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The Identity Challenge in Finance

Identity is fundamental in finance. At a time when huge TechFins like Amazon are making inroads into the financial services industry, major questions are arising as to the most effective methods of customer identification and meeting Know Your Customer obligations (KYC). Does the solution lie in redefining identity, in the methodology of retrieving identification, in some mix of the two, or in other ways? We have recently explored these issues, here.

To date, forms of analogue and digitized identity (i.e paper documents and scanned ID documents respectively) have been relied upon to prove an individual’s identity to, say, a … Read more

Cleary Gottlieb Discusses Updates to Proxy Adviser Guidelines

As 2018 draws to a close, both Institutional Shareholder Services Inc. (“ISS”) and Glass Lewis are in the process of updating their 2019 proxy voting guidelines.

In mid-October, ISS launched its 2019 benchmark voting policy consultation period, pursuant to which ISS solicits feedback on certain of its proposed voting policies for the upcoming proxy season.  This year, ISS requested comment on proposed policies for U.S. public companies related to board gender diversity and its pay-for-performance model, as described in greater detail below.  ISS plans to announce its final policy changes in mid-November.

In addition, Glass Lewis recently released its 2019 … Read more

The Transatlantic Debate over Shareholder Rights

Effective and sustainable shareholder engagement is a cornerstone of the corporate governance model of listed companies, which is based on a system of checks and balances among boards, management, and stakeholders. Enhancing the involvement of shareholders in corporate governance is therefore an important factor in improving the financial and non-financial performance of companies, particularly with respect to environmental, social, and governance issues, as set forth in the United Nations’ principles of responsible investment (Recital 14 of the Directive, available here). And this is even more the case in view of the fact that the increased involvement of all stakeholders, … Read more

ISS Comments for the SEC Staff Roundtable on the Proxy Process

Institutional Shareholder Services Inc. (ISS) appreciates the opportunity to comment in advance of the SEC Staff Roundtable on the Proxy Process that is scheduled for November 15, 2018.  We focus these preliminary comments on two primary areas, proxy advisory firms and the proxy process.

Proxy Advisory Firms

As a registered investment adviser, we have a fiduciary obligation to our clients to provide  advice that is in their best interest.  In the free market, our clients hire us because we provide services they value and deem to be cost-effective.  We listen to our clients and make our vote recommendations based on … Read more

Blue Sky Banter Podcast: John Coffee on the State of Insider Trading Law

Professor John C. Coffee, Jr. of Columbia Law School speaks with John Metaxas (Columbia Law ’84) about insider trading law and his role on a new task force created to develop proposals for reform in this area. The task force will be chaired by Preet Bharara (Columbia Law ’93), the former U.S. attorney for the Southern District of New York. Coffee explains that the time is ripe for the panel, given uncertainty surrounding the largely court-created rules on insider trading and the need for clearer guidance from Congress or the Securities and Exchange Commission. The panel’s members will include academics, … Read more

Debevoise & Plimpton on the SEC Enforcement Division’s 2018 Annual Report

On November 2, 2018, the U.S. Securities and Exchange Commission’s (“SEC” or “Commission”) Division of Enforcement released its 2018 Annual Report (“Report”) which presents and assesses the Division’s accomplishments during the 2018 Fiscal Year (“FY”).[1] The statistics, as well as narrative discussion in the Report, reveal an active Division focused on pursuing cases impacting retail investors, such as investment adviser fraud, as well as actions directed at the impact of emerging technological changes on the securities market, such as cryptocurrencies and cybersecurity.   While the penalty and disgorgement numbers were similar to last year, this was primarily because of the … Read more

Market Data, the SEC and Stock Exchanges: Reopening Pandora’s Box?

