Monthly Archives: July 2012

Task Force on Commercial Litigation in the 21st Century

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 the executive summary of a report issued by the Chief Judge’s Task Force on Commercial Litigation in the 21st Century, which was co-chaired by Mr. Lipton and Former Chief Judge of New York Judith Kaye. The full report is available here.

As the Commercial Division of the New York Supreme Court approaches its twentieth anniversary in a significantly changed world, the Chief Judge constituted this Task Force to ensure that the New York Judiciary helps our State retain its role as the preeminent financial and commercial center of the world. The rule of law and the quality of the courts that apply and enforce it are key elements in keeping us competitive in today’s global economy.

In 1995, New York blazed a judicial trail when it launched the first commercial court of its kind in the country. But since that time, the number and complexity of cases in the Commercial Division have grown dramatically. Today, the judges of the Commercial Division adjudicate thousands of cases and motions that include some of the most important, complex commercial disputes being litigated anywhere. This is especially true in the wake of the financial crisis. Commercial Division judges regularly decide cutting-edge legal issues and oversee massive discovery involving multiple parties, dozens of depositions and millions of documents. Additionally, a host of other states have followed New York’s lead, creating new commercial courts to attract both business disputes and businesses to their jurisdictions. In 2010, even Delaware, whose Chancery Court remains a leader in the world of corporate law, created in its Superior Court a new Complex Commercial Litigation Division.


FSB Reports Regulatory Reform Is Advancing, But Slowly

The following post comes to us from Heath Tarbert, partner and head of the Financial Regulatory Reform Working Group at Weil, Gotshal & Manges LLP, and is based on a Weil alert by Mr. Tarbert, Sylvia Mayer, and Scott Bowling.

On June 19, 2012, the Financial Stability Board (FSB) issued a progress report to the G20 Leaders on the steps FSB member nations have taken to implement financial reforms designed to improve the stability of the global financial system. The FSB reviewed, among other things, its members’ Basel implementation, adoption of resolution-planning regimes, oversight of the so-called “shadow banking system,” reform of the OTC derivatives market, and the effectiveness of the FSB itself. The FSB concluded that its member nations have made significant progress in implementing globally agreed financial reforms, but large strides are still necessary – particularly regarding recovery and resolution planning – to protect the global economy against future financial crises.

What is the FSB?

The FSB is an informal body of financial regulatory authorities from the G20 nations and the former members of the Financial Stability Forum. It was established in 2009 – in the wake of the 2008 financial crisis – with the intent of improving global financial stability by coordinating the way in which the world’s major economies implement their own financial reforms. At present, the FSB is not an independent legal entity but acts under the auspices of the Bank for International Settlements (BIS), an international organization that assists central banks in promoting financial stability and serves as an international central bank itself. The FSB has no enforcement authority; it derives its legitimacy from the cooperative participation of its member nations. As described below, however, the FSB’s institutional power may be growing: the G20 Leaders recently granted the FSB authority to organize itself as an independent legal entity.


The Pension System and the Rise of Shareholder Primacy

The following post comes to us from Martin Gelter, Associate Professor of Law at Fordham University.

In the paper, The Pension System and the Rise of Shareholder Primacy, which was recently made publicly available on SSRN, I explore the influence of the pension system on corporate governance, particularly shareholder primacy and the relationship between corporations and their employees. Today it is widely accepted among business managers, scholars of corporate law and financial economists that the objective of corporate law and corporate governance should be to promote shareholders wealth (as opposed to a wider community of interests, including employees, creditors, suppliers, customers and local communities). Shareholder capitalism is, however, a relatively recent development. Large, publicly-traded corporations in the middle of the 20th century were characterized by managerial capitalism: managers had taken over the role of entrepreneurs within the firm, and compared to their predecessors they were hardly accountable to owners. Economists sometimes saw this as an advance over previous periods characterized by dominant founders, given that the system seemed more rational and stable. Around 1980, managerial capitalism began to give way to investor capitalism. Hostile takeovers, and later equity-based executive compensation, began to emerge as the new forces creating incentives for managers to focus on share value.


