Monthly Archives: March 2011

The Directors’ Duty to Inform

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.

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

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.

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

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.

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Overconfidence, Compensation Contracts, and Capital Budgeting

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.

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SEC Proposes Reaffirmation of Existing Treatment of Security-Based Swaps

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.

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

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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Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting?

The following post comes to us from Rasha Ashraf of the Department of Finance at Georgia State University; Narayanan Jayaraman, Professor of Finance at the Georgia Institute of Technology; and Harley Ryan of the Department of Finance at Georgia State University.

In the paper, Do Pension-Related Business Ties Influence Mutual Fund Proxy Voting? Evidence from Shareholder Proposals on Executive Compensation, which can be found in a forthcoming issue of the Journal of Financial and Quantitative Analysis, we examine the relation between mutual fund votes on shareholder executive compensation proposals and pension-related business ties between fund families and the firms. Mutual funds have a fiduciary responsibility to act in the interests of their shareholders. Shareholder proposals provide one mechanism via which mutual funds can influence firm policies to benefit shareholders. However, mutual funds benefit when they receive pension fund business from firms, which creates a potential conflict of interest that creates an incentive for fund managers to support firm management and to vote against shareholder proposals. Rationally, fund families should trade off the economic benefit of self-interested voting against possible economic losses related to lower portfolio returns, damaged reputations, or potential lawsuits. Shareholder proposals that relate to executive compensation provide an excellent arena in which to examine the influence of pension-related business ties, since these proposals can directly affect the pay and benefits of managers with influence over which fund families receive pension business.

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Supreme Court Holds Corporations Don’t Have Privacy Interest Assertable Under FOIA

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, Peter C. Hein and Maura R. Grossman.

On March 1, 2011, the U.S. Supreme Court ruled in Federal Communications Commission v. AT&T Inc. that Freedom of Information Act Exemption 7(C) – which exempts from required public disclosure information “compiled for law enforcement purposes” the disclosure of which “could reasonably be expected to constitute an unwarranted invasion of personal privacy” – could not be invoked to protect against disclosure of records produced to an agency on the grounds that disclosure would constitute an unwarranted invasion of personal privacy of a corporation.

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Florida SBA Confronts Recent Corporate Governance Issues at Home and Abroad

Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on an excerpt from the SBA’s 2011 Corporate Governance Report by Mr. McCauley, Jacob Williams and Lucy Reams. Mr. Williams and Ms. Reams are Corporate Governance Manager and Senior Corporate Governance Analyst, respectively, at the SBA. The complete report is available here; further information regarding the SBA’s governance activities, including proxy voting data, is available here.

Global Proxy Voting

In 2010, the SBA worked with The Corporate Library to analyze its proxy voting among nine externally managed foreign equity portfolios totaling approximately $9 billion. The vote audit examined a total of 33,729 individual ballot items (proxy voting decisions) across 257 distinct voting categories. The purpose of the foreign equity proxy vote audit was to evaluate the external managers’ voting activities as well as to benchmark those voting decisions against similar SBA votes and those of a major corporate governance research provider. The vote audit examined aggregate voting results, voting by each individual manager, and benchmarked external manager voting against SBA internal voting decisions.

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Did Structured Credit Fuel the LBO Boom?

The following post comes to us from Anil Shivdasani, Professor of Finance at the University of North Carolina, and Yi Hui Wang of the Department of Finance at the Chinese University of Hong Kong.

In our forthcoming Journal of Finance paper, Did Structured Credit Fuel the LBO Boom? we study how large shifts in the availability of credit affected the corporate use of leverage by examining LBO transactions that rely heavily on debt financing. We argue that developments that led to the growth of structured credit contributed to increased credit supply that at least partially fueled the recent LBO boom. Our evidence highlights important linkages between structured credit, the dual role of banks in the structured credit markets as loan originators and underwriters, and the corporate use of leverage.

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