Yearly Archives: 2008

Emergency Economic Stabilization Act of 2008: US Government Capital Injections

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Saturday, October 18, 2008
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This post comes to us from Davis Polk & Wardwell partners Samuel Dimon, Randall D. Guynn, Michael Kaplan, Mark Mendez, Margaret E. Tahyar, and William L. Taylor who advised the Federal Reserve Bank of New York on the plan discussed in the memo.

In the wake of intense pressure in the global credit markets and continued turmoil in the stock markets, the US Treasury Department, in coordination with other G-7 governments, recently expanded its plan to restore confidence in the US banking system.

Wielding the extraordinary discretion recently granted to it by Congress, the US government announced a plan to inject $250 billion of capital directly into the US banking system, to guarantee the short-term debt of most US banks and thrifts and to eliminate FDIC insurance limits for noninterest bearing accounts. Under the plan, the Secretary of the Treasury, the Chairman of the FDIC and the Chairman of the Federal Reserve Board jointly announced the following:

  • Treasury will use the full $250 billion it currently has available under the Troubled Asset Relief Program (“TARP”) to purchase preferred stock and warrants for common stock of the nine US bank holding companies that are systemically important and of other healthy regional and community banks;
  • The FDIC will use its emergency powers to guarantee through June 30, 2012 certain senior unsecured debt issued by eligible banking institutions; and
  • The FDIC will provide unlimited insurance through 2009 for non-interest bearing deposit accounts, a move primarily designed to protect the payroll and working capital accounts of small and medium-sized businesses.

This memorandum analyzes the implications of these developments and the federal government’s evolving response to the financial crisis.

The memo is available here.

Executive Compensation and the Emergency Stabilization Act of 2008

Posted by Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, on
Friday, October 17, 2008
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This post is based on a memorandum by Michael J. Segal, Jeannemarie O’Brien, Adam J. Shapiro, and Jeremy L. Goldstein of Wachtell, Lipton, Rosen & Katz.

The President recently signed into law the Emergency Economic Stabilization Act of 2008 (the “Act”), which aims to restore liquidity and stability to the financial system, to protect the value of Americans’ homes and savings and to promote economic growth. The Act includes a number of provisions relating to executive compensation, which have important implications for financial institutions selling troubled assets under the Act.

The Act subjects financial institutions that sell assets to the Treasury to restrictions on executive compensation based on the nature of the sale. In a recent Memorandum, my colleagues and I identify several items that demand immediate attention from institutions that may become subject to these restrictions:

• Severance Agreements. Financial institutions that have previously determined to enter into severance agreements with senior executive officers or individuals who may become senior executive officers should execute these agreements prior to engaging in sales of troubled assets under the Act, although it is unclear whether the prohibition on new golden parachute agreements will apply retroactively to cover arrangements entered into after enactment of the Act but prior to such sales.

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Delaware Court Provides Further Guidance on Material Adverse Effect Clauses

Posted by Scott J. Davis, Mayer Brown LLP, on
Thursday, October 16, 2008
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This post is from Scott J. Davis of Mayer Brown 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 Chancery Court’s decision in Hexion Specialty Chemicals, Inc. v. Huntsman Corp. represents a strong statement by the Delaware courts that they will not tolerate efforts by buyers who have changed their minds about deals, or have been pressured by their lenders to change their minds, to avoid their contractual obligations on the basis of contrived arguments. Following previous Delaware cases, the Court rejected the buyer’s claim that a material adverse effect excused its obligation to close, holding that the buyer had not met its burden of showing “the occurrence of unknown events that substantially threaten the overall earnings potential of the target in a durationally-significant manner.”

My partner William Kucera has written a memorandum discussing the court’s reasoning and offering detailed suggestions and observations for drafting MAE clauses in future deals. In particular, it discusses provisions — other than MAE clauses — on which buyers could rely as a means to avoid closing a transaction. Against the backdrop of the decision, the memo also explains the continued relevance of MAE clauses in deals and describes how threats by the buyer to invoke such a clause have played out in a number of recent transactions.

The memorandum is available here.

