Yearly Archives: 2010

Court Reinstates Insider Trading Claim Against Mark Cuban

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, October 23, 2010
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This post comes to us from Todd Cosenza of Willkie Farr & Gallagher LLP, and is based on a Willkie Farr & Gallagher client memorandum by Mr. Cosenza and Tariq Mundiya. This post discusses the recent opinion by the U.S. Court of Appeals for the Fifth Circuit in S.E.C. v. Cuban, which is available here.

On September 21, 2010, in S.E.C. v. Cuban, 2010 WL 3633059, No. 09-10996 (5th Cir.), a federal appeals court vacated a lower court decision that had dismissed the SEC’s well-publicized insider trading lawsuit against Mark Cuban.  The Fifth Circuit held that it was at least “plausible,” based on the SEC’s allegations, that Cuban had violated a duty not to trade on material, nonpublic information and remanded the case for further proceedings.

Factual and Procedural Background

In November 2008, the SEC brought a civil enforcement action against Mark Cuban, the owner of the NBA’s Dallas Mavericks franchise.  The action arose from Cuban’s June 2004 sale of his entire 6.3 percent ownership interest (600,000 shares) in Mamma.com Inc. (now Copernic, Inc.), a Canadian internet search company.  According to the SEC’s complaint, during the spring of 2004, Mamma.com’s executives decided to initiate a private investment in public equity (“PIPE”) offering to raise additional capital.  Because such offerings tend to dilute the value of existing shares, the company expected Cuban, its largest known shareholder at the time, to be unhappy.  The company’s CEO telephoned Cuban, informing him of the PIPE offering.  Cuban orally agreed to keep the information regarding the PIPE offering confidential, but allegedly ended his call with the CEO by saying, “Well, now I’m screwed.  I can’t sell.”  Nevertheless, following this telephone conversation and another discussion with the investment bank conducting the PIPE offering, Cuban instructed his broker to sell his entire stake in Mamma.com.  The next day, the company publicly announced the PIPE offering, and the stock price of Mamma.com declined.  By selling on the nonpublic information, Cuban avoided over $750,000 in losses.

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When is Disclosure of Adviser Conflicts Enough?

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Friday, October 22, 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.

Investment advisers have a duty to disclose material conflicts of interest to clients.  The more difficult question is: “how much disclosure is enough?”  In a recent settled enforcement action, the SEC suggests that disclosure of material facts alone may not be sufficient, and that more explicit disclosure is needed when investment advice may result in additional compensation to the adviser.  The case is Matter of Valentine Capital Asset Management.

The SEC’s administrative order found that the adviser “fail[ed] to fully and adequately disclose a material conflict of interest” by not informing its clients that the adviser would receive an additional commission if its clients accepted its recommendation to switch from one series of a managed fund to another series in that same fund.  The SEC reached this conclusion despite the fact that the adviser fully disclosed all commission costs to its clients.

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Citizens United: Waking a Sleeping Giant

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, October 21, 2010
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Editor’s Note: This post comes to us from Ciara Torres-Spelliscy, Counsel at the Brennan Center for Justice at NYU School of Law and Adjunct Professor of Constitutional Law at Rutgers University. A recent discussion paper issued by the Program, co-authored by Lucian Bebchuk and Robert Jackson Jr., discusses the corporate law rules that should govern political spending, and is available here.

As Professor Barry Friedman and Dahlia Lithwick noted in a recent piece, the Roberts Supreme Court is usual pretty savvy about gauging public opinion and acting accordingly, but when they decided Citizens United, they grossly misread the mood of the American public. They must have thought that this would be a little-noticed change to campaign finance minutia. Instead headlines from all over the country howled about the invitation of corporate money into American elections. Unwittingly, Citizens United, roused a sleeping giant, the American investor.

Maybe it’s the backdrop of the Great Recession juxtaposed with another record year for Wall St., but for whatever reason, Citizens United hit a raw nerve. One of the reasons that this is such an objectionable decision is it allows corporate managers in publicly traded companies to spend what Justice Brandeis called “other people’s money.” And as the Brennan Center noted in Congressional testimony right after the decision was announced, this raises a host of corporate governance issues.

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Dynamic Competition, Valuation, and Merger Activity

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, October 20, 2010

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The following paper comes to us from Matthew Spiegel, Professor of Finance at Yale University, and Heather Tookes, Associate Professor of Finance at Yale University.

In the paper, Dynamic Competition, Valuation, and Merger Activity, recently made publicly available on SSRN, we present an estimable model in order to address several questions. First, how do product market dynamics impact firm valuation? Second, how do these dynamics impact M&A activity? Third, what are the value implications for rivals? In the context of a dynamic oligopoly, we provide closed form solutions for the values of n competing firms. These solutions allow us to estimate the values of innovations in fixed costs, profitability and spending effectiveness, explicitly incorporating the current state of the industry and rivals’ competitive responses to such investments.

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Delaware Supreme Court Upholds Poison Pill in Versata

Posted by Scott J. Davis, Mayer Brown LLP, on
Tuesday, October 19, 2010
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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, William R. Kucera and Michael T. Torres, and refers to the recent Delaware Supreme Court decision in Versata Enterprises Inc. v. Selectica, Inc., which is available here. Other posts about poison pills, including more information about the Versata 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 Versata Enterprises Inc. v. Selectica, Inc., No. 193, 2010 (Del. Oct. 4, 2010), the Delaware Supreme Court addressed the validity of a shareholder rights plan, or “poison pill”, for the first time in a number of years. The court upheld the adoption of a poison pill with a 4.99% trigger designed to protect a company’s net operating losses (“NOLs”) and the subsequent adoption of a “reloaded” poison pill to protect against future threats to those net operating losses.

