Yearly Archives: 2012

Loyalty Claims Against Outside Directors

Posted by Steven M. Haas, Hunton & Williams LLP, on
Friday, February 10, 2012
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Steven Haas is an associate at Hunton & Williams specializing in mergers and acquisitions, securities laws and corporate governance matters. 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.

A September 2011 Delaware Court of Chancery decision refused to dismiss claims alleging that a board of directors breached its fiduciary duty of loyalty in authorizing a sale of a corporation to a third party. The stockholder plaintiff alleged that the sale was motivated by the corporation’s former chairman and chief executive officer, who owned 37% of the corporation’s common stock and needed liquidity. The decision is significant for refusing to dismiss allegations of disloyal conduct against outside directors who were disinterested in the transaction and otherwise unaffiliated with the former CEO.

Background

New Jersey Carpenters Pension Fund v. infoGROUP, Inc. involved the 2010 sale of infoGROUP, Inc., to a private equity fund. The stockholder-plaintiff alleged that the sale was motivated by the corporation’s former chairman and chief executive officer, who owned 37% of the company and “desperately needed liquidity” to fund a new venture and to satisfy $12 million in settlement obligations stemming from a Securities and Exchange Commission action and a derivative suit brought against him. The plaintiff claimed that the board of directors breached its fiduciary duties by capitulating to the former CEO’s pressure and approving a transaction that was not in the best interests of all shareholders.

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Managerial Investment and Changes in GAAP

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 10, 2012
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The following post comes to us from Nemit Shroff of the Department of Accounting at MIT.

In my paper, Managerial Investment and Changes in GAAP: An Internal Consequence of External Reporting, which was recently made publicly available on SSRN, I investigate whether changes in Generally Accepted Accounting Principles (GAAP) affect corporate investment decisions. I hypothesize that the relation between changes in GAAP and investment manifests for at least two non-mutually exclusive reasons. First, I hypothesize that changes in GAAP can affect investment because the numbers reported in financial statements have a direct bearing on contractual outcomes. For example, debt contracts often contain covenants based on numbers reported in financial statements (Leftwich [1983]). Consequently, if a change in GAAP has an unfavorable (favorable) impact on current and future financial statements, and debt covenants are not adjusted to incorporate the changes, the change in GAAP will likely tighten (loosen) covenant slack. As a result, managers may alter their actions to avoid covenant violation. Specifically, since most investments have an uncertain future outcome and some positive probability that the outcome is a loss, they increase the probability of violating covenants in the future by adversely impacting future financial ratios. Consequently, managers might respond to changes in GAAP that adversely affect financial statements by cutting investment in risky assets with the goal of preserving net worth and preventing deterioration of financial ratios.

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Congress Considers STOCK Act Amending Insider Trading Laws

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, February 9, 2012
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The following post comes to us from Kenneth A. Gross, leader of the Political Law practice at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on two Skadden, Arps memorandums.

Last Thursday, February 2, 2012, the Senate passed S. 2038 (the STOCK Act) which, among other things:

  • confirms that the insider trading ban under Section 10(b) of the Securities Exchange Act of 1934 (’34 Act) applies to congressional members and staff, and executive and judicial branch officials;
  • amends the Lobbying Disclosure Act of 1995 (LDA) to cover political intelligence contacts; and
  • broadens the illegal gratuities statute.

The above changes are described in greater detail below. Information about the House version of the STOCK Act is provided later in the post.

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Court of Chancery Upholds Contractual Modifications of Fiduciary Duties

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, February 9, 2012
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The following post comes to us from Allen M. Terrell, Jr., director at Richards, Layton & Finger, and is based on a Richards, Layton & Finger update. 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.

In Gerber v. Enterprise Products Holdings, LLC, C.A. No. 5989-VCN (Del. Ch. Jan. 6, 2012), the Court of Chancery enforced the contractual modification of fiduciary duties in Enterprise GP Holdings, L.P.’s partnership agreement and, on a motion to dismiss, dismissed all claims against the defendants arising out of the sale of a subsidiary by Enterprise GP Holdings to an affiliate and the subsequent merger of Enterprise GP Holdings into the same affiliate.

