Monthly Archives: July 2012

Binding Shareholder Say-on-Pay Vote in UK

Edward Greene is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on corporate law matters. This post is based on a Cleary Gottlieb Alert Memorandum; the full version of the memo, including footnotes, is available here.

In 2002, the UK began requiring an advisory shareholder vote on the annual executive and non-executive director compensation practices of UK-incorporated quoted companies (“UK Companies”). Eight years later, in July 2010, the US followed suit when President Obama signed into law the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), providing for an advisory say-on-pay vote for most large US public companies.

The UK government has now gone one step further by proposing to reform the approval process for director remuneration, including through the introduction of a binding shareholder vote for all UK Companies that must occur not less frequently than every three years. The new UK proposal does not stem from guidelines or mandates adopted by any European or other supra-national body. Rather, the proposal was the initiative of the UK government made at the national level in consultation with companies, shareholders, institutional investors and other interested parties. The UK approach, if ultimately implemented as expected, could be a powerful example for US investors seeking to drive change in executive compensation practices.

We discuss below the current state of say-on-pay in the US and the UK reforms.


Duty to Disclose SEC Wells Notices Rejected by Judge

The following post comes to us from Jonathan R. Tuttle, partner in the litigation department at Debevoise & Plimpton LLP, and is based on a Debevoise & Plimpton memorandum by Mr. Tuttle, Paul R. Berger, Matthew E. Kaplan, Alan H. Paley, and Colby A. Smith.

Judge Paul Crotty of the U.S. District Court for the Southern District of New York recently held that Goldman Sachs & Co. did not have a duty to publicly disclose the receipt of a Wells Notice from the Securities and Exchange Commission (“SEC”). Prior to this decision, no court had ever been asked to consider disclosure obligations with respect to Wells Notices. Going forward, this decision may inform companies’ consideration of whether and when to publicly disclose receipt of a Wells Notice.

The case, Richman v. Goldman Sachs Group, Inc., centered on allegations by class action plaintiffs against Goldman relating to the firm’s role in a synthetic collateralized debt obligation (“CDO”) called ABACUS 2007 AC-1 (“Abacus”). In January 2009, Goldman’s SEC filings disclosed ongoing governmental investigations related to the Abacus transaction. Between July 2009 and January 2010, the SEC issued Wells Notices to Goldman and two Goldman employees involved in the Abacus transaction, notifying them that Enforcement Division staff “intend[ed] to recommend an enforcement action.” The SEC filed a complaint against Goldman and one of its employees in April 2010, which Goldman settled for $550 million in July 2010. Plaintiffs alleged that Goldman’s failure to disclose its receipt of the Wells Notices was an actionable omission under Section 10(b) and Rule 10b-5 of the Exchange Act, and that Goldman had an affirmative legal obligation to disclose its receipt of the Wells Notices under applicable regulations.


CFTC Proposes Cross-Border Guidance and Exemptive Order

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

On June 29, the CFTC released proposed interpretive guidance regarding the cross-border impact of the swap-related provisions of Title VII of the Dodd-Frank Act. [1] The CFTC also released a proposed exemptive order that would provide non-U.S. registered swap dealers (“SDs”) and major swap participants (“MSPs”) with temporary conditional exemptions from many swap-related Title VII requirements for one year, and permit SDs and MSPs that are U.S. persons (as defined below) to defer compliance with some requirements until January 2013. [2] Comments on the proposed interpretive guidance are due 45 days after it is published in the Federal Register and comments on the proposed exemptive order are due 30 days after it is published in the Federal Register, both of which are expected shortly.

The Proposed Guidance

The proposed guidance interprets the cross-border reach of Title VII’s swap provisions. The main impacts would be as follows:


The Political Economy of International Financial Regulation

The following post comes to us from Pierre-Hugues Verdier, Associate Professor of Law at University of Virginia.

