Monthly Archives: January 2010

Court Takes Narrow View on Safe Harbor for Whistleblower Procedures in France

Edward Greene is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on corporate law matters. This post is based on a Cleary Gottlieb Steen & Hamilton Alert Memo.

On December 8, 2009, the French Cour de Cassation rendered an important judgment about the implementation of whistleblower procedures in France.

Since 2005, whistleblower procedures have been the subject of considerable controversy and difficulties in France. After prohibiting affiliates from McDonald’s Corporation and Exide Technologies from implementing whistleblower procedures required under the Sarbanes-Oxley Act, [1] the French Commission Nationale de l’Informatique et des Libertés (the “CNIL”) released guidelines (the “Guidelines”) summarizing its views on whistleblower procedures [2] and later implemented a safe harbor (the “Safe Harbor”) whereby whistleblower procedures are deemed authorized pursuant to a “unified authorization,” subject to certain conditions. [3]

Since the publication of the Safe Harbor, companies wishing to implement whistleblower procedures in France have three options: [3]


Proposed Changes May Facilitate “Wall-Crossed” Offerings

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client memorandum by Andrew Fabens, Glenn Pollner, Jamie Greenberg and Megan Olds.

On December 21, 2009, the Securities and Exchange Commission issued a proposed amendment to paragraph (c) of Rule 163 under the Securities Act of 1933, as amended. Rule 163 was initially adopted in 2005 as part of the SEC’s Securities Offering Reform, which, among other things, eased many of the “gun jumping” restrictions on communications by issuers and others in connection with registered securities offerings. The proposed amendments to Rule 163 would further ease some of these restrictions and may thereby facilitate so called “wall-crossed” offerings by well-known seasoned issuers, or WKSIs. [1]

As currently in effect, Rule 163 permits a WKSI to offer securities before filing a related registration statement. Such offers may be deemed made, for example, when discussions with potential investors take place to gauge market interest prior to broad public disclosure of a transaction. However, as currently drafted, Rule 163 applies only to communications made “by or on behalf of the issuer itself.” Other offering participants, such as underwriters or dealers, may not rely on this exception from the gun jumping restrictions. This limitation can create a significant impediment to a WKSI seeking to communicate with potential investors in advance of a securities offering, but has not filed an automatic shelf registration statement, or ASR, [2] covering the security to be offered.


Acquirer-Target Social Ties and Merger Outcomes

This post comes to us from Joy Ishii, Assistant Professor of Finance at the Stanford Graduate School of Business, and Yuhai Xuan, Assistant Professor of Business Administration at the Harvard Business School.

In our recent working paper Acquirer-Target Social Ties and Merger Outcomes, we estimate the relationship between merger announcement returns and the extent of social ties between the top managers and directors of the two merging firms. We focus on educational institutions as well as employment history as the basis of the social networks that we use in our analyses.

Using a sample of 539 mergers between publicly-traded U.S. firms between 1999 and 2007, we find that acquirers’ announcement returns associated with a merger tend to be lower in the presence of many social connections. Upon examining the relationship between target announcement returns and social ties, we find no significant relationship that would indicate that targets are overpaid based on social networks. We then consider the acquirer and target weighted average announcement return for the combined entity and confirm that the overall effect of social ties is significantly negative, both statistically and economically. This supports the view that the negative impact of social networks outweighs whatever positive information-based effects might be present.


Pros and Cons of Voluntarily Implementing Proxy Access

Charles Nathan is Of Counsel at Latham & Watkins and is Global Co-Chair of the firm’s Mergers and Acquisitions Group. This post is based on a Corporate Governance commentary by Latham & Watkins and Georgeson Inc.

Although many things about proxy access remain uncertain, it is clear the SEC remains committed to adopting a final rule in early 2010. The new rule will likely be effective for the 2011 proxy season.

