Yearly Archives: 2011

Poison Pills in 2011

Posted by Matteo Tonello, The Conference Board, on

Sunday, April 3, 2011

Beneficial owners, Boards of Directors, Hostile takeover, NOLs, Poison pills, Staggered boards, The Conference Board
More from: Andrew Bab, Matteo Tonello, Sean Neenan, The Conference Board

Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Andrew L. Bab and Sean P. Neenan. Additional posts about poison pills, including several from the Program on Corporate Governance, can be found here.

Having been buffeted by sustained attacks from activists and proxy voting advisors in past years, the shareholder rights agreement is no longer as prevalent as it once was—a phenomenon that has been documented by many corporate governance observers like The Conference Board. However, the most recent case law confirms the validity of poison pills that are properly structured, adopted, and administered. This report discusses these new trends and provides guidance to boards considering whether to adopt a pill and how to formulate its terms.

Despite the continued decline in the number of outstanding poison pills maintained by U.S. public companies, Delaware courts in several cases in 2010 and early 2011 have steadfastly confirmed the continuing legal vitality of pills that are properly structured, adopted, and administered. The most recent of these cases demonstrates how powerful a poison pill can be when working in tandem with a classified board: Air Products withdrew its 16-month long hostile pursuit of Airgas promptly after the Delaware Court of Chancery upheld Airgas’ combined defenses. [1] It is interesting, therefore, that fewer and fewer companies are maintaining classified boards; companies may find that without them, the effectiveness of their poison pills will be significantly reduced.

FDIC’s Second Notice of Proposed Rulemaking under the Orderly Liquidation Authority

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

Saturday, April 2, 2011

Bankruptcy Code, FDIC, Resolution authority
More from: Margaret Tahyar, Randall Guynn, Reena Sahni, Davis Polk

Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post discusses a Davis Polk client memorandum by Randall Guynn and Reena Agrawal Sahni which is available here.

This Davis Polk memorandum, primarily written by Randy Guynn and Reena Agrawal Sahni, describes the FDIC’s second notice of proposed rulemaking, published on March 23, 2011, to implement its new Orderly Liquidation Authority (OLA) under Title II of the Dodd-Frank Act. The proposed rules raise significant issues in a number of areas, including the recoupment of compensation from senior executives and directors and the treatment of set off rights under OLA.

Overall, the Second NPR strikes a more balanced tone between how the FDIC will use its new authority to end taxpayer-funded bailouts of creditors and other stakeholders, while avoiding the sort of “disorderly” liquidation or reorganization under the Bankruptcy Code that could trigger a chain reaction of panic and failures that could result in a severe destabilization or collapse of the U.S. financial system. While it is too early to tell whether the Second NPR signals a permanent change in the tone of the FDIC’s rulemakings and other public statements, it is an important first step.

The complete memorandum is available here.

Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay

Posted by Jesse Fried, Harvard Law School, on

Friday, April 1, 2011

Equity-based compensation, Incentives, Insider trading, Repurchases, Shareholder value
More from: Jesse Fried

Jesse Fried is a Professor of Law at Harvard Law School.

Academics, regulators, and investors have been urging firms to tie executive pay to the long-term stock price. In the paper, Share Repurchases, Equity Issuances, and the Optimal Design of Executive Pay, which was recently made publicly available on SSRN, I explain why tying executive pay to the future value of the firm’s stock—even the stock’s long-term value—can sometimes perversely reward executives for taking steps that reduce the value flowing from the firm to its public investors over time.

The paper describes and analyzes two distortions caused by tying an executive’s payoff to a stock’s future value. The first is “costly contraction:” when the stock’s current price is below its actual value, the executive may have an incentive to divert cash from productive projects in the firm to fund bargain-price share repurchases. If the stock trades for a low enough price, a bargain-price repurchase can boost the value of the executive’s shares even if the repurchase forces the firm to cut back on profitable investments.

The Directors’ Duty to Inform

Posted by John Wilcox, Sodali, on

Thursday, March 31, 2011

Duty to inform, ERISA, Fiduciary duties, Proxy voting, Regulation FD, Rule 14a-8, Sodali
More from: John Wilcox

John Wilcox is Chairman of Sodali, a director of ShareOwners.org, and former Head of Corporate Governance at TIAA-CREF. The article discussed below is available here.

Comply-and-Explain: Should Directors Have a Duty to Inform?, published recently in Duke Law School’s Journal of Law and Contemporary Problems, argues that the directors of publicly held companies in the United States should be subject to a new state law duty requiring them to explain to shareholders how the board is exercising business judgment and acting in the best interests of the corporation.

The duty is derived from: (1) the Model Business Corporation Act (MBCA) Section 8.30 that requires directors to act in the best interest of the corporation and to share information material to the exercise of the board’s decision-making or oversight functions; (2) Section 3.C.4 of the American Bar Association’s Corporate Director’s Guidebook, that sets forth a director’s “duty of disclosure”; and (3) the Department of Labor ERISA requirements governing the fiduciary duties of institutional investors and their exercise of proxy votes. The duty to inform also builds on concepts from the UK’s principles-based, comply-or-explain governance system that gives directors wide discretion to customize governance policies provided that they explain how their decisions are intended to achieve business goals and serve the best interests of the company and its shareholders.

