Monthly Archives: August 2011

Corporate Governance and Banks

The following post comes to us from Hamid Mehran of the Federal Reserve Bank of New York; Alan Morrison of the Saïd Business School, University of Oxford; and Joel Shapiro of the Saïd Business School, University of Oxford. The views expressed in this post are those of the authors and are not necessarily reflective of views at the Federal Reserve Bank of New York or the Federal Reserve System.

How did the governance structure of banks perform during the financial crisis? In our paper, Corporate Governance and Banks: What Have We Learned from the Financial Crisis? we examine this question in light of recent academic work and policy discussions.

We begin by providing a twist on the usual question of what is different about banks by asking what differences are important to governance. Two themes are key: 1) the multitude of stakeholders in banks and 2) the complexity of the business. Besides shareholders, the stakeholders in banks are both numerous (depositors, debtholders, and the government as both insurer of deposits and residual claimant on systemic externalities) and large (over 90 percent of the balance sheet of banks is debt). Yet shareholders control the firm, and evidence shows that both the boards and the compensation package for CEOs represent the shareholders’ preference for increasing risks. Meanwhile, banks have become much larger and expanded dramatically into other businesses since the passage of the Gramm-Leach-Bliley Act in 1999.


Transparency and Confidentiality in the Post Financial Crisis World

Annette Nazareth and Margaret Tahyar are partners in the Financial Institutions Group at Davis Polk & Wardwell LLP. This post is part of a series discussing articles appearing in the inaugural issue of the Harvard Business Law Review, which is published in partnership with the Harvard Law School Program on Corporate Governance.

The U. S. Congressional response to the most significant financial crisis since the Great Depression was to mandate, among other things, an unprecedented amount of new types of disclosure by financial institutions and their supervisors. In the Dodd-Frank Act, Congress created a new oversight body—the Financial Stability Oversight Counsel (FSOC), which is responsible for supervision and oversight of systemic risk in the financial system. To enable the FSOC to make informed decisions about systemic risk, Congress granted the FSOC access to vast amounts financial information. The Dodd-Frank Act also created an independent office within the Treasury Department—the Office of Financial Research (OFR)— which is charged with collecting data on behalf of the FSOC and making the results of its activities available to financial regulatory agencies and the public. The OFR and the FSOC are expected to collect data, some of which may be of a confidential or sensitive nature, that were never previously collected and aggregated by the government, including information from financial institutions about any activity that might be deemed to be of systemic significance, information in resolution plans, information about trading strategies related to trading position data, and information related to stress tests.


2011 Private Equity Buyer/Public Target M&A Deal Study

Marc Weingarten is partner and chair of the Business Transactions Group at Schulte Roth & Zabel LLP. This post is based on the Schulte Roth & Zabel 2011 Private Equity Buyer/Public Target Deal Study, which is available here.

We conducted our survey, in part, to observe any notable trends or themes based on our review of the 25 transactions. Please note, however, that in our experience, particularly in terms of deal-making post-2008 credit crisis, these deals are often sui generis due to a number of factors, including the marketability/prospects of the target, the regulatory profile of the transaction, whether the agreement is the product of dedicated one-on-one negotiations, a formal auction or somewhere in between, the state of credit markets and the recent historical track record of the buyer. Accordingly, undue weight should not be placed on this study — it is intended to help identify “market practice” for individual deal terms and assist on negotiations, but does not purport to establish what is appropriate for any given transaction.


Say on Pay: A Victory for Shareholders and the Executive Pay Model

Ira Kay is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance memorandum by Mr. Kay and Bentham W. Stradley.

In the first year of Say on Pay (SOP), executive pay programs at thousands of U.S. public companies have received strong support from shareholders. An overwhelming majority have supported resolutions at more than 98% of companies holding votes. Though opportunities remain for companies to improve their pay programs, most should view SOP results as a general endorsement of the current executive pay model.

Proponents of the SOP concept achieved an early victory when the Troubled Asset Relief program laid the groundwork for the provision’s inclusion in the Dodd-Frank Act of 2010. Shareholder advisory votes became a reality because of the persistent efforts of shareholder activists, including individual shareholders and union and public-employee pension funds. They had legitimate concerns about the executive pay model; they also had their own political agendas. Some of the wellsprings of the SOP movement were ideological, ensuing from the long-standing social debate over income inequality.

