Tag: Public firms

NYSE Expands Rules on Material News and Trading Halts

Stuart H. Gelfond is a partner in the Corporate Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Gelfond, Victoria D. Laubach, and Hayley S. Cohen.

Recently, the New York Stock Exchange LLC (“NYSE” or “Exchange”) filed a proposed rule change with the Securities and Exchange Commission to amend the NYSE Listed Company Manual (the “Manual”), effective September 28, 2015. [1] The proposed amendments (i) expand the pre-market hours during which companies with listed securities are required to notify the Exchange prior to disseminating material news, (ii) provide guidance related to the release of material news after the close of trading on the Exchange and (iii) permit the Exchange to halt trading in certain additional circumstances, including when it needs to obtain more information about a listed company’s news release.


The Board’s Prerogative and Mergers

Clare O’Brien and Rory O’Halloran are partners at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Ms. O’Brien, Mr. O’Halloran, and Gregory Gewirtz. This article first appeared in the July/August 2015 issue of Thomson Reuters’ The M&A Lawyer. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk. 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.

Under Delaware law, the board of directors of each company executing a merger agreement is required to adopt a resolution approving the merger agreement and declaring its advisability, [1] although Delaware law also provides that a company may “agree to submit a matter to a vote of its stockholders whether or not the board of directors determines at any time subsequent to approving such matter that such matter is no longer advisable and recommends that the stockholders reject or vote against the matter.” [2] Further, under the Securities Exchange Act of 1934, for transactions involving a tender offer or exchange offer, the target is required to file a Tender Offer Solicitation/Recommendation Statement on Schedule 14D-9, disclosing the target board’s position as to whether its stockholders should accept or reject the tender offer or defer making a determination regarding such offer. [3]


Treasury Seeks to Curb “Cash-Rich” and
REIT Spin-Offs

Jodi J. Schwartz and Joshua M. Holmes are partners at Wachtell Lipton Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Ms. Schwartz, Mr. Holmes, and David B. Sturgeon.

The Treasury Department and the Internal Revenue Service have announced (in Notice 2015-59) that they are studying issues related to the qualification of certain corporate distributions as tax-free under Section 355 of the Internal Revenue Code in situations involving substantial investment assets, reliance on relatively small active businesses, and REIT conversions. The IRS concurrently issued related guidance (Rev. Proc. 2015-43), adding such transactions to its ever-expanding list of areas on which it will not issue private letter rulings. While this expansion of the IRS’s “no-rule” areas is not a statement of substantive law, these announcements may have a chilling effect on certain pending and proposed transactions.


The Disappearance of Public Firms

Gustavo Grullon is Professor of Finance at Rice University. This post is based on an article authored by Professor Grullon; Yelena Larkin, Assistant Professor of Finance at Penn State University; and Roni Michaely, Professor of Finance at Cornell University.

In our paper, The Disappearance of Public Firms and the Changing Nature of U.S. Industries, which was recently made publicly available on SSRN, we show that contrary to popular beliefs, U.S. industries have become more concentrated since the beginning of the 21st century due to a systematic decline in the number of publicly-traded firms. This decline has been so dramatic that the number of firms these days is lower than it was in the early 1970s, when the real gross domestic product in the U.S. was one third of what it is today.

We show that the decline in the number of public firms has not been compensated by other mechanisms that could reduce market concentration. First, private firms did not replace public firms, as the aggregate number of both public and private firms declined in over half of the industries, and the concentration ratio based on revenues of public and private firms has increased. Second, we examine whether the intensified foreign competition could provide an alternative source of rivalry to domestic firms, and find that the share of imports out of the total revenues by U.S. public firms has remained flat since 2000. Third, we show that the decrease in the number of public firms has been a general pattern that has affected over 90% of U.S. industries, and is not driven by distressed industries, or business niches that have disappeared due to technological innovations or changes in consumer preferences. Instead, it has been driven by a combination of a lower number of IPOs as well as high M&A activity.


Understanding the US Listing Gap

René Stulz is Professor of Finance at Ohio State University. This post is based on an article authored by Professor Stulz; Craig Doidge, Associate Professor of Finance at the University of Toronto; and Andrew Karolyi, Professor of Finance at Cornell University.

