Yearly Archives: 2012

“Publicness” in Contemporary Securities Regulation after the JOBS Act

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, August 22, 2012
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The following post comes to us from Donald Langevoort and Robert Thompson, Professor of Law and Professor of Business Law, respectively, at the Georgetown University Law Center.

In our article “Publicness” in Contemporary Securities Regulation after the JOBS Act, forthcoming in the Georgetown Law Journal, we focus on the ideologically-charged question of when a private enterprise should be forced to take on public status, an extraordinarily significant change in its legal obligations and freedom to maneuver. The JOBS Act, which became law in April 2012, makes the first change in almost a half century in the criteria specified for companies that must meet public obligations under the Securities Exchange Act of 1934. Congress increased the “private space” by raising the 500 shareholder threshold to 2000 (so long as no more than 499 of those are not “accredited investors”) and permitting most new IPO companies to skip a host of regulatory obligations during their first five years as a public company.

Yet the reforms were not the product of any coherent theory about the appropriate scope of securities regulation, not just because of the political dimension but because the public-private divide has long been an entirely under-theorized aspect of securities regulation. This is illustrated by the gross inconsistency in how the two main securities statutes—the Securities Exchange Act of 1934 and the Securities Act of 1933—approach this divide Putting aside the voluntary acts of listing on an exchange or making a registered public offering, Section 12(g) of the ’34 Act has, until 2012, simply counted assets and shareholders to determine companies subject to reporting and other obligations under the Act The ’33 Act, by contrast, uses investor wealth and sophistication, i.e., investor qualification.

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“Say on Pay” in the 2012 Proxy Season

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Tuesday, August 21, 2012
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David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal. The views expressed are the authors’ and do not necessarily represent the views of the partners of Wachtell, Lipton, Rosen & Katz or the firm as a whole.

As the 2012 proxy season draws to a close, it is clear that executive compensation issues, particularly “say on pay,” again dominated the headlines. Though by some metrics say on pay was nearly a nonissue — after all, the median level of shareholder approval was around 90 percent, with fewer than 3 percent of U.S. companies experiencing a failed vote [1] — the vote results themselves are merely the tip of the iceberg. Say on pay was a topic of paramount concern to issuers this year and was the basis for a great deal of work both before and during the proxy season. Looking back on the past few months, two primary themes emerge: First, the importance of understanding and responding to the methodology of ISS Proxy Advisory Services (ISS), as its recommendations continue to be highly significant; and second, the importance of direct, frequent communication with shareholders and investment decision makers.

Directors who make compensation decisions that result in a negative ISS recommendation, shareholder disapproval, or other public criticism will wish to consider taking steps to minimize controversy surrounding company compensation practices. And, while, in some cases, shareholders have sued boards on the basis of a negative say on pay vote, directors can be confident that their compensation decisions, when made in good faith and in accordance with their fiduciary duties, are protected by the business judgment rule.

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Private Equity/Public Target Deals: Mid-Year Update

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, August 20, 2012
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The following post comes to us from John Pollack and David Rosewater, partners focusing mergers & acquisitions at Schulte Roth & Zabel LLP. This post is based on the Schulte Roth & Zabel PE Buyer/Public Target M&A Deal Study: 2012 Mid-Year Update, which is available here. Posts about previous versions of the study are available here, here, and here.

The large private equity buyer/public company segment of the U.S. M&A market (all cash deals over $500 million) was significantly affected in the first half of 2012 by troubles in the U.S., European and global economies. Only six trans­actions within our deal parameters were executed. Five of them had key deal terms generally consistent with our prior observations; the remaining transaction, Insight Ven­ture Partners/Quest Software, had certain key deal terms (“go-shop” period, target break-up fee and buyer reverse termination fee) that were outliers. Accordingly, for certain of our observations below, we have expressed the data including and excluding Insight Venture Partners/Quest Software (“Quest Software”). [1]

1. Fewer deals were completed in 1H 2012 and average deal size decreased. The decline in deal activity that began in Q1 2011 continued in 1H 2012. In 1H 2012, deal activity was down 33% compared to 1H 2011, and down 25% compared to 2H 2011. On an annualized basis, deal activity in the segment surveyed decreased 29% in 2012 compared to 2011. Equity values were also lower. For 1H 2012, in the deals within our survey, mean equity value fell 21% when compared to 1H 2011 and 54% when com­pared to 2H 2011. (See Chart 1 below.)

