Monthly Archives: February 2010

Acquirers Not Liable for Attorneys’ Fees for Renegotiating Merger Terms

Marc Wolinsky is a member of the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton client memorandum by Mr. Wolinsky and his colleagues Ian Boczko and Rodman K. Forter, Jr.

Two recent rulings in New York and Delaware denying motions by plaintiffs in a shareholder class action for attorneys fees should provide acquirers with comfort that they can negotiate changes to transaction terms without fear that the renegotiation will necessarily render them liable for attorneys’ fees. In re Bear Stearns Litig., Index No. 600780/08 (N.Y. Sup. Ct. Dec. 28, 2009); Alaska Electrical Pension Fund v. Brown, C.A. No. 2015 (Del. Jan. 14, 2010).

In the Bear Stearns case, the plaintiffs filed suit challenging the terms of an acquisition the day after it was announced, claiming that the consideration was inadequate. When the parties to the merger subsequently renegotiated its terms to increase the consideration, the class action plaintiffs sought attorneys’ fees, claiming that their litigation had caused the parties to renegotiate the economic terms of the deal. Similarly, in Alaska Electrical Pension Fund, while the defendant agreed that the settlement of Delaware litigation played a role in the decision to increase the deal price from $93 to $100 per share, the defendant contested the claim of non-settling plaintiffs that their separate litigation in California played a role in the subsequent decision to raise the deal price to $109 per share.

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Exploring the Roles Corporate and Securities Law Can Play in Encouraging Corporations to Respect Human Rights

John Ruggie is the Berthold Beitz Professor of International Affairs at the Kennedy School of Government, an Affiliated Professor in International Legal Studies at Harvard Law School, and the UN Secretary-General’s Special Representative for Business and Human Rights (SRSG).

Recently York University’s Osgoode Hall Law School in Toronto convened an expert meeting in support of the Corporate Law Tools Project of my UN mandate, titled “Corporate Law and Human Rights: Opportunities and Challenges of Using Corporate Law to Encourage Corporations to Respect Human Rights.” The consultation was also supported by the Office of the UN High Commissioner for Human Rights and further assistance was provided by Export Development Canada and PricewaterhouseCoopers.

I was appointed in 2005 by then UN Secretary‐General Kofi Annan, pursuant to a broad mandate adopted by the then UN Commission on Human Rights, to identify and clarify standards of corporate responsibility and accountability regarding human rights, including the role of states. In June 2008, after extensive global consultation with business, governments and civil society, I proposed a policy framework to the UN Human Rights Council (Council) for better managing business and human rights challenges. The Council was unanimous in welcoming the framework.

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Policy Perspectives on OTC Derivatives Market Infrastructure

This post comes to us from Darrell Duffie, Professor of Finance at Stanford University, Ada Li of the Federal Reserve Bank of New York, and Theodore Lubke of the Federal Reserve Bank of New York.

In our paper Policy Perspectives on OTC Derivatives Market Infrastructure (Federal Reserve Bank of New York Staff Report No. 424), we address market design weaknesses in the over-the-counter (OTC) derivatives market that were identified through the crisis, and discuss how the New York Fed and other regulators could improve the structure of this market.

In the wake of the recent financial crisis, OTC derivatives have been blamed for increasing systemic risk. Over-the-counter derivatives markets are said to be complex, opaque, and prone to abuse by market participants who would take irresponsibly large amounts of risks. Although OTC derivatives were not a central cause of the crisis, we find that weaknesses in the infrastructure of derivatives markets did exacerbate the crisis. As a result of failures of risk management, corporate governance, and management supervision, some market participants took excessive risks using these instruments. The complexity and limited transparency of the market reinforced the potential for excessive risk-taking, as regulators did not have a clear view into how OTC derivatives were being traded. If used responsibly, however, over-the-counter derivatives provide important risk management and liquidity benefits to the financial system as well as non-financial corporations and other market participants.

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Ownership’s Powerful and Pervasive Effects on M&A

John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post relates to Professor Coates’ working paper, The Powerful and Pervasive Effects of Ownership on M&A, which is available here.

