Monthly Archives: March 2012

Finding Common Ground on Environmental and Social Metrics

The following post comes to us from Peter A. Soyka, founder and President of Soyka & Company, LLC. This post is based on the executive summary of an Investor Responsibility Research Center Institute report by Mr. Soyka and Mark Bateman, founder and President of Segue Point LLC; the full report is available here.

Investors and companies are both increasingly interested in sustainability issues. These issues typically revolve around environmental and social factors that have real but potentially long-term or contingent impacts on corporate financial value. This, in turn, makes traditional accounting metrics less valuable in assessing sustainability issues than in analysis of many other business issues. Therefore, both investors and companies – as well as groups that service or monitor and regulate them – have a growing interest in receiving meaningful corporate environmental, social, and governance (ESG) information on an ongoing basis. Despite this shared interest, investors often complain about the difficulty of gathering and truly understanding corporate ESG data, while company representatives may express concerns about “survey fatigue,” or the amount of time and resources it takes to supply the requested data to various investors and ESG research firms.


Proposed Initiatives May Affect Capital Formation and Public Reporting Requirements

The following post comes to us from Brian V. Breheny, partner at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a section from Skadden’s 2012 Insights that was published earlier this year, contributed by Mr. Breheny, Stacy J. Kanter, Michael J. Zeidel, Andrew J. Brady, and Pallas A. Comnenos.

Recent regulatory and legislative initiatives relating to capital formation and public reporting requirements, if implemented, would have a significant effect on privately held companies and publicly traded small and emerging businesses. Although the ultimate outcomes and timing of these initiatives are unknown, we expect at least some of them to be adopted in 2012. Because the proposals could materially impact the timing of when a company decides to go public, how it attracts, retains and pays employees, and the manner in which issuers and investment banks conduct offerings, issuers and their advisors should closely monitor developments related to these initiatives.

Prompted by a series of letters in the spring of 2011 between Rep Darrell E. lssa (R-CA), Chairman of the House Committee on Oversight and Government Reform, and Mary L. Schapiro, Chairman of the Securities and Exchange Commission (SEC), in which Chairman lssa criticized perceived regulatory impediments to capital formation, the staff of the Division of Corporation Finance of the SEC (the Division) has committed to undertake a review of certain regulatory provisions, including:


Predicting Future Merger Activity

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

I’m frequently asked to explain merger activity and to predict the level of future merger activity. In part in response to these requests and in part as the consequence of a long career of advising as to mergers, I’ve identified many of the factors that determine merger activity, but a complete catalog is beyond me and I am not able to predict even near-term levels of activity. I’ve written and lectured extensively on this and the history of merger waves since the 1880s. In preparation for work on a revision of my merger waves studies, I made an outline of the factors that I believe are the most significant that affect mergers. I thought it might be interesting to share a condensed version and that as an ancillary benefit of doing so, readers might favor me with comments and suggestions.

First, it is recognized that mergers are an integral part of market capitalism, including the types that are practiced in China, India and Russia. Mergers are an agent of the Schumpeterian creation and destruction that characterizes market capitalism.


The Effectiveness of Institutional Investors in Evaluating Analysts

The following post comes to us from Lily Fang of the Department of Finance at INSEAD and Ayako Yasuda of the Graduate School of Management at UC Davis.

In the paper, The Effectiveness of Institutional Investors in Evaluating Analysts, which was recently made publicly available on SSRN, we examine the effectiveness of institutional investors in evaluating analysts by comparing the performance of recommendations made by AAs—star analysts elected by institutional investors—with those made by other analysts.

We ask four related questions. First, does the AA status at least partially reflect analyst skill? That is, if AAs make more valuable recommendations, is it because of skill, or other factors such as luck, market influence, or access to management? If investors are effective in evaluating analysts, we expect the AA status to be indicative of skill. Second and closely related to the first question, does the AA status contain information about the analyst that is not entirely captured by other observable characteristics? The answer should be affirmative if institutional investors uncover unique information about analysts. Third, can institutional investors and the AA election process adapt to major changes brought to the industry by regulations and labor market movements? And finally, who benefits the most from the elected star analysts’ views?


Allison Bennington Joins PCG’s Advisory Board

The Forum is pleased to announce that Allison A. Bennington, General Counsel and a Partner of ValueAct Capital, joined the Advisory Board of the Harvard Law School Program on Corporate Governance.

She joins the existing members of the Board: William Ackman, Peter Atkins, Joseph Bachelder, Richard Breeden, Richard Climan, Isaac Corré, John Finley, Stephen Fraidin, Byron S. Georgiou, Larry Hamdan, Robert Mendelsohn, David Millstone, Theodore Mirvis, James Morphy, Toby Myerson, Eileen Nugent, Paul Rowe, and Rodman Ward.

Prior to joining ValueAct Capital in April 2004, Mrs. Bennington was the General Counsel of Atriax, Ltd. (“Atriax”), a joint venture of Deutsche Bank, J.P. Morgan Chase, Citibank and Reuters that was formed to establish a global foreign exchange internet trading market. Prior to joining Atriax, Mrs. Bennington was a Managing Director of Robertson Stephens, a full service investment bank, where she ran the Legal Department. Mrs. Bennington was previously a Partner in the London office of Brobeck Hale and Dorr International, where she specialized in cross-border mergers and acquisitions and corporate finance transactions. Mrs. Bennington is a director of Seitel, Inc. She has a B.A. from the University of California at Berkeley and a J.D. from the University of California, Hastings College of the Law.

