Monthly Archives: April 2010

Special Litigation Committees in Shareholder Derivative Litigation

This post comes to us from Joseph M. McLaughlin. Mr. McLaughlin is a Partner in the Litigation Department at Simpson Thacher & Bartlett LLP. The post is based on a Simpson Thacher client memorandum by Mr. McLaughlin.

A properly constituted Special Litigation Committee of disinterested and independent directors (SLC) empowered by the board to investigate and determine whether the prosecution of derivative claims is in the best interests of the company can be a powerful aspect of a board’s management authority. The SLC procedure is of greatest utility in a pending suit in which pre-suit demand on the board has been excused as futile by a court on a motion to dismiss under Rule 23.1. Even where a shareholder plaintiff has survived a motion to dismiss for failure to make pre-suit demand by showing reasonable doubt concerning the disinterest or independence of a majority of board members, that board can properly delegate its authority concerning litigation decisions on behalf of the corporation to an SLC consisting of disinterested and independent directors.

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Italian Regulator Issues New Rules on Related-Party Transactions

Edward Greene is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on corporate law matters. This post is based on a Cleary Gottlieb Alert Memo. A translation of the Italian regulation described in the post is available here.

On March 12, 2010, through Resolution No. 17221, Consob issued new rules governing related-party transactions entered into by listed issuers and other issuers with widely held shares. The new rules are applicable whether such transactions are entered into directly by such issuers or indirectly through subsidiaries (the “Regulation”). [1]

Main Innovations

The Regulation confers a pivotal role upon independent directors, organized in committees and possibly assisted by advisors, who shall be called upon to provide ex ante opinions on related-party transactions. Under the Regulation, independent directors will have to be involved in the negotiation and preparatory phases leading up to material related-party transactions.

In order not to render related-party transactions excessively burdensome, the Regulation provides a simplified regime for recently-listed issuers, small-sized issuers and widely held unlisted issuers, as well as exemptions for certain categories of transactions.

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The Fundamentals of Director Oversight Under Threat

Andrea Unterberger is Assistant General Counsel and the Director of CSC Media at Corporation Service Company. This post is an excerpt from the 2010 Edition of The Directors’ Handbook, by Thomas J. Dougherty of Skadden, Arps, Slate, Meagher & Flom LLP. In the foreword to the edition, Mr. Dougherty explores how recent reform initiatives will result in an irrevocable shift of power in the boardroom.

Several “reform” initiatives bred by the financial and regulatory crises of 2008–2009 now threaten to undermine the fundamentals of director oversight in 2010 and beyond. Collectively, if not individually, these destabilizing dynamics will alter the balance of power utterly between directors and activist stockholders, between federal and state regulators, between American and foreign sources of capital, and between models of consensus and contentious corporate governance.

The principal forces amassing to shift power and destabilize those respective relationships are the combination of these “significant seven” developments:

  • 1. Proxy Access: the SEC’s new sweeping “proxy access” proposals;
  • 2. No Broker Voting: the SEC’s abolition of broker voting of “uninstructed” retail client shares;
  • 3. Anemic “e-voting”: the perverse decline in retail stockholder voting following recent substitution of “e-voting” for slow-mail proxy distribution;
  • 4. “55 × 70 × 55”: the ever-upward rise of institutional share ownership dominance from “55-cubed” a decade ago (when more than 55 percent of the shares of more than 55 percent of Fortune 500 companies were owned by fewer than 55 respective institutions) toward “55 × 70 × 55” today (more than 55 percent of the shares of more than 70 percent of Fortune 500 companies are now owned by approximately 55 respective institutions);

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Managerial Legacies, Entrenchment, and Strategic Inertia

Alexander Gümbel is Associate Professor of Finance at the University of Toulouse.

In the paper, Managerial Legacies, Entrenchment, and Strategic Inertia, forthcoming in the Journal of Finance, my co-author, Catherine Casamatta, and I explore a firm’s decision to replace a poorly performing CEO with a new CEO in a context where strategic decisions have a long-term impact on the firm’s cash flows. Such a legacy implies that a new CEO’s performance is partially affected by something he bears no responsibility for, namely the previous CEO’s choice of firm strategy. This renders the incentive problem of a new CEO more severe than it would be for the incumbent CEO. As a result the firm will not always wish to fire the CEO even if he performs poorly – the incumbent is entrenched. In contrast to much of the literature on CEO turnover, which views entrenchment as a result of weak boards, we argue that entrenchment may be optimal for shareholders.

We then study the board’s decision to change strategy and CEO. Strategy change and managerial turnover are closely associated, and the (endogenous) cost of managerial turnover makes it more expensive for the firm to change strategy. This leads to ‘strategic inertia’ in the firm’s decision. These results arise purely from managerial incentive problems and in spite of the fact that all managers in our model are ex ante identical. We thus challenge the view that managerial style, i.e., an innate manager specific skill, is required to explain the observation that managers in practice are associated with certain types of strategies.

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Scrutiny of Confidential Witnesses Endorsed in Securities Fraud Complaint

Paul Vizcarrondo Jr. is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz specializing in corporate and securities litigation and regulatory and white collar criminal matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Vizcarrondo, Emil A. Kleinhaus and Jonathan Goldin, and relates to the opinion in the recent case of Campo v. Sears Holdings Corp., which is available here.

It has become routine for plaintiffs’ lawyers to make allegations purportedly obtained from confidential witnesses to meet the stringent pleading requirements applicable to federal securities fraud complaints, and the weight that courts should give such allegations in deciding motions to dismiss has been hotly contested. In affirming the dismissal of a federal securities fraud class action, the United States Court of Appeals for the Second Circuit has questioned the use of anonymous sources in securities complaints and endorsed the examination of those sources in determining whether such complaints should be dismissed. Campo v. Sears Holdings Corp., No. 09-3589, 2010 WL 1292329 (2d Cir. Apr. 6, 2010).

