Monthly Archives: March 2011

Petitioners File Reply Brief in Challenge to SEC Proxy Access Rules

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on an reply brief that was prepared by a Gibson Dunn team representing the Chamber of Commerce and the Business Roundtable; the complete brief is available here. Other posts on the case are available here, and other posts on proxy access, including a number of posts by affiliates of the Program on Corporate Governance, are available here.

On February 25, my colleagues at Gibson Dunn, Gene Scalia, Amy Goodman and Dan Davis, representing petitioners Business Roundtable and the U.S. Chamber of Commerce, filed the petitioners’ reply brief in Business Roundtable v. SEC, a challenge to the Securities and Exchange Commission’s recently promulgated rules providing certain shareholders the right to place board-of-director nominees in company proxy materials.

According to the petitioners, in promulgating the rules the Commission failed to satisfy its statutory duty to assess the rules’ economic consequences. The Commission instead speculated about the rules’ costs, despite record evidence showing that the rules would likely cause expensive election campaigns. The petitioners contend further that the shareholders most likely to use the rules are union and government pension funds, which have a history of using shareholder activism to pursue non-investment-related objectives that depart from other shareholders’ interests. The petitioners fault the Commission for claiming that the rules further shareholder rights, when the mandatory rules instead disenfranchise the vast majority of shareholders, who may wish to avoid the tremendous costs that proxy access would impose on their company.


Courts Repudiate Attempts to Find Loopholes in Supreme Court Foreign Cubed Decision

George Conway is partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum.

Citing the Supreme Court’s decision in Morrison v. National Australia Bank, on February 22 a federal district judge in New York threw out most of a securities class action jury verdict that plaintiffs’ lawyers had estimated was worth $9.3 billion. The jury’s verdict, rendered against the French media conglomerate Vivendi, S.A. thirteen months ago—before National Australia was argued and decided, and thus under now-overturned law—upheld claims that were predominantly “foreign-cubed” (asserted by foreign investors against a foreign issuer for losses on a foreign exchange) and “foreign-squared” (asserted by American investors against a foreign issuer for losses on a foreign exchange). In categorically dismissing all the claims of those investors, the decision in In re Vivendi Universal, S.A. Securities Litigation, No. 02 Civ. 5571 (RJH) (S.D.N.Y. Feb. 23, 2011), according to Vivendi and its counsel, eliminated at least 80%, and perhaps up to 90%, of the liability that the verdict could have produced.


Corporate Governance and Innovation

The following post comes to us from Matthew O’Connor, Professor of Finance at Quinnipiac University, and Matthew Rafferty, Professor of Economics at Quinnipiac University.

In the paper, Corporate Governance and Innovation, which was recently made publicly available on SSRN, we examine the effect of corporate governance on innovation as measured by firm research and development (R&D) expenditures. Two different perspectives dominate the academic literature on corporate governance. One perspective emphasizes principal-agent problems and suggests that executives who are protected from shareholder pressure become entrenched. Entrenched executives pursue their own interests at the expense of shareholders. If executives prefer less-risky corporate strategies then an entrenched executive might reduce risky R&D expenditures. An alternative perspective emphasizes that the threat of takeovers forces executives to focus on short-term results so long-term investments such as R&D may suffer. An executive concerned about a takeover threat may reduce R&D expenditures, which are not expensed, to increase short-term profits and stock prices to discourage a hostile takeover. This perspective suggests that entrenched executives who are free from the pressure of hostile takeovers may pursue more R&D expenditures.


Second Circuit Rules on MD&A Trend Disclosure Requirements

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 a Wachtell Lipton firm memorandum by Mr. Katz, Peter C. Hein and S. Christopher Szczerban.

The U.S. Court of Appeals for the Second Circuit recently decided Litwin v. Blackstone Group, L.P. (2d Cir. 2011), addressing “trend disclosure” requirements under Item 303 of Regulation S-K, 17 C.F.R. § 229.303(a)(3)(ii).  This decision highlights the importance of giving appropriate consideration to trend disclosures in public filings, including registration statements as well as annual and quarterly reports.


Second Circuit Addresses Materiality Standard Under Federal Securities Law

Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum, and relates to the decision of the Second Circuit Court of Appeals in Landmen Partners v. The Blackstone Group, which is available here.

In an opinion issued on February 10, 2011, in Landmen Partners, Inc. v. The Blackstone Group, L.P., a panel of the United States Court of Appeals for the Second Circuit adopted a view of materiality that may potentially reduce the pleading burden of plaintiffs asserting claims under the federal securities laws. The ruling runs counter to a judicial trend that, since the Supreme Court’s ruling in Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007), has applied greater scrutiny to securities class action complaints. It did so by, among other things, minimizing the pleading obligations in claims under Sections 11 and 12(a)(2) of the Securities Act of 1933; focusing its analysis on the importance of the allegedly misleading statements to a corporate segment, rather than the public entity itself; and permitting a claim to be based on corporate and market developments that were publicly known but not specifically described in the registration statement at issue.