Flexibility of the FSB Principles for Sound Compensation Practices at Financial Institutions

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Thursday, March 31, 2011

Europe, Executive Compensation, Financial reform, FSB, Risk, Risk-taking
More from: Guido Ferrarini, Maria Ungureanu

The following post comes to us from Guido Ferrarini, Professor of Business Law and Director of the Centre for Law and Finance at the University of Genoa, and Maria Cristina Ungureanu, Research Fellow at the Centre for Law and Finance.

The Principles for Sound Compensation Practices at financial institutions and their Implementation Standards issued in 2009 by the Financial Stability Board (FSB) are only the first step in a complex global reform process that is currently underway at both regional and national levels. This process is the outcome of an intense political debate conducted against the backdrop of the international crisis and popular resentment, within countries and across the international arena. When the G20 head of governments and the FSB considered the relevant issues, some of the political conflicts were no doubt diluted by the international and diversified membership of these institutions, and solutions were found at a sufficient level of generality to allow for adaptations and exceptions. However, when the implementation of the Principles is discussed at regional and national level, many of the underlying conflicts inevitably resurface, depending not only on the relative weight of the interest groups involved and the role of banks in the economy, but also on national culture and ethical values.

Early Results from 2011 Proxy Season Show Trends on “Say-on-Frequency” Resolutions

Posted by Charles M. Nathan, Latham & Watkins LLP, on

Wednesday, March 30, 2011

Dodd-Frank Act, Georgeson, Proxy voting, Say on frequency, Say on pay
More from: Charles Nathan, David Drake, Latham

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 Corporate Governance Commentary by Mr. Nathan and James D.C. Barrall of Latham & Watkins, and David S. Drake, Steven Pantina and Rhonda L. Brauer of Georgeson Inc.

According to our research, more than 300 companies subject to Dodd-Frank’s say-on-pay vote requirements have filed proxy statements thus far this year. Of those, 125 companies have held shareholder meetings at which shareholders have voted on advisory resolutions on the frequency in which say-on-pay resolutions should appear on the proxy ballot (commonly referred to as “say-on-frequency” or “say-WHEN-on-pay”), including 77 companies in the Russell 3,000 index and 55 companies in the S&P 1,500 index. Of the 125 votes submitted to date, more than 50% of companies have recommended triennial say-on-pay votes to their shareholders.

Overconfidence, Compensation Contracts, and Capital Budgeting

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

Wednesday, March 30, 2011

Executive Compensation, Firm valuation, Manager characteristics, Overconfidence, Risk, Risk-taking
More from: J.B. Heaton, Simon Gervais, Terrance Odean

The following post comes to us from Simon Gervais of the Finance Department at Duke University, J.B. Heaton of Bartlit Beck Herman Palenchar & Scott LLP, and Terrance Odean, Professor of Finance at the University of California at Berkeley.

In our forthcoming Journal of Finance paper, Overconfidence, Compensation Contracts, and Capital Budgeting, we study the interaction of managerial overconfidence and compensation in the context of a firm’s investment policy. To do so, we develop a capital budgeting problem in which a manager, using his information about the prospects of a risky project, must decide whether his firm should undertake the project or drop it in favor of a safer investment alternative.

SEC Proposes Reaffirmation of Existing Treatment of Security-Based Swaps

Posted by James Morphy, Sullivan & Cromwell LLP, on

Tuesday, March 29, 2011

Beneficial owners, Dodd-Frank Act, Exchange Act, Exchange Act s.13, Exchange Act s.16, SEC, Swaps
More from: James Morphy, Sullivan & Cromwell

James Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. This post is based on a Sullivan & Cromwell client memorandum.

As anticipated, the U.S. Securities and Exchange Commission has proposed to readopt certain of its current rules, with no changes, in order to confirm that the Dodd-Frank Wall Street Reform and Consumer Protection Act did not alter the treatment of “security-based swaps” for purposes of determining “beneficial ownership” of equity securities under Sections 13 and 16 of the Securities Exchange Act of 1934. Comments on the proposal are due by April 15, 2011.

Delaware Decision Supports Properly Structured Top-Up Options in Tender Offers

Posted by Trevor Norwitz, Wachtell, Lipton, Rosen & Katz, on

Tuesday, March 29, 2011

Delaware cases, Delaware law, Olson v. EV3, Tender offer, Top-up option
More from: Sabastian Niles, Trevor Norwitz, William Savitt, Wachtell Lipton

Trevor Norwitz is a partner in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on mergers and acquisitions, corporate governance and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Norwitz, William Savitt and Sabastian V. Niles. 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.

Since their emergence about ten years ago, “top-up” options have become a common feature in tender offers forming the first stage in a “two-step” cash acquisition. A recent decision of the Delaware Court of Chancery confirms that properly structured top-up options will withstand legal challenge and effectively facilitate prompt completion of a back-end merger. Olson v. EV3, Inc., et al., C.A. No. 5583-VCL (Del. Ch. Feb. 21, 2011).

A top-up option granted by an issuer to the acquirer enables the acquirer, once it has obtained control of the target company in the tender offer, to immediately increase its ownership to the threshold required (90 percent in Delaware) to effect a short-form merger and secure full ownership of the target without having to hold a shareholder meeting. As Vice Chancellor Laster recognized in his recent opinion, this approach offers advantages to all parties. By avoiding the cost and delay of having to hold a special meeting whose outcome is a foregone conclusion, the buyer is able to close the back-end merger sooner, thus reducing transaction risk, facilitating efficient financing, and speeding integration of the acquired company. Target shareholders, for their part, also benefit from a reduction in transaction risk, and, importantly, receive their merger consideration months earlier than they otherwise would.

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