Every security traded in public markets represents several data points that can be valuable to future trades (not to mention compliance). The Regulation National Market System (or “Reg NMS”) grants exchanges, licensed as self-regulatory organizations (“SROs”), the responsibility to disseminate market data consolidated from their platforms. Exchange data is vital to matching orders, especially in today’s electronic and automated markets.[1]

Like most “platform” companies, exchanges seek to monetize the data generated by their trading platforms. This market data has obvious value: Virtually instantaneous access to granular information on previous trades translates into clear competitive advantages for market participants. Exchanges … Read more

Shearman & Sterling on Whether a Cyber Breach Can Be a Violation of Internal Controls

On October 16, 2018, the Securities and Exchange Commission (SEC) issued a report outlining an investigation conducted by the SEC’s Division of Enforcement related to the internal accounting controls at nine public companies that were the victims of cyber fraud. The SEC elected to issue a report under Section 21(a) of the Securities Exchange Act of 1934 rather than proceeding with enforcement actions against any of the companies involved as a way to draw attention to the growing issue of cyber fraud, highlight what it believes are necessary and best practices in this area and, importantly, caution all public companies … Read more

Internal Whistleblowing’s Counterintuitive Impact on Lawsuits and Settlements

While external whistleblowing—reporting misconduct to regulators or members of the media— has captured much attention, the impact of reporting misconduct anonymously to management, known as internal whistleblowing, is relatively unknown. Our new study, Evidence on the Use and Efficacy of Internal Whistleblowing Systems, reveals the impact of these systems.

Due to the sensitivity of individual internal whistleblowing reports, we received only limited data on each whistleblowing event. No names or specific text were shared. We did have access to over 900 public company internal feedback systems, including reports about financial reporting issues, harassment or other HR issues, business integrity, … Read more

Cleary Gottlieb Discusses Non-Disparagement Clauses

In September, former Uber executive Eric Alexander filed a complaint (the “Complaint”) against another former Uber executive, Rachel Whetstone. The Complaint alleges breach of a mutual non-disparagement clause in Whetstone’s separation agreement with Uber; a clause that Whetstone, during her negotiation with Uber, apparently insisted specifically name Alexander and preclude them from disparaging each other. In the Complaint, Alexander alleges that he is a third party beneficiary of the contract and can therefore enforce the non-disparagement obligation against Whetstone.

The Complaint, filed in California state court, alleges that Whetstone disseminated false and/or misleading information to reporters and others about Alexander’s … Read more

Insider Trading: Are Insolvent Firms Different?

Are insolvent firms different from solvent firms with respect to insider trading law and policy? Formally, the law does not change. But economic realities and non-securities law duties do. As a result, the insider trading landscape changes considerably. The law is more permissive in some ways, and more constraining in others, as troubled instruments trade.

One difference is the level of regulation of trading in the residual claims of the firm. In solvent firms, the residual claims are equity securities, and equity securities are subject to the full ambit of trading restrictions.

In insolvent firms, non-equity claims such as trade … Read more

Arnold & Porter Discusses Growing Cybersecurity Oversight by SEC and Shareholders

Protecting against data breaches, hacks and cyber threats is an unwelcome but necessary reality for businesses today. In addition to vigilantly guarding against attacks, companies must consider the possibilities of litigation and investigations that can stem as a result of such events. State attorneys general, the Federal Trade Commission, the Department of Health and Human Services Office of Civil Rights, and other federal and state agencies have each investigated companies that have been the victim of a cyberattack. Now, businesses must also take into account whether failing to prepare for cyber threats exposes them to investigations or enforcement actions undertaken … Read more

Do Public and Private Firms Invest Differently?

Equity markets are an important source of capital financing for firms, particularly in the United States. These large, liquid markets channel capital from savers to firms and facilitate corporate investment by distributing risks among many smaller investors. There is concern, however, that along with these benefits, equity financing has significant costs. One of the most prominent criticisms of the public ownership of firms is that investor pressure over short-term stock market performance causes public firms to forgo profitable, long-term investments.

This criticism has prompted such notable corporate leaders as Jamie Dimon of J.P. Morgan Chase and Warren Buffett of Berkshire … Read more

How Boards Can Get Ready for Climate Change

We are constantly reminded of the urgency to act as we witness the impact of climate-related events on peoples’ lives and their communities around the world.

The signing of the Paris Climate Agreement in 2016 was a watershed moment as the world committed to transition to a low carbon economy limiting the increase of global average temperature to 2°C.

Supported by academic research that shows doing good does not entail a trade-off to do well, a growing number of investors are acknowledging the long-term impact of climate change on their investment performance and therefore are integrating climate change aspects in … Read more

Skadden Discusses Merger Reviews and Antitrust Inquiries in Case of “No-Deal” Brexit

As the U.K.’s March 29, 2019, exit date from the European Union approaches, companies involved in merger reviews or antitrust investigations should pre-emptively address the risk of a “no-deal” Brexit.