Governance Through Trading and Intervention

The following post comes to us from Alex Edmans of the Finance Department at the University of Pennsylvania, and Gustavo Manso of the Finance Department at the Massachusetts Institute of Technology.

In our paper, Governance Through Trading and Intervention: A Theory of Multiple Blockholders, which is forthcoming in the Review of Financial Studies, we analyze the optimal shareholder structure that maximizes the efficiency of corporate governance. Traditional theories argue that shareholders exert governance through directly intervening in a firm’s operations, for example by firing a shirking manager or blocking a wasteful investment. (This is sometimes referred to as “voice”). Under this view, the optimal governance structure features a single concentrated blockholder, as her large stake overcomes free-rider problems and maximizes her incentives to intervene. However, in reality, most firms have multiple small blockholders. This appears to be inefficient as no blockholder has a large enough stake to induce her to bear the cost of intervention. Therefore, some commentators argue that policymakers should encourage more concentrated stakes.


Europe’s Ius Commune on Director Revocability

The following post comes to us from Sofie Cools, a S.J.D. candidate at Harvard Law School.

Among the most important rights of shareholders is the right to elect and dismiss directors. While the election of directors usually garners a lot of attention among scholars and policymakers, the same cannot be said of the right to dismiss directors, even though it is at least of equal concern. In my paper, Europe’s Ius Commune on Director Revocability, which was recently made available on SSRN, I explore the neglected topic of the latitude of shareholder meetings to remove directors of public companies over time and across several jurisdictions in Europe and the United States. The specific question relates to whether the law mandatorily prescribes that shareholders have the right to remove directors at will, and whether common principles can be distilled at a regional or international level.


Chinese Bank Transaction May Open the Door for M&A

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 by Mr. Herlihy, Richard K. Kim, Lawrence S. Makow and Patricia A. Robinson.

Last week, Industrial and Commercial Bank of China announced that it had entered into an agreement to purchase 80 percent of the outstanding common stock of the U.S. subsidiary bank of The Bank of East Asia, Limited, a privately held Hong Kong-based bank. Bank of East Asia also has an option to sell to ICBC its remaining 20% interest in the U.S. bank for a period of 10 years following the acquisition. Although relatively small in size, this transaction is a most significant precedent. The ICBC deal would mark the first control acquisition by a mainland Chinese bank of a U.S. bank since Congress passed a law in 1991 substantially tightening the regulation of foreign banks operating in the U.S. following the collapse of BCCI. The transaction could be the start of a very significant new dynamic in U.S. bank M&A.


Adoption of Poison Pill to Deter Activist Investor Opposition to Negotiated Mergers

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 Latham & Watkins Corporate Governance Commentary.

At the peak of the last public company merger frenzy in 2006 and early 2007, it was common for activist shareholders (mostly hedge funds and arbitrageurs) to mount vote no campaigns against announced deals. [1] Frequently such campaigns resulted in relatively small price bumps and an abandonment of the vote no campaign. On a few occasions, the vote no campaign sparked a bidding war. However, in a number of others, the vote no campaign ended with a worst-case result; defeat of the merger deal with no competing transaction in sight. Icahn’s proposed acquisition of Lear Corporation in the summer of 2007 is one the most memorable of the worst cases. After Icahn refused to raise his final price to “buy-off” an activist investor vote no campaign, the merger was voted down. Lear remained independent and, as a result of the virulent 2008 economic crisis, wound up filing for bankruptcy, wiping out all shareholder value.


Relative Performance Evaluation and Related Peer Groups

The following post comes to us from Guojin Gong of the Accounting Department at Pennsylvania State University, and Laura Li and Jae Shin, both of the Accounting Department at the University of Illinois at Urbana-Champaign.

In the paper, Relative Performance Evaluation and Related Peer Groups in Executive Compensation Contracts, forthcoming in The Accounting Review, we examine the explicit use of relative performance evaluation (RPE) and related peer groups based on S&P 1500 firms’ first proxy disclosures under the SEC’s 2006 executive compensation disclosure rules. Prior empirical research offers mixed evidence on the use of RPE in executive compensation contracts based on an implicit approach. The implicit approach infers RPE use by regressing executive pay on industry performance across a population of firms, and thus relies on simplified assumptions concerning RPE contract details. We demonstrate that a lack of knowledge of both RPE peer group composition and the link between RPE-based performance targets and future peer performance cloud inferences drawn from implicit tests. These findings highlight the limitations of the implicit approach and underscore the importance of incorporating explicit RPE contract details in testing for RPE use.


Page 4 of 5
1 2 3 4 5