Yearly Archives: 2011

Early Results from Say on Pay

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, April 17, 2011
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The following post comes to us from Michael R. Littenberg, a partner at Schulte Roth & Zabel LLP, and is based on Schulte Roth & Zabel client alert by Mr. Littenberg, Farzad F. Damania and Justin M. Neidig.

Beginning on Jan. 21, 2011, most domestic public companies became subject to the SEC’s new “say on pay” and “say on frequency” rules.

In the first 30 days of the new rules, 95 companies (including TARP recipients) held SOP votes and 92 companies held SOF votes. At 93 of the 95 companies, NEO compensation was approved by shareholders, in most cases by an overwhelming percentage of the votes cast. In contrast, frequency recommendations did not receive nearly as much support:

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Reform for the Covered Bond Industry on the Horizon

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, April 16, 2011
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The following post comes to us from Barton Winokur, Chairman and Chief Executive Officer of Dechert LLP, and is based on a Dechert publication by Patrick D. Dolan, Robert H. Ledig, Gordon L. Miller and Kira N. Brereton.

On the heels of the Administration’s recently published report to Congress outlining its objectives for reforming the housing finance market, [1] new legislative action may come that would encourage the issuance of covered bonds. Secretary of the Treasury Timothy Geithner on March 1, 2011 in testimony before the House Committee on Financial Services (“Committee”) stated that the development of a legislative framework for a covered bond market should be included as part of the consideration of new means to provide mortgage credit. [2] Notwithstanding earlier delays in implementing reform for this industry, [3] proposals for legislative action addressing covered bonds are likely to be a focal point for the Committee [4] during this session of Congress. A discussion draft of a bill sponsored by Representative Scott Garrett (R-NJ), which aims to establish standards for covered bond programs and a covered bond regulatory oversight program, has been circulated to members of Congress and securitization market participants. The draft bill, if enacted in its current form, would (i) define the issuers and asset classes that would be subject to the oversight program; (ii) establish a framework for a federal regulatory oversight program for covered bonds; and (iii) implement a default and insolvency resolution process. This memorandum summarizes the February 2011 discussion draft, entitled the “United States Covered Bond Act of 2011” (the “Act”), which is expected to be introduced later this year.

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Agency Problems in Public Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, April 15, 2011
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The following post comes to us from Jesse Edgerton, an economist at the Board of Governors of the Federal Reserve in Washington, D.C. The paper and post express his views only and not necessarily those of the Federal Reserve Board or its staff.

The extent of agency problems in publicly traded firms and the need for reform of executive compensation remain the subject of active debate. In the paper, Agency Problems in Public Firms: Evidence from Corporate Jets in Leveraged Buyouts, recently made available on SSRN, I bring new evidence to this debate by measuring a particular kind of firm behavior where there is potential for managerial abuse—the use of corporate jets.

Motivated by a large literature that finds improvements in efficiency and performance when firms are purchased by a private equity (PE) fund in a leveraged buyout (LBO), I use novel data to compare the fleets of jets operated by publicly traded and privately held firms. In the cross-section of firms from 2008, I find that PE-owned firms average about 40% smaller jet fleets than publicly traded firms, even after controlling for firm size, industry, and location in a variety of flexible ways. One could still worry, however, that these cross-sectional differences do not represent a causal effect of PE ownership due to omitted variables or other factors. Thus, I also measure changes in jet fleets within firms that are taken from public to private by a PE fund in an LBO between 1992 and 2007, and I find fleet reductions of a similar magnitude. Of course, the selection of firms into PE-ownership is not random, and I discuss assumptions under which these comparisons across and within firms provide estimates of lower and upper bounds on the average treatment effect of taking a firm from public to private in an LBO.

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Del Monte and the Responsibility of a Board in a Sales Process

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Thursday, April 14, 2011
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David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal. 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.

The acquisition of Del Monte Foods Co. by a group of financial buyers was completed earlier this month. [1] The shareholder vote, which took place in early March, had been delayed for twenty days by the Delaware Court of Chancery because the court found that the financial advisor to Del Monte’s board had failed to disclose important information to the board and had become so conflicted in the transaction that the entire process had become tainted by the financial advisor’s misconduct and the directors’ breach of their fiduciary duties. [2]

The Del Monte transaction highlights important considerations for companies pursuing sale transactions, whether in the context of a going-private transaction or a sale to a strategic acquiror. One set of issues centers around the board’s oversight of its financial advisors, and another concerns the appropriate use of special committees by boards. The opinion of Vice Chancellor Laster in the Del Monte case is a powerful reminder to directors that actions such as hiring advisors and forming special committees—while appropriate and even essential in some circumstances—do not obviate the need for members of the board to be fully engaged in and actively supervising the process of negotiating a significant company transaction.