The Merger Agreement as a Contract

Posted by Jim Naughton, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, October 15, 2008

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Recently, in the Mergers, Acquisitions, and Split-Ups course here at Harvard Law School, two preeminent M&A practitioners discussed The Merger Agreement as a Contract. Richard Climan, head of the M&A group at Cooley Godward Kronish, and Eileen Nugent, co-head of the private equity group at Skadden and a member of the advisory board of the Harvard Law School Program on Corporate Governance, went through all the components of an acquisition agreement, from the description of the deal to the deceptively labelled “boilerplate”. They stressed the role of the acquisition agreement for allocating risk between the parties, and as a roadmap for the transaction between signing and closing (and beyond). Mock negotiations between Climan and Nugent served to demonstrate what is at stake in certain key provisions. Climan and Nugent discussed the impact of recent events and court decisions with Vice Chancellor Leo Strine, Jr., who is one of the class’s teachers and who has authored many of those decisions himself on the Delaware Court of Chancery. Professor Robert Clark, Strine’s co-teacher and former Dean of Harvard Law School, added some perspective from the boardroom. The video of the panel is available here. (video no longer available)

Delaware Court Orders Hexion to Pursue Financing of Huntsman Acquisition

Posted by George R. Bason, Jr., Davis Polk & Wardwell LLP, on
Tuesday, October 14, 2008
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This post is from George R. Bason, Jr. of Davis Polk & Wardwell LLP. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

My colleagues Phillip R. Mills and Justine Lee and I have prepared the following post on the Delaware Chancery Court’s recent decision in Hexion Specialty Chemicals, Inc., v. Huntsman Corp., C.A. No. 3841-VCL (Del. Ch. Sept. 29, 2008).

The Delaware Chancery Court ruled that Hexion Specialty Chemicals, Inc. must specifically perform its covenants under its merger agreement with Huntsman Corporation, including taking all actions necessary to consummate the financing of the transaction and to satisfy antitrust regulators, but the Court stopped short of requiring Hexion, a portfolio company of Apollo Global Management, to consummate the transaction. The Court rejected Hexion’s claim that Huntsman had suffered a “Material Adverse Effect” or MAE (as discussed more fully below), and found that Hexion deliberately breached its obligations under the merger agreement and that any damages caused by such breach will not be subject to the $325 million liquidated damages cap in the contract.

While this decision is a clear victory for Huntsman and stands out from other recent instances where private equity buyers have successfully negotiated or litigated to extricate themselves from highly leveraged transactions entered into before the credit crunch, when contemplating its wider implications, the Court’s rulings must be analyzed in the context of a merger agreement that was particularly favorable to the seller. The merger agreement was negotiated in a competitive “deal jump” situation, with an industrial counterparty, after Huntsman had already entered into a signed agreement to sell itself to a third party.

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Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration

Posted by William N. Goetzmann, Yale School of Management, on
Monday, October 13, 2008
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This post is from William N. Goetzmann of Yale School of Management.

In our forthcoming Journal of Finance article, Mandatory Disclosure and Operational Risk: Evidence from Hedge Fund Registration, we use the SEC rule adopted on December 2, 2004 that required hedge fund managers to register as investment advisers by February 1, 2006 as an opportunity to test the potential value and materiality of operational risk and conflict of interest variables disclosed by a large number of hedge funds in February 2006. On June 23, 2006, the U.S. Court of Appeals for the District of Columbia Circuit vacated this rule change, with the result that far fewer hedge fund managers have been required to register as investment advisors. As a result, the February 2006 ADV filings by a large number of hedge fund managers present a rare opportunity to examine the fundamental question of whether such disclosure is necessary or warranted.

We find that operational risk indicators are conditionally correlated with conflict of interest variables, indicating a potential value of disclosing such conflicts to investors. Operational risk factors are also correlated with lower leverage and concentrated ownership, suggesting that the 2006 disclosure requirements may have been redundant for lenders and equity investors in hedge funds. In contrast, operational risk factors had no ex-post effect on the flow-performance relationship, suggesting that investors either lack this information or do not regard it as material. The results of our analysis provide a framework for the cost-benefit analysis of regulatory disclosure. Our findings suggest that any consideration of disclosure requirements should take into account the endogenous production of information within the industry, and the marginal benefit of required disclosure on different investment clienteles.

The full paper is available for download here.

