Yearly Archives: 2012

From the Shareholders’ Spring to the Autumn of Activism

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Tuesday, August 28, 2012
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John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert by Selina S. Sagayam; the full version, including footnotes, is available here.

This alert discusses some of the recent regulatory developments and debate in the UK and at EU level which may have an impact on institutional investors (asset managers and asset owners) and public companies and takes a look at some examples of investor activism in these jurisdictions.

I. Shareholder Spring — Recent Examples of Activism

The UK press has had a field day over the past 12 months with news of shareholder challenges or activism. In the run up to the AGM season in the spring, barely a day went by without report of shareholders flexing their muscles by taking on the boards of listed companies — the discussions and debates which typically had gone on behind closed boardroom doors had escaped into the public arena.

The issues that boards have been called up on have varied from corporate governance (with a particular focus on the highly emotive board remuneration issues), to influencing corporate events (acquisitions, disposals, takeovers) to more fundamental challenges on corporate and business strategy with a view to unlocking value for shareholders.

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Mid-Year Securities Litigation Update

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, August 27, 2012
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The following post comes to us from Robert F. Serio, head partner in the New York office of Gibson, Dunn & Crutcher and co-chair of the Securities Litigation Practice Group. This post is based on a Gibson Dunn client alert, available here.

The first half of 2012 has not seen the series of landmark Supreme Court decisions that were handed down in 2011, but it has been a significant period as lower courts apply these decisions in different areas and in a number of different contexts. And the Supreme Court did decide one case–Credit Suisse Securities (USA) LLC v. Simmonds, 132 S. Ct. 1414 (2012)–relating to the statute of limitations under Section 16 of the Securities and Exchange Act of 1934, and granted review in two other cases–Amgen, Inc. v. Connecticut Retirement Plans & Trust Funds and Comcast Corp. v. Behrend–that are likely to result in watershed rulings on the issue of class certification in securities class actions.

Securities litigation filing trends remain generally steady in the face of these developments, with securities class action filings increasing only slightly in the first half of 2012, and the filings against particular sectors staying roughly similar to last year, with filings against financial industry companies at their lowest level since 2008. One particularly noteworthy development is that not a single securities class action filing thus far in 2012 has named an accounting firm as a defendant, possibly as a result of the Supreme Court’s rejection of aiding and abetting liability under the securities laws, emphatically reinforced last year in Janus Capital Group Inc. v. First Derivative Traders, 131 S. Ct. 2296 (2012) (in which Gibson Dunn represented Janus).

Some of the most significant case law and legislative developments in the first half of 2012 are summarized below.

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Financial Regulation in General Equilibrium

Posted by Anil K. Kashya, University of Chicago, on
Monday, August 27, 2012
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Anil K. Kashyap is the Edward Eagle Brown Professor of Economics and Finance at the University of Chicago Booth School of Business.

In our recent NBER working paper, Financial Regulation in General Equilibrium, my co-authors (Charles Goodhart of the London School of Economics, Dimitrios P. Tsomocos of the University of Oxford, and Alexandros Vardoulakis of the Banque de France) and I explore how different types of financial regulation could combat many of the phenomena that were observed in the financial crisis of 2007 to 2009. The primary contribution is the introduction of a model that includes both a banking system and a “shadow banking system” that each help households finance their expenditures. Households sometimes choose to default on their loans, and when they do this triggers forced selling by the shadow banks. Because the forced selling comes when net worth of potential buyers is low, the ensuing price dynamics can be described as a fire sale. The presence of the banking and shadow banking system, and the possibility that their interaction can create fire sales distinguishes our analysis from previous studies.

The model builds on past work by Tsomocos (2003) and Goodhart, Tsomocos and Vardoulakis (2010) and uses many of the same ingredients as their general equilibrium model. In particular, the model includes two periods and allows for heterogeneous agents who borrow and lend to each other through financial intermediaries. When the borrowers default, the intermediaries suffer losses and tighten lending standards to future borrowers. Thus, the model also includes a possible credit crunch.