In my paper, The Political Economy of International Financial Regulation, forthcoming in the Indiana Law Journal, I examine the current system of international financial regulation (IFR) from a historical and political perspective. In contrast with conventional theories of IFR, which see the current system of informal regulatory networks and non-binding standards as overall rational and efficient, I argue that historical path dependence and political economy play a major role in shaping outcomes in IFR. As a result, it produces mixed results—while it adequately addresses some international regulatory challenges, it is relatively ineffective at others, and avoids some altogether. This state of affairs has several important implications; perhaps most worrisome, it raises doubts that IFR can live up to the G-20’s ambitious post-crisis promises to address the international dimensions of systemic risk and moral hazard.

As readers of this blog will no doubt appreciate, there are substantial difficulties involved in developing a general account of IFR. The field is deeply fragmented, as international standards address a broad range of issues: accounting and disclosure rules, fraud, capital adequacy, prudential supervision, and cross-border resolution, to name but a few. All of these areas present different challenges and outcomes vary substantially across them. This being said, one recurrent feature of IFR is its informality. Instead of legally binding treaty obligations and formal international organizations, IFR relies almost exclusively on non-binding standards developed by networks of national regulators, such as the Basel Committee, IOSCO and IAIS. This feature is striking in comparison with many other areas of international governance where more formal mechanisms loom larger, such as trade, investment and the environment.


The Parallel Universe of the Volcker Rule

The following post comes to us from Charles Horn and Dwight Smith, partners focusing on bank regulatory matters at Morrison & Foerster LLP.

If timing is everything, this is not an auspicious time to argue against the Volcker Rule, given the recent London trading and investment misadventures of JPMorgan Chase. Predictably, there has been a hue and cry over this situation, and the bank regulators will be under heavy political pressure to toughen the Volcker Rule. In turn, the regulatory agencies probably will stiffen the Volcker Rule’s implementing regulations when they are adopted later this year (perhaps). For that reason, now is a good time to take a critical look at the Volcker Rule’s utility in improving regulatory oversight and preventing future financial crises.

In fact, the Volcker Rule continues to exist in a parallel universe that has little relation either to the recent financial crisis, the functional realities of the modern financial markets, or to the ongoing efforts to strengthen our financial system. Nothing that JPMorgan Chase, or any other too-big-to-fail bank, has or has not done changes that essential fact. Here is why:


FASB Abandons Changes to Disclosure of Loss Contingencies

The following post comes to us from Eric M. Roth, partner in the litigation department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Roth and Peter C. Hein.

The Financial Accounting Standards Board (“FASB”) voted today to remove from its agenda its outstanding project aimed at modifying the accounting standards applicable to disclosure of loss contingencies.

As noted in prior memos, in 2008 (memo) and 2010 (memo) the FASB issued “Exposure Drafts” of proposed new accounting standards for loss contingencies, including litigation contingencies.  Numerous comments were submitted in response to the exposure drafts, many of which were opposed to enhanced requirements for loss contingency disclosures (memo).

Today’s vote by the FASB to remove this project from the Board’s agenda may reflect a view by the majority of the FASB Board that current requirements under Accounting Standards Codification 450 are sufficient, but the adequacy of corporate loss contingency disclosures may continue to be a subject of compliance and enforcement interest.  For example, as we have noted, the SEC has continued efforts to encourage companies to enhance their disclosure of litigation contingencies and, in particular, to provide estimates of both exposure in excess of established accruals and “reasonably possible” losses or range of losses in actions for which accruals have not been established, or to explain why such estimates cannot be provided (memo).

Effective Consolidated Audit Trail: Keeping the Door Open

Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Walter’s statement at a recent open meeting of the SEC, which is available here. 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. This post relates to the adoption of an SEC rule on consolidated audit trail; the final rule is available here.

In my remarks at the Commission’s May 26, 2010 meeting considering the CAT proposal, I quoted from a 1980 Commission report that spoke about the need for a comprehensive market oversight surveillance system. [1] Flash forward over three decades from that report, and not much has changed. We have seen enormous growth in the capital markets, and the SEC still does not have access to comprehensive market data. As a result, I have been a consistent and vocal supporter of a consolidated audit trail. [2]

It has taken over 30 years for the Commission to be poised to act on this issue. Accordingly, it is important that the Commission get it right. If the first steps in establishing this national market oversight framework are flawed, the system will not be comprehensive, and it will not serve the needs of the American public.

