continent, according to people familiar with the plans.

One banker involved said the option – referred to as ‘branch-back’ by lawyers – was ‘the simplest arrangement’ available that offered ‘less cost, less disruption and movement.’ Branch-back is in essence a reversal of the existing set-up, where US banks tend to use their London operations to ‘passport’ their services across the rest of the EU. But the plans risk antagonizing European regulators, which may resist moves by banks to keep staff who are handling transactions with EU clients in the UK along with much of the capital associated with the activities. All of the banks declined to comment.

Bloomberg reported that Deutsche Börse has joined those criticizing a new type of trading venue being ushered in by Europe’s Mifid II rules. Deutsche Börse says it, too, wants regulators to strip the new stock-trading venues, known as systematic internalizers (SIs), of the ability to price stocks more flexibly than exchanges can. Critics argue that the price advantage could allow SIs to siphon away trading from public markets – exactly the opposite of what was intended with Mifid.

Alexandra Hachmeister, chief regulatory officer at Deutsche Börse, said Mifid is unfair in that SIs don’t have to follow the same tick-size rules as everyone else. The European Securities and Markets Authority (Esma) has proposed rewriting part of Mifid II to force SIs to follow the same rules as stock exchanges. A Deutsche Börse spokesperson said the exchange backs Esma’s plan.

– Uber Technologies cleared the way for a multi-billion dollar investment led by SoftBank Group that would transform the firm’s corporate structure, The Wall Street Journal reported. The deal took shape after former CEO Travis Kalanick and a major investor, Benchmark, reached an agreement over control of board seats, including putting on hold a lawsuit against the former chief executive, according to people familiar with the matter.

Once completed, the deal would add six directors and introduce voting changes that would, in effect, limit Kalanick’s power on the board, the people said. Directors have used the proposed SoftBank deal to push through board reforms sought by investors. The reforms only kick in if the investment deal is consummated.

‘We believe this agreement is a strong vote of confidence in Uber’s long-term potential,’ an Uber spokesperson said. ‘Upon closing, it will help fuel our investments in technology and our continued expansion at home and abroad, while strengthening our corporate governance.’

Bloomberg reported that, in its latest fiscal year, the SEC sought the lowest number of penalties since 2013, a drop that took place as it went months without permanent leadership and may show a softer approach to enforcement. In lawsuits against companies and individuals, the SEC tried to obtain $3.4 billion in fines and disgorgement during the 12 months ended in September, according to data collected by Urska Velikonja, a law professor at Georgetown University. The agency filed 612 enforcement cases, also the fewest in four years, Velikonja’s research shows.

Although the data spans a transition at the top of the SEC, it may be early evidence that President Donald Trump’s more friendly tone toward corporations is having an impact on the regulator’s investigations into wrongdoing, according to Velikonja. ‘The big takeaway is that the sweeps are gone,’ she said. ‘[The SEC is] not going after those technical violations.’ An SEC spokesperson didn’t immediately respond to a request for comment.

– The number of banks deemed systemically important and therefore subjected to extra regulation in the US would drop by two thirds under plans to roll back Obama-era reforms that have attracted bipartisan support, according to the FT. As the Trump administration and congressional Republicans push to reverse the Dodd-Frank Act, the agreement with several key Democrats raises the chances banks will secure relief from important parts of the law. The plans from members of the Senate banking committee would raise the threshold for banks deemed systemically important from $50 billion in assets to $250 billion.

– The WSJ reported that Missouri’s attorney general launched a broad investigation into whether Google’s business practices violate the state’s consumer protection and antitrust laws. Missouri attorney general Josh Hawley said he issued an investigative subpoena to probe Google’s collection of user data, its use of other sites’ content and its alleged manipulation of search results to favor its own services. Google said: ‘We have not yet received the subpoena, [but] we have strong privacy protections in place for our users and continue to operate in a highly competitive and dynamic environment.’

– The WSJ reported that, according to a state regulator’s letter, Bank of Tokyo Mitsubishi UFJ sidestepped state supervision of a New York branch in the middle of a state investigation into the bank’s safeguards meant to ensure clients weren’t evading US sanctions. The bank on November 7 converted the branch’s license from a New York state license to a federal one, with approval from its new regulator, the Office of the Comptroller of the Currency (OCC). The move raises concerns about ‘regulatory arbitrage’, in which banks switch supervisors to seek easier oversight, according to the letter from the New York State Department of Financial Services.

An OCC spokesperson said that ‘the decision to operate under a state or federal charter is a business decision by the bank’ and the bank met the standards for converting its license. ‘Consolidating regulatory oversight under one primary regulator… is more effective and is consistent with the regulation of other institutions of similar scale,’ the bank said, adding ‘we have been working diligently to comply’ with the state regulator’s orders and ‘we will complete all of the remaining remediation actions required.’