Both the U.K. and EU have antitrust laws that can apply simultaneously to the same merger or allegedly anti-competitive conduct. Currently, procedural rules determine how jurisdiction is divided between the European Commission (Commission), at the EU level, and the Competition and Markets Authority (CMA), at the U.K. level. But there are no transitional provisions dictating how jurisdiction for pending matters is to be handled in the event of a “no-deal” … Read more

The Enduring Distinction Between Business Entities and Security Interests

Why are security interests and legal entities both widely used?  The prevailing answer in legal scholarship is that both bodies of law exist to partition assets for the benefit of designated creditors.[1] This view is not merely an academic matter; rather, it is exemplified by many financial products, such as asset securitizations. In a standard securitization, a sponsor corporation transfers some of its assets to an entity, which borrows money from creditors and passes the money back to the sponsor as consideration for the assets. This entity is not a prototypical business with an active management and going concern … Read more

Shareholder Activism Through Say-on-Pay

Shareholder activism around the world has increased substantially over the last few years (see here and here for recent examples). Empowered shareholders seek to discipline management and voice their dissatisfaction with specific corporate decisions. A particular source of tension between investors and management is executive compensation, which in a number of jurisdictions requires at least non-binding approval of shareholders through a voting process widely known as “Say-on-Pay.” This regulatory framework has encouraged shareholder activism further and caught the attention of the public and media, with market commentators talking about a “shareholder spring”.[1]

In our paper, “The Importance of Shareholder … Read more

Davis Polk Discusses the New Populist Movement in Antitrust

In recent years, a new populist school of antitrust thinking has emerged, known as “Neo-Brandeisian” to its proponents and “hipster” to its detractors.  There are varying formulations of this movement, but proponents generally point to the purported increase in economic concentration and corporate profits in the U.S. economy to advocate for more aggressive antitrust enforcement, with respect to both mergers and other conduct.  One notable element of this movement is a push to expand or even replace the established “consumer welfare” standard—which focuses on prices and outputs in balancing potential competitive harms against procompetitive efficiencies—by adopting a more rigid presumption … Read more

Can Companies and M&A Law in Europe Adapt to the Market for Corporate Control?

Takeover regimes in Europe have been under persistent scrutiny by the public, politicians, and market participants. Sometimes, that is just the nature of the game: Takeovers create winners and losers, and the latter (with the help of their champions and constituencies) often complain. But other times the discontent derives from the inadequacy of regimes in handling certain deals. The task of the law is not easy: Deals are complex and unique, while the law is general. In particular, target companies have a particular ownership structure that must fit the paradigm contemplated by the law, which in the EU consists almost … Read more

Sullivan & Cromwell Offers Corporate Governance Updates

On October 18, Institutional Shareholder Services Inc. (“ISS”) announced that the comment period for its 2019 benchmark voting policy is open until 5:00 PM ET on November 1, 2018.  For U.S. companies, ISS is soliciting comments on proposed changes relating to board gender diversity and say-on-pay secondary screens.  However, the proposed policy change relating to board gender diversity is not proposed to be in effect for 2019.  ISS is not soliciting comments for tracking director controversies on other company boards or providing adjusted voting results for dual-class companies, both of which were included in ISS’s annual policy survey earlier this … Read more

The Hollowed Out Common Law

There are two striking features about the ways in which contracts stemming from the electronic marketplace are adjudicated today. The first is the steady decline in the number of cases litigated in state court as compared with the federal forum. By 2015, federal courts adjudicated the vast majority of claims concerning formation issues in contracts in the electronic market. Drawing on data from consumer cases involving  largely electronic transactions, we show that state common law has all but  disappeared. The second development is related to the first: the relative rise of class action suits. The use of class actions to … Read more

SEC Commissioner Discusses Improving Information for Investors in the Digital Age

I last spoke to you in May 2014 about “Building Momentum.”[1] At the time, I was a rookie Commissioner. Now, I stand before you after five years as a Commissioner and over 5,700 votes under my belt. It has been an amazing time to be on the Commission, and I’ve learned a great deal about what matters to both companies and investors. Today, I’d like to share with you some of my thoughts borne from my experience. Specifically, my thoughts on how the Commission should improve disclosure to investors in the Digital Age.[2]