Mergers and acquisition (M&A) practices vary – indeed, practitioner lore is that every deal is unique.  But M&A deals have much in common.  M&A contracts, techniques, and outcomes vary systematically.  While practitioners exploit such patterns, few have been reported, analyzed, or considered in academic research, and not all practitioners fully reflect these patterns in their practices.  In a recent working paper, available here, I show that ownership dispersion is a first-order determinant of M&A practices.  Firms with dispersed ownership are more salient, and tend to be larger, but dispersion varies significantly even at large US businesses, and affects M&A deal size, duration, techniques, contract terms, and outcomes.

Privately held firms are an important part of the US economy, as is private target M&A. Most US business corporations had 100 or fewer owners, and those firms generated 20+% of corporate receipts in 2006.  Of businesses with more than $250 million in assets, only 18% were C corporations with 500+ shareholders.  Even at public companies, dispersion varies significantly.  A few have millions of record owners, and 500+ have 15,000+ shareholders. But 500+ “public” companies have fewer than 50 record shareholders, and over a third have fewer than 300 record holders.  These companies are the reverse of firms that have “gone dark” – they could deregister with the SEC, but instead voluntarily choose to “remain lit” and file regular reports.

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SEC Releases Initiative to Foster Cooperation

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn update by Mark Schonfeld, John Sturc, George Curtis, Barry Goldsmith, Alex Southwell and Darcy Harris.

The SEC yesterday formally released an anticipated new initiative designed to encourage individual and company cooperation with SEC investigations and enforcement actions. [1] The initiative, laid out in a new section of the enforcement manual for the Division of Enforcement entitled “Fostering Cooperation,” (the “Initiative”) establishes incentives for early, substantial, robust cooperation with the stated goal of ensuring “that potential cooperation arrangements maximize the Commission’s law enforcement interests.” [2] The Initiative provides guidance for evaluating an individual’s cooperation and authorizes new cooperation tools, including cooperation agreements, deferred prosecution agreements and non-prosecution agreements. While the new Initiative provides more options for the Enforcement Division and individuals, only time will tell if it proves to be the “game-changer” that Enforcement Director Robert Khuzami anticipates.

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Capital Allocation and Delegation of Decision-Making Authority

This post comes to us from John Graham, Professor of Finance at Duke University, Campbell Harvey, Professor of International Business at Duke University, and Manju Puri, Professor of Finance at Duke University.

In our paper Capital Allocation and Delegation of Decision-Making Authority within Firms, which was recently published on SSRN, we examine the allocation of capital and the delegation of decision-making authority within firms. Theoretical research examines how decision-making authority is delegated within groups. While the theoretical implications are far-ranging, there is a scarcity of empirical evidence about the delegation of authority within corporations (as noted by Prendergast (2002) and others). This paper provides some of the first empirical evidence that focuses on the delegation of decision-making authority with respect to major corporate policies. In particular, we study whether the chief executive makes decisions on her own versus delegating to lower-level executives and divisional managers.

We survey more than 1,000 CEOs and CFOs around the world to determine who within the firm makes five different corporate decisions: capital allocation, capital structure, investment, mergers and acquisitions, and payout. Most of our analysis focuses on the 950 CEO and 525 CFO survey respondents who work in U.S.-based companies, though we also examine smaller samples of Asian and European executives. Knowing the job title of the corporate decision-maker is important, given recent evidence that executive-specific fixed effects appear to drive some corporate policies.

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Risk Oversight: A Board Imperative

This post comes to us from James DeLoach, a Managing Director at Protiviti.

Risk oversight is a high priority for today’s boards of directors. The risk oversight playbook is likely to evolve as boards refine their processes into 2010 and beyond. There are signs that legislators and regulators have risk oversight in their line of sight. For example, in the United States, the SEC proposed new proxy disclosures to spotlight directors’ qualifications and the role of the board in the risk management process. Some U.S. law- makers are sponsoring a bill to mandate a separate risk committee of the board. Whatever happens, it is clear the bar is being raised as boards take a fresh look at the qualifications of their members, how they operate, the extent to which they avail themselves of the appropriate company officers and other expertise to understand the enterprise’s risks, and whether their committee structure and the information to which their committees have access are conducive to effective risk oversight.