– General Electric set out a new agenda on Monday as it tries to restructure its way back to stronger growth, and said it was cutting the number of seats on its board as part of what its CEO called ‘a reset year’ in 2018, CNBC reported. The board of directors will be reduced from 18 to 12, with three new members slated ‘with relevant industry experience.’ Directors will have 15-year term limits.

– The WSJ reported that, according to people familiar with the matter, Deutsche Bank CEO John Cryan met recently with Adam Tan, chief executive of the bank’s biggest investor, China’s HNA Group. ‘We are talking with our shareholders, not about our shareholders,’ a Deutsche Bank spokesperson said. An HNA spokesperson declined to comment, as did a spokesperson for Alexander Schütz, HNA’s representative on the Deutsche Bank board.

– With demand for cyber-security expertise exploding but qualified people in short supply, cyber-war gaming competitions have become key recruiting grounds for companies and government security agencies, according to Bloomberg. There are roughly 1 million unfilled cyber-security jobs globally, according to an estimate from Cisco. Computer security firm Symantec forecasts that the number of positions will grow to 1.5 million by 2019.

– The SEC rejected a last-minute request from securities exchanges to delay a vast database of trading information billed as the most advanced defense against manipulation and bouts of market mayhem, the WSJ reported. The SEC said it wouldn’t delay Wednesday’s launch of the consolidated audit trail, a project that regulators accelerated after they didn’t have enough data to explain the May 2010 flash crash. Exchanges recently launched a lobbying campaign to convince the SEC and lawmakers that the repository would include too much personal information about US investors and would become a target for hackers.

– At its annual shareholder meeting a month ago, Procter & Gamble announced that its preliminary count of proxy votes showed it had warded off an effort by activist investor Nelson Peltz to win a seat on its board. But after the market closed on Wednesday, Peltz’s Trian Fund Management announced that a vote count by the independent inspector of elections showed that he had, in fact, been elected, The New York Times reported.

In a statement, Procter & Gamble said Peltz’s winning margin – 42,780 shares, or about 0.0016 percent of the shares outstanding – was still preliminary and was ‘subject to a review and challenge period’. The announcement means the corporate proxy battle is likely to be studied for years. On Wednesday, Trian urged Procter & Gamble to accept the preliminary results. Procter & Gamble said it would announce the final results in the weeks ahead after it received a final, certified report from the inspector of elections.

– The SEC’s enforcement division issued a report highlighting its priorities for the coming year as well as a review of enforcement actions that took place during fiscal 2017. In the report, co-directors Stephanie Avakian and Steven Peikin state five core principles that will guide their enforcement decision-making: focus on retail investors, focus on individual accountability, keep pace with technological change, impose sanctions that most effectively further enforcement goals, and constantly assess the allocation of resources.

According to the report, the commission during fiscal year 2017 brought a diverse mix of 754 enforcement actions, including 446 stand-alone actions, and returned a record $1.07 billion to harmed investors.

– Richard Cordray, the first head of the Consumer Financial Protection Bureau (CFPB), plans to leave at the end of November, paving the way for Trump to restructure the agency, according to the WSJ. The CFPB has been a subject of partisan bickering since it was established in 2011. Cordray didn’t give a reason for his departure, which comes before his term is set to end in July 2018. A CFPB spokesperson declined to comment.

– Former OneWest Bank Group CEO Joseph Otting won Senate approval to lead the OCC, further clearing the way for the Trump administration to roll back Wall Street regulations, Bloomberg reported. In heading the OCC, Otting will have a central role in efforts to reverse Volcker Rule trading restrictions, certain capital constraints and tough supervision that banks say reflect an overreaction to the financial crisis.

– The WSJ reported that an activist investor in Barnes & Noble has proposed a transaction that would take the bookseller private with the help of shareholders and substantial borrowings. Sandell Asset Management approached the company with a plan that would value Barnes & Noble at more than $650 million, or more than $9 a share, according to people familiar with the matter.

In a statement, Barnes & Noble said it doesn’t consider Sandell’s proposal ‘bona fide’, noting the investor owns only $7 million in common stock. ‘[Barnes & Noble chair Leonard Riggio] has no intention of rolling his shares into such a transaction, and the company believes a debt financing of $500 million is highly unlikely,’ it said.

– AT&T said it hired media lawyer Daniel Petrocelli, whose clients have included Trump, to defend its acquisition of Time Warner if the government sues to block the deal, according to Reuters. Petrocelli, a partner at law firm O’Melveny & Myers, will be lead trial counsel for both companies if the case ends up before a judge, a spokesperson for AT&T said.

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