Yearly Archives: 2010

Italian Regulator Issues New Rules on Related-Party Transactions

Posted by Edward F. Greene, Cleary Gottlieb Steen & Hamilton LLP, on

Saturday, April 24, 2010

More from: Edward Greene, Cleary Gottlieb

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.

The Fundamentals of Director Oversight Under Threat

Posted by Andrea Unterberger, Corporation Service Company, on

Friday, April 23, 2010

CSC, Morrison v. National Australia Bank Ltd.
More from: Andrea Unterberger, Thomas Dougherty, Skadden

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);

Managerial Legacies, Entrenchment, and Strategic Inertia

Posted by Alexander Gümbel, University of Toulouse, on

Friday, April 23, 2010

More from: Alexander Gümbel

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.

Scrutiny of Confidential Witnesses Endorsed in Securities Fraud Complaint

Posted by Paul Vizcarrondo, Wachtell, Lipton, Rosen & Katz, on

Thursday, April 22, 2010

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.

The Influence of Top Managers on Voluntary Corporate Financial Disclosure

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

Wednesday, April 21, 2010

More from: Isabel Wang, John Jiang, Linda Bamber

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?

Enhancing Board Performance through Dynamic Board Development

Posted by Jeffrey Stein, King & Spalding LLP, on

Tuesday, April 20, 2010

More from: Jeffrey Stein, King & Spalding

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.

New SSRN e-journal on Mergers & Acquisitions

Posted by Holger Spamann, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Monday, April 19, 2010

SSRN
More from:

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.

Law Firm Reputation and Mergers and Acquisitions

Posted by Ronald Masulis, Vanderbilt University, on

Monday, April 19, 2010

Reputation
More from: Ronald Masulis

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.

The Decade’s Most Influential Corporate Lawyers

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Sunday, April 18, 2010

More from:

This post by Scott Hirst, a co-editor of the Forum, is based on an article that first appeared in the National Law Journal. That article can be accessed here.

The National Law Journal recently published a list of the most influential lawyers of the last decade in each area of practice. We at the Forum were pleased to see that, out of the three attorneys selected as most influential in the corporate area, two are guest contributors of the Forum. The three attorneys selected in the corporate area are as follows:

H. Rodgin Cohen of Sullivan & Cromwell, a guest contributor to the Forum. Among other things, the National Law Journal noted Mr. Cohen’s role in the deals that rescued AIG and Fannie Mae and the sales of Bear Stearns and Lehman Brothers, as well as the help he provided policymakers in crafting the response to the financial crisis. Mr. Cohen’s most recent posts on the Forum are available here.

Edward Herlihy of Wachtell, Lipton, Rosen & Katz, a guest contributor to the Forum. Among other things, the National Law Journal noted that Mr. Herlihy played a key role in the response to the financial crisis, including advising U.S. Treasury Department officials on their takeover of mortgage finance giants Fannie Mae and Freddie Mac. During the years preceding the crisis, he worked on some of the biggest mergers and acquisitions of the decade, including Bank of America’s acquisitions of Countrywide Financial and Merrill Lynch. Mr. Herlihy’s most recent posts on the Forum are available here.

Jeffrey Rosen of Debevoise & Plimpton. Among other things, the National Law Journal noted that Mr. Rosen was involved in two of the largest deals of the last decade – the merger that created NBC Universal, and the purchase by International Paper Co. of 5.7 million acres of timberland.

The National Law Journal’s complete list of influential lawyers is available here, and its discussion of the most influential lawyers in the corporate field is available here.

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