Monthly Archives: February 2011

The Second Corporate Governance Wave in the Middle East and North Africa

The following post comes to us from Alissa Koldertsova, Policy Analyst in the OECD’s Corporate Affairs Division, where she is primarily responsible for managing the Organization’s work on corporate governance in the Middle East and North Africa region.

In the paper, The Second Corporate Governance Wave in the Middle East and North Africa, forthcoming in the OECD Financial Market Trends, I chart the evolution of corporate governance across the Middle East and North Africa (MENA). Less than a decade ago, the understanding of corporate governance as a concept was nascent in the Middle East and North Africa. There was no Arabic term for corporate governance, which led to the confusion between corporate governance and corporate social responsibility.


Foreclosure Suspensions and Other Mortgage Disputes

This post comes to us from Chudozie Okongwu and Timothy McKenna, respectively, Senior Vice President and Senior Consultant at National Economic Research Associates.

In late 2010, a number of banks with mortgage servicing operations declared moratoriums or suspensions on some aspects of foreclosure proceedings, a move that appears to have been prompted by revelations about the banks’ alleged substandard foreclosure practices. By mid-October 2010, it was reported that the Office of the Comptroller of the Currency and the attorneys general of all 50 states were launching investigations into issues surrounding the mortgage foreclosures.


The Convergence of Traditional and Alternative Investment Products

The following post comes to us from Citi Fund Services, Inc., and is a summary of an article that first appeared in the Investment Lawyer, which is available here.

For more than half a century, traditional investment funds (mutual funds) and alternative investment funds (hedge funds) occupied separate and distinct segments of the investment market.  They employed different investment strategies, were subject to different regulatory standards, and mostly catered to different classes of investors.  Increasingly, however, these two types of funds have found themselves converging toward common investing ground.

Recent changes to the capital markets, to investor preferences, and to industry regulations have caused investors to seek out investment products that contain the characteristics of both mutual funds and hedge funds.  Investment managers have responded by introducing a new breed of hybrid funds that combine the exotic strategies of hedge funds with the transparency and relative stability of mutual funds.  Because mutual funds and hedge funds operate within different logistical and regulatory frameworks, investment managers desiring to operate in this new hybrid space must familiarize themselves with the elements of each.


Exploring the Role Delaware Plays as a Domestic Tax Haven

The following post comes to us from Scott Dyreng of the Accounting Department at Duke University, Bradley Lindsey of the Accounting Department at the College William and Mary, and Jacob Thornock of the Accounting Department at the University of Washington. 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 the paper, Exploring the Role Delaware Plays as a Domestic Tax Haven, which was recently made publicly available on SSRN, we examine whether the market for incorporation extends beyond decisions related to the parent company down to decisions related to the subsidiaries of the firm. We extend the finance and legal literatures that examine why parent firms incorporate in the state of Delaware by showing that the decision to incorporate subsidiaries in Delaware is partially driven by corporate income tax considerations. This stands in contrast to the findings in prior research that legal and governance reasons dominate the market for parent incorporation location.


The Airgas Ruling and the Professors

Editor’s Note: 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.

Chancellor Chandler’s monumental ruling in the Airgas case, which is available here, provides a comprehensive review and analysis of the evolution and current state of Delaware’s law concerning the use of defensive tactics and the limits to boards’ ability to “just say no.” In doing so, the opinion considers the body of academic work on the subject, and significantly engages with work done by academics affiliated with the Harvard Program on Corporate Governance, including the following:

Delaware’s Intermediate Standard for Defensive Tactics: Is there Substance to Proportionality Review? In reviewing the evolution of Delaware’s doctrine,  Chancellor Chandler devotes considerable attention to this article by Reinier Kraakman (co-authored with Ronald Gilson). This article introduced the idea, subsequently incorporated into Delaware doctrine, that defensive tactics can be justified by concerns about “substantive coercion” – that is, a board’s concerns that shareholders would tender to a non-coercive offer out of “in ignorance or mistaken belief” of the value of remaining independent.

The Powerful Antitakeover Force of Staggered Boards: Theory, Evidence, and Policy: Chancellor Chandler also relies on and engages with the 2002 Stanford Law Review article by Bebchuk, Coates, and Subramanian, the first academic work to highlight and empirically demonstrate the special significance of staggered boards in the age of the pill:

  • (1) Chancellor Chandler relies on the concept of an “effective staggered board” (ESB) as introduced and defined by Bebchuk, Coates, and Subramanian to refer to situations in which a firm’s governance documents do not provide shareholders and/or a bidder with ways to get around or weaken the impediments posed by a staggered board.
  • (2) Chancellor Chandler explains in detail why the case before him is different from the “paradigmatic case” on which the Bebchuk-Coates-Subramanian study focused. According to Chandler, that paradigmatic case is one in which a company has a fully effective ESB and the bidder won one election on a “let the shareholders decide” platform. Chandler notes that Vice Chancellor Strine expressed openness to considering redeeming a pill in such circumstances in his Stanford response to the professors’ article, The Professorial Bear Hug: The ESB Proposal as a Conscious Effort to Make the Delaware Courts Confront the Basic “Just Say No” Question, and in Strine’s opinion in the Yucaipa case.

