Yearly Archives: 2010

F-Squared Claim Rejected

Posted by Warren Stern, Wachtell, Lipton, Rosen & Katz, on
Saturday, April 10, 2010
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Warren Stern is Of Counsel at Wachtell, Lipton, Rosen & Katz, where he concentrates on corporate and securities litigation. This post is based on a Wachtell Lipton firm memorandum by Mr. Stern, George T. Conway III and Jonathan E. Goldin.

The United States District Court for the Southern District of New York has strongly reaffirmed limitations on the extraterritorial application of U.S. securities laws, concluding that U.S. investors who buy shares in foreign companies on foreign exchanges may not be able to invoke Rule 10b-5 to redress alleged frauds that principally occurred overseas.

In In re European Aeronautic Defence & Space Company Securities Litigation, No. 08 Civ. 5389 (S.D.N.Y. March 26, 2010), the court dismissed an action brought by an American pension fund on behalf of U.S. purchasers of shares of a European aerospace company. The pension fund alleged that the company’s disclosures with respect to the delivery schedule for a major aircraft violated Rule 10b-5. The purchases were made on European exchanges.

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How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systematically Important?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, April 9, 2010
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This post comes to us from Julapa Jagtiani, Special Advisor at the Federal Reserve Bank of Philadelphia, and Elijah Brewer, Professor of Finance at DePaul University.

In the paper, How Much Did Banks Pay to Become Too-Big-To-Fail and to Become Systematically Important? which was recently made publicly available on SSRN, we estimate the value of the too-big-to-fail (TBTF) subsidy. The special treatment provided to too-big-to-fail institutions during the financial crisis that started in mid-2007 has raised concerns among analysts and legislators about the consequences of this for the overall stability and riskiness of the financial system. Stern (2009) testified before the Committee on Banking, Housing, and Urban Affairs that “TBTF arises when the uninsured creditors of systemically important financial institutions expect government protection from loss … If creditors continue to expect special protection, the moral hazard of government protection will continue. That is, creditors will continue to underprice the risk-taking of these financial institutions, overfund them, and fail to provide effective market discipline. Facing prices that are too low, systemically important firms will take on too much risk. Excessive risk-taking squanders valuable economic resources and, in the extreme, leads to financial crises that impose substantial losses on taxpayers.”

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A Cautionary Tale for Audit Committee Chairs?

Posted by Keith F. Higgins, Ropes & Gray LLP, on
Thursday, April 8, 2010
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Keith F. Higgins is a partner at Ropes & Gray LLP specializing in securities offerings, mergers and acquisitions and corporate governance.

The SEC announced on March 15, 2010 that it had charged the former CEO, CFOs, and Audit Committee Chair of infoGroup Inc. with securities fraud and other securities law violations in connection with almost $9.5 million of undisclosed perquisites paid to the CEO and $9.3 million of undisclosed related party transactions with entities the CEO controlled. The CEO and the Audit Committee Chair agreed to settle the matter, without admitting or denying the allegations.

The Audit Committee Chair, Vasant Raval, consented to an injunction against future violations, agreed to pay a $50,000 civil money penalty, and agreed to be barred from serving as an officer or director of a public company for five years.

Bad facts, it is frequently said, make bad law. It is difficult to know whether this case represents a measured response to a set of egregious facts or whether it sets a new standard to which audit committee chairs should be held. At the very least, it provides audit committee chairs with a roadmap of what not to do when confronted with allegations of improper conduct.

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A Reexamination of Tunneling and Business Groups: New Data and New Methods

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, April 7, 2010
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This post comes to us from Jordan Siegel, Associate Professor of Business Administration at Harvard Business School, and Prithwiraj Choudhury, Doctoral Candidate in Strategy at Harvard Business School.

In our paper, A Reexamination of Tunneling and Business Groups: New Data and New Methods, which was recently made publicly available on SSRN, we look at emerging economies in general and at India in particular and argue for a simultaneous analysis of corporate governance and strategic activity differences in order to reveal the true quality of firm-level corporate governance.

The last decade of corporate governance research has been focused in large part on identifying what leads to superior or deficient corporate governance in emerging economies, and we think the conventional wisdom about the economically important topics of tunneling and business groups will need to be significantly questioned and reformulated in light of new findings, data, and methodology presented here. We propose the idea that firms’ corporate governance and firms’ strategic business activities within an industry are interlinked, and that only by conducting a simultaneous economic analysis of business strategy and corporate governance can scholars fully discern the quality of a firm’s governance. We advance this idea by taking a fresh look at one of the most rigorous extant methodologies for detecting “tunneling,” or efforts by firms’ controlling owner-managers to take money for themselves at the expense of minority shareholders.

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The Parallel Universes of Institutional Investing and Institutional Voting

Posted by Charles M. Nathan, Latham & Watkins LLP, on
Tuesday, April 6, 2010
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Charles Nathan is Of Counsel at Latham & Watkins LLP and is co-chair of the firm’s Corporate Governance Task Force. This post is based on a Latham & Watkins Corporate Governance Commentary by Mr. Nathan and Parul Mehta.

The Dichotomy between Institutional Investing and Institutional Voting

Over the past 30 years, institutional investing and institutional voting of portfolio shares have separated to the point that in most institutions the persons charged with making investment decisions have relatively little or no responsibility for voting the institution’s portfolio shares. While this is not universally the case, it is by far the prevailing paradigm. It has become rare for those charged with making investment decisions to buy or sell stock also to be important players in the share voting process. [1]

The reasons for the divorce of investing and voting at institutional investors are:

  • The law of large numbers (too many portfolio companies with too many ballot votes at annual shareholder meetings), and
  • Two seminal decisions by government agencies that regulate our institutional investor community — the US Securities and Exchange Commission (SEC) and the US Department of Labor in its administration of ERISA.

