Yearly Archives: 2010

Recent Delaware Decisions Reaffirm Merger Terminates Derivative Standing

Posted by Theodore Mirvis, Wachtell, Lipton, Rosen & Katz, on
Tuesday, July 20, 2010
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Theodore Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Eric M. Roth, Stephen R. DiPrima and Graham W. Meli, and relates to the decision of the Delaware Supreme Court in Ark. Teacher Ret. Sys. v. Caiafa, which is available 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.

The Delaware Supreme Court has long recognized that a merger terminates the standing of the target corporation’s former shareholders to maintain a derivative action on the target’s behalf, with two narrow exceptions: if the merger is fraudulently designed solely to eliminate derivative standing or if it is merely a “reorganization” that does not affect the shareholders’ ownership of the enterprise. Despite efforts by the plaintiffs’ bar to circumvent this rule, two recent decisions relating to the Countrywide-Bank of America merger have reaffirmed these fundamental principles.

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Regulators Issue Final Guidance on Banking Incentive Compensation

Posted by H. Rodgin Cohen, Sullivan & Cromwell LLP, on
Tuesday, July 20, 2010

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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 relating to banking incentive compensation guidance.

Research by the Program on Corporate Governance dealing with regulation of financial firms’ pay structures by bank regulators includes Regulating Bankers’ Pay, by Lucian Bebchuk and Holger Spamann, which was discussed on the Forum here, as well as in Lucian Bebchuk’s testimony in two hearings before the House of Representatives, which are available here and here. Recent Program research on how pay should be designed to reduce risk-taking incentives also includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried, discussed here.

On June 21, 2010, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, the Office of Thrift Supervision and the Federal Deposit Insurance Corporation jointly issued comprehensive final guidance designed to ensure that incentive compensation policies do not undermine the safety and soundness of banking organizations by encouraging employees to take imprudent risks. The Guidance finalizes the proposal issued by the Federal Reserve in October 2009.

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The Cost of Debt

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, July 19, 2010

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This post comes to us from Jules van Binsbergen of the Department of Finance at Northwestern University and Stanford University, John Graham, Professor of Finance at Duke University, and Jie Yang of the Department of Finance at Georgetown University.

In the paper, The Cost of Debt, which is forthcoming in the Journal of Finance, we use panel data from 1980 to 2007 to estimate the marginal cost function for corporate debt. This is the first explicit estimate of the cost of debt function in the literature. We use variation in debt tax benefit curves to help us map out the marginal cost function. We employ two identification strategies: (i) a full panel approach using all time-series and cross-sectional information from 1980 to 2007, (ii) a time series approach focused on the 1986 Tax Reform Act.

The estimated marginal cost of debt functions are positively sloped. The location of the function depends on firm characteristics such as asset collateral, size, book-to-market, asset tangibility, cash flows, and whether the firm pays dividends. Our findings are robust to firm fixed effects, year fixed effects, across time periods, and when accounting for fixed adjustment costs of debt. We provide an easy-to-use formula that allows others to create firm-specific marginal cost of debt functions. We also provide firm-specific recommendations of optimal debt policy against which firms’ actual debt choices can be benchmarked, and we quantify the welfare costs to the firm from deviating from the model-recommended optimum.

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Preventing Investor Harm Should be SEC Priority Number One

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Sunday, July 18, 2010
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC, which are available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners or the Staff.

The entire securities industry and its participants … whether it is issuers, intermediaries, fund companies, or other market participants would not be able to function, much less profit, without the trust of investors and the public as a whole. Pay to play activity—where intermediaries direct contributions in order to obtain advisory pension plan business—undercuts this basic trust by harming investors and damaging the reputations of regulated institutions and the securities industry as a whole.

As an SEC Commissioner, you quickly learn that there will always be someone somewhere engaging in securities fraud because the temptation is always there. Likewise, the temptation to engage in pay to play activity is all too clear. As you have already heard today, public pension plans control trillions of assets and represent one-third of all U.S. pension assets. The advisory business generated from these plans is tantalizing in terms of both the fees and the reputational benefit.

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Key Changes to the EU Prospectus Directive

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Saturday, July 17, 2010

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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.

This Alert summarizes certain key changes to the EU Prospectus Directive (2003/71/EC) which were approved by the EU Parliament on June 17, 2010 (the “Amending Directive”). These changes are the result of several months of discussions among the European Commission, the European Parliament and the European Council and various market participants.

The Amending Directive will come into force 20 days from publication in the Official Journal, which is expected to occur in September or October of 2010. EU Member States are required to implement the Amending Directive into national law within 18 months following its entry into force (March or April 2012). Accordingly, issuers will have some time to consider the proposed changes for debt and equity offerings in the EU. However, issuers of wholesale debt securities with minimum denominations of EUR 50,000 (or equivalent) that are listed on an EU-regulated market should note that the Amending Directive increases the minimum denominations to EUR 100,000 both for purposes of the Prospectus Directive and the Transparency Directive (2004/109/EC). As a result, issuers wishing to continue to benefit from the exemption from periodic reporting for issuers of wholesale debt securities under the Transparency Directive will need to ensure that they issue in denominations of EUR 100,000 if issuing after the date of entry into force of the Amending Directive.

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Delaware Provides Guidance Regarding Discounted Cash Flow Analysis

Posted by John G. Finley, Simpson Thacher & Bartlett LLP, on
Friday, July 16, 2010
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John Finley is co-head of the Mergers and Acquisitions Group at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum. 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.

