Monthly Archives: February 2011

The Matrixx of Materiality and Statistical Significance in Securities Fraud Cases

The following post comes to us from David Tabak, Senior Vice President at National Economic Research Associates.

The US Supreme Court will soon consider whether information needs to be statistically significant for it to be deemed material and required to be disclosed by a company. To understand this issue, one must understand both statistical significance and materiality. If this is a topic of interest to you, then you may want to read a new NERA paper on the subject, The Matrixx of Materiality and Statistical Significance in Securities Fraud Cases. This is an expanded version of an article that you may have seen on


Securities Litigation Update

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn Client Alert.

We reported in Gibson Dunn’s 2010 Mid-Year Securities Litigation Update that the first half of 2010 was a busy one for securities litigation. That remained so in the second half of the year. The securities litigation landscape has featured ongoing battles in the trial courts regarding the scope and application of the Supreme Court’s decision in Morrison holding that purchasers on foreign exchanges cannot bring an action under Section 10(b) of the 1934 Act. As we discuss more fully below, Plaintiffs are employing various strategies in their attempts to bring actions on behalf of foreign purchasers in U.S. courts despite the Supreme Court’s explicit rejection of U.S. federal court jurisdiction for such claims, including initiating claims in state court, under state law, and even under foreign law, as well as arguing that a transaction is domestic when the investment decision is made in the U.S. To date, none of these strategies has been successful. We expect these disputes to continue in the district courts and to eventually make their way up to the courts of appeal.


Capital Market Myopia and Plant Productivity

The following post comes to us from Sreedhar Bharath of the Department of Finance at Arizona State University, Amy Dittmar of the Department of Finance at the University of Michigan, and Jagadeesh Sivadasan of the Business Economics Department at the University of Michigan.

In the paper, Does Capital Market Myopia Affect Plant Productivity? Evidence from Going Private Transactions, which was recently made publicly available on SSRN, we hypothesize that if capital markets pressure listed firms to be myopic in a way that impacts efficiency (an influential criticism of the stock market oriented U.S. financial system), then going private (when myopia is eliminated) should cause U.S. firms to improve their establishment level productivity relative to a peer control groups of firms.


Dodd-Frank and Mutual Funds: Alternative Approaches to Systemic Risk

This post comes to us from David M. Geffen, Counsel at Dechert LLP who specializes in working with investment companies and their investment advisers. This post is based on a article by Mr. Geffen and Joseph R. Fleming that first appeared in the Bloomberg Law Reports.

The Credit Crisis and Reform

Largely in response to the recent credit crisis (Credit Crisis), the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) was enacted in July 2010. The Dodd-Frank Act is an historic and wide-ranging piece of legislation and constitutes the most significant legislative change in the regulation and supervision of financial institutions since the Great Depression.

Registered investment companies and registered investment advisers (also referred to herein as “funds” and “advisers,” respectively) were minor players in the Credit Crisis. [1] Nevertheless, the Dodd-Frank Act contains several provisions, rulemaking directives, and required studies that could impact funds and their advisers. The Dodd-Frank Act defers many of its effects to future studies and regulations by federal regulators, which are directed under the Dodd-Frank Act to promulgate a variety of regulations in the six to 18 months following the Dodd-Frank Act’s enactment. [2] These studies and regulations have the potential to impact funds and their advisers significantly.


The Outlook for Bank M&A in 2011

Edward Herlihy is a partner and co-chairman of the Executive Committee at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum.

As we move into 2011, interesting shifts are taking place that could make the year a significant one for consolidation in the U.S. financial sector. The end of 2010 witnessed a flurry of concentrated activity, including repayments of TARP by several large institutions and significant announced acquisitions (such as Wilmington Trust by M&T, Marshall & Ilsley by Bank of Montreal, and Whitney Holdings by Hancock Holdings). All of this points to an active M&A landscape in 2011.

The Storm Clouds Are Lifting. The past two years have been marked by extremely difficult conditions for financial institutions. Bank balance sheets were battered by falling home prices, elevated loan defaults, volatile asset valuations and a generally depressed earnings outlook. High unemployment and excess industrial capacity made the new business climate sluggish. Political populism, increased regulatory scrutiny, concerns about a double-dip recession and European sovereign risk jitters undoubtedly made bankers more risk-averse and uncertain of the next shoe to drop.


On the Optimality of Shareholder Control

The following post comes to us from Jonathan Cohn of the Department of Finance at the University of Texas at Austin, Stuart Gillan of the Department of Finance at Texas Tech University, and Jay Hartzell of the Department of Finance at the University of Texas at Austin. Recent discussion papers issued by the Program’s faculty on the subject of proxy access include Private Ordering and the Proxy Access Debate, The Harvard Law School Proxy Access Roundtable, and Does Shareholder Proxy Access Improve Firm Value?

