Yearly Archives: 2010

Designing the SEC Rules Governing Say on Pay Frequency

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Wednesday, October 13, 2010
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Lucian Bebchuk is a Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is an Associate Professor of Law at Columbia Law School. This post is based on a comment letter they filed with the SEC, available here. A separate comment letter filed by Robert Jackson in connection with the planned SEC rules concerning golden parachutes is available here.

The Securities and Exchange Commission is now considering adopting preliminary rules concerning the frequency with which companies will have to hold “say on pay” votes. One critical issue facing the Commission is setting rules concerning the resolutions all public companies will be required to hold to determine whether say on pay votes will take place every 1, 2, or 3 years. We recently filed with the SEC a comment letter in which we propose that the Commission’s rules:

  • Provide a default rule to govern in the absence of a shareholder majority on any resolution concerning “say on pay” frequency; and
  • Provide that resolutions concerning “say on pay” frequency may be brought to a vote more frequently than is mandated by the Act, and that both the issuer and shareholders may offer such resolutions in each annual proxy statement.

Below are the substantive parts of our letter. The letter itself can be access here.

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Important Chancery Court Opinion for Corporations with Staggered Boards

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Tuesday, October 12, 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 regarding the Delaware Court of Chancery’s decision in Airgas, Inc. v. Air Products & Chemicals, Inc., 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.

On October 8, 2010, the Court of Chancery of Delaware issued an important opinion, Airgas, Inc. v. Air Products & Chemicals, Inc. (Del. Ch. Oct. 8, 2010), with significant implications for public corporations with staggered boards. The decision arose out of the ongoing takeover battle by Air Products for control of Airgas, Inc. At Airgas’s 2010 annual meeting, held last September 15, Air Products successfully obtained all three board seats that were up for election on Airgas’s nine-member staggered board. In addition, holders of 45.8% of the shares entitled to vote at the annual meeting approved a bylaw amendment, proposed by Air Products, which would cause Airgas’s annual meeting to be held each year in the month of January as opposed to August, when Airgas’s annual meetings had historically been held. Adoption of the proposed bylaw means that Airgas’s 2011 annual meeting will take place barely four months after Airgas’s 2010 annual meeting was held, and Air Products will have the opportunity to replace a majority of Airgas’s staggered board in the space of four months. Airgas filed suit and moved to declare the bylaw amendment invalid.

The Court determined that the annual meeting bylaw amendment was properly adopted at the September 15, 2010 annual meeting, that it does not conflict with Airgas’s charter, and that it is valid under Delaware law.

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Delaware’s Balancing Act

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, October 11, 2010
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The following post comes to us from John Armour, Professor of Law and Finance at the University of Oxford; Bernard Black, Professor of Finance and Law at Northwestern University and Professor of Finance and Law at the University of Texas at Austin; and Brian Cheffins, Professor of Corporate Law at the University of Cambridge. 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 the paper Delaware’s Balancing Act, which was recently made publicly available on SSRN, we examine the decline in Delaware’s popularity as a venue for corporate litigation. The Delaware court system has functioned to a significant degree as a de facto “national” court for U.S. corporate law. Corporate disputes arising in Delaware courts frequently generate extensive press coverage. Delaware law is a central part of the business law curriculum in U.S. law schools and law students learning corporate law are exposed to a steady diet of Delaware case law. Official comments accompanying the Model Business Corporations Act (M.B.C.A.), a model set of laws prepared by the Committee on Corporate Laws of the Section of Business Law of the American Bar Association followed by 24 states, frequently refer to Delaware cases to provide examples or as a source of further explanation. Courts in M.B.C.A. states often rely on Delaware case law to clarify gaps in the M.B.C.A. and sometimes even cite Delaware jurisprudence in preference to M.B.C.A. court decisions.

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Recent Delaware Cases Regarding Poison Pills

Posted by Scott J. Davis, Mayer Brown LLP, on
Sunday, October 10, 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. 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.

