Yearly Archives: 2011

Say-on-Pay Under Dodd-Frank

Posted by Joseph E. Bachelder III, Law Offices of Joseph E. Bachelder, on
Saturday, September 17, 2011
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Joseph Bachelder is founder and senior partner of the Bachelder Law Firm. This post is based on an article that first appeared in the New York Law Journal by Mr. Bachelder, with assistance from David T. Ling and Andy Tsang.

Say-on-pay has completed most of its first proxy season under the Dodd-Frank Wall Street Reform and Consumer Protection Act. [1] For this purpose, say-on-pay means a non-binding vote by shareholders of a publicly traded company pursuant to Dodd-Frank Section 951 to approve or disapprove the executive compensation program at that company. [2]

During the 2011 proxy season so far approximately 40 companies in the Russell 3000 have reported that a majority of their shareholder votes disapproved of the executive pay program at the company. This represents about 2 percent of the approximately 2,300 companies in the Russell 3000 that have had say-on-pay votes so far during the 2011 proxy season. [3] At another approximately 130 companies, between 30 percent and 50 percent of votes cast were negative votes or abstained. (Abstentions were very few.) Thus, during the 2011 proxy season so far, approximately 170 companies in the Russell 3000 had less than 70 percent of votes cast in favor of the company’s pay programs. [4]

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Making Banks Transparent

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 16, 2011
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The following post comes to us from Robert P. Bartlett III, Assistant Professor of Law at the University of California, Berkeley.

In the paper, Making Banks Transparent, forthcoming in the Vanderbilt Law Review, I propose a mandatory disclosure regime designed to make the credit risk residing on the balance sheets of financial institutions more transparent to the marketplace than is presently the case. As the Financial Crisis and the more recent European sovereign debt crisis each illustrated, U.S. financial institutions represent uniquely opaque organizations for investors in capital markets. Although bank regulatory policy has long sought to promote market discipline of banks through enhanced public disclosure, bank regulatory disclosures are notoriously lacking in granular, position-level information concerning their credit investments due largely to conflicting concerns about protecting the confidentiality of a bank’s proprietary investment strategies and customer information. When particular market sectors experience distress, investors are thus forced to speculate as to which institutions might be exposed, potentially causing significant disruptions in credit markets and contributing to systemic risk. Together with the failure of bank regulators to monitor bank risk-taking prior to the Financial Crisis, these concerns have prompted renewed calls for making financial institutions more transparent.

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SEC Action Needed to Fulfill the Promise of Citizens United

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, September 15, 2011
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Editor’s Note: John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. Taylor Lincoln is Research Director at Congress Watch. More information about the SEC petition mentioned below is available here; more posts about corporate political spending are available here.

As we note in a recent op-ed in the Washington Post, the Supreme Court’s Citizens United decision to let corporations spend unlimited sums in federal elections was premised on a pair of promises: Corporations would disclose expenditures, and shareholders would police such spending.

Those promises remain unfulfilled: of the more than $300 million spent by outside groups in 2010, nearly half was spent by groups that revealed nothing about their funders, double the total spending by outside groups in 2006, as shown in analyses by the Center for Responsive Politics.

The best chance to fulfill those promises may now rest with the SEC, which was recently petitioned to begin a rule-making process to require disclosure of political activity by corporations.

Contrary to consensus views, SEC action may benefit owners of affected firms. In a new report, we estimate industry-adjusted price-to-book ratios of 80 companies in the S&P 500 that have policies calling for disclosure of electioneering. After controlling for size, leverage, research and development, growth and political activity, we find disclosing companies had 7.5 percent higher ratios than other S&P 500 companies in 2010.

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September 2011 Dodd-Frank Rulemaking Progress Report

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Wednesday, September 14, 2011
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Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post discusses a Davis Polk report which is available here. A post about the previous progress report is available here. Other posts about the Dodd-Frank Act are available here.