In April 2009, Enterprise GP Holdings sold Texas Eastern Products Pipeline Company, LLC to Enterprise Products Partners, L.P., a publicly traded partnership managed by a subsidiary of Enterprise GP Holdings (the “Sale”). A committee of independent directors of EPE Holdings, LLC, the general partner of Enterprise GP Holdings, approved the Sale after receiving a fairness opinion from Morgan Stanley & Co. In September 2010, Enterprise Products Partners and Enterprise GP Holdings entered into a merger agreement that provided for Enterprise Products Partners to issue units in exchange for all of the outstanding units of Enterprise GP Holdings (the “Merger”). Again, a committee of independent directors of EPE Holdings approved the Merger after receiving a fairness opinion from Morgan Stanley.

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“Financial Stability” Analysis in Bank M&A

Posted by H. Rodgin Cohen, Sullivan & Cromwell LLP, on
Wednesday, February 8, 2012
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H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell LLP publication.

A recent acquisition approval order of the Board of Governors of the Federal Reserve System (the “FRB”) provides the first analysis of the “financial stability” factor in Section 604(d) of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). This section amended Section 3(c) of the Bank Holding Company Act of 1956 (“BHC Act”) to require the FRB, when evaluating a proposed bank acquisition, merger, or consolidation, to consider “the extent to which [the] proposed acquisition, merger, or consolidation would result in greater or more concentrated risks to the stability of the United States banking or financial system”. Section 604(e) of the Dodd-Frank Act similarly amended Section 4(j)(2) of the BHC Act to require the FRB to consider financial stability concerns when reviewing notices by bank holding companies to engage in nonbanking activities.

On December 23, 2011, the FRB issued an order (the “Order”) explaining its reasons for approving the acquisition of RBC Bank (USA) (“RBC Bank”) by The PNC Financial Services Group, Inc. (“PNC”). (The FRB announced its approval of the transaction on December 19, 2011 but, unusually, the Order was not released until several days later.) The Order constitutes the first articulation by the FRB of how it will analyze proposed transactions under the new financial stability factor. The FRB stated in the Order, however, that it expects to issue a notice of proposed rulemaking implementing this change to Section 3(c) of the BHC Act as well as other provisions of the Dodd-Frank Act that require the FRB to consider the effect on financial stability of other proposals by financial institutions, and that this will afford the public an opportunity to provide comments on how the FRB should take financial stability into account when reviewing applications and notices.

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The Real Effects of Financial Markets

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 8, 2012
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The following post comes to us from Alex Edmans and Itay Goldstein, both of the Department of Finance at the University of Pennsylvania, and Wei Jiang, Professor of Finance at Columbia University.

In our paper, The Real Effects of Financial Markets: The Impact of Prices on Takeovers, forthcoming in the Journal of Finance, we provide evidence on the real effect of financial markets. Using non-fundamental shocks to market prices — occurring due to non-discretionary trades by mutual funds that face liquidation pressure from investors’ outflows — as an instrumental variable, we show that market prices affect takeover activity. A non-fundamental decrease in the stock price creates a profit opportunity for acquirers, and increases the probability that the firm will be taken over. Using an instrument for price changes is essential for identifying this effect since market prices are endogenous and reflect the likelihood of an upcoming acquisition. This may explain the weak relationship between prices and takeover activity found by prior literature. By modeling the relationship between prices and takeovers as a simultaneous system that accounts for anticipation, and identifying using an instrument, we find a significantly stronger effect of prices on takeovers than previous research.

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Strategic M&A, Spin-Offs, Hostile Transactions and Private Equity

Posted by Peter Atkins, Skadden, Arps, Slate, Meagher & Flom LLP, on
Tuesday, February 7, 2012
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Peter Atkins is a partner of corporate and securities law matters at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a section from Skadden’s 2012 Insights, contributed by Thomas W. Greenberg.

Strategic M&A Continues to Drive Overall Deal Activity

The dollar value of announced M&A transactions involving U.S. targets rose by approximately 12 percent during 2011 compared with 2010, according to Dealogic data. However, the total number of announced transactions remained relatively flat, with activity levels at their highest in the first quarter of 2011 and slowing during the rest of the year amid increasing economic uncertainty and market volatility.