Two recent opinions from the Delaware Court of Chancery, both authored by Vice Chancellor Leo E. Strine, Jr., provide important guidance for the preparation and use of a discounted cash flow (DCF) analysis in appraisal and other merger-related proceedings. [1]

In Global GT LP v. Golden Telecom, Inc., C.A. No. 3698-VCS (Del. Ch. April 23, 2010), shareholders successfully challenged the pre-merger value of a Russian telecommunications company, Golden Telecom, Inc., in an appraisal proceeding. The valuation experts for both the shareholders and the company each primarily relied on the DCF method of valuation but arrived at meaningfully different results: $139 per share (shareholder valuation expert) versus $88 per share (company valuation expert). Vice Chancellor Strine ultimately arrived at an appraised value of approximately $125 per share (Golden was originally purchased at $105 per share) after making determinations with respect to the key differences between the experts’ competing DCF valuations. In particular, the Vice Chancellor made determinations with respect to the following key elements of the DCF:

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Increased Disclosure Requirements and Corporate Governance Decisions

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, July 16, 2010
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This post comes to us from Xue Wang of the Accounting Department at Emory University.

In the paper, Increased Disclosure Requirements and Corporate Governance Decisions: Evidence from Chief Financial Officers in the Pre- and Post-Sarbanes Oxley Periods, which is forthcoming the Journal of Accounting Research, I examine how the new internal control disclosure requirements mandated by SOX affect annual corporate governance decisions regarding CFOs. The “disclosure of type” hypothesis argues that increased disclosures on internal controls mitigate information asymmetry between the board and the CFO by credibly disclosing the quality of firms’ internal controls, thus distinguishing good CFOs from bad ones. As a result, it predicts lower pay and higher turnover for low-quality CFOs.

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Summary and Implementation Schedule of the Dodd-Frank Act

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Thursday, July 15, 2010

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Margaret E. Tahyar is a partner and member of the New York Financial Institutions Group at Davis Polk & Wardwell LLP. This post relates to a Davis Polk Client Memorandum summarizing the Dodd-Frank Act, which is available here, and accompanying regulatory implementation slides, which are available here. Additional posts on the Dodd-Franks Act are available here.

The Dodd-Frank Wall Street Reform and Consumer Protection Act will soon be the law of the land, assuming Senate passage. With the President’s signature, the bill will mark the greatest legislative change to financial supervision since the 1930s.

This legislation will affect every financial institution that operates in this country, many that operate from outside this country and will also have a significant effect on commercial companies. As a result, both financial institutions and commercial companies must now begin to deal with the historic shift in U.S. banking, securities, derivatives, executive compensation, consumer protection and corporate governance that will grow out of the general framework established by the bill. While the full weight of the bill falls more heavily on large, complex financial institutions, smaller institutions will also face a more complicated and expensive regulatory framework. This memorandum, written by a broad cross-specialty team of derivatives, bank regulatory, broker-dealer, funds, corporate governance and executive compensation teams at Davis Polk, summarizes the major provisions of the bill in bullet point form. For those who would like to dip into only the sections relevant to them, the table of contents contains hyperlinks. The accompanying Davis Polk Regulatory Implementation Slides are designed to show the effectiveness and implementation timeline of these provisions.

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New Sentencing Guidelines for Corporate Defendants

Posted by Holly Gregory, Weil, Gotshal & Manges LLP, on
Thursday, July 15, 2010
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Holly Gregory is a Corporate Partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal briefing by Thomas C. Frongillo, Lisa R. Eskow, and Caroline K. Simons.

On April 7, 2010, the United States Sentencing Commission approved significant changes to Chapter 8 of the Federal Sentencing Guidelines, which applies to organizations convicted of criminal offenses. In particular, these amendments affect the requirements for establishing an “effective compliance program” — a means of mitigating institutional punishment in the wake of criminal conduct. Barring rejection or changes from Congress, the amendments take effect automatically on November 1, 2010.

One important change expands an organization’s eligibility for a reduced sentence if it has an effective compliance and ethics program in place at the time an offense occurs. Additional amendments clarify what constitutes an appropriate response to criminal conduct as part of an effective compliance program. And, notably, the Commission rejected controversial proposals regarding independent monitors and document retention policies that some had argued would prevent flexibility in tailoring context-appropriate compliance programs and responses. On balance, the amendments reflect a give-and-take approach designed to encourage better internal and external reporting of suspected criminal conduct as a means of detecting and deterring crime, especially at the executive level.

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An Open Proposal for Client Directed Voting

Posted by James McRitchie, CorpGov.net, on
Wednesday, July 14, 2010
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James McRitchie is the publisher of CorpGov.net.

According to the SEC, “client directed voting” will be included in a forthcoming concept release on “proxy plumbing” issues and SEC Chairman Mary L. Schapiro now indicates review by the Commission is forthcoming (see this post on the Forum). It is critical that shareowners become familiar with this term. The SEC can shape their concept release to facilitate entrenchment, by essentially reestablishing a limited form of broker voting, or their framework can further the interests of shareowners and the larger society through an open and competitive system.

Background

Historically, most retail shareowners toss their proxies. During the first year under the “notice and access” method for Internet delivery of proxy materials, less than 6% voted. This contrasts with almost all institutional investors voting, since they have a fiduciary duty to do so. “Client directed voting” (CDV), a term coined by Stephen Norman, is seen by many as a solution for getting more retail shareowners to vote, ensuring companies get a quorum, and helping management recapture a good portion of the broker-votes cast in their favor that evaporated with recent reforms. An open form of CDV, could result in similar impacts but would also create much more thoughtful and robust corporate elections.

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