Yearly Archives: 2012

Shining Light on Corporate Political Spending

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Tuesday, October 2, 2012
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Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Associate Professor of Law and Milton Handler Fellow at Columbia Law School. This post is based on their forthcoming article, Shining Light on Corporate Political Spending. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending that filed a rulemaking petition concerning political spending, discussed on the Forum here and here. Their earlier work on corporate political spending, Corporate Political Speech: Who Decides?, is discussed on the forum here, here and here.

In our new paper, Shining Light on Corporate Political Spending, we put forward a comprehensive, empirically-grounded case for SEC rules requiring public companies to disclose their political spending. We provide empirical evidence on the need for such rules and respond to the full range of objections that have been raised to mandatory disclosure in this area. The paper, which will be published by the Georgetown Law Journal, is available here.

Our paper systematically develops the case for the position taken in a rulemaking petition that was submitted to the SEC last year by a committee of ten law professors that we co-chaired. The petition has received unprecedented support, including from comment letters submitted to the SEC by more than a quarter of a million individuals. In addition, the petition has drawn supportive commentary from institutional investors, editorials in the New York Times and Bloomberg News, and a substantial number of members of the U.S. Senate and House of Representatives. At the same time, the petition, and the push for SEC disclosure rules in this area, has attracted opponents, including legal academics, prominent members of Congress, and the Wall Street Journal’s editorial page.

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Tying Non-Competes to Sale of Business: California Appellate Court Decision

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Tuesday, October 2, 2012

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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 Jim Alexander, Frederick Brown, Steven J. Johnson, Jason Schwartz and Katherine V.A. Smith.

On August 24, 2012, in the case of Fillpoint, LLC v. Maas, a California appellate court issued an opinion reinforcing both California’s general public policy against covenants not to compete and the important exceptions to that rule. While California Business and Professions Code § 16600 generally declares void any covenant that restrains an individual from engaging in a lawful profession, trade or business, § 16601 provides an exception to this rule for covenants executed in connection with the sale of a business. The Fillpoint case instructs that, to qualify for § 16601’s sale-of-business exception, employers must thoroughly document and tether any non-compete covenant to the sale of a business.

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Canadian Court Addresses Continuing Use of Empty-Voting Tactics

Posted by Adam O. Emmerich, Wachtell Lipton Rosen & Katz, on
Monday, October 1, 2012
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Adam Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz focusing primarily on mergers and acquisitions and securities law matters. This post is based on a Wachtell Lipton firm memorandum by Mr. Emmerich, David A. Katz and Trevor S. Norwitz.

Activist investors continue to aggressively exploit a variety of techniques — including hedging, securities borrowing, total return swaps and other contractual arrangements — to avoid public disclosure of their investments and to obtain governance rights out of proportion with their economic stakes. We have long warned against these abuses, which are not confined to the U.S. market but are truly a global phenomenon. Courts, including the Supreme Court of Delaware, have emphasized that corporate voting rights and economic interests should not be “uncoupled” but should travel together. The SEC is considering regulating the use of derivatives in its “proxy plumbing” initiative, and we have encouraged it to focus on “empty voting” abuses.

A recent case in Canada illustrates the problems with the current system. In TELUS Corp. v. CDS Clearing and Depository Services Inc., a U.S.-based hedge fund, Mason Capital, amassed a voting position of almost 20% in TELUS, a Canadian telecommunications provider with a dual-class capitalization. Mason hedged its entire position by shorting TELUS’s non-voting shares. Although Mason was the company’s largest voting shareholder, it would be unaffected whether TELUS shares increased or decreased in value, but rather stood to profit if the price differential between the voting shares and the non-voting shares widened. Mason used its (empty) voting position to defeat TELUS’s plan to collapse its dual class share structure, and sought to call a shareholder meeting to approve resolutions requiring a minimum premium for any conversion of non-voting shares into voting common, which would be advantageous for Mason, but not necessarily for other shareholders whose economic interests are aligned with their voting rights.

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Efficient Markets and the Law: Predictable Past and Uncertain Future

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, October 1, 2012
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The following post comes to us from Henry T. C. Hu, Allan Shivers Chair in the Law of Banking and Finance at the University of Texas School of Law.