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The Partner-Manager: Some Thoughts on Bebchuk and Fried

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, October 18, 2010
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The following post comes to us from Lawrence Mitchell, Professor of Law at George Washington University.

In the forthcoming University of Pennsylvania Law Review paper The Partner-Manager: Some Thoughts on Bebchuk and Fried, which comments on Lucian Bebchuk and Jesse Fried, “Paying for Long-Term Performance” [U. Pa. L. Rev., Vol. 158, p. 1915-1959, 2010], I argue that this work, and their work on executive compensation more broadly, addresses the symptoms of excessive compensation without examining or taking account of the deeper structural changes that compensation practices have led to in the broader context of corporate governance. The American history of the role of senior corporate executives reveals an evolution, from entrepreneurial leadership in early industrialism to the rise of the professional manager, as described by Alfred Chandler. A third stage of evolution has taken place over the last twenty years. That is the shift from professional manager to what I call the “partner manager,” at least at the highest executive levels.

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Corporate Governance Structure and Mergers

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, October 17, 2010
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The following post comes to us from Elijah Brewer III, Professor of Finance at DePaul University; William E. Jackson III, Professor of Finance and Management at the University of Alabama; and Julapa A. Jagtiani, Special Advisor at the Federal Reserve Bank of Philadelphia.

In the paper Corporate Governance Structure and Mergers, which was recently made publicly available on SSRN, we examine the balance of control between top-tier managers and shareholders using data from bank mergers over the period 1990-2004. Several studies have investigated the role of independent outside directors at nonfinancial firms. Independent boards (with more than 50 percent outside directors) have been reported in the corporate finance literature to be associated with larger shareholder gains and more effective monitoring of management. Unlike the corporate finance literature on nonfinancial firms, the role of independent outside directors in banking firms has not received much attention in the literature. The role of independent outside directors in banking firms could be very different from those of nonfinancial firms due to banking regulations and supervision (at the state and federal level), deposit insurance, and too-big-to-fail implications for very large banks.

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Cost Benefit Analysis of Pay Disparity Disclosure

Posted by Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, on
Saturday, October 16, 2010
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Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s executive compensation and corporate governance practices. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein and Jeannemarie O’Brien.

As we previously discussed in our memorandum of August 2, the Dodd-Frank Act directs the SEC to amend the proxy rules to require disclosure of the ratio of the median annual total compensation of a company’s employees (excluding its chief executive officer) to the total annual compensation of its chief executive officer. For the sake of clarity, the median is the number exactly between the top and the bottom — not the average. This means that, on its face, the rule would require each of the nation’s 12,000 public companies to determine the value under the proxy disclosure rules of each element of compensation provided to each employee of the issuer on an annual basis and then to calculate the median amount of such compensation.

Based on the statute, it appears that this disclosure is required for all companies covered by the Securities Act of 1933 and the Securities Exchange Act of 1934, which includes, in addition to companies listed on a public exchange, companies with public debt and those that are otherwise obligated to file periodic reports with the SEC (but does not include foreign private issuers). Unlike other compensation-related provisions of the Act, such as say on pay, the Act does not appear to provide the SEC with express exemption authority from the pay ratio disclosure.

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The Reliability of Preliminary Earnings Releases

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, October 15, 2010
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The following post comes to us from Scott N. Bronson of the School of Business at the University of Kansas; Chris E. Hogan of the Department of Accounting & Information Systems at Michigan State University; Marilyn F. Johnson of the Department of Accounting & Information Systems at Michigan State University; and K. Ramesh of the Jones Graduate School of Business at Rice University.

In the paper, The Unintended Consequences of PCAOB Auditing Standards Nos. 2 and 3 on the Reliability of Preliminary Earnings Releases, forthcoming in the Journal of Accounting and Economics, we examine the trade-off that companies face in providing value relevant information on a timely basis through preliminary earnings announcements (PEAs) versus the potential loss of reliability from releasing information prior to the audit report date. Historically, the vast majority of publicly-traded companies wait until after the audit report date (i.e., after the completion of audit fieldwork) to release preliminary earnings information. However, the implementation of Public Company Accounting Oversight Board Auditing Standards No. 2 (“AS2”) on internal control and No. 3 (“AS3”) on audit documentation resulted in delaying completion of the audit for a large number of public companies.

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Improving Governance of Chapter 11 Debtors

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 14, 2010
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This post comes to us from Alan S. Gover and Ian J. Silverbrand. Mr. Gover is a partner and Mr. Silverbrand an associate in the Financial Restructuring & Insolvency Group of White & Case LLP. [*]

The concept of a debtor in possession – that incumbent directors and managers can be made into statutory fiduciaries to reorganize a business that failed under their leadership – is an inspired idea. It is a uniquely American expression of trust and confidence, and it is consistent with the principles of fresh start and renewal at the heart of Chapter 11. Notwithstanding the concept’s brilliance, we take issue with the automatic and universal application of the default presumption that all Chapter 11 debtors should remain in possession.

Despite Congress’s intention that business reorganization cases would be used “to restructure a business’s finances so that it may continue to operate, provide its employees with jobs, pay its creditors, and produce a return for its stockholders,” [1] Chapter 11 has become something quite different. Now, Chapter 11 is oftentimes a mechanism to effectuate an orderly liquidation or to correct process failures. [2] That is not “wrong” or even troubling to us; instead, we are concerned that in some such cases, allowing the debtor and its corporate management to remain in possession could inhibit the reorganization process.

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