Monthly Archives: October 2011

Delaware Court Recognizes Need for Flexibility in Reviewing Sales Processes

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, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

The Delaware Court of Chancery has refused to enjoin an all-cash merger transaction negotiated by an actively engaged and independent board of directors, despite the fact that the sales process did not include customary features such as a fairness opinion or a fiduciary out, and the transaction was effectively locked up within a day by the execution of written consents by a majority of the stockholders. In re OPENLANE, Inc. S’holders Litig., C.A. No. 6849-VCN (Del. Ch. Sept. 30, 2011).

OPENLANE is a thinly-traded company with a highly concentrated shareholder base: 68.5 percent of its stock is held by a sixteen-person group of management and directors. Anticipating adverse market conditions in its principal business, the board negotiated with three potential strategic buyers in the first part of 2011, but did not undertake a broad auction or contact any possible financial buyers. In September, the board signed an agreement with the top bidder. Although no voting agreement was entered into as part of the merger, a majority of the company’s shareholders executed written consents approving the merger the very next day.


The Vickers Report: What the Recommendations Mean for the Future of Banking in the UK

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds, Azad Ali, Thomas A. Donegan, and Aatif Ahmad.

The final report of the UK’s Independent Commission on Banking, chaired by Sir John Vickers, was published on 12 September 2011. Its recommendations include ring-fencing UK banks’ retail banking operations, higher capital requirements for UK retail banks, preferential status for insured deposits in a bank insolvency and measures to increase competition in the UK banking sector. This memorandum summarises the key recommendations and their likely impact.


The Independent Commission on Banking (the “Vickers Commission”) was set up by the Coalition Government to make recommendations for reform of the UK banking sector with a view to reducing systemic risk, mitigating moral hazard and reducing the likelihood and impact of firm failures. The Vickers Commission was also asked to consider competition in the UK banking sector.

The Vickers Commission published an Interim Report on 11 April 2011 which set out its provisional views. Having considered the responses to its Interim Report, the Vickers Commission set out its final recommendations in a paper now known as the Vickers Report. [1] All three of the UK’s main political parties have approved the report’s recommendations.


Did the Bailout Encourage Risk-Taking?

The following post comes to us from Ran Duchin and Denis Sosyura, both of the Department of Finance at the University of Michigan.

In the paper, Safer Ratios, Riskier Portfolios: Banks’ Response to Government Aid, which was recently made publicly available on SSRN, we investigate the effect of TARP on bank risk taking. One of the key features of the past decade has been an increased role of government regulation, which culminated in the bailout of over 700 firms under the Emergency Economic Stabilization Act (EESA) of 2008. At the forefront of an ongoing regulatory debate is the potential effect of the bailout on the risk-taking behavior of financial institutions, since imprudent risk-taking is often blamed for leading to the crisis in the first place. On the one hand, recent regulatory reforms, including the EESA, the Dodd-Frank Act of 2010, and Basel III, were tasked with promoting financial stability and preventing excessive risk-taking by financial institutions. On the other hand, the bailout sent a signal of implicit protection of certain financial institutions, which could encourage risk-taking as a response to a perceived safety net for institutions that encounter financial distress.

We study three channels of bank operations – retail lending, corporate lending, and financial investments. We use hand-collected data on bank applications for government capital to control for the selection of fund recipients and investigate the effect of both application approvals and denials. To distinguish banks’ risk taking behavior from changes in economic conditions, we also control for the volume and quality of credit demand based on micro-level data on home mortgages and corporate loans.


SEC Proposes Rule 127B to Implement Section 621 of the Dodd-Frank Act

Giovanni Prezioso is a partner focused on securities and corporate law matters at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Raymond B. Check, Michael A. Mazzuchi, and Joyce E. McCarty.

The SEC recently proposed Rule 127B to implement the prohibition under Section 621 of the Dodd-Frank Act on material conflicts of interest between securitization participants of an ABS and any investor in the ABS. The proposed rule includes exceptions for certain risk-mitigating hedging activities, liquidity commitments and bona fide market-making. The proposed rule is available here.

