Yearly Archives: 2011

Can Madoff Trustee Go After the Banks?

Posted by John F. Savarese, Wachtell, Lipton, Rosen & Katz, on
Friday, December 2, 2011
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John Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Douglas K. Mayer, Stephen R. DiPrima, and Emil A. Kleinhaus.

Recently, the United States District Court for the Southern District of New York ruled that the trustee for Bernard L. Madoff Investment Securities lacks authority to pursue common-law damages claims belonging to the investors in Madoff’s Ponzi scheme.  Based on that ruling, the court dismissed claims against JPMorgan and UBS seeking to hold the banks liable for customer losses resulting from Madoff’s scheme.  Picard v. JPMorgan Chase & Co., No. 11 civ. 913 (S.D.N.Y. Nov. 1, 2011) (McMahon, J).

It is a longstanding principle of bankruptcy law that a trustee, as successor to the debtor, may not bring claims that belong to creditors.  It is also well-established that, where the debtor has defrauded its creditors, the trustee — who stands in the debtor’s shoes — cannot recover from third parties for wrongdoing that the debtor itself took part in.

In attempting to escape these principles, the Madoff trustee argued that the Securities Investor Protection Act (SIPA), which governs the liquidation of broker dealers, provides a SIPA trustee with broader powers than an ordinary bankruptcy trustee, including the power to bring claims belonging to creditors (in this case, Madoff’s former customers).  The Madoff trustee purported to have such standing as a “bailee” of customer property.  The trustee also argued that section 544(a) of the Bankruptcy Code, which grants a trustee rights of a hypothetical creditor that extends credit to the debtor at the time of its bankruptcy, permits a trustee to assert damages claims that belong to actual creditors.

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Do Institutional Investors Influence Capital Structure Decisions?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, December 2, 2011
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The following post comes to us from Roni Michaely, Professor of Finance at Cornell University, and Christopher Vincent of the Department of Finance at Cornell University.

In the paper, Do Institutional Investors Influence Capital Structure Decisions?, which was recently made publicly available on SSRN, we analyze whether institutional holdings influence capital structure decisions, and whether firms’ financial leverage affects institutional investors’ decisions to hold their equity. Theories of capital structure imply that firms choose their leverage in response to market frictions such as agency costs and asymmetric information. Meanwhile, institutional monitoring and information-gathering affect firms’ agency costs and information environment, opening channels through which institutions may influence firms’ choices of leverage. In the agency framework, institutional investors serve as an external disciplinary mechanism for management, lessening the need for internal disciplinary mechanisms such as debt. In the asymmetric information framework, institutional investors decrease information asymmetry between outside and inside shareholders, which reduces the adverse selection costs of equity and lowers the cost of equity relative to debt, serving to decrease the amount of debt needed for a separating signaling equilibrium.

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How to Win the Say on Pay Vote

Posted by Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, on
Thursday, December 1, 2011
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Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s Executive Compensation and Benefits practice. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein, Jeannemarie O’Brien and David E. Kahan.

With proxy season approaching, public companies must consider their strategy for the second year of the mandatory say on pay advisory vote.

Even companies that passed last year’s vote with flying colors should prepare for the upcoming season with a fresh perspective, as the second season of say on pay will present new challenges. Some investors may have applied more relaxed standards to companies last year in recognition of the fact that mandatory say on pay was new. In addition, shareholders and proxy advisory firms may focus on a company’s response to the first mandatory say on pay vote, which was not an issue last year. Indeed, in its recently released 2012 draft policy changes, Institutional Shareholder Services (ISS) asked whether its voting recommendations should take into account a company’s response to receiving a majority but less than 70% support for its prior year’s say on pay vote. Further, an important factor in whether a company received a positive recommendation from the proxy advisory firms was the results of the total shareholder return (TSR) analysis described below and, accordingly, a change in performance can adversely affect the vote, even where compensation practices have not changed. Finally, ISS recently proposed revisions to its voting policies that may impact say on pay recommendations in the upcoming season.

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Updated Private Equity Buyer/Public Target M&A Deal Study

Posted by Marc Weingarten, Schulte Roth & Zabel LLP, on
Thursday, December 1, 2011
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Marc Weingarten is partner and chair of the Business Transactions Group at Schulte Roth & Zabel LLP. This post is based on the updated Schulte Roth & Zabel 2011 Private Equity Buyer/Public Target Deal Study by John Pollack and David Rosewater, available here. A post about an earlier version of the study is available here.