In our previous Proxy Access Analysis No. 4 we observed that:

  • A critical question for companies and investors alike is whether the final rule will permit shareholders to adopt bylaws that impose greater limitations on proxy access than the SEC rule (for example, by raising the minimum number of shares that a nominating shareholder must own or increasing the holding period).
  • If the final rule does permit shareholders to adopt such a bylaw (commonly called an opt-out bylaw), it seems safe to assume many companies will propose opt-out bylaws to their shareholders in order to tailor proxy access better to the particular circumstances of each company.
  • It would make sense for companies to consider over the next several months whether they would prefer to propose an opt-out bylaw at their 2010 annual meetings, rather than waiting until their 2011 meetings or later.


Market Reactions to CEO Inside Debt Holdings

Editor’s Note: This post comes to us from David Yermack, the Albert Fingerhut Professor of Finance and Business Transformation at New York University, and Chenyang Wei, economist at the Federal Reserve Bank of New York.

In our recently updated working paper Stockholder and Bondholder Reactions to Revelations of Large CEO Inside Debt Holdings: An Empirical Analysis, we investigate investor reactions to the first disclosures of the values of CEOs’ pensions and deferred compensation. These two items together comprise managers’ “inside debt” claims against their firms, since each represents a fixed liability owed by the companies to their executives at a future date.

We identify 231 companies whose CEOs have positive inside debt holdings and whose proxy statements with 2006 compensation data are filed in early 2007 during the first wave of disclosures under the SEC’s new executive compensation disclosure regulations. About 45% of these CEOs have excessive inside debt, as their personal inside debt-equity ratios exceed the external debt-equity ratios of their firms. As expected, we find evidence of transfers of value away from equity and toward debt upon revelations that top managers hold large pension and deferred compensation claims. Our results show that bond prices rise, equity prices fall, and the volatility of both securities drops at the time of disclosures by firms whose CEOs have large inside debt.


Ten Thoughts for Ordering Governance Relationships in 2010

Holly Gregory is a Corporate Partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal client memorandum by Ms. Gregory, Ira M. Millstein and Rebecca C. Grapsas. The complete memorandum is available here.

As the 2010 proxy season nears, we encourage both boards and shareholders to rethink the contours of their relationship. We expect institutional shareholders to have greater influence in director elections this year given the increasing prevalence of majority voting requirements and, for the first time, the absence of discretionary voting by brokers of uninstructed shares. Institutional shareholder power will expand further in 2011 if the SEC moves forward with proxy access rules and Congress enacts legislation mandating majority voting and “say on pay.” In this environment, boards and shareholders will be well served by considering in an open way how this shift in influence should be reflected in changes in behavior.

For boards, the challenge will be to understand the key concerns of the company’s shareholder base and get out ahead on these issues. Boards should also consider whether company disclosures and communications can be improved to better inform shareholders and encourage them to make company-specific decisions through a long-term lens. This will require devoting more attention, resources and creativity to communications and relations with shareholders. Boards that are insensitive to shareholder concerns risk bruising election battles, while providing further inducement for the homogenized governance mandates currently percolating in Washington.


Additional Views on What TARP Has Achieved

Editor’s Note: Damon Silvers is Associate General Counsel for the AFL-CIO and a member of the Congressional Oversight Panel established in 2008 to review the current state of financial markets and the regulatory system. This post is based on Mr. Silver’s additional views on the recent report of the Panel, which was the subject of this post by Professor Elizabeth Warren.

This separate view does not reflect a disagreement with the Panel report in any respect. Rather I wish to say in a somewhat briefer and perhaps blunter way what I believe the Panel report as a whole says about TARP.

The Emergency Economic Stabilization Act of 2008 and the Troubled Asset Relief Program it created, in my opinion, were significant contributors to stabilizing a full blown financial panic in October 2008. It is clear to me that for that reason, we are better off as a nation for the existence of TARP than if we had done nothing. Of course this proposition is very hard to prove, but I am convinced it is true. Many people deserve credit for doing TARP rather than doing nothing, but three people who in particular deserve credit are Federal Reserve Chairman Ben Bernanke, Treasury Secretary Timothy Geithner, and in particular, former-Treasury Secretary Henry Paulson.


