Self-Dealing Without a Controller

Jason M. Halper and Ellen V. Holloman are partners and James M. Fee is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Ms. Holloman, and Mr. Fee and is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

On July 26, 2018, Vice Chancellor Glasscock of the Delaware Court of Chancery denied in part and granted in part Defendants’ motion to dismiss in Sciabacucchi v. Charter Communications Corporation et al. We discussed the Court’s prior ruling in this action here. In brief, the action challenged certain transactions between Charter Communications, Inc. and its largest stockholder, Liberty Broadband Corporation, which owned approximately 26% of Charter’s outstanding common stock and had the right to designate four of ten directors on Charter’s Board. In particular, a Charter stockholder challenged a voting proxy agreement between Charter and Liberty and two stock issuances worth $5 billion made by Charter to Liberty, allegedly as a part of the “financing” of Charter’s $78.7 billion merger with Time Warner Cable and its purchase of Bright House Networks, LLC. Ultimately, 86% of Charter stock not affiliated with Liberty voted, in a single vote, to approve (i) the share issuances and the voting agreement, (ii) the merger with Time Warner Cable and (iii) the purchase of Bright House. Both third-party transactions were conditioned on Charter stockholders’ approval of the share issuances to and voting agreement with Charter.

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Urban Vibrancy and Firm Value Creation

Christopher A. Parsons is Professor at the University of Washington Foster School of Business. This post is based on a recent paper authored by Professor Parsons; Casey Dougal, Assistant Professor of Finance at Drexel University LeBow College of Business; and Sheridan Titman, Professor of Finance at University of Texas at Austin McCombs School of Business.

Financial economists have long been interested in the reasons some organizations create more value than others. One common measure takes the difference between a firm’s market value and the replacement cost of its assets, under the notion that when management adds little value, the firm should be worth approximately the value of its plants, equipment, and other physical assets. On the other hand, when managers can squeeze more value out of these assets, the “market-to-book” ratio can substantially exceed one, the wedge representing value created for its shareholders. In this paper, we ask whether the location of a firm’s headquarters represents a source of comparative advantage, and accordingly, whether market-to-book ratios differ meaningfully between headquarter cities.

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FCPA Successor Liability

James Gatta and Derek Cohen are partners at Goodwin Procter LLP. This post is based on a Goodwin Procter memorandum by Mr. Gatta and Mr. Cohen.

In its continuing efforts to encourage companies to self-report Foreign Corrupt Practices Act (FCPA) violations, the Department of Justice (DOJ) announced [July 25, 2018] that it intends to apply the principles of its FCPA Corporate Enforcement Policy to successor companies that uncover wrongdoing in connection with mergers and acquisitions. Accordingly, successor companies that voluntarily disclose such wrongdoing to the DOJ, cooperate with a government investigation of the conduct, and enact effective remedial measures will be positioned to benefit from the principles of the policy, including being presumed eligible for a declination of prosecution. The announcement made clear that the FCPA Corporate Enforcement Policy will apply to companies that uncover corrupt conduct through due diligence in advance of an acquisition as well as to companies that learn of such conduct subsequent to an acquisition. This extension of the policy to mergers and acquisitions was announced on July 25, 2018, by Deputy Assistant Attorney General (DAAG) Matthew S. Miner of the Criminal Division of the Department of Justice, at the American Conference Institute’s Eighth Global Forum on Anti-Corruption Compliance in High-Risk Markets, held in Washington, D.C.

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Director Skill Sets

Renée B. Adams is Professor of Finance at the University of Oxford’s Saïd Business School; Ali C. Akyol is Senior Lecturer at the University of Melbourne; and Patrick Verwijmeren is Professor of Corporate Finance at the Erasmus School of Economics and the University of Melbourne. This post is based on a recent paper by Professor Adams, Dr. Akyol, and Professor Verwijmeren.

Boards of directors are multi-dimensional and the optimal board combines monitoring and advisory roles to varying degrees. We examine how individual director skills map into these roles. Do directors specialize as “advisors” or “monitors,” or, like boards, do they combine roles? And how do directors’ skills aggregate to the board level—are individual skills independent of each other or do they complement/substitute each other? The answers to these questions are important for understanding what boards do, why they are structured the way they are, and how they can be improved.

In our paper, we answer these questions by exploiting an amendment to Regulation S-K in 2009, which requires public U.S. firms to describe their reasons for nominating directors. According to this rule, firms have to disclose the skills they believe each director brings to the table. A particular strength of these data is that the descriptions represent the firm’s perspective rather than a perspective chosen by researchers. The data allow us to document the skills that directors have and allow us to test how these skills cluster at the board level. We then examine whether some boards have skill sets that lead them to systematically outperform other boards.

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Women in the C-Suite: The Next Frontier in Gender Diversity

Subodh Mishra is Executive Director at Institutional Shareholder Services, Inc. This post is based on an ISS Analytics publication by Kosmas Papadopoulos, Managing Editor at ISS Analytics.