Delaware courts have recently ruled on the validity of a shareholder rights plan, or “poison pill,” in two situations that presented issues of first impression under Delaware law. On August 12, 2010, Vice Chancellor Strine, in Yucaipa American Alliance Fund II, L.P. v. Riggio, C.A. No. 5465-VCS (Del. Ch. Aug. 12, 2010), upheld the use of a poison pill with a 20 percent threshold to delay a possible takeover of Barnes & Noble by funds controlled by Ronald Burkle, even though the founder and chairman of Barnes & Noble, Leonard Riggio, controlled more than 30 percent of the company’s outstanding common stock.

Less than a month later, on September 9, 2010, Chancellor Chandler, in eBay Domestic Holdings, Inc. v. Newmark, et al., C.A. No. 3705-CC (Del. Ch. Sept. 9, 2010), rescinded a poison pill adopted by the directors of craigslist because the court found that the purpose of the pill was to punish eBay, the holder of about 28 percent of craigslist’s outstanding common stock, rather than to protect the company or its shareholders from economic harm. These cases demonstrate the willingness of the Delaware courts to uphold the use of poison pills when directors can make a reasonable argument that they are being used to protect the economic interest of shareholders and the unwillingness of those courts to permit the use of poison pills in other circumstances.

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Changing Corporate Behavior through Shareholder Activism

Posted by Lance E. Lindblom, The Nathan Cummings Foundation, on
Saturday, October 9, 2010
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Lance Lindblom is President and Chief Executive Officer of the Nathan Cummings Foundation. This post builds on a white paper published by the Foundation, titled Changing Corporate Behavior through Shareholder Activism, available here.

Each year, American foundations give away billions of dollars to address social and environmental issues. This number, though substantial, is dwarfed by the amount of assets that remain invested in foundations’ endowments. Few foundations, however, recognize the vast funds in their investment portfolios as anything other than a source of income to fund grants and operating expenses. This in unfortunate because, as the Nathan Cummings Foundation (NCF) and some of its forward-thinking peers have shown, the funds in a foundation’s investment portfolio can in fact be leveraged to address numerous social and environmental issues while preserving or even enhancing the long-term value of the portfolio.

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Voluntary Non-Financial Disclosure and the Cost of Equity Capital

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, October 8, 2010
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The following post comes to us from Dan Dhaliwal, Professor of Accounting at the University of Arizona; Oliver Li of the Accounting Department at the University of Arizona; Albert Tsang of the School of Accountancy at Chinese University of Hong Kong; and George Yong Yang of the School of Accountancy at Chinese University of Hong Kong.

In the paper, Voluntary Non-Financial Disclosure and the Cost of Equity Capital: The Initiation of Corporate Social Responsibility Reporting, forthcoming in The Accounting Review, we examine a potential benefit associated with the initiation of voluntary disclosure of CSR activities—a reduction in the cost of equity capital.

We find that the likelihood of a firm initiating standalone disclosure of CSR activities is associated with a higher prior year cost of equity capital. Firms with CSR performance superior to that of their industry peers enjoy a reduction in the cost of equity capital after they initiate CSR reports. Further, firms initiating CSR disclosure with superior CSR performance attract dedicated institutional investors and analyst coverage, and these analysts achieve lower absolute forecast errors and dispersion following such disclosure. Finally, CSR disclosure initiators appear to exploit this potential benefit of a reduction in the cost of equity capital. They are more likely than non-disclosing firms to conduct SEOs to raise capital in the two years following the disclosure. In addition, among firms conducting SEOs, CSR disclosure initiators raise a significantly larger amount of equity capital than non-initiators.

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NYSE Commission Report Defines Core Principles of Corporate Governance

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, October 7, 2010
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This post comes to us from David Berger, a partner in the litigation department at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert memorandum.

In the fall of 2009, the New York Stock Exchange formed a diverse and independent commission to examine core governance principles that could be widely supported by issuers, investors, directors, and other market participants. Chaired by Wilson Sonsini Goodrich & Rosati chairman Larry Sonsini, the NYSE Commission on Corporate Governance recently issued its final report, which was released by NYSE Euronext on September 23, 2010. The report identifies 10 core governance principles covering such topics as the fundamental objectives of the board, management’s responsibility for governance, and the relationship between shareholders’ trading activities, voting decisions, and governance.

