Monthly Archives: February 2011

Joe Flom — A Brief Salute

Editor’s Note: Peter Atkins is a partner for corporate and securities law matters at Skadden, Arps, Slate, Meagher & Flom LLP.

I had the incredible good fortune over a span of 43 years to know, work with, be a partner of and, most importantly, to have the friendship and guidance of Joe Flom. His passing on February 23, 2011, in his 87th year, is a profound loss for me – and for the legion of people and institutions he touched during his remarkable life. But sharing the pain of that loss is not the purpose of this note.

Rather, I would like to put down a few words about Joe Flom, the lawyer – a shining product of Harvard Law School, ever appreciative for what it did for him and of its preeminent role in promoting the rule of law, and forever giving back to it.

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Investing in Corporate Social Responsibility to Enhance Customer Value

The following post comes to us from the Conference Board Governance Center, and is based on a Conference Board report by John Peloza and Jingzhi Shang.

Corporate social responsibility (CSR) activities have the potential to create several distinct forms of value for customers. It is the customer perception of this value that mediates the relationship between CSR activities and subsequent financial performance. By categorizing major CSR activities and the different types of value each can create, this report offers a number of practical recommendations to business leaders embarking in CSR programs for their companies.

Investments in CSR activities are under scrutiny. Boards and shareholders are increasingly demanding that outcomes from these investments be measured to understand if and how they positively impact the profitability of the firm. Not surprisingly, a significant amount of research has been undertaken to understand the relationship between CSR and profitability.

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Delaware Court Implements Guideline Regarding the Preservation of Electronic Information

The following post comes to us from Kevin F. Brady, a Partner in the Business Law Group at Connolly Bove Lodge & Hutz LLP, and relates to guidelines for preservation of electronically stored information issued by the Delaware Court of Chancery, which 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.

On January 18, 2011, the Delaware Court of Chancery became one of the first state courts to issue a guideline for the preservation of electronically stored information (“ESI”) (the “Guideline”). The stated purpose of the Guideline is a reminder to litigants and their counsel (inside and outside counsel) of their common law duty to preserve potentially relevant information to the litigation. The reason for the focus on preservation is that based on the Court’s experience, proper preservation can remedy many discovery ills that arise later in the litigation. Indeed, most courts would agree that glitches in preservation are often difficult to remedy after the fact.

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Director Pay

Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s executive compensation and corporate governance practices. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein; the memo was also discussed by Peter Lattman in the New York Times DealBook, available here.

During the past decade, we have witnessed both a dramatic increase in the demands placed on directors of public companies and the scrutiny of boards’ actions. While the fundamental model of a director’s fiduciary duties under state law has remained mostly stable, in other precincts – including the Securities and Exchange Commission and other regulators, ISS, institutional investors, politicians and the public – expectations about directors’ involvement and influence over a corporation have increased significantly.

An engaged, skilled and thoughtful board of directors adds immense value to a corporation. It is more difficult than ever to recruit and retain directors who meet the requirements – including the increased legal and regulatory requirements imposed within the past ten years – for experience, expertise, diversity, independence, leadership, collegiality and character. Competition for the best candidates is intense, particularly in view of the fact that the ideal director candidate is often a successful, independent and prominent person who does not need the exposure to the obligations that public company directorship entails.

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The Fund Industry: How Your Money is Managed

The following post comes to us from Sean Cameron, a fixed income portfolio manager at PIMCO based in New York, and reviews a recent book by Forum contributor Robert Pozen.

Robert Pozen and Theresa Hamacher’s The Fund Industry: How Your Money is Managed provides keen insights into the evolution of the money management industry. Pozen and Hamacher offer readers a comprehensive roadmap toward understanding the various types of funds offered for investors. Beneficial both for experienced investors looking to refine their understanding of how the funds they invest in operate and beginning investors looking to make informed decision about the suite of investment products available to them, The Fund Industry provides easily readable and relevant information on this rapidly evolving industry.

Pozen himself brings to the book his perspective both as Chairman Emeritus of MFS Investments as well as Senior Lecturer at Harvard Business School, offering valuable insights as an experienced practitioner and educator. Hamacher also brings three decades of experience in the money management business to light in offering her wisdom for readers.

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Compensation Consultant Selection, Switch and CEO Pay

The following post comes to us from Wei Cen of the Department of Applied Economics and Management at Cornell University and Naqiong Tong of the University of Baltimore.