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Dispute Resolution for Earnouts and Purchase Price Adjustments

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on
Sunday, August 26, 2012
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Daniel Wolf is a partner at Kirkland & Ellis LLP focusing on mergers and acquisitions. This post is based on a Kirkland & Ellis M&A Update by Mr. Wolf. 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.

We have written before of certain pitfalls that await dealmakers utilizing earnouts and purchase price adjustments. An oft-shared aspect of those two deal provisions was the subject of a recent Delaware decision by Chancellor Strine — the employment of an independent accountant to resolve post-closing disputes between the parties. The outcome, while hardly surprising, offers some timely reminders of some of the hazards presented by this popular dispute resolution mechanism.

The case arose from Viacom’s 2006 purchase of Harmonix, the maker of the Guitar Hero and Rock Band video games. A substantial portion of the consideration was in the form of a contingent earnout based on a multiple of “gross profit” for the acquired business for the two years following closing. Following a dispute relating to the 2008 earnout, the parties, per the merger agreement, submitted the disagreement to an independent accountant for review. The accountant decided in favor of the sellers awarding them $239 million, and Viacom sought court review of the decision. Chancellor Strine’s opinion largely focused on two key issues:

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Derivatives Rules under the Dodd-Frank Act Affecting End-Users

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, August 25, 2012
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The following post comes to us from John White, partner in the Corporate Department and co-chair of the Corporate Governance and Board Advisory practice at Cravath, Swaine & Moore LLP. This post is based on a Cravath memorandum; the full version, including footnotes, is available here.

Background — The Dodd-Frank Act

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”) provides for new Federal regulation of the swaps market, and, when fully implemented, is expected to make fundamental changes in the way the swaps market operates. Title VII seeks to reduce systemic risk, increase transparency and improve efficiency in the swaps market by requiring centralized clearing and exchange trading of swaps as well as real-time and regulatory reporting of swap transactions. Under the Dodd-Frank Act, the Commodity Futures Trading Commission (the “CFTC”) will regulate most swaps on interest rates, commodities and currencies and the Securities and Exchange Commission (the “SEC,” together with the CFTC, the “Commissions”) will regulate swaps, including equity and credit default swaps, on single securities and narrow-based securities indices. The term “swap” is defined broadly in the Dodd-Frank Act, and includes certain foreign exchange transactions, such as non-deliverable foreign currency forwards, that may not be characterized as swaps for other purposes.

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Insider Trading via the Corporation

Posted by Jesse Fried, Harvard Law School, on
Friday, August 24, 2012
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Jesse Fried is a Professor of Law at Harvard Law School.

My paper, Insider Trading via the Corporation, recently posted on SSRN, critically examines the regulations applicable to U.S. firms trading in their own shares and puts forward a proposal for reform.

Publicly-traded U.S. firms buy and sell a staggering amount of their own shares in the open market each year. Open-market repurchases (“OMRs”) alone total hundreds of billions of dollars per year; in 2007, they reached $1 trillion. Firms are also increasingly selling shares in the open market through so-called “at-the-market” issuances (“ATMs”).

When a U.S. firm trades in its own shares, its trade-disclosure requirements are minimal. The firm must report only aggregate trading activity, and not until well into the following quarter. Thus, the firm can secretly buy and sell its own shares in the open market for several months, and never disclose the exact details of its trades to shareholders and regulators. The lack of detailed disclosure, I explain, makes it difficult to detect illegal trading on material inside information; the lack of timely disclosure makes it difficult for investors to determine when the firm is trading on valuable but sub-material information.

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Aider and Abettor Liability Standards in SEC Civil Enforcement Actions

Posted by Victor I. Lewkow, Cleary Gottlieb Steen & Hamilton LLP, on
Friday, August 24, 2012
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Victor Lewkow is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Lewis Liman.

