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Corporate governance expert tackles acquisition violation

17 Dec 2014

Derivative lawsuit against Bazaarvoice results in policy overhaul 

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A corporate governance expert from London Business School who brought a derivative lawsuit against a $600m publicly-traded company he had shares in, has secured significant improvements to the company’s Acquisition, Compensation, and Insider Trading Policies.

Alex Edmans, Professor of Finance, London Business School, visiting from The Wharton School, was the lead plaintiff in a derivative litigation against Bazaarvoice, a $600m publicly-traded company which violated the Clayton Act by acquiring its only competitor, thereby destroying competition and creating a monopoly in its commercial space. Bazaarvoice completed its acquisition of PowerReviews in June 2012, which led to its stock price soaring above $20. Bazaarvoice’s officers and directors then sold $90 million of stock before the U.S. Department of Justice commenced an antitrust lawsuit in January 2013. The DOJ lawsuit led to Bazaarvoice’s stock price falling to below $7, and ultimately forced Bazaarvoice to divest PowerReviews.

Professor Edmans, who was represented in the case by the New York law firm Newman Ferrara LLP, has been a shareholder in the company since before its IPO. He explained why the case was so important: “Effective corporate governance should ensure that managers act in the long-run interest of their firm, rather than pursuing short-term gains. The PowerReviews acquisition allowed Bazaarvoice directors to cash out at inflated stock prices, while long-term shareholders suffered because the acquisition was illegal. My research has highlighted the importance of long-term incentives, and this lawsuit was a way of putting these academic ideas into practice.”

One of Professor Edmans’ studies has shown that CEOs cut investment in research and development, advertising, and capital expenditure in years in which they have significant equity vesting. Another finds that, in months in which they have equity vesting, CEOs release both more news items and more positive news items, which lead to a temporary stock price increase. His 2012 Journal of Finance paper demonstrates that executive pay packages should involve stock and options with long vesting periods to deter short-termism.

The Bazaarvoice case, which settled recently, resulted in the creation of a Lead Acquisition Director to monitor future acquisitions and the retention of outside counsel to analyse the antitrust implications of such acquisitions. It has also created a Lead Independent Director to oversee the hiring, firing, evaluation, and compensation of the CEO, if the CEO is also the Chairman. Bazaarvoice has also improved its Insider Trading Policy and created a whistleblower hotline. In addition, it will retain a compensation consultant to ensure that Bazaarvoice’s pay structures incentivize its executives to act in its long-term interest, and in particular to evaluate whether the vesting horizon of equity grants should be increased to five years.

Edmans explains: “I believe that all of the above corporate governance changes are positive moves and will help Bazaarvoice to create long-term value going forward.”