Online Shareholder Participation in Annual Meetings

The following post comes to us from Janice Hester Amey, corporate governance portfolio manager at the California State Teachers’ Retirement System, and Elizabeth Danese Mozley, vice president at Broadridge Financial Solutions. The post is based on a report, available in full here, which was issued by the Best Practices Working Group for Online Shareholder Participation in Annual Meetings.


It is a generally accepted cornerstone of sound corporate governance that shareholder participation is a key component of a successful annual meeting of shareholders. State laws require companies to hold annual meetings of their shareholders to elect directors and act upon other matters properly brought before the meeting. From a governance perspective, the annual meeting often serves as an opportunity for management to update shareholders on company developments, for shareholders to ask questions of management and directors, to consider shareholder proposals and to review the company’s performance.

In recent years, there has been ongoing dialogue regarding best practices, or safeguards, to ensure that annual meetings are accessible, transparent, efficient and meet the corporate governance needs of shareholders, boards and management.

To that end, a group of interested constituencies, comprised of retail and institutional investors, public company representatives, as well as proxy and legal service providers, has been discussing best practices and safeguards for annual shareholder meetings, online shareholder participation in annual shareholder meetings and rules of engagement for such meetings.


SEC Approves FINRA Private Placement 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 by Russell Sacks, Charles Gittleman, and Michael Blankenship.

On June 7, 2012, the US Securities and Exchange Commission (“SEC”) approved FINRA Rule 5123 governing regulation of broker-dealer participation in private placements of securities. The new rule will require member firms to file certain disclosure documents and material amendments to previous disclosure documents with the Financial Industry Regulatory Authority, Inc. (“FINRA”).


On June 7, 2012, the SEC approved FINRA’s proposed Rule 5123 (the “Rule”), which, as adopted, significantly expands the scope of FINRA’s regulation over broker-dealer participation in private placements. [1] Among other things, unless exempt, Rule 5123 imposes a notice filing requirement on member firms participating in a private placement—with FINRA no later than 15 days after the date of first sale. The Rule’s various exemptions effectively limit its applicability to non-institutional private placements. [2]

It should be noted that FINRA has withdrawn an earlier proposal that would have required specific disclosure to each investor to whom the security is sold; that disclosure would have required (a) a description of the anticipated use of offering proceeds, (b) the amount and type of offering expenses, and (c) the amount and type of compensation provided or to be provided to sponsors, finders, consultants, and members and their associated persons in connection with the offering. As a result, the Rule as adopted requires only the filing with FINRA of the disclosure documents described below.


CFTC’s Expanded Jurisdiction Over Swaps May Capture Certain REITs

The following post comes to us from David J. Goldschmidt, partner in the corporate finance department at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden memorandum by Mr. Goldschmidt, Michael K. Hoffman, Maureen A. Donley, and Daniel S. Konar II; the full memo, including footnotes, is available here.

As a result of the pending expansion of the jurisdiction of the Commodity Futures Trading Commission (CFTC) to include most swaps, some publicly traded real estate investment trusts (REITs) may soon be considered “commodity pools” whose directors or trustees would be subject to CFTC regulation as commodity pool operators (CPOs) and whose investment managers could be subject to CFTC regulation as commodity trading advisors (CTAs).

How Can a REIT Be Subject to CFTC Regulation?

In July 2011, the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act) amended the Commodity Exchange Act (CEA) to add swaps to the CFTC’s jurisdiction under a broad statutory definition, which includes many of the products REITs use to hedge their interest rate risks. To give effect to this expanded jurisdiction, Congress enacted an expanded version of the CFTC’s long-standing definition of “commodity pool” so that a commodity pool will include “any investment trust, syndicate, or similar form of enterprise operated for the purpose of trading in commodity interests, including any … swap.” Congress also amended the existing definitions of CPO and CTA to include references to swaps. When considered in conjunction with prior CFTC staff positions, these new definitions of commodity pool, CPO and CTA may well capture many publicly traded mortgage REITs, as well as their operators and investment managers, even if they use only a single swap.


U.K. Announces Proposals Intended to Curb Executive Compensation

The following post comes to us from Jean Mcloughlin, partner in the corporate department at Davis Polk & Wardwell LLP, and is based on a Davis Polk memorandum by Kyoko Lin and Simon Witty.