Citing information purportedly obtained from several confidential witnesses, the complaint in Campo alleged that Kmart Holding Corporation, now part of Sears Holdings Corporation, and certain of its officers had intentionally understated the value of Kmart’s real estate in the company’s SEC filings. When the defendants moved to dismiss the complaint, the district court allowed the defendants to depose these confidential witnesses to determine if they had made the statements attributed to them in the complaint. Upon being deposed, the witnesses disowned and contradicted many of those statements.

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The Influence of Top Managers on Voluntary Corporate Financial Disclosure

This paper comes to us from Linda Bamber, Professor of Accounting at the University of Georgia, John Jiang and Isabel Wang, both Assistant Professors of Accounting at Michigan State University.

Our paper, What’s My Style? The Influence of Top Managers on Voluntary Corporate Financial Disclosure, forthcoming in The Accounting Review, investigates two related research questions: (1) Do top managers exhibit unique and economically significant individual-specific styles in voluntary corporate financial disclosure? (2) If so, are observable characteristics of managers’ personal backgrounds associated with any cross-sectional differences in their overall disclosure styles?

Prior theoretical and empirical research in economics, finance, and accounting generally posits a limited role for idiosyncratic manager-specific influences in explaining accounting and disclosure choices. In contrast, upper echelons theory, originating in the strategic management literature, suggests that differences among individuals can affect corporate outcomes, particularly in complex situations lacking clear solutions. Most of the prior research in voluntary disclosure follows the traditional financial economics perspective, yet even the most comprehensive empirical models leave most of the cross-sectional variation in disclosure unexplained. This prompts us to investigate whether these models are missing a major component: Do individual managers play a significant incremental role in voluntary corporate financial disclosure?

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Enhancing Board Performance through Dynamic Board Development

Jeffrey Stein is a partner in the Corporate Practice Group at King & Spalding LLP. This post is based on an article by Mr. Stein and Susan E. Wolf that originally appeared in The Metropolitan Corporate Counsel; it is reprinted by permission of the publisher.

Recent events have placed increased demands on the boards of public companies, and investors, regulators and lawmakers are calling on boards to improve their performance in key areas such as strategy, oversight of risk management, succession planning and the nomination process. Rather than seeking to address each of the current challenges in isolation, leading public company boards – and company officers who support public company boards – seek to make enhancements that best address the unique priorities and circumstances of a particular board and company.

Effective boards use a holistic approach, by choosing enhancements that are synergistic and will produce the greatest benefits to overall board processes. Through such a holistic approach to board development, a board will not only position itself to respond to today’s challenges, but will be well prepared for future challenges. This article will consider important board processes, not only for the sake of improving each of these processes, but also for enhancing the board’s performance in all its endeavors.

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Valuing Safety is Good for Companies’ Bottom Line


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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that first appeared in the online edition of The Atlantic.

In recent weeks, we have had two striking examples of why a “safety culture” is critical in reducing the dangerous risks posed by business operations.

One, the death of 29 workers in an explosion at Massey Energy Company’s Upper Big Branch Mine, illustrates the catastrophic impact when such a culture is missing. The second, the halting of air transport due to the ash cloud from an Icelandic volcano, shows the power of a robust safety culture in learning from past incidents to avoid catastrophic events in the future.

The contrast is, if you will pardon the phrase, no accident. Underground mining is hidden from public view and, although coal as an energy source affects hundreds of millions, an accident in a mine does not put fear in households around the world receiving electricity from coal-burning plants. Air transport, of course, is one of the world’s most visible businesses, and a fatal accident is front of mind for the hundreds of millions globally who fly during the course of a year.

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New SSRN e-journal on Mergers & Acquisitions


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This post is part of a series introducing journals published by SSRN’s new Corporate Governance Network (CGN). CGN publishes and distributes electronic journals covering the full range of areas in corporate governance. It seeks to provide its readers with full exposure to new corporate governance research placed on SSRN irrespective of the author’s discipline. CGN’s director is Lucian Bebchuk, Director of the Program on Corporate Governance at Harvard Law School.

The Corporate Governance Network (CGN) of SSRN recently launched a new e-journal on Acquisitions, Mergers, Contests for Control, & Activism. This journal distributes abstracts of, and links to, selected recent working papers that deal with M&A transactions, proxy fights & corporate elections, going private and freezeout transactions, hedge fund activism, and similar topics.

The journal collects abstracts on these topics from all new submissions to the entire SSRN database irrespective of discipline. It brings together contributions from accounting, economics, finance, law, management, sociology and psychology. Thus, this e-journal attempts to provide its readers with full exposure to all new papers related to its subject matter placed on SSRN.

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Law Firm Reputation and Mergers and Acquisitions

Ronald Masulis is a Professor of Finance at Vanderbilt University.

In this paper, Law Firm Reputation and Mergers and Acquisitions, which was recently made publicly available on SSRN and presented at the 4th Annual Conference on Empirical Legal Studies 2009, my co-author, C.N.V. Krishnan of Case Western Reserve University, and I document the influence that top law firms have on M&A offer outcomes.

Using a comprehensive sample of M&A offers over 1990-2008, we show that more reputable law firms have significant relationships to M&A offer outcomes, even after controlling for offer, bidder and investment bank characteristics. Top bidder legal advisors are associated with significantly higher deal completion rates than other legal advisors. In contrast, top target legal advisors are associated with significantly higher deal withdrawal rates than other legal advisors. Top bidder and target law firms are both associated with significantly higher takeover premia in completed deals than less prominent law firms.

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