My article, Efficient Markets and the Law: A Predictable Past and an Uncertain Future (forthcoming in the Annual Review of Financial Economics (vol. 4, 2012)), analyzes the diverse situations in which the efficient-market hypothesis (EMH) has influenced — or has failed to influence — federal securities regulation and state corporate law, and the prospective roles for the EMH in both federal and state contexts. In federal securities regulation, the EMH has offered a theoretical construct to accompany the general belief in the value of accurate and complete information that has animated the US Securities and Exchange Commission (SEC) since its creation. Applications of the EMH have generally been straightforward and predictable: For instance, EMH concepts of the market processing of public information helped motivate the streamlining of procedural requirements as to corporate disclosures and, more controversially, as to Rule 10b-5-based securities class actions. In state corporate law, the EMH has helped shape thinking as to takeovers and the corporate objective.

However, the EMH and related learning have failed to properly inform governmental actions to address financial illiteracy. This is troubling as a social matter, especially in an era of increased individual responsibility for retirement well-being, inadequate savings, and highly uncertain financial times.

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Hedge Funds and Risk-Decoupling — The Empty Voting Problem in the EU

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, September 30, 2012
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The following post comes to us from Wolf-Georg Ringe, Professor of International Commercial Law at Copenhagen Business School.

In my paper, Hedge Funds and Risk-Decoupling — The Empty Voting Problem in the European Union, I address the implications of negative risk-decoupling, otherwise known as empty voting, for corporate governance and corporate finance, and I develop suggestions for a regulatory response. These suggestions are framed for the European context, but the underlying policy considerations may prove useful for other regulators worldwide, including the SEC.

Empty voting is a popular strategy amongst hedge funds and other activist investors. In short, it is the attempt to decouple the economic risk from the share’s ownership position, retaining in particular the voting right without risk. This paper uses three perspectives to analyze the problems created by such negative risk-decoupling: an agency costs approach, an analysis of information costs, and a perspective from corporate finance. It shows how risk-decoupling is a type of market behavior that creates significant costs for market participants, in particular existing shareholders and potential investors. Risk-decoupling strategies create both agency and information costs for investors. Furthermore, they generate challenges for traditional categories of corporate finance, aiming to extract the “best of both worlds”, debt and equity.

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Breaking Up the Big Banks: Is Anybody Thinking?

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Saturday, September 29, 2012
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Editor’s Note: Peter J. Wallison is a senior fellow at the American Enterprise Institute. This post is based on an article by Mr. Wallison; the full article, including footnotes, is available here.

Breaking up the biggest banks is said to have growing support in Congress, but the idea’s supporters—even those who are respected commentators—do not appear to have given it any deep thought. Without any serious discussion, it should come as no surprise that the idea has bipartisan support among the American people. But Martin Baily of Brookings, always levelheaded in his judgments, calls it “nuts.”

Obviously, for the United States to break up its largest banks would be a very consequential step with significant implications for our economy and financial system. Before proceeding, we should have a reasoned debate on the costs and benefits. Instead, what we have had thus far is a surprising chorus of commentators calling for breaking up the banks without seeming to give any attention to the most elementary issues such a step would entail.

This article will lay out some of those issues. These are not technical matters; they are the simple, first-order questions that ought to occur immediately to anyone who supports the idea of breaking up the largest banks—and they have been largely ignored. Ultimately, this is a depressing commentary on how our discourse on important matters of financial regulation and financial structure has descended—in this era of 24/7 media and instant reaction—to the level of slogans and bumper-strip opinionating.

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Ten Myths of “Say on Pay”

Posted by David F. Larcker, Stanford Graduate School of Business, on
Friday, September 28, 2012
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David Larcker is the James Irvin Miller Professor of Accounting at Stanford University.