Nearly 100 years ago, the

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The Underappreciated Dilemmas of Overlapping Financial Regulations

Calls to dismantle the legal framework that was developed in response to the financial crisis have begun to multiply and gain momentum. Pursuant to a Trump Administration executive order, the Treasury Department has released a series of reports that undertakes a comprehensive review of existing financial regulations. And in Congress, the proposed Financial CHOICE Act sets forth a roadmap for replacing the Dodd-Frank Act in full. Some of that roadmap was enacted earlier this year with the passage of the Economic Growth, Regulatory Relief, and Consumer Protection Act.

The recent wave of reforms is as much about a change in … Read more

Paul Weiss Discusses New Trends in Private Equity Transactions

The private equity market is more competitive than ever.  Target company multiples have skyrocketed due to both a robust strategic acquisition market, and stiff competition from PE buyers as they vie with one another to deploy $1 trillion in dry powder that remains from the $3 trillion raised in the past five years.[1]  As traditional investment strategies become more challenging, PE firms are adopting innovative strategies to adapt.

In this issue of the Private Equity Digest, we look at four methods PE firms have used to adapt to the current competitive environment – (i) engaging in more buy-and-build approaches … Read more

The Role of Public Pension Funds in Governance

Public pension funds have great influence over corporate governance because of the size and nature of their portfolios: They manage more than $3 trillion in assets and often invest in a large number of companies. Besides largely unobservable private negotiations, voting at annual or special shareholder meetings is one of the most direct ways for investors to affect corporate decisions. CalPERS, the largest public pension fund in the U.S., states that proxy voting is “the primary way we can influence a company’s operations and corporate governance.” This view is shared by a number of other high profile-public pension … Read more

Clifford Chance Discusses the CFTC’s Claim of Authority to Prosecute “Reckless” Market Manipulation

The U.S. Commodity Futures Trading Commission (“CFTC”) has taken a highly questionable view of its authority to pursue price manipulation charges against traders whose bona fide open market trading recklessly distorts market prices.  Rather than proving that a trader, whose genuine trades were otherwise lawful, had the specific intent to distort prices, as required by the CFTC itself and the courts prior to the passage of the Dodd-Frank Act (“DFA”),[1] the CFTC has asserted that, under a regulation it promulged in 2011 to implement a new DFA-added Commodity Exchange Act (“CEA”) statutory provision,[2] proof of mere recklessness will … Read more

Long-Term Economic Consequences of Hedge Fund Activist Interventions

Our new academic study examines the long-term effects of interventions by activist hedge funds. Prior studies document positive equal-weighted long-term returns and operating performance improvements following activist interventions, and typically conclude that activism is beneficial to shareholders. We challenge and extend prior literature in two ways. First, we find that equal-weighted long-term returns are driven by the smallest 20 percent of firms with an average market value of $22 million. The largest 80 percent of firms experience insignificant negative long-term returns. On a value-weighted basis, which likely best gauges effects on shareholder wealth and the economy, we find that pre- … Read more

Debevoise Discusses UK’s Proposed National Security Review for M&A

Many countries have been looking again at their ability to block acquisitions when they threaten national security. For example, we reported on a change to German law in July last year, and a European Commission proposal (which would cover all EU member states) in October. Most recently, a new law in the United States has increased the power of the Committee on Foreign Investment (CFIUS) to block deals. Such rule changes – often triggered by a controversial foreign acquisition – are understandable, but investors need to know the process and timeline. Vague tests, long clearance procedures or excessive look-back periods … Read more

Going Concern Opinions, Institutional Ownership, and CEO Compensation

Auditors issue going concern opinions when they have substantial doubts about a client’s ability to continue as a going concern for one year beyond the financial statement date. Abundant anecdotal evidence shows that  companies that received these opinions went through restructurings, with managers and employees losing their jobs or seeing their pay cut. For example, after Ernst & Young sent Texas utility Dynegy Holdings, Inc. a going concern opinion in 2011, a majority of the company’s directors said they wouldn’t consider being re-elected,  and the CEO and CFO said they might leave the company. After Clearwire Corp. received a going … Read more