This study updates our firm’s Summer 2011 Deal Study in three important ways:

  • First, we have supplemented our Deal Study by taking into account the relevant deal terms from the 5 private equity buyer/public company target all-cash merger transactions involving consideration of at least $500 million in enterprise value [1] entered into during the third calendar quarter of 2011.
  • Second, we have added a comparative element to our Deal Study by comparing the treatment of certain key deal terms in the 20 transactions entered into between Jan. 1, 2010 and Dec. 31, 2010, which we refer to as the “2010 Transactions,” with the treatment of the same key deal terms in the 11 transactions entered into between Jan. 1, 2011 and Sept. 30, 2011, which we refer to as the “2011 YTD Transactions.”
  • Finally, we have added several new topics to this Deal Study, including a more detailed analysis of “go shop” provisions.

Please note that: (i) our findings described in this survey are not intended to be an exhaustive review of all transaction terms in the surveyed transactions — instead, we report only on those matters that we believe would be most interesting to the deal community; (ii) our observations are based on a review of publicly available information for the surveyed transactions — the surveyed transactions accounted for only a portion of M&A activity during the survey period and may not be representative of the broader M&A market; and (iii) our observations from the comparative analysis are affected by the two data sets not being of the same sample size (11 transactions in 2011 to date vs. 20 transactions in 2010) or average deal size ($2.0 billion mean for 2011 YTD Transactions vs. $1.6 billion mean for the 2010 Transactions).

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ISS Issues Policy Updates for 2012 Proxy Season

Posted by Holly Gregory, Weil, Gotshal & Manges LLP, on
Wednesday, November 30, 2011
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Holly Gregory is a Corporate Partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal Alert. The complete article, including the appendix, is available here.

On November 17, 2011, Institutional Shareholder Services Inc. (ISS) issued updates to its proxy voting policies applicable to shareholder meetings held on or after February 1, 2012. This Alert summarizes and discusses implications of those updates for US companies. The ISS proxy voting guidelines and the updates are available at http://www.issgovernance.com/policy.

ISS is generally considered the most influential proxy advisor in the US. Recent studies have found that ISS is able to influence shareholder votes by 6% to 20%. [1] In preparing for 2012 annual meetings, corporate counsel, corporate secretaries, and directors (particularly those serving on compensation or nominating and governance committees) should review the ISS policy updates and consider how the changes may affect ISS’ evaluation of director re-elections, executive compensation matters, and other matters for shareholder vote. Note that for the 2012 proxy season, ISS has identified over 50 circumstances that may support a negative vote recommendation (either “against” or “withhold”) in uncontested director elections.

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Equilibrium in the Initial Public Offerings Market

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, November 30, 2011
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The following post comes to us from Jay Ritter, Professor of Finance at the University of Florida.

The critical review article, Equilibrium in the Initial Public Offerings Market, forthcoming in the Annual Review of Financial Economic,  focuses on selected topics dealing with initial public offerings (IPOs) of equity securities, emphasizing issues that are of current interest to academics, practitioners, and policymakers.

On average, the average first-day returns on IPOs in the U.S. and most other countries appear to be higher than they should be if companies were trying to maximize the amount of money being raised. I criticize the ability of popular asymmetric information-based models to explain the magnitude of the underpricing of IPOs that is observed. I suggest that the quantitative magnitude of underpricing can be explained with a market structure in which underwriters want to underprice excessively, issuers are focused on services bundled with underwriting rather than on maximizing the offer proceeds, and there is limited competition between underwriters. I explain why competition is limited, in spite of the existence of dozens of underwriters competing for deals.

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The Corporate Shareholder’s Vote and Its Political Economy

Posted by Mark Roe, Harvard Law School, on
Tuesday, November 29, 2011
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Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. Work from the Program on Corporate Governance about shareholder voting includes Private Ordering and the Proxy Access Debate by Bebchuk and Hirst; more posts about proxy access are 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.

At the Columbia Law School conference on the Delaware Chancery Court this November, I summarized my recent working paper The Corporate Shareholder’s Vote and Its Political Economy, in Delaware and in Washington. I discuss this paper below. Related work includes Delaware’s Competition, Delaware’s Politics, and Delaware and Washington as Corporate Lawmakers.