Key provisions of the rule include:

Conditions Required for Application of the Proposed Rule

  • Covered Persons. The proposed rule would apply to an underwriter, placement agent, initial purchaser or sponsor, or any affiliate or subsidiary of such entity, of an ABS.
  • Covered Products. The proposed rule would apply to any ABS, as such term is defined in section 3 of the Exchange Act, including, for the purpose of the rule, synthetic ABS. The definition of ABS provided in the Exchange Act is much broader than the definition of ABS in the Securities Act Regulation AB. Both registered offerings and private placements would be covered by the proposed rule.


Preparing for “Proxy Access” Shareholder Proposals

The following post is based on a Cleary Gottlieb Steen & Hamilton LLP memorandum by Victor Lewkow, Janet Fisher, and Esther Farkas.

Following the SEC’s decision not to seek a rehearing of the decision by the U.S. Court of Appeals for the District of Columbia Circuit vacating its “proxy access” rule (Rule 14a-11 under the Securities Exchange Act of 1934), the stay on the companion “private ordering” amendments to Rule 14a-8 was lifted and those amendments are now in effect. Companies can no longer exclude otherwise-qualifying shareholder proposals seeking to establish a procedure in a company’s governing documents to permit shareholder nominees to be included in the company’s future proxy statements. As with other shareholder proposals, in order to make an access proposal a shareholder need only own $2,000 of company stock and have held it continuously for one year.

While some companies may receive proxy access proposals because of their size or notoriety, or seemingly at random, others will receive them because of shareholder dissatisfaction with the company’s performance, strategic direction, compensation policies or general governance profile. We expect that larger institutional investors will focus their attention on a very small number of issuers where a relatively high level of dissatisfaction exists. Of course, the most important steps a company can take to reduce the risk of receiving a proxy access proposal (or, if one is received, it obtaining substantial support or even being approved) are the same ones that apply to other potential activism: knowing who the company’s major shareholders are and staying in touch with them, understanding their views and concerns, and considering what steps can be taken to address those concerns well before any proposal is received. Even if a company does not expect to be a target of a proposal in the near future, understanding the views of key shareholders on this important subject should be part of the agenda for any meetings it is planning with shareholders in anticipation of the 2012 proxy season.


The Williams Act: A Truly “Modern” Assessment

The following post comes to us from Andrew E. Nagel, Andrew N. Vollmer, and Paul R.Q. Wolfson, partners at Wilmer Cutler Pickering Hale and Dorr LLP, and is based on a paper by the authors, available here. Related work by the Program on Corporate Governance on the SEC consideration of possible changes to rule 13(d) includes The Law and Economics of Blockholder Disclosure by Bebchuk and Jackson.

Recently, a debate has emerged about the merits of certain proposed piecemeal reforms to the Williams Act’s 13(d) disclosure regime. The aim of our paper, The Williams Act: A Truly “Modern” Assessment, is to examine the implications of these proposals and to suggest that, before making any changes to the regime, the Commission should undertake a comprehensive review of the role of the Williams Act in today’s market and decide what best serves overall shareholder interests. The paper was prepared on behalf of certain members of the Managed Funds Association and was sent in advance of various meetings with the Staff of the Securities and Exchange Commission and with certain SEC Commissioners. The participants at those meetings included Pershing Square Capital and JANA Partners, as well as BlackRock, California State Teachers’ Retirement System, Florida State Board of Administration, The New York State Common Retirement Fund, Ontario Teachers’ Pension Plan Board, TIAA-CREFF, T. Rowe Price, and pension fund representatives of Change to Win and the United Food and Commercial Workers Union.

The Williams Act: An Historical Perspective

Enacted in 1968, the Williams Act was a response to a wave of hostile coercive takeover attempts, primarily cash tender offers. At the time the Williams Act was passed, the vast majority of shares were owned by individual shareholders, a fragmented and ill-informed group unprepared to exert their rights as shareholders. Cash tender offers posed the real risk of destroying value by forcing shareholders to tender their shares on a compressed timetable.


A Regulatory Design for Monetary Stability

Morgan Ricks is a Visiting Assistant Professor at Harvard Law School.