Arnold & Porter Compares New California Privacy Law With the EU’s Privacy Regime

On September 23, 2018, the governor of California signed into law an amended version of the California Consumer Privacy Act of 2018 (CCPA),[1] which was originally enacted in late June 2018. The amendments are a partial response to extensive criticism of the legislation as overbroad, ambiguous, and excessively burdensome for organizations doing business in California. Throughout the summer, a coalition of businesses and industry associations  (including the California Retailers Association, the Consumer Technology Association, the Internet Association and others), engaged in a concerted effort to persuade the California Legislature to clarify certain definitions in the law, limit its scope … Read more

Competition: The Forgotten Fourth Pillar of the SEC’s Mission

Thank you so much, Sarah [Miller], for that kind introduction. It’s a privilege to be here with you and the Open Markets Institute and Village Capital today. I’ve long admired the Institute’s leadership in putting the concentrated power choking our economy at the forefront of the national agenda, and I share your commitment to making sure our markets are competitive and fair for all Americans. So it’s a real honor to be here with you today.*

Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect … Read more

Proposed New Disclosures for Mutual Fund Advisers

According to the Securities and Exchange Commission (SEC) release establishing the Proxy Voting Rule, an investment adviser “is a fiduciary that owes each of its clients duties of care and loyalty with respect to all services undertaken on the client’s behalf, including proxy voting.”[1] This was the rationale behind the rule,[2] which requires investment advisers, including mutual fund advisers, to create and disclose their proxy voting policies and procedures.  However, the SEC and its staff have yet to clarify what these fiduciary duties mean for the largest mutual fund advisers now that they control an extraordinary amount of … Read more

How Institutional Ownership Affects Insider Trading

Institutional owners have traditionally been thought of as passive investors that have little concern for or influence on corporate policies and decisions. In contrast, recent literature shows that while many institutions are passive in terms of their investment choices and holdings, they are not passive in their role as monitors. For example, Appel et al. (2016) find that index mutual funds influence firms’ governance choices. Others find institutional owners exert influence over firms’ dividend choices (Crane et al. (2016)) and corporate tax strategies (Bird and Karolyi (2017), Khan et al. (2017)). In a new study, we examine how institutional ownership … Read more

Debevoise Discusses the UK’s Proposed National Security Review for M&A Deals

Many countries have been looking again at their ability to block acquisitions when they threaten national security. For example, we reported on a change to German law in July last year, and a European Commission proposal (which would cover all EU member states) in October. Most recently, a new law in the United States has increased the power of the Committee on Foreign Investment (CFIUS) to block deals. Such rule changes – often triggered by a controversial foreign acquisition – are understandable, but investors need to know the process and timeline. Vague tests, long clearance procedures or excessive look-back periods … Read more

Lame Duck CEOs

The process of replacing key individuals is crucial to organizations’ performance. This is as true for presidents of countries as it is for CEOs. When a firm announces the departure of a CEO without announcing a successor, the incumbent CEO becomes a lame duck. Consistent with the name’s pejorative connotations, some market participants argue that firms with lame-duck CEOs suffer from a lack of leadership that may create high levels of uncertainty and stall important decisions. This has prompted the SEC and other regulators around the world to require more disclosure of succession plans.[1] For example, in October 2009, … Read more

Gibson Dunn Discusses How Brexit Will Affect Financing and Documentation

Since the result of the Brexit referendum was announced in June 2016, there has been significant commentary regarding the potential effects of the UK’s withdrawal from the EU on the financial services industry.

As long as the UK is negotiating its exit terms, a number of conceptual questions facing the sector still remain, such as market regulation and bank passporting. Many commentators have speculated from a ‘big picture’ perspective what the consequences will be if / when exit terms are agreed.  From a contractual perspective, the situation is nuanced.  This article will consider certain areas within English law financing documentation … Read more

Don’t Fear California’s New Board Gender Quota

On September 30, 2018, only hours before the deadline, California Gov. Jerry Brown signed bill SB 826, making his state the first in the U.S. to adopt board gender quotas for public companies.