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The Harvard Crimson on the Harvard Forum

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, April 5, 2010
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Editor’s Note: This is the text of an article by Zoe Weinberg that appeared in today’s Harvard Crimson, which is available here.

Thirty-four of the 100 most influential figures in corporate governance are affiliated with Harvard Law School, according to a review by Directorship Magazine.

The Directorship 100 List, published annually, compiles “the who’s who of the corporate governance community” and the “most influential people in the boardroom,” according to the magazine, a publication aimed at the directors of public companies.

Directorship’s 2009 list includes President Barack Obama, a 1991 graduate of the Law School, Congressman Barney Frank ’61 (D-Mass.), a 1977 Law School graduate, and Senator Charles E. Schumer ’71 (D–N.Y.), a 1974 Law School graduate.

The majority of Harvard’s affiliates on the list are part of the Law School’s Forum on Corporate Governance.

“The work that the forum has done is very thoughtful and makes you reconsider your own views,” said H. Rodgin Cohen ’65, a 1968 Law School graduate who was included in list.

Cohen, former chairmen of the law firm Sullivan & Cromwell, has advised the boards of many financial institutions on risk management this past year. Cohen was called the “trauma surgeon of Wall Street” by The New York Times in November.

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Financial Regulatory Reform Bill Passes Senate Banking Committee and Heads to the Senate Floor

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Monday, April 5, 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 is by Ms. Tahyar, Robert L.D. Colby, Randall D. Guynn, Arthur S. Long, Annette L. Nazareth, and Reena Agrawal Sahni, and refers to two recent Davis Polk client memorandums, which are available here and here.

The financial regulatory reform bill passed by the Senate Banking Committee on March 22, 2010 represents the latest milestone on the road to regulatory reform.  The Committee bill, as amended by the subsequent manager’s amendment, reflects a series of new proposals and compromises between legislators and regulators.  A few of the key provisions of the Senate Banking Committee’s bill and their state of play are described below.  For more detail, please see Davis Polk’s memoranda, Summary of the March 15, 2010 Draft of the Restoring American Financial Stability Act, Introduced by Senator Christopher Dodd (D-CT), and Summary of Manager’s Amendment to the March Dodd Bill.

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Tobin’s Q Does Not Measure Performance: Theory, Empirics, and Alternative Measures

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 5, 2010

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This paper comes to us from Philip Dybvig, Professor of Banking and Finance at Washington University in Saint Louis, and Mitch Warachka, Associate Professor of Finance at Singapore Management University.

In the paper Tobin’s Q Does Not Measure Performance: Theory, Empirics, and Alternative Measures, which was recently made publicly available on SSRN, we provide a simple theoretical framework to demonstrate that underinvestment by entrenched managers confounds the relationship between Tobin’s Q and corporate governance. In particular, stronger corporate governance can decrease Tobin’s Q as well as return on assets. Overall, the relationship between corporate governance and Tobin’s Q is ambiguous. This ambiguity arises from managerial decisions regarding scale and cost discipline having offsetting effects on Tobin’s Q.

Our framework then develops two unambiguous measures of operating efficiency. The first measure uses revenue to assess managerial decisions regarding their firm’s level of output, while the second measure uses costs to assess the cost discipline of management. These operating efficiency measures are derived from the maximization of market value net of invested capital.

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Director-Management Relationships under Stock Exchange Independence Standards

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, April 4, 2010
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This post comes to us from Colin J. Diamond, a partner at White & Case LLP concentrating on securities transactions, public mergers and acquisitions, and general corporate representations. The post is based on a White & Case Client Alert by Mr. Diamond, Oliver Brahmst, Gary Kashar and John Reiss.

A recent disclosure by Black & Decker Corp. and a subsequent clarification as a result of a complaint by the New York Stock Exchange provide helpful insight regarding how business, and possibly other, relationships between directors and senior management may impair a director’s independence both for exchange listing standards and other contexts, and may give rise to unwanted publicity. [1]

Background

On March 9, 2010, Black & Decker Corp. issued a press release ahead of a special stockholder meeting being held to approve its merger with The Stanley Works. In the press release, Black & Decker disclosed what it termed “a private business relationship” between its CEO, Nolan D. Archibald, and one of its directors, M. Anthony Burns. The business relationship disclosed by Black & Decker in the press release consisted of a real estate co-investment by Mr. Burns and Mr. Archibald involving an undisclosed, yet “significant,” amount. The investment was in a private golf and four-season recreational community in Utah. In the press release, Black & Decker stated “[p]ersonal business relationships between individuals (as opposed to relationships with the company) generally are not relevant to the independence tests under the New York Stock Exchange rules because they do not create a material relationship between a director and the company.” [2]

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Harmonized European Short Selling Disclosure Regime Proposed

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, April 3, 2010
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This post comes to us from Barnabas W.B. Reynolds, partner and head of the Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication.

The Committee of European Securities Regulators (“CESR”) has presented its report to the European Commission proposing a permanent pan-European short selling disclosure regime. The CESR report (the “Report”) envisages a harmonised European approach to short selling. Since 2008, short selling has been subject to different actions taken by Member States in response to recent market turmoil. CESR’s report, and the proposals it contains, seeks to avoid ongoing divergence in Member State requirements.

Introduction

In July 2009 CESR launched a consultation on the need for a European disclosure regime for short selling to address the concern that, as a result of the patchwork of short selling regulations implemented in different states since 2008, market participants had become burdened with having to comply with divergent sets of national requirements. The Report, entitled “Model for a Pan-European Short Selling Disclosure Regime”, [1] is the result of that consultation and recommends new European legislation on short selling to be enacted as soon as possible.

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