On June 20, 2012, the U.K. Secretary of State for Business, Innovation and Skills Vince Cable announced a package of proposals following the U.K. government’s publication of a consultation paper in March and a consultation period that ended in April. The proposed measures, intended to curb executive pay, include:

  • a binding shareholder vote on the company’s policy regarding compensation (including “exit payments”) of directors, including executive directors;
  • continuing the annual advisory shareholder vote on how the company’s pay policy was implemented in the previous year;
  • enhanced compensation disclosure, including disclosure of a “single figure” for the total pay that directors received for the previous year; and
  • consultation by the Financial Reporting Council regarding proposed changes to the U.K. Corporate Governance Code, which is applicable to all companies with a Premium Listing of equity shares in the U.K.


CEO Overconfidence and International Merger and Acquisition Activity

The following post comes to us from Stephen Ferris, Professor of Finance at the University of Missouri-Columbia; Narayanan Jayaraman, Professor of Finance at the Georgia Institute of Technology; and Sanjiv Sabherwal, Associate Professor of Finance at the University of Texas at Arlington.

In the paper, CEO Overconfidence and International Merger and Acquisition Activity, forthcoming in the Journal of Financial and Quantitative Analysis, we examine the role that CEO overconfidence plays in an explanation of international mergers and acquisitions during the period 2000-2006. Although the causes and performance of mergers have been extensively examined in the literature, few studies focus on the overconfidence of CEOs and managers as a factor in explaining merger activity. In the few studies that do, virtually none examines the effect that overconfidence might have on international merger and acquisition activities. Indeed, existing studies examine overconfidence in the context of U.S. mergers and ignore its international characteristics. Because managerial overconfidence is shaped in part by national cultures, we expect that the dispersion of overconfidence among CEOs will vary across the globe. As noted by La Porta et al. (1998, 1999, 2000), Stulz and Williamson (2003), Doidge, Karolyi, and Stulz (2007), and Griffin et al. (2009), national culture involves dimensions such as language, religion, and legal heritage. These factors can be expected to influence the extent to which overconfidence affects managerial decision-making. Consequently, national cultures are likely to be important for an understanding of how overconfidence is related to global merger activity.


Deferred Underwriting Compensation in Public Offerings

The following post comes to us from Robert Buckholz, partner and co-coordinator of the Corporate and Finance Group at Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication.

FINRA proposes to amend Rule 5110, the Corporate Financing Rule, to permit a broader range of deferred compensation arrangements between member firms and issuers regarding future public offerings, provided the arrangements meet two significant new requirements. [1] Under the proposal, engagement letters for underwriting and financial advisory services will be permitted to include termination fees and rights of first refusal, but must specify that any future underwriting fees be reasonable or customary and must permit the issuer to terminate these arrangements for cause. As is currently the case, the arrangements also must be limited to two or three years in duration as described below. While the proposal will provide member firms more flexibility to negotiate deferred compensation arrangements with their issuer clients, they should consider the potential impact of the proposed new requirements on their engagement letter practices. Separately, FINRA also proposes to amend Rule 5110 to exempt a broader range of exchange-traded fund (“ETF”) offerings from the filing requirement of the Rule. FINRA has asked for comments on the proposals by July 23, 2012.


OCC Lending Limit Rules

The following post comes to us from Andrea R. Tokheim, special counsel at Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Ms. Tokheim. The full publication, including an appendix comparing the new rules to prior rulemaking, is available here.

On June 20, the Office of the Comptroller of the Currency (“OCC”) issued interim final rules (including both the interim final rule and the preamble, the “Lending Limit Release”) to implement Section 610 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Section 610 expands the statutory definition of “loans and extensions of credit” in the lending limit provisions of the National Bank Act [1] and Home Owners’ Loan Act [2] to include the credit exposure from repurchase and reverse repurchase transactions and securities lending and borrowing transactions (collectively, “securities financing transactions”) and derivative transactions. [3] The Lending Limit Release sets out the procedures and methodologies for calculating the credit exposure for these newly covered transactions. The Lending Limit Release also establishes a single set of lending limit rules applicable to both national banks and federal and state-chartered savings associations. The lending limit rules are effective July 21, 2012, with an exemption until January 1, 2013 for credit exposures from derivatives and securities financing transactions.


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