This posting, the September Davis Polk Dodd-Frank Progress Report, is the sixth in a series of Davis Polk presentations that illustrate graphically the progress of the rulemaking work that has been done and is yet to occur under the Dodd-Frank Act. The Progress Report has been prepared using data from the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis.

In this report:

  • No New Deadlines. No new rulemaking requirements were due in August.
  • 9 Requirements Met, 3 Proposed. Four deadlines that had been previously missed were met, and five with future deadlines were finalized. Two of the proposed rules, one from the SEC and one from the Federal Reserve, appear as missed requirements as their deadlines have passed.
  • Bank Regulators. Although August was a quiet month for the Bank Regulators, they are expected to take action on several key items in the coming months, including issuing rules regarding resolution plans and implementation of the Volcker Rule.
  • CFPB Begins Rulemaking. The CFPB finalized its first 5 rules in late July. None had a statutory deadline.

Executive Compensation and R&D Intensity

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 14, 2011
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The following post comes to us from Rajiv Banker, Professor and Merves Chair of Accounting and Information Technology at Temple University; Dmitri Byzalov, Assistant Professor of Accounting at Temple University; and Chunwei Xian, Assistant Professor of Accounting at Northeastern Illinois University.

In our paper, Executive Compensation and Research & Development Intensity, which was recently made publicly available on SSRN, we examine the mediating effect of R&D intensity on the weights on signals of ability and financial performance measures in executive compensation contracts. There are many prior studies that investigate the impact of R&D intensity on total executive compensation (e.g., Dechow and Sloan 1991; Kwon and Yin 2006; Cheng 2004). However, prior studies did not incorporate adverse selection in their analysis. In other words, they did not investigate how R&D intensity affects the role of managerial ability in executive compensation. In contrast, we investigate how R&D intensity impacts the weights placed on human capital measures such as technical work experience, science and engineering degrees, and past experience in R&D intensive firms.

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A Closer Look at Antitrust Reverse Termination Fees

Posted by David Fox, Kirkland & Ellis LLP, on
Tuesday, September 13, 2011
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David Fox is a partner at Kirkland & Ellis LLP, focusing on complex mergers and acquisitions as a member of that firm’s Corporate Group. This post is based on a Kirkland & Ellis M&A Update by Mr. Fox, Timothy Muris, and Christine Wilson.

Perhaps no topic has engendered more conversation among dealmakers in recent months than the allocation between merging parties of the risk of obtaining antitrust approval of a proposed acquisition. With the increase in strategic combinations and the expectation of a more robust regulatory environment under the current administration, many recent merger agreements feature painstakingly negotiated provisions to address these risks. While much attention has been devoted to headline-grabbing reverse termination fees payable to the seller by the buyer upon failure to obtain required antitrust approvals in such deals as Google/Motorola Mobility ($2.5 billion or 20% of deal value) and AT&T/T-Mobile (~$6 billion of value/15%), it is important to realize that the reverse termination fee is just one facet (as often absent as not) of a complex matrix of provisions in the merger agreement that ultimately determines the risk-sharing between the parties on this issue.

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Acquirer Valuation and Acquisition Decisions

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, September 12, 2011
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The following post comes to us from Itzhak Ben-David of the Department of Finance at The Ohio State University, Michael S. Drake of the School of Accountancy at Brigham Young University, and Darren T. Roulstone of the Department of Accounting and MIS at The Ohio State University.

In the paper, Acquirer Valuation and Acquisition Decisions: Identifying Mispricing Using Short Interest, which was recently made publicly available on SSRN, we provide new evidence helping to resolve an ongoing academic debate about the factors that lead firms to acquire other firms. In the center of the debate are two views. According to the neoclassical approach, acquisitions are an efficient way for firms to expand. The prediction of this school of thought is that mergers are more likely to take place for firms with high Tobin’s Q which is indicative of high investment opportunities. In contrast, the behavioral school of thought argues that firms that are temporarily overvalued have an incentive to engage in stock acquisitions in order to exchange their overvalued equity for real assets. Resolving the debate requires distinguishing overvaluation from high investment (or growth) opportunities. To date, most studies use variations of the market-to-book ratio to measure overvaluation as well as to measure investment opportunities. Hence, in order to distinguish between the two hypotheses, one needs an instrument to separate these two economic variables.