Shareholder power to effectively nominate, contest, and elect the company’s board of directors became core to the corporate governance reform agenda in the past decade, as corporate scandal and financial stress put business failures and scandals into headlines and onto policymakers’ agendas. As is well known to corporate analysts, the incentive structure in corporate elections typically keeps shareholders passive, and incumbent boards largely control the electoral process, usually nominating and electing themselves or their chosen successors. Contested corporate elections are exceedingly rare. But shareholder power to directly place their nomination for a majority of the board in the company-paid-for voting documents, as the SEC has pushed toward, could revolutionize American corporate governance by sharply shifting authority away from insiders, boards, and corporate managements. During the past decade, the SEC proposed, withdrew, and then promulgated rules that would shift the control of some corporate election machinery, to elect a minority of the board, away from insiders and into shareholders’ hands. Then, in July 2011, the D.C. Circuit Court of Appeals struck down the most aggressive of the SEC’s rules.

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FINRA Proposed Rule on Private Placements

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, November 29, 2011
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The following post comes to us from Robert E. Buckholz, Jr., partner at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication.

In January 2011, FINRA proposed to amend Rule 5122 (“Private Placements of Securities Issued by Members”) so that its disclosure and filing requirements, which currently apply only to private placements of securities issued by a FINRA member or a “control entity” of a member, would apply to all private placements, including those of unaffiliated issuers, covered by the rule. [1] On October 18, 2011 and in response to comments on the January proposal, FINRA withdrew its proposal to amend Rule 5122 and instead submitted new proposed Rule 5123 (“Private Placements of Securities”) to the Securities and Exchange Commission for adoption. [2] Rule 5122 would remain unchanged.

Proposed Rule 5123 would prohibit members and persons associated with a member from offering or selling a security in reliance on an exemption from registration under the Securities Act of 1933 (which the proposed rule defines as a “private placement”), or from participating in the preparation of a private placement memorandum, term sheet or other disclosure document in connection with such a private placement, unless the member or associated person provides to each investor, prior to sale, information about the anticipated use of the offering proceeds and the amount and type of offering compensation and expenses. This required information must be included in a private placement memorandum or term sheet or, if none is prepared, in a separate disclosure document. Although the rule’s definition of “private placement” is literally quite broad, it is unclear whether FINRA intends the rule to apply outside the context of non-public offerings generally effected pursuant to Section 4(2) or Regulation D.

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Investment Cycles and Startup Innovation

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, November 28, 2011
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The following post comes to us from Ramana Nanda and Matthew Rhodes-Kropf, both of the Entrepreneurial Management Unit at Harvard Business School.

In our paper, Investment Cycles and Startup Innovation, which was recently made publicly available on SSRN, we examine how the environment in which a new venture was first funded relates to their ultimate outcome. New firms that surround the creation and commercialization of new technologies have the potential to have profound effects on the economy. The creation of these new firms and their funding is highly cyclical (Gompers et al. (2008)). Conventional wisdom associates the top of these cycles with negative attributes. In this view, an excess supply of capital is associated with money chasing deals, a lower discipline of external finance, and a belief that this leads to worse ventures receiving funding in hot markets.

However, the evidence in our paper suggests another, possibly simultaneous, phenomenon. We find that firms that are funded in “hot” times are more likely to fail but create more value if they succeed. This pattern could arise if in “hot” times more novel firms are funded. Our results provide a new but intuitive way to think about the differences in project choice across the cycle. Since the financial results we present cannot distinguish between more innovative versus simply riskier investments, we also present direct evidence on the quantity and quality of patents produced by firms funded at different times in the cycle. Our results suggest that firms funded at the top of the market produce more patents and receive more citations than firms funded in less heady times. This indicates that a more innovative firm is funded during “hot” markets.

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2012 Proxy Season: Audit Firm Rotation

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, November 27, 2011
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The following post comes to us from Sean DiSomma, Senior Vice President at Alliance Advisors LLC, and is based on an Alliance Advisors whitepaper by Shirley Westcott.

In the wake of the financial crisis, regulators and shareholder activists alike have been revisiting the issue of auditor independence with a view towards requiring companies to periodically rotate their outside audit firms.

The United Brotherhood of Carpenters is filing resolutions for 2012 asking companies to establish a policy that at least every seven years the audit firm rotates off the engagement for a minimum of three years. The Carpenters argue that mandatory auditor rotation would improve the integrity of the audit and ensure the independence of the audit firm’s work.

Three of the targeted companies with early annual meetings—Deere, Hewlett-Packard and Walt Disney—are seeking no-action relief on ordinary business grounds. Although the SEC has historically allowed companies to omit shareholder resolutions limiting auditor tenure, the Commission may take into account whether recent regulatory initiatives have elevated the issue to a policy matter engendering widespread public debate.

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