Despite recent advances in female board participation globally, gender diversity among top executives remains disappointingly low across all markets, with some improvement discerned in the past few years. Moreover, there does not appear a correlation between board gender diversity and gender diversity in the C-Suite at the market level. Some of the markets that have implemented gender quotas on boards and have achieved the highest rates of female board participation, such as France, Sweden, and Germany, appear to have embarrassingly low rates of female top executives. In fact, many of the markets with progressive board diversity policies have lower gender diversity levels in executive positions compared to several emerging markets like South Africa, Singapore, and Thailand. Thus, achieving higher rates of gender diversity in the C-Suite will require deeper cultural shifts within organizations in order to overcome potential biases and hurdles to gender equality.

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Proposed Amendments to SEC’s Whistleblower Program

Angela Burgess, Kyoko Takahashi Lin, and Linda Chatman Thomsen are partners at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Burgess, Ms. Takahashi Lin, Ms. Chatman Thomsen, Michael Flynn, Katherine Swan, and Sidney Bashago.

On June 28, 2018, the Securities and Exchange Commission (“SEC”) voted to propose amendments to the rules governing its whistleblower program. These changes include expanding the types of resolutions covered by the program, giving the SEC discretion in modifying awards, eliminating potential double recovery, adjusting the claims review process, and barring individuals who submit false information or make repeated frivolous claims. [1] The proposed amendments would also expressly adopt the reporting requirements set forth in Digital Realty Trust, Inc. v. Somers, a recent Supreme Court decision which held that Dodd-Frank whistleblower protections apply only when a securities-law violation is reported to the SEC. [2] If adopted, these rules may increase reporting of potential securities-law violations to the SEC, though more data is needed to better understand the potential ramifications.

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Circuit Split on Morrison Application

Jared Gerber, Roger Cooper, and Adam Fleisher are partners and Leslie Silverman is senior counsel at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Gerber, Mr. Cooper, Mr. Fleisher, Mr. Silverman, and Alexandra McCown.

On July 17, 2018 the Ninth Circuit, in Stoyas v. Toshiba Corporation, held that the Supreme Court’s ruling in Morrison v. National Australia Bank Ltd. did not preclude the assertion of claims under the U.S. federal securities laws against foreign issuers with respect to domestic transactions in unsponsored American Depository Receipts (“ADRs”). The court, however, further held that even though a domestic transaction in unsponsored ADRs is necessary for the federal securities law to apply under Morrison, it is not sufficient under the Exchange Act. In order to state a claim against a foreign issuer, a plaintiff must also allege sufficient facts to demonstrate that the defendant’s actions were committed “in connection with” the domestic transaction at issue. In short, the plaintiff must allege facts showing that the foreign issuer committed the fraud to induce the domestic transaction. In issuing this decision, the Ninth Circuit explicitly parted ways with the Second Circuit’s decision in Parkcentral Global Hub Ltd. v. Porsche Automobile Holdings, which held that a domestic transaction may not satisfy Morrison if the nature of the transaction and allegations of fraud were predominantly foreign. The Ninth Circuit’s decision has important consequences for determining the extraterritorial scope of the federal securities laws, particularly with respect to unsponsored ADRs and other transactions in which the named foreign entity may not have been involved.

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Shedding the Status of Bank Holding Company

V. Gerard Comizio is partner and Nathan S. Brownback is associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Comizio and Mr. Brownback.

On July 17, 2018, the Financial Stability Oversight Council (“FSOC”) issued a proposed decision that would, if finalized, approve a transaction (the “Transaction”) through which Zions Bancorporation, a bank holding company (“BHC”), would be eliminated through a merger into its national bank subsidiary, Zions Bank, N.A. (“ZB,” and, collectively with Zions Bancorporation, “Zions”), such that ZB would be the surviving entity.

Currently, Zions is a $66 billion banking organization, headquartered in Utah. It operates 433 branches in the western United States under eight brand names, and 99.7% of Zions Bancorporation’s assets and revenues come from ZB.

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SEC Concept Release on Compensatory Offerings

Laura D. Richman is counsel and Robert F. Gray, Jr. and Michael L. Hermsen are partners at Mayer Brown LLP. This post is based on a Mayer Brown memorandum by Ms. Richman, Mr. Gray and Mr. Hermsen.

On July 18, 2018, the US Securities and Exchange Commission (SEC) issued a concept release [1] soliciting public comment on potential ways to modernize compensatory offerings and sales of securities, consistent with investor protection. Specifically, the concept release requests comment on aspects of Rule 701 under the Securities Act of 1933 (Securities Act), an exemption from registration for securities issued by non-reporting companies pursuant to compensatory arrangements, and on Form S-8, a registration statement used by SEC-reporting companies for compensatory offerings. This post highlights key questions raised by the concept release. The comment period is scheduled to remain open through September 24, 2018.

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Weekly Roundup: August 3-9, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of August 3-9, 2018.

SEC Liability for Social Media Violations



Private Equity Liability Under European Law



Structuring Discretion for Clawbacks



JOBS Act 3.0


The Rise of the Net-Short Debt Activist



2018 Proxy Season Review



What Directors Need to Include in Effective Appraisal Notices



Cash America and the Structure of Bondholder Remedies


Should a Board Have a Reputation?

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