Delaware Court Considers Conflicts of Interest in M&A

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn Client Alert by Mr. Gallardo and Stephenie Gosnell Handler. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

On February 29, 2012, Chancellor Strine of the Delaware Court of Chancery issued an opinion that is highly critical of the sale process run by El Paso Corporation in connection with its $21.1 billion acquisition by Kinder Morgan, Inc. See In re El Paso Corporation Shareholder Litigation, No. 6949-CS (Delaware Court of Chancery). The Court focuses on various alleged conflicts of interest involving El Paso’s CEO and its financial advisor, which persuaded the Court that the plaintiffs have a reasonable probability of success on a claim that the merger was tainted by breaches of fiduciary duty. But despite the “disturbing nature of some of the behavior,” the Court concluded that the balance of hardships did not support a preliminary injunction because the “stockholders should not be deprived of the chance to decide for themselves about the Merger.”


Unintended Consequences of the STOCK Act

Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

On February 16, 2012, the House of Representatives sent its version of the Stop Trading on Congressional Knowledge Act (the “STOCK Act”) to the Senate for reconciliation. Although it remains to be seen how the two bodies will resolve their differences, the core of the legislation will amend the securities laws to forbid members of the three branches of the federal government and their employees from profiting from insider information. The two versions of the STOCK Act do so by specifying that, for purposes of the securities laws, each covered person “owes a duty arising from a relationship of trust and confidence to the Congress, the United States, government, and the citizens of the United States with respect to material, nonpublic information” derived from such person’s position or gained from the performance of such person’s official responsibilities. Much of the public debate concerning the STOCK Act has centered on this explicit establishment of a duty of trust and confidence, but less attention has focused on the bill’s practical implications for private parties who routinely obtain information from those covered by the new statute.


Globalizing the Boardroom

The following post comes to us from Ronald Masulis of the Australian School of Business at the University of New South Wales, Cong Wang of the Department of Finance at the Chinese University of Hong Kong, and Fei Xie of the School of Management at George Mason University.

In the paper, Globalizing the Boardroom – The Effects of Foreign Directors on Corporate Governance and Firm Performance, forthcoming in the Journal of Accounting and Economics as published by Elsevier we examine independent directors of U.S. firms who are based in foreign countries, and investigate how their geographic location affects their ability to perform their monitoring and advisory duties. About 13% of U.S. firms have foreign independent directors on their boards. On the positive side, FIDs can utilize their international background and expertise to enhance the advisory function of boards and benefit firms with substantial foreign operations or plans for overseas expansion. On the negative side, the geographic distance between FIDs and corporate headquarters, as well as national borders with passport and custom controls create significant obstacles for FIDs to effectively participate in the governance of U.S. firms.


What’s Next for the Volcker Rule?

Bradley Sabel is partner and co-head of Financial Institutions Advisory & Financial Regulatory practice group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication.

The Volcker Rule has been only a skeleton in statutory form, but now is beginning to take shape as proposed regulations would flesh out its requirements. Now that the comment period on the proposed regulations has ended, a survey of the substantive suggestions for change displays a variety of approaches, but at least the financial institutions directly affected have made significant, and strident, criticisms of most of the proposal. Surprisingly, many foreign governments have also weighed in because of their concern about the effect on global markets generally and on their own sovereign debt specifically. Many of these topics merit serious consideration.

The financial services industry is closely watching the progress of the federal financial regulatory agencies in adopting rules to implement the Volcker Rule. [1] The rule is at Section 619 of the Dodd-Frank Wall Street Reform and Consumer Protection Act and was enacted primarily at the urging of Paul Volcker, former Chairman of the Board of Governors of the Federal Reserve System. [2] The Agencies have issued a proposed rule (“Proposal”), the comment period for which ended on February 13. The Agencies will review and analyze the comments, before adopting a final rule that provides guidance on how a banking entity may now conduct market-making and fund activities.


March 2012 Dodd-Frank Progress Report

The following post comes to us from Margaret E. Tahyar and Gabriel D. Rosenberg of the Financial Institutions Group at Davis Polk & Wardwell LLP. This post discusses a Davis Polk report which is available here. A post about the previous progress report is available here. Other posts about the Dodd-Frank Act are available here.

This posting, the March 2012 Davis Polk Dodd-Frank Progress Report, is the twelfth in a series of Davis Polk presentations that illustrate graphically the progress of the rulemaking work that has been done and is yet to occur under the Dodd-Frank Act. The Progress Report has been prepared using data from the Davis Polk Regulatory Tracker™, an online subscription service offered by Davis Polk to help market participants understand the Dodd-Frank Act and follow regulatory developments on a real-time basis.

In this report:

  • As of March 1, 2012, a total of 225 Dodd-Frank rulemaking requirement deadlines have passed. Of these 225 passed deadlines, 158 (70.2%) have been missed and 67 (29.8%) have been met with finalized rules.
  • Major rulemaking activity this month included CFTC final rules relating to swap dealer internal business conduct and a CFPB proposed a rule defining “larger participants” in certain consumer financial markets.
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