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The Geography of Revlon-Land

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, August 20, 2012
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The following post comes to us from Stephen M. Bainbridge, Professor of Law at the UCLA School of Law. Professor Bainbridge blogs on corporate law and other topics at ProfessorBainbridge.com. 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.

In Revlon, Inc. v. MacAndrews & Forbes Holdings, Inc., [1] the Delaware Supreme Court explained that when a target board of directors enters Revlon-land, the board’s role changes from that of “defenders of the corporate bastion to auctioneers charged with getting the best price for the stockholders at a sale of the company.” [2]

Unfortunately, the Court’s colorful metaphor obfuscated some serious doctrinal problems. What standards of judicial review applied to director conduct outside the borders of Revlon-land? What standard applied to director conduct falling inside Revlon-land’s borders? And when did one enter that mysterious country?

By the mid-1990s, the Delaware Supreme Court had worked out a credible set of answers to those questions. As for the borders of Revlon-land, the Court had explained that:

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The Carlyle Group Tries to Bar Investors From Court

Posted by Mark Lebovitch, Bernstein Litowitz Berger & Grossmann LLP, on
Sunday, August 19, 2012
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Mark Lebovitch is a partner at Bernstein Litowitz Berger & Grossmann LLP specializing in corporate governance litigation. This post is based on an article by Ann M. Lipton, an associate at BLB&G.

As private equity giant Carlyle Group LP prepared to join rivals Blackstone Group LP and KKR & Co. as a publicly traded company this year, it made headlines with a stunningly “shareholder-unfriendly” proposal to eliminate the litigation rights of its future public owners.

On January 10, Carlyle amended its registration statement in advance of its forthcoming initial public offering (“IPO”) to include a provision declaring that any and all investor disputes would be decided in private arbitration proceedings rather than in a court of law.

Although Carlyle ultimately removed the provision after widespread publicity and SEC objections, it is likely only a matter of time before more companies attempt to insert similar provisions in their registration statements and corporate charters. Because class action claims are usually unavailable in arbitrations — Carlyle’s clause explicitly prohibited them — and because arbitration proceedings generally disadvantage individual plaintiffs to the benefit of corporate defendants, if such clauses become widespread, it will take away an important check on corporate conduct and deal a tremendous blow to investor rights.

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Stakeholder Dialogue in Germany, Italy, and the United States

Posted by Matteo Tonello, The Conference Board, on
Saturday, August 18, 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 Lorenzo Patelli, professor at the School of Accountancy of the University of Denver. This Director Note was based on a paper coauthored by Professor Patelli, available here.

Consistent with corporate social responsibility (CSR), firms strive to engage stakeholders through various initiatives aimed at fostering dialogue between managers and external stakeholders. Diverse forms of dialogue and broad involvement are critical to the success of stakeholder dialogue (SD) initiatives. This Director Notes describes the results of an international survey on 249 SD initiatives undertaken by firms in Germany, Italy, and the United States. The survey results highlight the limitation of current SD practices and identify a strong link between the national approach to corporate social responsibility and the firm approach to SD.

Firms seek the involvement of stakeholders in order to maximize the alignment of business activities with the interests of different organizational and social actors. [1] In particular, SD refers to all initiatives undertaken by firms to listen and communicate to stakeholders regarding a vast array of topics. [2] Many researchers have noted the positive effects SD is expected to produce:

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Principles of Corporate Governance 2012

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 17, 2012
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The following post comes to us from Alexander M. Cutler, chairman & CEO of The Eaton Corporation and chair of Business Roundtable’s Corporate Governance Committee. This post is based on the foreword and introduction of a Business Roundtable publication; the full version is available here.