On August 8, 2012, the Second Circuit issued an important decision in Securities and Exchange Commission v. Apuzzo, 2012 WL 3194303, clarifying the test the SEC must meet to establish aiding and abetting liability for a securities law violation. There previously had been uncertainty in the Second Circuit whether the SEC must prove that the aider and abettor proximately caused the harm on which the primary violation was based. In Apuzzo, the Second Circuit made clear that “proximate cause” was not an element of the aiding and abetting violation and that, to charge someone with aiding and abetting, the SEC need allege and prove only that the aider and abettor associated himself with the venture in some way, participated in the venture as in something he wished to bring about, and sought by his action to make the venture succeed. The Court of Appeals also stated that proof of a high degree of knowledge of a primary violation may lessen the SEC’s burden in proving substantial assistance.

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Massachusetts Pension Reserves Investment Management Board and the Shareholder Rights Project Collaborate

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, August 23, 2012
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Editor’s Note: Professor Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), and Scott Hirst is the SRP’s Associate Director. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University.

In a joint media release, available here, the SRP and the Massachusetts Pension Reserves Investment Management Board (PRIM) recently announced their collaboration to encourage a significant number of public companies to consider moving to annual elections.

PRIM is charged with the general supervision of the Pension Reserves Investment Trust (PRIT) Fund, with pension assets exceeding $49 billion. PRIM, on behalf of the PRIT Fund, has submitted shareholder declassification proposals for 2012 and 2013 annual meetings to twenty companies with staggered boards, and the SRP is representing and advising PRIM and the PRIT Fund in connection with these proposals. The proposals urge a repeal of the companies’ classified board structures and a move to annual elections, which are widely viewed as corporate governance best practice.

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Strategic Risk Management: A Primer for Directors

Posted by Matteo Tonello, The Conference Board, on
Thursday, August 23, 2012
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Matteo Tonello is managing director of corporate leadership at the Conference Board. This post is based on an issue of the Conference Board’s Director Notes series by Mark L. Frigo and Richard J. Anderson, director and professor of strategic risk management, respectively, at DePaul University. This Director Note was based on a book authored by Dr. Frigo and Mr. Anderson, available here.

As noted by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), “In the aftermath of the financial crisis, executives and their boards realize that ad hoc risk management is no longer tolerable and that current processes may be inadequate in today’s rapidly evolving business world.” [1] However, especially for nonfinancial companies that may be relatively new to these topics, enhancing risk management can be a somewhat daunting task.

This article focuses on two key aspects of the relationship between risk and strategy: (1) understanding the organization’s strategic risks and the related risk management processes, and (2) understanding how risk is considered and embedded in the organization’s strategy setting and performance measurement processes. These two areas not only deserve the attention of boards, but also fit closely with one of the primary responsibilities of the board — risk oversight.

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Do Courts Count Cammer Factors?

Posted by Elaine Buckberg, NERA Economic Consulting, on
Thursday, August 23, 2012
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Elaine Buckberg is Senior Vice President at NERA Economic Consulting. This post is based on a NERA publication by Dr. David Tabak, available here.

One of the key stages in many securities class actions is class certification. The most common path for plaintiffs to obtain certification includes showing that the market in which the securities at issue traded was efficient, leading to what, in 1988, the Supreme Court in Basic v. Levinson termed a “rebuttable presumption” of reliance common to all class members.

The following year, the court in Cammer v. Bloom listed five factors that would help establish that a security traded in an efficient market. Since then, dozens of courts have relied on these “Cammer factors” in evaluating market efficiency. The rulings do not state, however, how the court reached an overall opinion on market efficiency when different factors point in different directions. To help shed light on this issue, we have examined identifiable cases from 2002 through 2011 in which a court ruled on market efficiency after reviewing some or all of the Cammer factors.

Our review of the data yields a perhaps remarkable conclusion: in over 98 percent of the cases, the ultimate ruling on efficiency can be predicted by the number of factors that the court found favored efficiency less the number of factors that the court said argued against efficiency. When this figure was positive, the court found the security at issue to have traded in an efficient market in all but one instance, while when the figure was zero, the court always found the security to have traded in an inefficient market. Moreover, just limiting the analysis to a review of three Cammer factors (turnover, analysts, and market makers) yields similar results.

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