Strategic M&A was the primary driver of overall activity last year, with an increase in larger, billion-dollar-plus transactions compared to 2010. Strategic buyers — in particular, well-established investment grade companies that have substantial amounts of cash on their balance sheets, improving outlooks on future business performance and access to financing on favorable terms — looked to M&A as a way to generate growth faster than could be achieved organically in the current economic environment. Industry sectors that were particularly active in 2011 M&A transactions included pharmaceuticals/health care, energy/oil & gas, telecommunications/ technology, real estate, chemicals and financial services. Given the liquidity available to strategic buyers, we expect cash to continue to be the preferred form of consideration in acquisitions, although equity and mixed consideration will continue to be used in transformative combinations (including mergers of equals), transactions where the buyer faces leverage constraints and those in which the seller is unwilling to give up the opportunity to participate in the potential future upside of the combined company.

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Negative Say on Pay Vote Litigation

Posted by Paul Rowe, Wachtell, Lipton, Rosen & Katz, on
Tuesday, February 7, 2012
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Paul Rowe is a partner in the Litigation Department at Wachtell, Lipton, Rosen and Katz. This post is based on a Wachtell Lipton memorandum by Mr. Rowe, Edward D. Herlihy, Jeremy L. Goldstein, and Jasand Mock.

In a decision reaffirming directors’ authority to determine executive compensation, the United States District Court for the District of Oregon has ruled that a suit against bank directors arising out of a negative “say on pay” vote should be dismissed. The court determined that plaintiffs failed to raise a reasonable doubt that the challenged compensation was a reasonable exercise of the board’s business judgment. This is the first federal court decision to dismiss such an action, a number of which have been filed in state and federal courts across the country in the wake of the Dodd-Frank Act. Plumbers Local No. 137 Pension Fund v. Davis, Civ. No. 03:11-633-AC (Jan. 11, 2012).

At issue in Davis was a decision by the compensation committee of Umpqua Holdings Corporation to pay increased compensation to certain executive officers for 2010 — a year in which the bank’s performance had improved and met predetermined compensation targets, but total shareholder return was allegedly negative. In a subsequent advisory “say on pay” vote, a majority of the shares voted disapproved of the 2010 compensation. Plaintiffs claimed that it was unreasonable for the Umpqua board of directors to increase compensation and that the shareholder vote rejecting the compensation package was prima facie evidence that the board’s action was not in the corporation’s or shareholders’ best interest.

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Recent Trends in Joint Venture Governance

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, February 7, 2012
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The following post comes to us from Stephen I. Glover, partner and member of the Corporate Transactions Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn client alert.

For the last decade, governance issues have been a priority at public companies and companies planning to go public. Recent joint venture activity reflects a carryover from the public company arena of this intense focus on improving governance. Venture partners are increasingly concentrating on developing and implementing governance best practices within their joint venture vehicles. This client alert provides a brief discussion of recent trends in joint venture governance.

Use of Public Company Governance Practices in Joint Ventures

Many joint venture planners are using or adapting governance practices developed by public companies to address public company governance concerns, including the following:

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PCAOB Board Appointment Disregards Investor Interests

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Monday, February 6, 2012
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement by Commissioner Aguilar regarding the appointment of Jeanette Franzel to the Public Company Accounting Oversight Board. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The Commission has failed to fulfill its legal obligation. It has appointed a member to the Public Company Accounting Oversight Board (“PCAOB”) who has no demonstrable record of investor advocacy. Thus, the Commission has failed to satisfy its basic statutory mandate to appoint an individual who, among other factors, has “a demonstrated commitment to the interests of investors.” [1] Accordingly, I do not support and must respectfully dissent for the reasons outlined below.

Congress established the PCAOB in response to scandalous audit failures, like Enron and WorldCom, that cost investors billions. In doing so, Congress entrusted this Commission with the significant responsibility of appointing the members of the PCAOB. In exercising this responsibility, the Commission is required to abide by the statutory criteria to appoint individuals “who have a demonstrated commitment to the interests of investors.” [2]

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