In the paper, A Regulatory Design for Monetary Stability, which was recently made publicly available on SSRN, I seek to make the case that our financial regulatory apparatus is ill-designed to address what is, arguably, the central problem for financial regulatory policy. That problem is the instability of the market for money-claims—a generic term that denotes fixed-principal, very short-term IOUs. The money-claim market is vast, and it is dominated by financial issuers. Building on prior work, the paper contends that the money-claim market is associated with a basic market failure. It further suggests that our current regulatory approach, even as modified by recent and pending reforms, is unlikely to be conducive to stable conditions in this market.

The paper offers an alternative regulatory framework to address this market failure. Specifically, it proposes that the issuance of money-claims be permitted only within a public-private partnership (“PPP”) system. Unlike our existing financial stability architecture, the proposed regulatory design embodies a coherent economic logic. Furthermore, the paper argues that the proposed regime would be more readily administrable than our current system, in part because it would rely on more modest regulatory capacities.


Del Monte Settlement Highlights Risk of Conflicts in Buyout Financing

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, Paul K. Rowe, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Recently, there was the announcement of a proposed $89.4 million settlement of shareholder claims arising out of the buyout of Del Monte Foods Company. The shareholders had alleged that the sales process was tainted by collusion between the buyers and Del Monte’s banker, which had sought to provide financing to the buyout group. The settlement follows the closing of the transaction and will be funded by both the new owners of the company and the banker.

The $89.4 million payment is one of the larger settlements to occur in Delaware shareholder litigation. The driver of the settlement was the Court of Chancery’s February ruling granting a motion for a preliminary injunction. (See our memo of February 15, 2011 on the decision.) The case highlights the following considerations relevant to sale-of-a-company processes:


Assessing Pay for Performance

Matteo Tonello is Director of Corporate Governance for The Conference Board, Inc. This post is based on a Conference Board Director Note by Stephen O’Byrne, president and co-founder of Shareholder Value Advisors. Related work from the Program on Corporate Governance on pay for performance includes two papers and a book from Bebchuk and Fried, available here, here, and here.

Although pay for performance is a nearly universal objective of executive compensation programs, there is little agreement on how to measure it and monitor it. Companies often seem to believe that it is obvious that pay varies with performance, while many investors feel that there is little evidence of a strong correlation between the two. This report explores five interpretations of the “pay for performance” concept, presents a practical way to measure it, assesses the concept’s prevalence, and explains how directors can monitor and improve pay for performance at their company.

Five Interpretations of “Pay for Performance”

An analysis of “pay for performance,” as used by the business community, reveals that there are at least five interpretations of the concept.

1. Pay versus target pay is tied to performance Many companies believe that they achieve pay for performance because they award compensation that is above a target level when performance is good and below a target level when performance is poor. For example, in its 2010 proxy statement, Procter & Gamble describes pay for performance this way: “We pay above target when goals are exceeded and below target when goals are not met.” [1] However, few institutional investors and proxy voting advisors are comfortable with a pay for performance concept tied to target pay levels, as they believe that, under this construct, some companies may adopt needlessly high target pay levels and reward poorly performing executives with pay levels that, albeit lower than those for well-performing executives, remain above the market.


Principal Changes to the UK Takeover Code

The following post comes to us from Jeremy G. Hill, corporate partner at Debevoise & Plimpton LLP, and is based on a Debevoise & Plimpton update by Mr. Hill, David Innes, and Guy Lewin-Smith.

Recently, a new version of the Takeover Code came into force. With few exceptions, it governs all offers and possible offers made from this date. The amendments are the result of the year-long consultation process initiated by the Takeover Panel after widespread criticism and concern following Kraft Food Inc.’s hostile takeover of Cadbury plc. The amendments are designed to address the concern that hostile bidders have recently been able to acquire a tactical advantage over the target company to the detriment of the target and its shareholders and that the outcome of hostile offers is often unduly influenced by short-term investors that do not take into account the long-term interest of the target. The amendments being introduced are intended to redress the balance in favour of the target. This note provides a brief update of the principal changes.

Requirement for a potential bidder to be identified. There are enhanced disclosure requirements in the first public announcement of a possible offer, including identifying by name any potential bidder(s) from whom the target company has received an approach or with whom it is in talks.


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