In the paper, On the Optimality of Shareholder Control: Evidence from the Dodd-Frank Financial Reform Act, which was recently made publicly available on SSRN, we use three events involving the adoption of the SEC’s “proxy access” rule in 2010 as natural experiments to test the effects of allocating more direct control to shareholders on firm value. Of particular importance, all three events contained information that was plausibly surprising to the market. We use information about proposed changes to specific aspects of the rule, along with variation in stock ownership by known activist institutional investors, to identify the impact of shocks to control rights on shareholder value.


New Rules Governing Compensation within French Financial Institutions

H. Rodgin Cohen is a partner and chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication by François Barrière and Richard Vilanova.

On December 17, 2010, the French Journal Officiel published an arrêté [1], (i) supplementing the rules adopted by the arrêté dated November 3, 2009 governing the variable compensation of “financial market professionals” employed by credit institutions and investment firms (see our publication of December 4, 2009), and (ii) giving the French Prudential Control Authority additional powers to monitor compensation levels within such institutions. These provisions implement provisions of the E.U. directive N° 2010/76/UE dated November 24, 2010 (referred to as the CRD III Directive) under French law. To a large extent, this arrêté (i) confirms and embodies in regulation the rules of conduct issued by the French Banking Federation dated November 5, 2009, and (ii) is consistent with the Committee of European Banking Supervisors’ Guidelines on Remuneration Policies and Practices, dated December 10, 2010.


SEC Proposes Rules Governing Private Fund Risk Reporting and Investor Definitions

David Huntington is a partner in the Capital Markets and Securities Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

I. Private Fund Systemic Risk Reporting

On January 25, 2011, the U.S. Securities and Exchange Commission (the “SEC”) proposed new Rule 204(b)-1 (the “Proposed Rule”) [1] under the Investment Advisers Act of 1940, as amended (the “Advisers Act”), to implement certain provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). [2] The Proposed Rule would require SEC-registered investment advisers that advise one or more “private funds” [3] to file a new reporting form with the SEC, Form PF, which would require the reporting of, among other things, performance-related information, counterparty exposure and borrowings. The information contained in Form PF is designed primarily to assist the Financial Stability Oversight Council (the “FSOC”) in assessing systemic risk in the U.S. financial system; however, the information would also be available to assist the SEC in its regulatory programs, including examinations, investigations, enforcement actions and investor protection efforts relating to private fund advisers. The information would be reported electronically on Form PF and would remain confidential except in very limited circumstances, as discussed below.


ISS Guidance Regarding Compensation Policies for the 2011 Proxy Season

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, David E. Kahan and Timothy G. Moore.

Institutional Shareholder Services, Inc. (ISS) recently published Frequently Asked Questions (FAQs) regarding its U.S. compensation policies for 2011. The FAQs address a number of issues regarding the shareholder advisory votes on executive compensation required by the Dodd-Frank Act (Dodd-Frank) and provide useful clarification of a number of other recent ISS pronouncements.

Say-on-Pay Frequency Vote. The FAQs clarify that a management recommendation of a biennial or triennial vote will not trigger a negative vote recommendation from ISS on other proxy items, notwithstanding ISS’s categorical support of annual say-on-pay votes. In addition, the FAQs indicate that ISS plans to address in next year’s policy updates how it will treat a company’s adoption of a frequency vote that is not supported by a plurality of votes cast at the 2011 shareholders’ meeting.


Staggered Boards and the Wealth of Shareholders: Evidence from the two Airgas Rulings

Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang are all affiliated with Harvard Law School’s Program on Corporate Governance. This post is based on their recent study, 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 Program on Corporate Governance just issued our paper Staggered Boards and the Wealth of Shareholders: Evidence from a Natural Experiment.

While staggered boards are known to be negatively correlated with firm valuation, such association might be due to staggered boards either bringing about lower firm value or merely being the product of the tendency of low-value firms to have staggered boards. Our paper uses a natural experiment setting to identify how market participants view the effect of staggered boards on firm value.

In particular, we focus on two recent rulings, separated by several weeks, that had opposite effects on the antitakeover force of the staggered boards of affected companies: (i) an October 2010 ruling by the Delaware Chancery Court approving the legality of shareholder-adopted bylaws that weaken the antitakeover force of a staggered board by moving the company’s annual meeting up from later parts of the calendar year to January, and (ii) the subsequent decision by the Delaware Supreme Court to overturn the Chancery Court ruling and invalidate such bylaws.

We find evidence consistent with the hypothesis that the Chancery Court ruling increased the value of companies significantly affected by the rulings –namely, companies with a staggered board and an annual meeting in later parts of the calendar year – and that the Supreme Court ruling produced a reduction in the value of these companies that was of similar magnitude (but opposite sign) to the value increase generated by the Chancery Court ruling. The identified positive and negative effects were most pronounced for firms for which control contests are especially relevant due to low industry-adjusted Tobin’s Q, low industry-adjusted return on assets, or relatively small firm size.

Our findings are consistent with market participants’ viewing staggered boards as bringing about a reduction in firm value. The findings are thus consistent with institutional investors’ standard policies of voting in favor of proposals to repeal classified boards, and with the view that the ongoing process of board declassification in public firms will enhance shareholder value.

Below is a more detailed description of what our paper does:


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