Monthly Archives: December 2010

Protectionism and Paternalism at the UK Panel on Takeovers and Mergers

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn Client Alert by Selina Sagayam.

On 1 June 2010 the UK Panel on Takeovers and Mergers (Panel), issued a “Green” Consultation Paper [1] on the Review of Certain Aspects of the Regulation of Takeover Bids in the UK (Green Paper). This Green Paper was issued following an announcement earlier in the year by the Panel that it would review certain rules of the UK Code on Takeovers and Mergers (Code) in the lights of widespread commentary and public discussion following the acquisition of Cadbury PLC by Kraft Foods Inc. in Q1 2010. On 21 October 2010 [2], the Code Committee of the Panel issued a statement setting out its findings following this initial consultation period which involved reviewing nearly 100 responses from a broad range of commerce, industry and practice including academics, trade union representatives and the professional advisory community (Response Statement).


Non-binding Voting for Shareholder Proposals

The following post comes to us from Doron Levit of the Finance Department at the University of Pennsylvania and Nadya Malenko of the Finance Department at Stanford University.

In the paper, Non-binding Voting for Shareholder Proposals, which is forthcoming in the Journal of Finance, we develop a theory of shareholder voting for non-binding shareholder proposals. The main difference of non-binding voting from the conventional binding voting mechanism is that the vote tally does not, at least directly, determine the outcome. Instead, the management has the discretion to decide whether or not to implement the proposal, even if the majority of shareholders support it.

Our main question is whether non-binding voting for shareholder proposals fulfills its advisory role by conveying shareholder expectations to the company’s management. We show that when the interests of the management and shareholders are not closely aligned, non-binding voting fails to convey shareholder views and therefore does not play its advisory role. This distinguishes voting for non-binding proposals from voting for binding proposals, where some information is always conveyed.


ISS Issues Policy Updates for 2011 Proxy Season

Holly Gregory is a Corporate Partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal Alert by Ms. Gregory and Matthew Elkin. The complete article, including the appendix, is available here.

On November 19, 2010, Institutional Shareholder Services Inc. (ISS) issued updates to its proxy voting policies applicable to shareholder meetings held on or after February 1, 2011. This Alert summarizes and discusses implications of those updates for US companies. The ISS proxy voting guidelines and the new updates are available at

ISS is generally considered the most influential proxy advisor in the US. A recent study found that a negative ISS recommendation in uncontested director elections is correlated with a 20.3% drop in favorable votes by shareholders, a far higher percentage than that of any other proxy advisor. [1] Other studies have found that ISS is able to influence shareholder votes by 6% to 19%. [2] For 2011, ISS has identified over 50 circumstances that may cause it to make a negative vote recommendation in uncontested director elections. A summary of these circumstances is included in Appendix A (available here).


Golden Parachutes and the Wealth of Shareholders

Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang teach at Harvard Law School.

The Program on Corporate Governance recently issued our study, Golden Parachutes and the Wealth of Shareholders.

Golden parachutes have attracted much debate and substantial attention from investors and public officials for more than two decades, and the Dodd-Frank Act recently mandated a shareholder vote on any future adoption of a golden parachute by public firms. Our study uses IRRC data for the period 1990-2006 to provide a comprehensive analysis of the relationship that golden parachutes have both with the evolution of firm value over time and with shareholder opportunities to obtain acquisition premiums. We find that golden parachutes are associated with increased likelihood of either receiving an acquisition offer or being acquired, a lower premium in the event of an acquisition, and higher (unconditional) expected acquisition premiums. Tracking the evolution of firm value over time in firms adopting GPs, we find that firms adopting a GP have a lower industry-adjusted Tobin’s Q already in the IRRC volume preceding the adoption, but that their value continues to decline during the inter-volume period of adoption and continues to erode subsequently. A similar pattern is displayed by an analysis of abnormal stock returns prior to the adoption of GPs, during the inter-volume period of adoption, and subsequently.

Here in some more detail is what our study, which is available here, does:


Lucky CEOs and Lucky Directors

Lucian Bebchuk is a Professor of Law, Economics, and Finance at Harvard Law School. Yaniv Grinstein is an Associate Professor of Finance at the Johnson Graduate School of Management at Cornell University. Urs Peyer is an Associate Professor of Finance at INSEAD.

The December issue of the Journal of Finance features our article Lucky CEOs and Lucky Directors. This study integrates two discussion papers we circulated earlier, Lucky CEOs, and Lucky Directors.

Our study contributes to understanding the corporate governance determinants and implications of backdating practices during the decade of 1996-2005. Overall, our analysis provides support for the view that backdating practices reflect governance breakdowns and raise governance concerns. (For recent expressions of the opposite view that backdating did not reflect governance breakdowns, see the recent op-ed by WSJ columnist Holman Jenkins, who argues that backdating was a “meaningless accounting violation.”)

In particular, we find that:

  • (i) Opportunistic timing has been correlated with factors associated with greater influence of the CEO on corporate decision-making, such as lack of a majority of independent directors, a long-serving CEO, or a lack of a block-holder with a “skin in the game” on the compensation committee;
  • (ii) Grants to independent directors have also been opportunistically timed and that this timing was not merely a by-product of simultaneous awards to executives or of firms’ routinely timing all option grants;
  • (iii) Lucky grants to independent directors have been associated with more CEO luck and CEO compensation;
  • (iv) Rather than being a substitute for other forms of compensation, gains from opportunistic timing were awarded to CEOs with larger total compensation from other sources; and
  • (v) Opportunistic timing was not driven by firm habit but rather, for any given firm, the use of such timing was itself timed to increase its profitability for recipients.