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Engaging With Strategy after the Financial Crisis

Posted by Jeffrey Stein, King & Spalding LLP, on
Sunday, September 11, 2011
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Jeffrey Stein is a partner in the Corporate Practice Group at King & Spalding LLP. This post comes to us from Mr. Stein and Bill Baxley, and is based on a report from the Lead Director Network, available here.

Oversight of corporate strategy has become an increasingly important board function in recent years, and boards are seeking ways to become more effective and spend additional time on strategy. Increasingly, corporate strategy is focusing on opportunities arising from globalization, which requires that boards also address the risks that arise from global operations. To be effective in overseeing global strategy, boards must focus on their own composition and directors’ experiences, and also draw effectively on management and experts outside their companies. Lead directors have a special responsibility for strategic oversight and can help their boards make greater contributions in this area.

Against this background, the Lead Director Network (the “LDN”), a group of lead directors, presiding directors and non-executive chairmen from many of America’s leading companies, met on July 13, 2011 to discuss how boards engage with strategy in this global environment. Following this meeting, King & Spalding and Tapestry Networks have published a ViewPoints report here to present highlights of the discussion that occurred at the meeting and to stimulate further consideration of these subjects.

The following provides highlights from the meeting, as described in the ViewPoints report.

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Second Circuit Clarifies Materiality Requirement in Securities Fraud Cases

Posted by Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Saturday, September 10, 2011
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Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

Recently, the Second Circuit decided Fait v. Regions Financial Corp., No. 10-2311-cv (2d Cir. Aug. 23, 2011), in which the Court affirmed the dismissal of a putative class action alleging violations of Sections 11(a), 12(a)(2), and 15 of the Securities Act of 1933 (the “Securities Act”). The Second Circuit held that defendants’ alleged failures to write down goodwill in a timely manner and to increase loan loss reserves sufficiently during the financial crisis were not actionable, because defendants’ challenged statements were matters of opinion rather than fact. Thus, plaintiffs had to allege that defendants did not believe the statements were true at the time they were made, something the complaint failed to do. Fait promises to be a useful tool in defending claims under the Securities Act, as well as claims that a defendant otherwise misstated financial figures, when those figures depend on the judgment of management rather than strictly objective criteria. The decision may be particularly important with respect to claims against accounting firms, whose conclusions based on their audits of financial statements and internal control regularly take the form of an expression of opinion.

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Bribes and Benefits

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 9, 2011
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The following post comes to us from Yan-Leung Cheung, Professor of Finance at Hong Kong Baptist University; P. Raghavendra Rau, Professor of Finance at the University of Cambridge; and Aris Stouraitis, Professor of Finance at Hong Kong Baptist University.

In the paper, Which firms benefit from bribes, and by how much? Evidence from corruption cases worldwide, which was recently made publicly available on SSRN, we analyze a hand-collected sample of 166 prominent bribery cases, involving 107 publicly listed firms from 20 stock markets that have been reported to have bribed government officials in 52 countries worldwide during 1971-2007. Prior papers have focused on the date of the revelation of the bribe on the firm’s stock price.

Our research questions are different from this literature. We try to answer three questions. First, who bribes? Second, how much do they pay? Third, what benefits do they get? In contrast to prior literature, to answer our research questions, we focus on the initial date of award of the contract for which the bribe was paid. At that time, the market was unaware that the firm obtained a particular contract by paying a bribe. So the change in market capitalization of the firm on the bribe paying date (which is only available ex-post) provides the magnitude of benefits firms get from the bribe. By subtracting the value of the bribe from the benefits, we get a measure of the NPV for the bribe.

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