The number of publicly-listed firms in the U.S. peaked in 1996 at 8,025. In that year, the U.S. had 30 listings per million inhabitants. By 2012, it had only 13, or 56% less. Importantly, the decrease in listings occurred in all industries and across both the NYSE and Nasdaq. In our new working paper, entitled The U.S. Listing Gap, which was recently made publicly available on SSRN, we show that this evolution is specific to the U.S. Listings in the rest of the world, in fact, increased over the same period. The U.S. has developed a “listing gap” relative to other countries with similar investor protection, economic growth, and overall wealth. The listing gap arises in the late 1990s and widens over time. It is statistically significant, economically large, and robust to different measurement approaches. We also find that the U.S. has a listing gap when compared to its own recent history and after controlling for changing capital market conditions.


The Iliad and the IPO

Andrew A. Schwartz is an Associate Professor of Law at the University of Colorado Law School. This post is based on Professor Schwartz’s recent article published in The Harvard Business Law Review, available here.

Many public companies have shed takeover defenses in recent years, on the theory that such defenses reduce share price. Yet new data presented in my latest article, Corporate Legacy, shows that practically all new public companies—those launching their initial public offering (IPO)—go public with powerful takeover defenses in place, which presumably depresses the price of the shares. This behavior seems strange, as pre-IPO shareholders both have a strong incentive to maximize the value of the shares being sold in the IPO and are in position to control whether to adopt takeover defenses. Why do founders and early investors engage in this seemingly counterproductive behavior? In Corporate Legacy, I look to a surprising place, the ancient Greek epic poem, the Iliad, for a solution to this important puzzle, and claim that pre-IPO shareholders adopt strong takeover defenses, at least in part, so that the company can remain independent indefinitely and thus create a corporate legacy that may last for generations.


Are Public Companies Required to Disclose Government Investigations?

Jon N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg.

For many public companies, the first issue they have to confront after they receive a government subpoena or Civil Investigative Demand (“CID”) is whether to disclose publicly that they are under investigation. Curiously, the standards for disclosure of investigations are more muddled than one would expect. As a result, disclosure practices vary—investigations are sometimes disclosed upon receipt of a subpoena or CID, sometimes when the staff advises a company that it has tentatively decided to recommend an enforcement action, sometimes not until the end of the process, and sometimes at other intermediate stages along the way. In many cases, differences in the timing of disclosure may reflect different approaches to disclosure. We discuss below the standards that govern the disclosure decision and practical considerations. We then provide five representative examples of language that companies used when they disclosed investigations at an early stage.


SPAC-and-Span: A Clean Exit?

Carol Anne Huff is a partner at Kirkland & Ellis who practices corporate and securities laws, with an emphasis on the representation of private equity firms and public companies in capital markets transactions and in mergers, acquisitions and divestitures. The following post is based on a Kirkland memorandum by Ms. Huff and Daniel Wolf.

While robust M&A and IPO markets have given investors solid liquidity options, in some cases selling a company to a publicly traded special purpose acquisition company, or SPAC, can be an appealing alternative. Recent examples in the United States include the $500 million acquisition by Levy Acquisition Corp. of Del Taco in June 2015 and the pending $879 million acquisition by Boulevard Acquisition Corp. of AgroFresh Inc., a subsidiary of The Dow Chemical Company. In the UK, notable examples include Burger King going public in 2012 through a $1.4 billion merger with a UK SPAC.


2015 Spin-Off Guide

Gregory E. Ostling is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz. This post is based on the introduction to a Wachtell Lipton memorandum; the complete publication, including annexes, is available here.

A spin-off involves the separation of a company’s businesses through the creation of one or more separate, publicly traded companies. Spin-offs have been popular because many investors, boards and managers believe that certain businesses may command higher valuations if owned and managed separately, rather than as part of the same enterprise. An added benefit is that a spin-off can often be accomplished in a manner that is tax-free to both the existing public company (referred to as the parent) and its shareholders. Moreover, robust debt markets have enabled companies to lock in low borrowing costs for the business being separated and monetize a portion of its value. For example, in connection with its $55 billion spin-off from Abbott Laboratories in 2012, AbbVie conducted a $14.7 billion bond offering, which at the time was the largest ever investment- grade corporate bond deal in the United States, at a weighted average interest rate of approximately two percent. Other notable recent spin-offs include Penn National Gaming’s spin-off of its real estate assets into the first-ever casino REIT, Rayonier’s spin-off of its performance fibers division, Energizer Holdings’ planned spin-off of its personal care business, Gannett’s planned spin-off of its publishing business, DuPont’s planned spin-off of its performance chemicals business, Yahoo!’s planned spin-off of its stake in Alibaba, eBay’s planned spin- off of PayPal, HP’s planned separation of its PC and printer business and its enterprise business and W.R. Grace’s planned separation of its construction and packaging business and its catalyst and materials technologies business. There were 204 spin-offs announced in 2014 and 201 in 2013.


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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