In the paper, Ten Myths of “Say on Pay”, my co-authors (Allan McCall, Gaizka Ormazabal, and Brian Tayan) and I review many widely held misconceptions regarding the shareholder voting practice called “say on pay.” “Say on pay” is a prominent issue today, given its unique position at the intersection of executive compensation and shareholder democracy—two topics which themselves are of deep interest to investors, stakeholder, regulators, and the media. Despite this interest, several misconceptions have developed which continue to be commonly accepted. Fortunately, academics have devoted considerable effort studying “say on pay,” shareholder democracy, and executive compensation. As a result, a lengthy empirical record exists against which “say on pay” can be examined. Our intention is to review “say on pay” in light of the scientific evidence so that practitioners have a better understanding of the limits and consequences of granting shareholders the right to vote on executive compensation.

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A Better Alternative to Basel Capital Rules

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Friday, September 28, 2012
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Editor’s Note: The following post comes to us from Thomas M. Hoenig, director of the Federal Deposit Insurance Corporation. This post is based on Director Hoenig’s remarks at the American Banker Regulatory Symposium, available here.

Introduction

I have been involved in central banking and financial supervision my entire career. I understand the importance of having the right market conditions and regulatory framework for an economic system to thrive. And most certainly I know that the foundation of a strong financial system is strong capital. For these reasons I wish to add my perspective on the discussion regarding Basel III. After reading the entire 1,000-plus page proposal, I would encourage the Basel Committee and the international regulatory community to step back and rethink the Basel capital standards.

It may be helpful here to recall how Basel has evolved. Following the implementation of Basel I, many in economics and finance and many of the world’s largest banks wanted a more sophisticated and flexible risk-based capital standard. The U.S. chaired the Basel II Committee then and with others agreed that such change was necessary for the largest firms to remain globally competitive. Basel II and III were also given the task of satisfying various national interests, adding more complexity. As a result, the number of Basel risk weights evolved from five to thousands.

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The Rise of the General Counsel

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, September 27, 2012
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in the Harvard Business Review online.

In a special New York Times section on business and law, Andrew Ross Sorkin opines: “As regulations change and the threat of litigation rises, the importance of lawyers has never been greater.” He, and writers in the rest of the section, then go on to talk about the downward pressures on private law firms to sustain profits per partner and the burgeoning crisis in private practice, symbolized by the collapse of Dewey & LaBoeuf and the exodus of young associates.

But from a business person’s point of view, Sorkin and other writers in the section don’t even discuss one of the most important developments of the last 25 years: the rise in the role, status and importance of the general counsel and other inside lawyers employed directly by the corporation. The following two critical trends for major companies in the U.S. — and increasingly in Europe and Asia — are not mentioned:

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Delaware Supreme Court Rules on Excess Insurer’s Coverage Obligations

Posted by Warren Stern, Wachtell, Lipton, Rosen & Katz, on
Thursday, September 27, 2012
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Warren Stern is Of Counsel at Wachtell, Lipton, Rosen & Katz, where he concentrates on corporate and securities litigation. This post is based on a Wachtell Lipton memorandum by Mr. Stern, Martin J.E. Arms and Caitlin A. Donovan. 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 September 7, 2012, the Supreme Court of Delaware, applying California law, ruled that an excess insurer of Intel had no payment obligation even after Intel’s out-of-pocket defense costs, combined with Intel’s prior settlement with an underlying insurer, exceeded the underlying insurer’s policy limits — notwithstanding a provision in the excess insurer’s policy providing that coverage would apply when “the insured or the insured’s underlying insurance has paid or is obligated to pay the full amount” of the underlying insurer’s policy limits. Intel Corp. v. Am. Guar. & Liab. Ins. Co., et al., No. 692, 2011 (Del. Sept. 7, 2012).

This dispute arose from antitrust litigation that was brought against Intel and for which Intel sought reimbursement for defense costs from its insurers. A small primary policy was quickly exhausted and Intel then entered into coverage litigation with XL, its first excess insurer, that was ultimately settled for $27.5 million of XL’s $50 million policy limits. Having incurred significantly more than $50 million in defense costs, Intel then turned to its second excess insurer, American Guarantee & Liability Insurance Company (“AGLI”), for reimbursements for defense costs in excess of XL’s policy limits. AGLI refused coverage and litigation followed.

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