Compensation and Risk Under New SEC Rules

Edward Greene is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on corporate law matters. This post is based on a Cleary Gottlieb Steen & Hamilton alert memorandum.

The SEC has amended its disclosure rules to require, among other matters, a discussion about a company’s compensation policies and practices for all employees if they create risks that are “reasonably likely” to have a material adverse effect on the company. [1] Prior SEC guidance, to which the SEC referred in adopting the amendments, indicates that the “reasonably likely” threshold is higher than “possible” but lower than “more likely than not.”

We are skeptical that any compensation committee knowingly approves compensation programs and arrangements that place the company at material risk, and insofar as the standard imports a “risk factor”-type threshold, we question whether it will elicit meaningful disclosure. That said, a conclusion that the disclosure trigger is not met necessarily rests on an assessment of the balance of risk and reward implied by the company’s compensation program design and incentive targets, taken as a whole. As with many SEC rules in the post-SOX era, process will be key. Because the compensation committee plays a central role in that process, we suggest below practical considerations relevant to its deliberations. We also note that most compensation committees do not now routinely review compensation arrangements for rank and file employees. A predicate for analyzing the disclosure question will therefore be an inventory and review of the operation of compensation programs for all employees, which should be undertaken immediately in light of the effective date of the rules. [2]


Board of Directors Meeting Agendas

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisition and matters affecting corporate policy and strategy. This post is based on a Wachtell, Lipton, Rosen & Katz client memorandum by Mr. Lipton, Steven A. Rosenblum, and Karessa L. Cain.

The numerous legislative and regulatory initiatives adopted or proposed in response to the economic crisis, and the increased corporate governance activism by shareholders and their advisory organizations, raise the question of what are the key matters that a board should be considering on a regular basis. As a supplement to our recent post on the Forum, entitled Some Thoughts for Boards of Directors in 2010, we developed the following list of matters. Some matters could be visited once a year; and some should be visited at each meeting. Some companies will need to add matters to this list in view of relevant business, corporate governance or other issues specific to their companies. Boards should also consider the extent to which some of these matters should be addressed more fully by board committees. Each company should tailor the scope of, and the allocation of time to, the matters, and the frequency of their consideration, to its particular circumstances.

  • Performance of the business, including comparison to budget and peers
  • CEO succession and exposure of senior executives to the board


Basel Committee Proposes Strengthening Bank Capital and Liquidity Regulation

H. Rodgin Cohen is a partner and chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell client memorandum.

On December 17, 2009, the Basel Committee issued two consultative documents proposing reforms to bank capital and liquidity regulation, which are intended to address lessons learned from the financial crisis that began in 2007. [1] The document titled Strengthening the Resilience of the Banking Sector proposes fundamental, although in many respects anticipated, changes to bank capital requirements. The document titled International Framework for Liquidity Risk Measurement, Standards and Monitoring proposes specific liquidity tests that, although similar in many respects to tests historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation.

The proposals in the first document, which we refer to as the “capital proposals”, would significantly revise – and, as described by the consultative document, simplify – the definitions of Tier 1 Capital and Tier 2 Capital, with the most significant changes being to Tier 1 Capital. Among other things, the proposals would disqualify innovative capital instruments – including U.S.-style trust preferred securities and other instruments that effectively pay cumulative distributions, and in many cases are debt for tax purposes – from Tier 1 Capital status. They would also re-emphasize that Common Equity is the “predominant” component of Tier 1 Capital by (i) adding a minimum Common Equity to risk-weighted assets ratio, with the ratio itself to be determined based on the outcome of an impact study that the Committee is conducting, and (ii) requiring that goodwill, general intangibles and certain other items that currently must be deducted from Tier 1 Capital instead be deducted from Common Equity as a component of Tier 1 Capital. This approach could have a significant impact on acquisitions in which goodwill arises.


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