In the paper, Big or Small: Compensation Consultant Selection, Switch and CEO Pay, we provide new evidence showing that CEOs of firms engaging BIG6 consultants receive lower equity payments and lower total compensations compared to that of firms engaging SMALL consultants. Although most prior studies have examined the compensation consultants’ potential conflicts of interest and its impact on CEO pay, little was known about why a firm retains its compensation consultants between BIG6 and SMALL consultants and what impact of a switch between BIG6 and SMALL consultant have on CEO pay. This study is the first study to investigate the impact of a firm’s selection between BIG6 and SMALL firms on CEO pay and the impact of a switch between BIG6 and SMALL consultant on CEO pay. The expertise, “repeat business” and reputation arguments imply that BIG6 consultants have incentives to design optimal contracts for CEOs to align the shareholder’s interest with the CEOs’ interest. However, the “other service” argument predicts that BIG6 consultants will design less optimal contracts and reward CEO higher pay to win CEO’s favor since the power of approval other service rests on CEOs.

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An Antidote for the Poison Pill

Editor’s Note: Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. This post is based on an op-ed article by Professor Bebchuk, available here, that appeared in today’s print edition of the Wall Street Journal. The op-ed article builds on Professor Bebchuk’s academic studies on the consequences of antitakeover defenses and the interaction of the poison pill with staggered boards, which include The Case Against Board Veto in Corporate Takeovers, The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy (with Coates and Subramanian), The Costs of Entrenched Boards (with Cohen), and Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment (with Cohen and Wang). 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 a major decision issued last week, William Chandler of Delaware’s Court of Chancery ruled that corporate boards may use a “poison pill”—a device designed to block shareholders from considering a takeover bid—for as long a period of time as the board deems warranted. Because Delaware law governs most U.S. publicly traded firms, the decision is important—and it represents a setback for investors and capital markets.

The ruling grew out of the epic battle between takeover target Airgas and bidder Air Products. Air Products made a takeover bid for Airgas in 2010, increased it several times, and kept it open until last week’s decision. Airgas’s directors argued that defeating the premium offer would prove, in the long run, to be in shareholders’ interests. As the Chancery Court stressed, however, the directors based their opinion solely on information publicly available to shareholders. Why should shareholders, who have powerful incentives to get it right, not be permitted to make their own choice between selling and staying independent?

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A Test of IPO Theories Using Reverse Mergers

The following post comes to us from Paul Asquith, Professor of Finance at the M.I.T. Sloan School of Management, and Kevin Rock, Professor of Finance at the Chicago Booth Graduate School of Business.

In the paper, A Test of IPO Theories Using Reverse Mergers, which was recently made publicly available on SSRN, we investigate many of the current theories explaining why IPO returns are large and significantly positive on the issuance date. Reverse mergers are an alternative method to IPOs for going public, and announcement day price reaction to private reverse mergers is comparable to the initial day price reaction to IPOs. In a private reverse merger, a private firm goes public by exchanging their stock for the stock in a public firm. After a reverse merger there are new stockholders, but the private firm’s old stockholders own the majority of public stock in the surviving firm. When we use reverse mergers as an out-of-sample test, most of the theories developed thus far to explain the market’s reaction to IPOs appear to be invalid.

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Federal Reserve Proposed Rulemaking Addresses Dodd-Frank Systemic Risk Provisions

Margaret E. Tahyar is a partner and member of the New York Financial Institutions Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum by Arthur S. Long.

In early February, the Board of Governors of the Federal Reserve System (the “Board”) issued a Notice of Proposed Rulemaking and request for comment [1] regarding two aspects of the new Dodd-Frank systemic risk regime. The proposed rule sets forth suggested definitions of two sets of terms that appear in the systemic risk provisions of Title I of the Dodd-Frank Act—“predominantly engaged in financial activities” and “significant” nonbank financial company and bank holding company.

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Delaware Supreme Court Allows Books and Records Action After Derivative Lawsuit

Andrew Tulumello is a partner in the Washington, D.C. office of Gibson, Dunn & Crutcher. This post is based on a Gibson Dunn Client Alert by Mr. Tulumello and Jason Mendro. 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 January 28, 2011, the Delaware Supreme Court clarified in King v. VeriFone Holdings, Inc., Del. Supr., No. 330, 2010, that plaintiffs may in some circumstances inspect a corporation’s books and records to bolster a derivative action complaint even after they have filed a lawsuit.

Section 220 of Delaware’s General Corporation Law provides shareholders with a limited right to inspect the books and records of Delaware companies in which they own stock. That right is subject to several conditions, including the condition that shareholders have a “proper purpose” for seeking inspection. [1] Investigating corporate mismanagement, for example, is a proper purpose. [2] Indeed, Delaware courts have repeatedly urged shareholders to use Section 220 to conduct such investigations before filing a derivative action. By using the “tools at hand,” those courts have explained, shareholders can become better equipped to plead allegations that are sufficient to meet the stringent pleading requirements that apply to derivative complaints, particularly in cases in which the plaintiffs did not serve a pre-suit demand and thus must plead “demand futility” (i.e., that serving a demand would be useless because the board of directors is biased against the claims or dominated by others who are). [3] Litigants have frequently clashed over whether the purpose of obtaining information to fortify a derivative complaint is “proper” when the complaint has already been filed.

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