Regardless of these origins, now that SOP is required and regulated by the SEC, shareholders’ views of the direction the executive pay model has taken over the past two decades is no longer a purely philosophical issue. Shareholders now have the choice of voting “against” pay programs, which might indicate opposition to the executive pay model and recognition of the need for change, or “for” them, indicating general acceptance of prevailing practices.


Banks’ Survival During the Financial Crisis

The following post comes to us from Jeffrey Ng of the Sloan School of Management and Tjomme Rusticus of the Kellogg School of Management.

In our paper, Banks’ Survival during the Financial Crisis: The Role of Financial Reporting Transparency, which was recently made publicly available on SSRN, we focus on how financial reporting quality affects bank stability by examining the relation between bank transparency and regulatory intervention in the form of enforcement orders and bank closures. Enforcement orders are issued against banks in which a federal regulator such as the Federal Reserve, the OCC, or the FDIC has found unsafe or unsound banking practices and violations of law and/or regulations. A bank closure, also known as a bank failure, generally refers to the closing of a bank by a federal or state banking regulatory agency due to concerns that the bank will be unable to meet its obligations to its depositors or other creditors.


Announced Modifications to HSR Reporting

The following post comes to us from Joseph Tringali, Partner in the Litigation Department at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

The Federal Trade Commission (“FTC”) has announced final rules implementing modifications to the Hart-Scott-Rodino (“HSR”) Premerger Notification Rules and Notification and Report Form (the “Form”) that parties must file under the HSR Act when seeking antitrust clearance for certain mergers and acquisitions. The FTC first published proposed modifications on August 13, 2010, and solicited public comments at that time, some of which are addressed in the final rule changes. These final rule changes will become effective 30 days after publication in the Federal Register, likely to occur in the next day or so, and will apply to all transactions that file on or after the effective date. The FTC’s stated purposes for the changes is to streamline the Form, thereby reducing the burden on filers, and to capture new information to assist the antitrust agencies in conducting their initial review of a proposed transaction’s competitive impact. While the rule changes will make some aspects of the HSR filing process easier, other aspects will become more difficult.


Court Upholds Broad Definition of “Settlement Payments” Under Bankruptcy Code

The following post comes to us from James L. Bromley, a partner and leader of the global bankruptcy and restructuring practice at Cleary Gottlieb Steen & Hamilton LLP.

On June 28, 2011, the Court of Appeals for the Second Circuit upheld the Southern District of New York’s determination that the safe harbor provision in § 546(e) of the Bankruptcy Code protects from the bankruptcy trustee’s powers to avoid transfers made by the Debtor, Enron Corp., to redeem commercial paper prior to maturity. In re Enron Creditors Recovery Corp., Dckt. No. 09-5122-bk (L) 09-5142-bk (Con) (2d Cir. June 28, 2011). The issue before the Court was whether the payments made during the preference period constitute “settlement payments” within the meaning of § 546(e)’s safe harbor. The decision is particularly noteworthy because this is the first instance the Second Circuit has addressed the breadth of this section of the Bankruptcy Code. In recent years, courts have struggled to interpret the statutory language and legislative intent of the § 546(e) safe harbor in a consistent manner, leaving litigants and transaction planners without a clear understanding of what types of transactions will be protected from the trustee’s avoidance powers. Although the decision is limited to the facts of the case, the Second Circuit adopted a broad reading of § 546(e) which was consistent with the intent of a safe harbor and resisted placing any limitations on its plain meaning, in contrast to the dissent, as well as some other courts. This case is therefore important, not only for cases involving the “settlement payment” safe harbor, but also potentially for litigation involving all of the Code’s safe harbors for financial contracts. [1]


Say on Pay in 2011: Lessons and Coming Attractions

James Barrall is a partner at Latham & Watkins LLP, and Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Mr. Barrall and his colleague Alice M. Chung.