Unfortunately, as currently structured, today’s rule falls short of establishing the process that investors deserve. It is with great disappointment that I am not able to support today’s rule. I am concerned that the proposal fails to set appropriately specific requirements to ensure the creation of a comprehensive market surveillance system, one that will capture the whole of the capital markets – including both regulated and currently unregulated markets. Moreover, I am concerned that the rule as currently drafted will limit innovation, and will fail to achieve cost savings.


The Final Rules for Consolidated Audit Trail

Editor’s Note: Elisse B. Walter is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Walter’s statement at a recent open meeting of the SEC, which is available in full here. The views expressed in the post are those of Commissioner Walter and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff. This post relates to the adoption of an SEC rule on consolidated audit trail; the final rule is available here.

I wholeheartedly and unreservedly support the creation of a consolidated audit trail. As someone who has worked at three market regulators for most of her career, I truly appreciate that there is a real need for regulators to have a robust and effective cross-market tracking system that will provide order and trading information in a timely, accurate and consistent manner.

The SEC regulates the largest capital markets in the world, and I am confident that a properly constructed audit trail will arm the Commission with needed information that we –perhaps shockingly– have not had in the past. Among other things, a consolidated audit trail will enable the agency and other regulators to reconstruct trading to determine if the market has been manipulated or if other rules have been broken. It would thus greatly enhance and expedite our examination and enforcement efforts. And, its benefits would inure to our policy efforts as well. For example, a sound, robust consolidated audit trail will enhance our speed and accuracy in determining the cause of significant market events like the May 6th flash crash. These enhanced capabilities will in turn serve to improve our policy responses and restore investor confidence to our markets.


Initiatives to Place Women on Corporate Boards of Directors

The following post comes to us from Douglas Branson, W. Edward Sell Chair in Law at the University of Pittsburgh.

In the paper, Initiatives to Place Women on Corporate Boards of Directors, forthcoming in the Australian Corporate & Securities Law Review, I investigate initiatives to place women on corporate boards. In the United States, the representation of women on corporate boards of directors has been flat for 6 years now. By contrast, elsewhere around the world the topic is a hot button issue. This includes Australia where the proportion of board seats held by women has suddenly jumped from 8% in 2010 to nearly 14% today. The Australian Stock Exchange (ASX) has adopted a “comply or explain” diversity disclosure requirement (for emphasis termed an “if not, why not” disclosure requirement), which emphasizes gender diversity. The requirement is even more stringent than the London Stock Exchange (LSX) comply or explain regulation adopted after the Lord Mervyn Davies Report on women in corporate governance appeared in February 2011. The Australian Institute of Company Directors also has instituted a mentoring/sponsorship program, the first of its kind in the world, designed to obtain board seats for women. This article reviews these Australian as well as global developments, including enactment of quota laws (especially Norway and France), certificate and pledge programs (“Rooney Rules”), and hard law disclosure requirements (United States).


Avoiding Unintended Consequences of Damage Waiver Provisions

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 Robert Little and Chris Babcock.

Acquisition agreements often contain provisions that restrict or prohibit the payment of “consequential,” “special,” or “incidental” damages for breach. [1] Principals and their counsel may intend that these provisions prevent liability arising from unknown and unforeseeable future events; however, because these terms are poorly understood in the context of acquisition agreements, the exclusion of these categories of damages may have unexpected consequences for the parties to a transaction. Buyers and sellers should carefully weigh the effect of these damage-limiting provisions and consider alternative, more clearly defined provisions to limit damages under their acquisition agreements.

General Contract Damages

Before examining contract provisions limiting damages, it is important to review briefly the basic principles for recovery of damages due to breach of contract. Damages arising out of the breach of a contract are generally limited by the principles set forth in the English case of Hadley v. Baxendale. [2] Hadley created a rule with two branches: (i) a party may recover for losses that directly and naturally arise from the breach of a contract and (ii) a party may recover for losses arising from special circumstances surrounding the breach to the extent that the breaching party knew of the circumstances at the time the contract was made. [3] Consistent with Hadley, under the default rules of most jurisdictions, recoverable losses arising under a breach of contract are limited to those damages that are reasonably foreseeable to the breaching party. [4]


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