Monthly Archives: December 2011

Can Madoff Trustee Go After the Banks?

Posted by John F. Savarese, Wachtell, Lipton, Rosen & Katz, on
Friday, December 2, 2011
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John Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Douglas K. Mayer, Stephen R. DiPrima, and Emil A. Kleinhaus.

Recently, the United States District Court for the Southern District of New York ruled that the trustee for Bernard L. Madoff Investment Securities lacks authority to pursue common-law damages claims belonging to the investors in Madoff’s Ponzi scheme.  Based on that ruling, the court dismissed claims against JPMorgan and UBS seeking to hold the banks liable for customer losses resulting from Madoff’s scheme.  Picard v. JPMorgan Chase & Co., No. 11 civ. 913 (S.D.N.Y. Nov. 1, 2011) (McMahon, J).

It is a longstanding principle of bankruptcy law that a trustee, as successor to the debtor, may not bring claims that belong to creditors.  It is also well-established that, where the debtor has defrauded its creditors, the trustee — who stands in the debtor’s shoes — cannot recover from third parties for wrongdoing that the debtor itself took part in.

In attempting to escape these principles, the Madoff trustee argued that the Securities Investor Protection Act (SIPA), which governs the liquidation of broker dealers, provides a SIPA trustee with broader powers than an ordinary bankruptcy trustee, including the power to bring claims belonging to creditors (in this case, Madoff’s former customers).  The Madoff trustee purported to have such standing as a “bailee” of customer property.  The trustee also argued that section 544(a) of the Bankruptcy Code, which grants a trustee rights of a hypothetical creditor that extends credit to the debtor at the time of its bankruptcy, permits a trustee to assert damages claims that belong to actual creditors.

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Do Institutional Investors Influence Capital Structure Decisions?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, December 2, 2011
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The following post comes to us from Roni Michaely, Professor of Finance at Cornell University, and Christopher Vincent of the Department of Finance at Cornell University.

In the paper, Do Institutional Investors Influence Capital Structure Decisions?, which was recently made publicly available on SSRN, we analyze whether institutional holdings influence capital structure decisions, and whether firms’ financial leverage affects institutional investors’ decisions to hold their equity. Theories of capital structure imply that firms choose their leverage in response to market frictions such as agency costs and asymmetric information. Meanwhile, institutional monitoring and information-gathering affect firms’ agency costs and information environment, opening channels through which institutions may influence firms’ choices of leverage. In the agency framework, institutional investors serve as an external disciplinary mechanism for management, lessening the need for internal disciplinary mechanisms such as debt. In the asymmetric information framework, institutional investors decrease information asymmetry between outside and inside shareholders, which reduces the adverse selection costs of equity and lowers the cost of equity relative to debt, serving to decrease the amount of debt needed for a separating signaling equilibrium.

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How to Win the Say on Pay Vote

Posted by Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, on
Thursday, December 1, 2011
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Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s Executive Compensation and Benefits practice. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein, Jeannemarie O’Brien and David E. Kahan.

With proxy season approaching, public companies must consider their strategy for the second year of the mandatory say on pay advisory vote.

Even companies that passed last year’s vote with flying colors should prepare for the upcoming season with a fresh perspective, as the second season of say on pay will present new challenges. Some investors may have applied more relaxed standards to companies last year in recognition of the fact that mandatory say on pay was new. In addition, shareholders and proxy advisory firms may focus on a company’s response to the first mandatory say on pay vote, which was not an issue last year. Indeed, in its recently released 2012 draft policy changes, Institutional Shareholder Services (ISS) asked whether its voting recommendations should take into account a company’s response to receiving a majority but less than 70% support for its prior year’s say on pay vote. Further, an important factor in whether a company received a positive recommendation from the proxy advisory firms was the results of the total shareholder return (TSR) analysis described below and, accordingly, a change in performance can adversely affect the vote, even where compensation practices have not changed. Finally, ISS recently proposed revisions to its voting policies that may impact say on pay recommendations in the upcoming season.

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

Posted by Marc Weingarten, Schulte Roth & Zabel LLP, on
Thursday, December 1, 2011
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Marc Weingarten is partner and chair of the Business Transactions Group at Schulte Roth & Zabel LLP. This post is based on the updated Schulte Roth & Zabel 2011 Private Equity Buyer/Public Target Deal Study by John Pollack and David Rosewater, available here. A post about an earlier version of the study is available here.

This study updates our firm’s Summer 2011 Deal Study in three important ways:

  • First, we have supplemented our Deal Study by taking into account the relevant deal terms from the 5 private equity buyer/public company target all-cash merger transactions involving consideration of at least $500 million in enterprise value [1] entered into during the third calendar quarter of 2011.
  • Second, we have added a comparative element to our Deal Study by comparing the treatment of certain key deal terms in the 20 transactions entered into between Jan. 1, 2010 and Dec. 31, 2010, which we refer to as the “2010 Transactions,” with the treatment of the same key deal terms in the 11 transactions entered into between Jan. 1, 2011 and Sept. 30, 2011, which we refer to as the “2011 YTD Transactions.”
  • Finally, we have added several new topics to this Deal Study, including a more detailed analysis of “go shop” provisions.

Please note that: (i) our findings described in this survey are not intended to be an exhaustive review of all transaction terms in the surveyed transactions — instead, we report only on those matters that we believe would be most interesting to the deal community; (ii) our observations are based on a review of publicly available information for the surveyed transactions — the surveyed transactions accounted for only a portion of M&A activity during the survey period and may not be representative of the broader M&A market; and (iii) our observations from the comparative analysis are affected by the two data sets not being of the same sample size (11 transactions in 2011 to date vs. 20 transactions in 2010) or average deal size ($2.0 billion mean for 2011 YTD Transactions vs. $1.6 billion mean for the 2010 Transactions).

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