Business Roundtable is recognized as an authoritative voice on matters affecting American business corporations and, as such, has a keen interest in corporate governance. Business Roundtable is an association of chief executive officers of leading U.S. companies with more than $6 trillion in annual revenues and more than 12 million employees. Member companies comprise nearly a third of the total value of the U.S. stock markets and represent nearly a third of all corporate income taxes paid to the federal government. Annually, they return more than $267 billion in dividends to shareholders and the economy. Business Roundtable companies give more than $7 billion a year in combined charitable contributions, representing nearly 60 percent of total corporate giving. They are technology innovation leaders, with $86 billion in annual research and development spending—nearly half of all total private R&D spending in the U.S. Only through sustainable, non-inflationary, long-term economic growth will America’s citizens, communities and companies remain competitive in the rapidly changing international economy. Business Roundtable asserts that to do this, the United States must create policies that foster a flexible and available workforce, sustainable cost structures and fair rules.

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The Anatomy of a Credit Crisis

Posted by Raghuram G. Rajan, University of Chicago Graduate School of Business, on
Friday, August 17, 2012
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Raghuram Rajan is Professor of Finance at the University of Chicago.

How important is the role of credit availability in inflating asset prices? And what are the consequences of past greater credit availability when perceived fundamentals turn? In our recent NBER paper, The Anatomy of a Credit Crisis: The Boom and Bust in Farm Land Prices in the United States in the 1920s, my co-author, Rodney Ramcharan, and I broach answers to these questions by examining the rise (and fall) of farm land prices in the United States in the early twentieth century, attempting to identify the separate effects of changes in fundamentals and changes in the availability of credit on land prices. This period allows us to use the exogenous boom and bust in world commodity prices, inflated by World War I and the Russian Revolution and then unexpectedly deflated by the rapid recovery of European agricultural production, to identify an exogenous shock to local agricultural fundamentals. The ban on interstate banking and the cross-state variation in deposit insurance and ceilings on interest rates are important regulatory features of the time that allow us to identify the effects of credit availability that we incorporate in the empirical strategy.

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Steering Financial Institutions Toward the High Road

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, August 16, 2012
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Editor’s Note: Sarah Bloom Raskin is a member of the Board of Governors of the Federal Reserve System. This post is based on Governor Raskin’s speech at the Graduate School of Banking at Colorado, available here. The views expressed in this post are those of Governor Raskin and do not necessarily reflect those of the Federal Reserve Board, the other Governors, or the Staff.

We’ve all faced business decisions that offer the opportunity to choose between taking the high road and the low road. In the banking industry, the high road offers a way to do business and to succeed over the long term by building enduring relationships; structuring profitable, win-win arrangements; and treating customers and communities as meaningful stakeholders in the bank’s work. But sometimes choosing this high road just doesn’t seem to take us where we want to go fast enough. Suddenly, the low road can seem attractive and tantalizing, and it may offer short-term rewards that can be hard to resist. Taking the low road can be an exhilarating and profitable ride for a while, but it almost always leads to disaster and wreckage, and, when banks are the vehicle, taking the low road can cause significant economic and financial problems. As we’ve experienced over the last several years, when your car is wrecked, it’s a long walk home.

At the Federal Reserve, we are working with our fellow regulators to realign the restraints and incentives–the guard rails and HOV lanes, if you will–of the regulatory system to promote use of the high road and warn bankers off of the low roads where the rocks are falling, the curves are sharp, and many calamitous accidents happen.

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Don’t Discourage Outside Shareholders

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, August 15, 2012
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Editor’s Note: Lucian Bebchuk is a Professor of Law, Economics, and Finance and Director of the Program on Corporate Governance at Harvard Law School.

The New York Times DealBook published today a piece I wrote, titled Don’t Discourage Outside Shareholders. The piece, available here, focuses on the SEC’s ongoing consideration of a rulemaking petition that advocates tightening the rules governing how quickly shareholders must disclose when they hold 5 percent or more of a company’s shares. I argue that such tightening could well unduly discourage the creation and activism of outside blockholders.

In contrast to the claims of the petition’s authors, the proposal should not be viewed as a “technical” closing of a loophole but rather as one that raises significant policy issues. In considering these issues, considerable weight should be given to the significant empirical evidence that the presence and involvement of outside blockholders enhances a company’s value and performance. Furthermore, the rules governing the balance of power between incumbents and outside blockholders are now substantially tilted in favor of insiders — both relative to earlier times and to other countries — rather than outside shareholders. This tilt counsels against tightening SEC rules in ways that would further disadvantage outsiders.

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