Bebchuk vs. Lipton on Just Say No: In a section, titled “Pills, Policy and Professors,” Chancellor Chandler reviews the debate that has taken place over the past three decades over the role of takeover defenses. Chandler comments that “two of the largest contributors to the literature are Lucian Bebchuk (who famously takes the ‘shareholder choice’ position that pills should be limited and that classified boards reduce firm value) on one side of the ring, and Marty Lipton (the founder of the poison pill, who continues to zealously defend its use) on the other.” Bebchuk and Lipton have long debated the subject in print. The most recent exchange between the two was published in the University of Chicago Law Review in 2002, when Bebchuk published The Case Against Board Veto in Corporate Takeovers, a comprehensive statement of the case against board veto in such transactions, and Lipton published a response, Pills, Polls, and Professors Redux, in which he defended such board power.


Delaware Court Reaffirms the Poison Pill and Directors’ Power to Block Inadequate Offers

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton firm memorandum, and relates to the decision of the Delaware Court of Chancery in the case of Air Products & Chemicals, Inc. v. Airgas, Inc., which is available here. Wachtell Lipton represented Airgas, Inc. in the matter. 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.

Almost thirty years ago, our Firm announced there was a way — the poison pill — to level the playing field between corporate raiders and a board of directors acting to protect the interests of the corporation and its shareholders.  Despite great skepticism about the pill in the legal and banking communities, the Delaware Supreme Court in 1985 agreed with us and affirmed that directors, in the exercise of their business judgment, could properly use the pill to protect the corporation from hostile takeover bids.


Buyout and Deal Protections Enjoined due to Conflicted Advisor

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, Trevor S. Norwitz, Andrew J. Nussbaum, William Savitt and Ryan A. McLeod, and relates to the decision of the Delaware Court of Chancery in In re Del Monte Foods Co. S’holders Litig., which is available here.

Another memorandum on the case, by George Bason, Arthur F. Golden and Justine Lee, of Davis Polk & Wardwell LLP is 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.

The Delaware Court of Chancery yesterday enjoined both the shareholder vote on a premium LBO transaction and the buyers’ “deal protection” devices.  In re Del Monte Foods Co. S’holders Litig., C.A. No. 6027-VCL (Del. Ch. Feb. 14, 2011).  The Court held that the advice the target’s board received from its financial advisor was so conflicted as to give rise to a likelihood of a breach of fiduciary duty and indicated that the bidding buyout firm may face monetary damages as an “aider and abettor” of the potential breach.

On a preliminary record, the Court found that after the Del Monte board called off a process of exploring a potential sale in early 2010, its investment bankers continued to meet with several of the bidders — without the approval or knowledge of Del Monte — ultimately yielding a new joint bid from two buyout firms late in 2010.  While still representing the board and before the parties had reached agreement on price, Del Monte’s bankers sought and received permission to provide buy-side financing, which required the company to retain another investment advisor to render an unconflicted fairness opinion.  Del Monte reached a high-premium deal with a “go-shop” provision and deal protection devices including a termination fee and matching rights.  The original bankers were then tasked with running Del Monte’s go-shop process (which yielded no further offers), although the Court noted they stood to earn a substantial fee from financing the pending acquisition.


Investor Communication and “Fifth Analyst Call”

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.

As the 2011 proxy season approaches, companies are focused on drafting their proxy statements and preparing for their annual meetings. With mandatory nonbinding say-on-pay votes on the ballot and continued focus by corporate governance activists on executive compensation, communication issues with investors, especially large stockholders, are taking on increased importance.

Recently, a group of institutional investors representing approximately $2.2 trillion in assets under management, led by Walden Asset Management, has asked that some companies host an annual conference call specifically for institutional investors to focus on corporate governance discussions in the proxy statement. [1] The call would be held after the publication of the company’s proxy statement and prior to the company’s annual meeting of stockholders. Each company that is approached by this group must consider this request in the context of its own situation; however, we offer some thoughts below on why companies may wish to resist this proposed new obligation. As a practical matter, such a conference call would be unlikely to provide investors with any useful information beyond the disclosures in the proxy statement; as a legal matter, any material, non-public information disclosed by the company must be provided to all stockholders, rather than to a select group of institutional investors.


CD&A Template Will Help Issuers Improve Compensation Disclosure

The following post comes to us from Kurt Schacht, managing director of the Standards and Financial Market Integrity division of the CFA Institute, and relates to a template prepared by Mr. Schacht, Matthew Orsagh, and James Allen of the CFA Institute, which is available here.

The compensation discussion and analysis (CD&A) portion of the corporate proxy statement has been a point of frustration for both issuers and investors since its adoption by the U.S. Securities and Exchange Commission (SEC) in 2006. The compensation disclosure regime was intended to help both shareowners and boards of directors make more informed decisions concerning appropriate executive compensation practices. However, the CD&A report, in its current format, has often resulted in frustration due to its length and complexity and because such reports often focus on regulatory compliance to the detriment of conveying the company’s compensation story in a concise and understandable manner.


Credit Quality as a Bonus Underpin

This post comes to us from George Dallas, Director of Corporate Governance at F&C Management Ltd., and is based on a concept paper prepared by F&C Management.

In the aftermath of the recent financial crisis, bank remuneration remains a critically sensitive issue – for shareholders, creditors, regulators, governments and the general public. This is particularly the case for those systemically important financial institutions that received government bailouts. While many of these institutions are beginning to recover, the negative effects of increased debt taken on at the public sector level to protect the financial system have resulted in serious and lingering economic problems in many countries, including the UK and the US. Indeed, the impact of public sector balance sheets absorbing losses of the banking sector has had the after-effect of contributing to sovereign debt crises in several smaller European jurisdictions — which continue to plague investors, taxpayers and the wider economy.


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