With the 2011 proxy season coming to a close, this report reviews the results of the inaugural season of shareholder advisory votes under the Dodd-Frank Wall Street Reform and Consumer Protection Act through June 23, 2011. It further offers recommendations for companies to consider in making their compensation and governance decisions to help position them for future say-on-pay (SOP) votes. [1]

The 2011 proxy season—the first in which all but small public companies in the United States were required to allow shareholders to vote on an advisory basis to approve or disapprove the compensation of their named executive officers—is almost over. Companies with non-calendar fiscal years or delayed meetings will continue to hold SOP votes throughout 2011, but a majority of U.S. companies that are now subject to the vote requirements (and most S&P 500 and Russell 3000 companies with calendar fiscal years) have already had their 2011 shareholder meetings. [2]

There have been many twists and turns this proxy season, but some clear trends and bottom lines have emerged. Now, while experience and memories are fresh, is a good time to review the results of the inaugural SOP season, identify trends and issues, and assess the landscape for future regulations and other developments. Most importantly, companies need to take all of this into account as they make the compensation and governance decisions in 2011 that will best position them for the 2012 proxy season and SOP votes to come.


The Dodd-Frank Extraterritorial Jurisdiction Provision

The following post comes to us from Richard W. Painter, the S. Walter Richey Professor of Corporate Law at the University of Minnesota. This post is part of a series discussing articles appearing in the inaugural issue of the Harvard Business Law Review, which is published in partnership with the Harvard Law School Program on Corporate Governance.

In The Dodd-Frank Extraterritorial Jurisdiction Provision: Was It Effective, Needed or Sufficient?, an article published in the inaugural issue of the Harvard Business Law Review, I discuss the Dodd-Frank Act’s cursory treatment of a critically important issue in global capital markets law: the extraterritorial application of Section 10(b) of the Exchange Act.

In Morrison v. National Australia Bank, the U.S. Supreme Court ruled in June 2010 that securities fraud suits could not be brought under Section 10(b) of the Exchange Act against foreign defendants by foreign plaintiffs who bought their securities outside the United States (so called “f-cubed” securities litigation). The Court held that, while federal courts have jurisdiction over all of these suits, Section 10(b)’s substantive prohibition reaches only fraud in connection with the “purchase or sale of a security listed on an American stock exchange, and the purchase or sale of any other security in the United States.” Congress responded to Morrison with Section 929P of the Dodd-Frank Act, which gives federal courts jurisdiction over some cases involving foreign securities transactions if the suits are brought by the SEC or the Department of Justice (DOJ). Private suits remain subject to Morrison, although Congress ordered an SEC study of whether changes should be made there as well.


Toward SEC Rules on Disclosure of Political Spending

Lucian A. Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law at Columbia Law School. This post is based on an SEC rulemaking petition available here. Bebchuk and Jackson are co-authors of Corporate Political Spending: Who Decides?, and their prior posts about the subject of corporate political spending are available here, here, and here.

A group of ten corporate and securities law experts submitted yesterday a rulemaking petition (the “Petition”) to the Securities and Exchange Commission. The Petition urges the Commission to develop rules to require public companies to disclose to shareholders the use of corporate resources for political activities.

The Committee on Disclosure of Corporate Political Spending, which we co-chair, is composed of ten academics whose teaching and research focus on corporate and securities law. In addition to the two of us, the members of the Committee include Bernard Black (Northwestern), John Coffee (Columbia), James Cox (Duke), Ronald Gilson (Stanford and Columbia), Jeffrey Gordon (Columbia), Henry Hansmann (Yale), Donald Langevoort (Georgetown), and Hillary Sale (Washington University in St. Louis).

The Petition proceeds as follows:

  • First, the Petition explains that the Commission’s disclosure rules have evolved over time in response to changes in investor interests and needs as well as corporate practices.
  • Second, the Petition presents data indicating that public investors have become increasingly interested in receiving information about corporate political spending.
  • Third, the Petition explains that, in response to increased investor interest, many public companies have voluntarily adopted policies requiring disclosure of the company’s spending on politics, and these disclosure practices can provide a useful starting point for the SEC in designing disclosure rules in this area.
  • Fourth, the Petition explains that disclosure of information on corporate political spending is important for the operation of corporate accountability mechanisms, including those that the Supreme Court has relied upon in its analysis of corporate political speech.
  • Finally, the Petition explains that the design of disclosure rules concerning political spending would involve choices similar to those presented by the disclosure rules previously developed by the Commission, and thus that the Commission has ample experience and expertise to make these choices.

The Petition concludes that the Commission should promptly initiate a rulemaking project to make political spending by public companies more transparent to investors.

The full Petition is available here.

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