Resolution Preparedness: Do You Know Where Your QFCs Are?

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Frank Serravalli, Dan Weiss, John Simonson, and Daniel Sullivan. The complete publication, including appendix, is available here.

In January, the US Secretary of Treasury issued a notice of proposed rulemaking (“NPR”) that would establish new recordkeeping requirements for Qualified Financial Contracts (“QFCs”). [1] US systemically important financial institutions (“SIFIs”) and certain of their affiliates [2] will be required under the NPR to maintain specific information electronically on end-of-day QFC positions, and to be able to provide this information to regulators within 24 hours if requested. This is a significant expansion in both scope and detail from current QFC recordkeeping requirements, which now apply only to certain insured depository institutions (“IDIs”) designated by the FDIC. [3]

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Further Recognition of the Adverse Effects of Activist Hedge Funds

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton. Earlier posts by Mr. Lipton on hedge fund activism are available here, herehere, and here. Recent work from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here). For five posts by Mr. Lipton criticizing the Bebchuk-Brav-Jiang paper, and for three posts by the authors replying to Mr. Lipton’s criticism, see here.

Despite the continued support of attacks by activist hedge funds by the Chair of the SEC, and many “Chicago school” academics who continue to rely on discredited statistics, there is growing recognition by institutional investors and prominent “new school” economists of the threat to corporations and their shareholders and to the economy of these attacks and the concomitant short-termism they create.

In a “must read,” March 31, 2015 letter to the CEOs of public companies, Laurence Fink, Chairman of BlackRock and one of the earliest to recognize the danger from attacks by activist hedge funds, wrote:

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Shareholder Activism: an Engagement Opportunity

The following post comes to us from Ernst & Young LLP, and is based on a publication by the EY Center for Board Matters.

The recent surge in shareholder activism [1] continues to keep boards on alert heading into the 2015 proxy season. Some companies are taking proactive measures to prepare for potential activist investor campaigns, including engaging long-term institutional investors.

Based on what we’re hearing from long-term institutional investors, these efforts are worthwhile in that they foster constructive relationships and alignment with key shareholders.

The EY Center for Board Matters (the Center) recently had conversations with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities. We also gained insights from investors, directors and other stakeholders through our proxy season dialogue dinners. [2]

This post is the second in a series of four posts based on insights gathered from those conversations and previewing the 2015 proxy season. The first post (available here) focused upon board composition. The upcoming two will focus on proxy statement disclosures, and the shareholder proposal landscape.

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IRS Releases Final Regulations Under Section 162(m)

The following post comes to us from Edmond T. FitzGerald, partner and head of the Executive Compensation Group at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Kyoko Takahashi Lin.

On March 31, 2015, the Internal Revenue Service published final regulations under Section 162(m) of the Internal Revenue Code. As it did when it proposed these regulations in 2011, the IRS has indicated that these regulations are not intended to reflect substantive changes to existing requirements of Section 162(m), but rather to clarify them.

The final regulations clarify two requirements for exceptions from the Section 162(m) tax deductibility limit:

  • the need for per-employee limits on equity awards in order to qualify stock options and stock appreciation rights (SARs) for the “qualified performance-based compensation” exception; and
  • the treatment of restricted stock units (RSUs) or phantom stock arrangements under the transition period exception for certain compensation “paid” by newly public companies.

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Volcker Underwriting: It’s Simple … No Need to Overanalyze

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication by Mr. Ryan, Chris Scarpati, Kevin Pilarski, and Lauren Staudinger. The complete publication, including annex, is available here.

As banks face the July 21, 2015 deadline for proving their trading desk exemptions from the Volcker Rule, they have been focused on estimating the reasonably expected near term demand of customers (“RENTD”) under the market making exemption. [1] However, trading desks intending to take the underwriting exemption (“underwriting desks”) must also estimate RENTD, which is defined differently for underwriting and in our view poses fewer implementation challenges.

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2015 Proxy Season Insights: Board Composition

The following post comes to us from Ernst & Young LLP, and is based on a publication by the EY Center for Board Matters.

Heading into the 2015 proxy season, board composition and renewal are once again in the spotlight for a number of reasons.