The Ban and the TARP

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on
Sunday, October 12, 2008
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This post is based on a memorandum by Edward D. Herlihy and Theodore A. Levine of Wachtell, Lipton, Rosen & Katz.

Recently the SEC announced that its ban on short selling in financial company stocks would expire three (3) days after the enactment by Congress of the Troubled Asset Relief Program. It was an arbitrary decision to tie the expiration of the ban to the Congressional action and, even if it made sense when the SEC announced it, it does not make sense now for the SEC ban to be lifted at midnight on Wednesday, October 8, 2008, especially given the recent market turmoil and instability.

The worldwide credit and securities markets are experiencing a serious meltdown with significant disruptions and dislocations. A substantial number of market regulators have, in one fashion or another and for varying lengths of time, banned short selling in financial company stocks. The SEC should coordinate its efforts, including the length of the short selling ban with the major international regulators and marketplaces in order to have a consistent and coordinated approach. It makes no sense for the SEC to impose the shortest ban or to unilaterally lift it.

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SEC Announces Extension of Emergency Short Selling Orders and Related Action

Posted by James Morphy, Sullivan & Cromwell LLP, on
Saturday, October 11, 2008
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This post is from James Morphy of Sullivan & Cromwell LLP.

The SEC recently issued a statement announcing that it was extending certain temporary emergency orders and describing other actions relating to short selling rules. The following temporary orders are being extended:

• The order prohibiting short selling in public financial companies specified by the securities exchanges on which the shares of those companies are listed. This order will be extended to 11:59 p.m. ET on the third business day after enactment of the legislation currently pending in Congress to stabilize credit markets and the financial system, but in no event later than 11:59 p.m. ET on October 17, 2008.

• The order requiring that institutional money managers report to the SEC their new short sales of certain publicly traded securities. This order will be extended to 11:59 p.m. ET on October 17, 2008, but the SEC intends that the order will continue in effect after that date without interruption in the form of an interim final rule. While the SEC will seek comments on the anticipated rulemaking, the rules will remain in effect during the comment period. The October 1 statement also provides that disclosure under the emergency order will be made only to the SEC.

• The order easing restrictions on the ability of securities issuers to repurchase their securities. This order will be extended to 11:59 p.m. ET on October 17, 2008.

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CSC Publishing Releases Fall Update of Delaware Laws Governing Business Entities

Posted by Andrea Unterberger, Corporation Service Company, on
Friday, October 10, 2008
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This post is from Andrea Unterberger of Corporation Service Company. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Corporation Service Company’s publishing division has released the Fall 2008 Edition of Delaware Laws Governing Business Entities, a two-volume set containing annotated Delaware business statutes and other useful research features.

The books, which are published in collaboration with legal publisher LexisNexis, are updated every six months to ensure that readers have access to current statutory information and recent cases, and contain the most recent annotations of judicial decisions applying Delaware business entity law around the country.

The Fall 2008 Edition has been updated to include the latest legislation from the 2008 Regular Session of the Delaware General Assembly, with summaries of all amended statutes describing the changes made, as well as over 50 new case annotations of judicial decisions in all U.S. jurisdictions applying Delaware business entity law. The chapter entitled “Amounts Payable by Business Entities under Delaware Law” reflects changes made to many of Delaware’s filing fees.

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A lesson from 1929 for the hedge funds

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, October 9, 2008
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Editor’s Note: This post by our Guest Contributors John Armour of the University of Oxford and Brian Cheffins of the University of Cambridge was published today on ft.com.

The current credit crisis has many reaching for their history books, seeking to find out what lessons might be drawn from previous financial disasters. There is a rich history of bank failures. What can history tell us about the $2,000bn world of hedge funds?

Some say the turmoil in financial markets could be a boon for shrewd hedge fund managers, allowing them to pick up assets on the cheap from distressed sellers. Others argue hedge funds are in a potential death spiral, with redemption demands from investors prompting asset sales which lock in losses, in turn prompting further redemptions and so on.

While hedge funds seem to capture perfectly the zeitgeist of contemporary capitalism, they actually have parallels in investment companies that flourished on Wall Street in the late 1920s. By 1929 a new investment company was being launched every day amidst frenzied demand from investors. These investment companies had a number of similarities to modern hedge funds.

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