The law requires listed companies headquartered in California to have at least one woman on the board by 2019, and at least two or three women – depending on whether boards have more than five members – by 2021. Companies that don’t meet the quota face a financial penalty that would vary from $100,000 to $300,000 depending on whether the company is facing a first or second … Read more

Paul Weiss Offers M&A at a Glance for September 2018

M&A activity in September 2018 was mixed compared to August levels, but generally reflected an overall continuing downward trend starting in April of this year.  Deal volume by dollar value0F[1] decreased in the U.S. by 44.5% to $77.06 billion and globally by 16.1% to $238.25 billion.  While the number of deals increased in the U.S. by 2.0% to 357 (the second lowest level since the beginning of this publication in 2012), the number of deals decreased globally by 1.5% to 2,195.

Strategic vs. Sponsor Activity

The number of strategic deals increased in September 2018 by 4.8% to 262 in … Read more

The Dubious Rise and Inevitable Fall of Hipster Antitrust

Antitrust law has garnered significant popular attention in recent months, with increased calls to dramatically expand enforcement to combat a perceived rise in market concentration and the widespread use of unfair commercial practices by so-called “dominant” firms.  We’ve recently posted our new draft article, “Requiem for a Paradox: The Dubious Rise and Inevitable Fall of Hipster Antitrust,” which analyzes this new populist movement and its calls for fundamental changes to modern antitrust institutions, including abandoning the focus on consumer welfare as the lodestar of antitrust law and instead using antitrust to deal with various social challenges ranging from … Read more

Gibson Dunn on Why the UK Is Heading for a “Soft Brexit”

Our discussions with politicians, civil servants, journalists and other commentators lead us to believe that the most likely outcome of the Brexit negotiations is that a deal will be agreed at the “softer” end of the spectrum, that the Conservative Government will survive and that Theresa May will remain as Prime Minister at least until a Brexit deal is agreed (although perhaps not thereafter).  There is certainly a risk of a chaotic or “hard” Brexit.  On the EU side, September’s summit in Salzburg demonstrated the possibility of unexpected outcomes.  And in the UK, the splits in the ruling Conservative Party … Read more

SEC Commissioner Jackson on Re-Opening Comment Period for Security-Based Swap Dealer Rules

Thank you, Mr. Chairman, and thank you to my colleague Commissioner Peirce and the terrific Staff in the Division of Trading and Markets for all of the hard work that so clearly went into this proposal. I’m especially grateful to Tom McGowan from Trading and Markets and Meredith Mitchell from our Office of General Counsel for being so patient with me and my office throughout this process.

Standing up our securities-based swap regime is an important step for the Commission and for the Nation. And our proposal has been sitting on the shelf since 2012.[1] The Commission’s failure to

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Arnold & Porter Discusses New California Law on Security for Internet-Connected Devices

California has passed the first state law imposing security requirements on devices in the Internet of Things (IoT). On September 28, 2018, California Governor Jerry Brown signed into law the nearly identical Senate Bill 327 and Assembly Bill 1906,[1] which require manufacturers of Internet-connected devices that are sold or offered for sale in California to equip them with “reasonable security features.”[2] Manufacturers of IoT devices are now on the clock to make the necessary changes to comply with the law before it becomes effective on January 1, 2020. While the law does provide some specific guidance for manufacturers—including … Read more

The Real but Exaggerated Threat of Financial Institution Mobility to Financial Regulation

Where jurisdictions differ in how they regulate an activity, migration allows private parties to choose between regulatory regimes.  In the context of financial regulation, scholars assert that harmonization of regulation across jurisdictions is necessary to prevent institutions from opting into the laxest regulatory regime through relocation.[1]  This assertion relies on two assumptions: (1) financial institutions indeed move in response to burdensome regulations, and (2) unilateral regulation is insufficient to achieve regulatory objectives with respect to offshore institutions.  My recent project provides the first empirical evidence supporting that financial institutions relocate activities in response to derivatives regulation.  Charges that unilateral … Read more

Wachtell Lipton Discusses the State of Play in Activism

As we approach the 2019 proxy season, developments since September 2017 prompt a brief updated review of the state of play.

  • The threat of activism remains high, and has become increasingly global.
  • Activist assets under management remain at elevated levels, encouraging continued attacks on many large successful companies in the U.S. and abroad.
  • In the current robust M&A environment, deal-related activism is prevalent, with activists instigating deal activity, challenging announced transactions (g., the “bumpitrage” strategy of pressing for a price increase) and/or pressuring the target into a merger or a private equity deal with the activist itself.
  • “Short”

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