The principles outlined by the commission are a significant contribution to understanding the core duties and responsibilities of boards, management, and shareholders in the governance process, and provide an important framework outlining the common interests of these groups.

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Regulating the Shadow Banking System

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, October 6, 2010
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The following post comes to us from Gary Gorton, Professor of Finance at Yale University, and Andrew Metrick, Professor of Finance at Yale University.

In the paper Regulating the Shadow Banking System, which was recently made publicly available on SSRN, we propose principles for the regulation of shadow banking and describe a specific proposal to implement those principles. The “shadow” banking system played a major role in the financial crisis, but was not a central focus of the recent Dodd-Frank Law and thus remains largely unregulated.

We first document the rise of shadow banking over the last three decades, helped by regulatory and legal changes that gave advantages to the main institutions of shadow banking: money-market mutual funds to capture retail deposits from traditional banks, securitization to move assets of traditional banks off their balance sheets, and repurchase agreements (“repo”) that facilitated the use of securitized bonds in financial transactions as a form of money. All of these features rely on an evolution of the bankruptcy code that allows securitized bonds to be used as a form of privately created money in large financial transactions, a usage that can have significant efficiency gains and would be costly to eliminate.

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Dodd-Frank Provisions Affecting Executive Pay

Posted by Joseph E. Bachelder III, Law Offices of Joseph E. Bachelder, on
Tuesday, October 5, 2010
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Joseph Bachelder is founder and senior partner of the Bachelder Law Firm. This post is based on an article by Mr. Bachelder that first appeared in the New York Law Journal. Additional posts relating to the Dodd-Frank Act are available here.

Today’s column focuses on several of the provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act, Pub. L. 111-203 (July 21, 2010) affecting executive compensation. These are (i) Say on Pay (including discussion of Proxy Access as it relates to Say on Pay), (ii) the so-called “clawback” provisions and (iii) the new requirement that a ratio of CEO pay to the median of the pay of all other employees be disclosed in the proxy statement. (These are only some of the provisions of Dodd-Frank that will impact on the executive pay process; a longer list of provisions relating to executive pay is noted separately below.)

Taken together, the provisions in Dodd-Frank that affect the executive pay process quite arguably will have the broadest and most significant impact on that pay process of any set of new rules ever contained in one law. The federal government, of course, has impacted for a long time on executive pay through tax and securities laws (and through temporary rulemaking such as that under Pay Controls (1971) and the Troubled Asset Relief Program (TARP) (2008)). But it is unlikely that there has ever been a single law that contains the potential long-term consequences for the process of setting executive pay that are contained in these provisions of Dodd-Frank.

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Bank Loans with Chinese Characteristics

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, October 4, 2010
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The following post comes to us from Warren Bailey, Professor of Finance at Cornell University; Wei Huang of the Department of Financial Economics at the Shidler College of Business, University of Hawaii at Manoa; and Zhishu Yang of the Finance Department at Tsinghua University.

In the paper Bank Loans with Chinese Characteristics: Some Evidence on Inside Debt in a State-Controlled Banking System, forthcoming in the Journal of Financial and Quantitative Analysis, we study the process of bank lending to corporations in a transitional environment. A simple model of a pooling equilibrium suggests that both negative and positive announcement effects are possible, depending on whether the banking system is run on purely commercial terms or is subject to political goals. Empirical results are based on a sample of large loans from Chinese banks to listed Chinese borrowers. We find that poorly performing firms are more likely to receive bank loans, and these loans appear intended to keep troubled firms afloat as subsequent long-run performance is typically poor. Stock values for Chinese borrowers typically decline significantly around bank loan announcements. Furthermore, these negative announcement effects are heightened for borrowers with frequent related-party transactions, poor subsequent performance, high state ownership, no foreign class shares, loans from local bank branches, or loans intended to repay existing debt. Thus, the Chinese stock market appears to understand corporate performance and what these loans mean, and responds accordingly, in contrast to the widely-held perception that it is inefficient.

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