  • Investors increasingly seek confirmation that boards have the skill sets and expertise needed to provide strategic counsel and oversee key risks facing the company, including environmental and social risks.
  • The continued lack of turnover on many boards and slow progress on increasing diversity, including by gender and ethnicity, are bringing director tenure and board succession planning under scrutiny.
  • A new widespread push for proxy access could make it easier for shareholders to nominate their own candidates to the board. [1]

These factors make it increasingly important for boards to explain their composition in a compelling way. Meeting this expectation is made all the more challenging by the fact that investors are assessing board composition using different factors.

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Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims

The following post comes to us from Mark Lebovitch and Jeroen van Kwawegen of Bernstein Litowitz Berger & Grossmann LLP. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Supreme Court’s May 8, 2014 Opinion in ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP”) marked a sudden and potentially transformative moment in the relationship among corporate boards, their stockholders, and the Delaware legal system. The article, Deterring Frivolous Stockholder Suits Without Closing Doors to Legitimate Claims, asserts that the “nuclear option” of allowing boards of public companies to employ fee-shifting bylaws against stockholders whose interests they are supposed to represent is poor policy and departs from well-established legal principles. Accordingly, the authors support the March 6, 2015 proposal from the Delaware Corporation Law Council to legislatively prohibit the use of fee-shifting provisions in the public company context. Rather than simply criticize ATP and support the legislative proposal, we propose a carefully tailored answer to frivolous litigation, which mitigates abuses, conforms to longstanding legal principles, and preserves the benefits of board accountability and meritorious stockholder litigation.

First, the article argues that directors must not be permitted to use their corporate and fiduciary powers as a weapon to avoid accountability to the stockholders whose assets they manage. The authors detail the policy and legal problems with the concept of allowing directors to impose fee shifting bylaws, putting in question the relationship between stockholders and boards that forms the foundation of the modern public corporation. If ATP applies to public corporations, the Delaware Supreme Court, sub silentio, reversed several bedrock principles of Delaware corporate law and upset the balance of powers between stockholders and boards that has been in existence for decades.

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Shareholder Activism: Who, What, When, and How?

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. The following post is based on a PricewaterhouseCoopers publication, available here.

Who are today’s activists and what do they want?

Shareholder activism spectrum

pwcsa1

“Activism” represents a range of activities by one or more of a publicly traded corporation’s shareholders that are intended to result in some change in the corporation. The activities fall along a spectrum based on the significance of the desired change and the assertiveness of the investors’ activities. On the more aggressive end of the spectrum is hedge fund activism that seeks a significant change to the company’s strategy, financial structure, management, or board. On the other end of the spectrum are one-on-one engagements between shareholders and companies triggered by Dodd-Frank’s “say on pay” advisory vote.

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The Influence of Board of Directors’ Risk Oversight on Risk Management Maturity and Firm Risk-Taking

The following post comes to us from Christopher Ittner of the Department of Accounting at the University of Pennsylvania and Thomas Keusch of the Department of Business Economics at Erasmus University Rotterdam.

A variety of external events, including inquiries into the causes of the 2008 financial crisis and changes in regulations and listing rules have fostered rising expectations for boards of directors to exert greater oversight of their organizations’ risk management processes. The primary impetus behind these external pressures is the belief that stronger board oversight over risk management processes will lead to substantive improvements in risk management and more informed risk-taking. Many observers, however, argue that board members often lack the time, skills, and information necessary for effective risk oversight. They contend that the adoption of governance practices that are advocated or mandated by external parties is often window-dressing. This point of view suggests that board risk oversight will have little effect on companies’ risk management practices or risk-taking.

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The Forum’s New Look

The Harvard Law School Forum on Corporate Governance and Financial Regulation is pleased to present a newly redesigned website. The Forum will continue to be available at its old address, http://blogs.law.harvard.edu/corpgov, which will automatically redirect to its new address, http://corpgov.law.harvard.edu.

Since the Forum was created in 2006, its audience has grown to hundreds of thousands of monthly visits and thousands of Twitter followers and subscribers to our newsletter, many of whom now access the Forum on mobile devices. The Forum has been completely redesigned with these trends in mind, and the new design will enhance readability, navigation, search, and mobile accessibility. Comments or feedback on the redesigned site can be sent to: techsupport@corpgov.law.harvard.edu.

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  • Programs Faculty & Senior Fellows

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