Our analysis suggests that the existence of CEO and director lucky grants as a variable that can be useful to research studying the governance and decision-making of firms. We therefore make available on the website of the Harvard Program on Corporate Governance a dataset (available here) of CEO and director luck indicators based on our work.

Here is a more detailed outline of what our paper (available here) does:


The Costs of Intense Board Monitoring

The following post comes to us from Olubunmi Faleye of the Finance Department at Northeastern University, Rani Hoitash of the Department of Accountancy at Bentley University, and Udi Hoitash of the Accounting Department at Northeastern University.

In our paper The Costs of Intense Board Monitoring, forthcoming in the Journal of Financial Economics, we study the effects of the intensity of board monitoring on directors’ effectiveness in performing their monitoring and advising duties. Our objectives are three-fold. First, we examine whether the quality of board monitoring is enhanced when the board is more focused on monitoring. Second, we examine whether intense monitoring is associated with weaker advising. Third, we examine how this potential tradeoff between the quality of board monitoring and advising affects overall firm value, emphasizing the role of the firm’s advising requirements in the process. We define a monitoring intensive board as one on which a majority of independent directors concurrently serve on two or more of the monitoring committees (i.e. audit, compensation, and nominating).


The Case for Professional Boards

Robert Pozen is Chairman of MFS Investment Management and a Senior Lecturer of Business Administration at Harvard Business School. This post is based on a longer article that appears in this month’s Harvard Business Review.

In 2002, Congress passed the Sarbanes Oxley (SOX) to prevent a repetition of the corporate governance debacles at Enron and WorldCom. All boards of public companies as well as their important committees would be comprised mainly of independent directors. A public company’s executives would conduct a yearly assessment of internal controls, subject to a special report by its external auditors.

Six years later, many of the largest financial institutions in the US had to be rescued by massive injections of federal assistance. Yet all these institutions were SOX compliant. Most members of their boards as well as all members of their important committees were independent. They all had evaluated their internal controls and the reports of their auditors showed no material weaknesses in 2007.

So why were the SOX reforms so ineffective? This article will identify the main deficiencies of current corporate boards — too many directors and too few experts with too much emphasis on procedures. Then this article will present a new model for boards of complex global companies — a small group of professional directors with enough relevant experience and sufficient time to hold management accountable.


Delaware Supreme Court Reverses Chancery Court in Airgas Case

Scott Davis is the head of the US Mergers and Acquisitions group at Mayer Brown LLP. This post is based on an article by Mr. Davis, Jodi Simala and Allison Handy, and refers to the recent Delaware Supreme Court decision in Airgas, Inc. v. Air Products and Chemicals, Inc., which is available here. Other posts about the Airgas case can be found here. 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.

In Airgas, Inc. v. Air Products and Chemicals, Inc., No. 649, 2010 (Del. Nov. 23, 2010), the Delaware Supreme Court, reversing the Chancery Court, held that a bylaw amendment moving up Airgas’s annual meeting by eight months was inconsistent with the company’s charter provision creating staggered terms for directors and permitted an improper removal of directors without cause.


Airgas has been the subject of a hostile takeover attempt by its competitor, Air Products, since October 2009.  Air Products made its first tender offer for 100% of the Airgas shares at $60 per share on February 11, 2010.  Between February and Airgas’s September 15, 2010 annual meeting, Air Products raised its bid twice, eventually to $65.50 per share.  Each bid was rejected by the board of Airgas as undervaluing the company.  As part of its takeover attempt, Air Products launched a proxy contest to gain control of Airgas’s staggered board by nominating three candidates for election at the 2010 annual meeting and proposing amendments to Airgas’s bylaws.  Each of Air Products’ director nominees was elected by the Airgas stockholders at the 2010 meeting.


Capital Structure and Debt Structure

The following post comes to us from Joshua Rauh of the Finance Department at Northwestern University and Amir Sufi of the Finance Department at the University of Chicago.

In the paper, Capital Structure and Debt Structure, forthcoming in the Review of Financial Studies, we use a novel data set on the debt structure of a large sample of rated public firms and show that debt heterogeneity is a first order aspect of firm capital structure. The majority of firms in our sample simultaneously use bank and non-bank debt, and we show that a unique focus on leverage ratios misses important variation in security issuance decisions. Furthermore, cross-sectional correlations between traditional determinants of capital structure (such as profitability) and different debt types are heterogeneous. These findings suggest that an understanding of corporate capital structure necessitates an understanding of how and why firms use multiple types, sources, and priorities of corporate debt.


Guiding Principles on Business and Human Rights

John Ruggie, the Berthold Beitz Professor of International Affairs at the Kennedy School of Government, is currently serving as the United Nations Secretary-General’s Special Representative for Business and Human Rights. This post discusses a draft of principles to implement the United Nation’s “Protect, Respect and Remedy” Framework; that draft, which is now open to comment, is available here.

On 22 November 2010 I posted a draft of the “Guiding Principles for the Implementation of the UN ‘Protect, Respect and Remedy’ Framework” on my online consultation forum, available here, under my mandate as Special Representative of the U.N. Secretary General for Business and Human rights. The forum, intended to gather views from a broad range of stakeholders, will remain open until 31 January 2011.

The Guiding Principles elaborate and clarify for companies, states, and other stakeholders how they can operationalize the UN ‘Protect , Respect and Remedy’ Framework, by taking practical steps to address business impacts on the human rights of individuals (learn more about the Framework here). The UN Human Rights Council had endorsed the Framework unanimously in 2008, and asked me to provide this additional concrete guidance. My hope is that stakeholders in every region will take advantage of this opportunity to be heard before I finalize the text of the Guiding Principles. The online forum is a critical complement to the more than 40 in-person consultations I’ve conducted around the world since my mandate began in 2005.


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