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Dodd-Frank Rulemaking Progress Report

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Thursday, April 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.

This posting, the Davis Polk Dodd-Frank Rulemaking Progress Report, is the first in a new 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 by our technology team, led by associate Gabe Rosenberg, as our first empirical data-mining exercise using 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.

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A New Legal Theory to Test Executive Pay: Contractual Unconscionability

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, April 13, 2011
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The following post comes to us from Lawrence A. Cunningham, Professor of Law at the George Washington University Law School, and is based on Professor Cunningham’s paper from the Iowa Law Review, available here.

Executive pay has skyrocketed in recent decades, in absolute terms and compared to average wages. The area of largest growth has been in stock-based components, including stock options, often tending to focus on the short-term, with associated risks we’ve seen. A vigorous academic debate has run for more than a decade, becoming a popular political discussion amid the financial crisis that arcane debate to public scrutiny.

Growth could be laudable, explained as creating proper incentives to align manager interests with shareholder interests and to promote optimal risk taking. In this view, if there is a problem, it is narrow and limited. Critics are skeptical whether this story holds up. They worry that managerial power has strengthened to enable top executives to control setting their own compensation. In this view, the problem is pervasive and warrants a comprehensive response—and proposals abound.

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Monitoring Managers: Does It Matter?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, April 13, 2011
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The following post comes to us from Francesca Cornelli, Professor of Finance at the London Business School; Zbigniew Kominek of the European Bank for Reconstruction and Development; and Alexander Ljungqvist, Professor of Finance at New York University.

In the paper, Monitoring Managers: Does It Matter? which was recently made publicly available on SSRN, we investigate how boards of directors monitor management, under what circumstances they fire CEOs, and whether these actions improve performance. Boards of directors are tasked with ensuring that firms are run by competent managers who act in their shareholders’ interest by providing appropriate incentives and through “active monitoring,” that is, collecting information about the firm’s operations or the manager’s ability and firing the manager if necessary. Much of the economic literature on corporate governance and boards studies the provision of incentives and pays less attention to monitoring. In this paper, we ask if boards with large shareholders indeed engage in active monitoring and whether such monitoring in turn improves performance.

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Delaware Court of Chancery Addresses Multi-Forum Deal Litigation

Posted by Theodore Mirvis, Wachtell, Lipton, Rosen & Katz, on
Tuesday, April 12, 2011
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Theodore Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Mirvis, William Savitt and Ryan A. McLeod. 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.

The pot of multi-forum stockholder litigation against deals continues to boil. The recent Allion decision, the subject of our recent memo, spotlights one solution that our Firm developed that has shown some promise.

That litigation follows in the wake of a deal’s announcement is nothing new. But participants in the M&A markets are still grappling with the increasingly prevalent trend of multiple shareholder actions challenging the same deal in different courts. The Delaware Court of Chancery recently endorsed a pragmatic solution to this endemic problem. In re Allion Healthcare Inc. S’holders Litig., C.A. No. 5022-CC (Del. Ch. Mar. 29, 2011).

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Exemplifying Fundamentals — Back to Basics in Securities Regulation

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Tuesday, April 12, 2011
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the annual NASAA 19(d) conference; the complete remarks are available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

For the last several years, we have been engaged in an uphill fight to restore the securities regulation framework at global, federal, and state levels to where it should be. Financial services exist to serve investors and our markets, and a focus on investors is absolutely essential to any credible regulatory restructuring.

It is time for everyone involved in the financial services industry to re-dedicate themselves to the fundamentals of regulation. It is time to go back to basics. I am going to spend my time today discussing with you our shared goal — ensuring that securities regulation works as it was fundamentally intended.

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Excess-Pay Clawbacks

Posted by Jesse Fried, Harvard Law School, on
Monday, April 11, 2011
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Jesse Fried is a Professor of Law at Harvard Law School.

In the paper, Excess-Pay Clawbacks, which was recently made publicly available on SSRN, Nitzan Shilon and I identify substantial deficiencies in the clawback arrangements of public companies. We also explain why the Dodd-Frank Act’s clawback requirement is likely to improve these arrangements, but does not go far enough.

The paper begins by highlighting the problem of “excess pay” – excessively high payouts to executives arising from errors in earnings and other compensation-related metrics. Such excess pay, we explain, can impose substantial costs on shareholders even if there is no manipulation or other misconduct. Unfortunately, directors frequently use their discretion to let current and departed executives keep excess pay. Thus, an optimal clawback policy would require directors to recover excess pay from either current or departed executives.

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