Key Considerations

“Risk oversight” describes the board’s role in the risk management process. Effective risk oversight deter- mines that the company has in place a robust process for identifying, prioritizing, sourcing, managing and monitoring its critical risks, and that this process is improved continuously as the business environment changes. By contrast, “risk management” is what management does to execute the risk management process in accordance with established performance goals and risk tolerances. Through the risk oversight process, the board (1) obtains an understanding of the risks inherent in the corporate strategy and the risk appetite of management in executing that strategy, (2) accesses useful information from internal and external sources about the critical assumptions underlying the strategy, (3) is alert for possible organizational dysfunctional behavior that can lead to excessive risk taking, and (4) provides input to executive management regarding critical risk issues on a timely basis.

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Compensation Season 2010 – Issues to Consider

Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s executive compensation and corporate governance practices. This post is based on a Wachtell Lipton client memorandum by Mr. Goldstein, Michael J. Segal, Jeannemarie O’Brien, Adam J. Shapiro and David E. Kahan.

For many public companies, the new year marks the commencement of compensation season. Setting pay and targets for the new year, determining achievement of performance objectives for the past year and preparing the annual proxy statement contribute to a busy first quarter for compensation committees and management teams working with them. In 2010, companies will undertake these activities in a fluid environment, with executive compensation continuing to receive significant attention from shareholder activists, government and the media. As companies prepare for the upcoming compensation season, they should consider the following items.

New SEC Disclosure Requirements. Companies should take steps to ensure compliance with the new SEC rules which, among other things, address corporate governance matters, risk in compensation programs, independence of compensation consultants and the valuation of equity awards in the compensation tables (see this Forum post or this Wachtell, Lipton, Rosen & Katz client memorandum for a description of the new rules). Companies should get an early start on organizing appropriate working groups, crafting necessary disclosures and preparing their directors so that they can meet their obligations with respect to upcoming filings.

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Implications of the “Volcker Rules” for Financial Stability

Editor’s Note: Hal Scott is the Director of the Program on International Financial Systems at Harvard Law School. This post is based on Professor Scott’s recent testimony before the Senate Committee on Banking, Housing And Urban Affairs, omitting footnotes. Professor Scott’s testimony is in his own capacity and does not purport to represent the views of the Committee on Capital Markets Regulation, of which he is the director. The full testimony of Professor Scott, including footnotes, is available here.

Let me preface my testimony by stressing the urgent need for broad regulatory reform in light of the financial crisis on matters ranging from the structure of our regulatory system, to the reduction of systemic risk in the derivatives market, to improving resolution procedures for insolvent financial companies, to increasing consumer protection, and to revamping the GSEs. The Committee on Capital Markets Regulation dealt with these issues in its May 2009 Report titled The Global Financial Crisis: A Plan for Regulatory Reform. These issues were also fully laid out in the Treasury Department’s June 2009 proposal on financial regulatory reform, and have been vigorously debated in public meetings, the press, and Congressional hearings for months. These efforts have so far culminated in the Wall Street Reform and Consumer Protection Act (H.R. 4173) as well as in Senator Dodd’s thoughtful Discussion Draft. And I applaud the ongoing efforts of this Committee to reach bipartisan consensus on these issues. In my judgment, we should not hold up these important reforms while we debate activity and size limitations.

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Commentaries on Critical Legal Issues in 2010

Peter Atkins is a Partner for Corporate and Securities Law Matters at Skadden, Arps, Slate, Meagher & Flom LLP. This post refers to a collection of commentaries published by Skadden entitled “Insights 2010,” which is available here.

For the second year in a row, Skadden, Arps, Slate, Meagher & Flom LLP has published a collection of commentaries addressing what we see as critical legal issues and areas of focus by businesses and industry sectors likely to be in the forefront of the matters considered by the U.S. and global financial and business communities in the year ahead. Many of these are a direct or indirect product of the national and global financial and economic crises of the past two years. By far the most powerful force that will drive these issues and areas of focus in 2010 is the continuing activist response of governments around the world to the recent financial and economic crises.

Nowhere is this more clearly illustrated than by the dramatic intervention of the federal government in the U.S. with respect to fundamentals of its financial and economic systems. In this regard, two of the major thematic questions from 2009 that will continue to dominate and shape the business environment in 2010 and beyond are:

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