Yearly Archives: 2012

U.K. Announces Proposals Intended to Curb Executive Compensation

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, July 18, 2012
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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.

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CEO Overconfidence and International Merger and Acquisition Activity

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, July 18, 2012
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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.

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Deferred Underwriting Compensation in Public Offerings

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, July 18, 2012
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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.

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OCC Lending Limit Rules

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, July 17, 2012
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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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EU Prospectus Directive: Amendment Update

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Tuesday, July 17, 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 Jeffery Roberts, Edward Tran, and Lisa Stevens.

The prospectus regime is being amended throughout Europe and this Alert provides (i) a summary of the key provisions of Directive 2010/73/EU (the “Amending Directive”), which amends the Prospectus Directive 2003/71/EC (the “Prospectus Directive”), and (ii) details of the related recently published delegated amending regulations, which amend the Prospectus Regulation 809/2009 (the “Prospectus Regulation”). Some of these changes have already been implemented in the UK and others will come into force on 1 July 2012.

These changes will modify:

  • when the Prospectus Directive does not apply;
  • when a prospectus which complies with the Prospectus Directive (a “Prospectus”) must be published;
  • requirements in relation to the form and content of a Prospectus; and
  • certain other aspects of Prospectus regulation.

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Compensation Committees and Adviser Independence under Dodd-Frank

Posted by Victor I. Lewkow, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, July 16, 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 Mary Alcock and Helen Skinner.

On June 20, 2012, the U.S. Securities and Exchange Commission (the “SEC”) released its final rules (the “Final Rules”) implementing Section 952 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). Section 952 of the Dodd-Frank Act (“Section 952”) added Section 10C to the Securities Exchange Act of 1934 (the “Exchange Act”) and contains a number of provisions generally relating to the independence of compensation committees and their advisers. The Final Rules are in most respects identical to the proposed rules released on March 30, 2011 (the “Proposed Rules”). [1] Below is a summary of the provisions of the Final Rules, noting the key changes from the Proposed Rules.

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New Basel Disclosure Rules

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, July 16, 2012
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The following post comes to us from Charles Horn and Dwight Smith, partners focusing on bank regulatory matters at Morrison & Foerster LLP, and is based on a Morrison & Foerster memorandum by Mr. Horn and Mr. Smith.

Yesterday, the Basel Committee on Banking Supervision published its Compilation of Capital Disclosure Requirements (“Disclosure Rules”) setting forth a uniform scheme for Basel II banks to disclose the composition of their regulatory capital. These rules are intended to be implemented by national supervisors by June 30, 2013, and affected banks will be expected to comply with all but one of the new requirements for any balance sheet financial statements published after that date. One fully phased-in requirement, a “common disclosure template,” becomes effective on and after January 1, 2018.

In announcing these rules, the Basel Committee noted that the financial crisis revealed the difficulties that market participants and national supervisors had in their efforts to undertake detailed assessments of banks’ capital positions and make cross-jurisdictional comparisons, as a result of “insufficiently detailed disclosure” by banks and a lack of consistency in reporting between banks and across jurisdictions. The Disclosure Rules are intended to address these perceived disclosure deficiencies, and promote uniform and meaningful capital disclosures within and across national jurisdictions.

Basel II banks in the United States can expect future banking agency rulemaking to implement the Disclosure Rules. These rules presumably will be integrated with the disclosure provisions in the new capital and resolution planning regulations. Review of yesterday’s announcement should not be limited to Basel II banks in the United States, however; as with other Basel standards, the Disclosure Rules may lead to new disclosure requirements for a large number of non-Basel II banks in the U.S.

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Managing Agency Problems in Early Shareholder Capitalism

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, July 16, 2012
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The following post comes to us from Paul Ingram, Professor of Business at Columbia University, and Brian Silverman, Professor of Strategic Management at the University of Toronto.

In the paper, Managing Agency Problems in Early Shareholder Capitalism: An Exploration of Liverpool Shipping in the 18th Century, which was recently made publicly available on SSRN, we use historical data on Liverpool transatlantic shipping to examine the effect of equity ownership on top manager behavior. We found that the pattern of equity ownership by captains in the vessels that they piloted was not random. Rather, vessels that were at particular risk of attack by enemy privateers were significantly more likely to have captains who were also part-owners. This is consistent with an agency view of equity ownership. Owners preferred that captains resist privateers fiercely, but it was difficult to construct contractual incentives to elicit such behavior. Partial ownership of the vessel by the captain was one mechanism by which to align captains’ and owners’ incentives regarding the privateer threat, and consequently to elicit desired behavior from captains.

We found that equity ownership was associated with a lower likelihood that a vessel would be captured by privateers. Difference of means tests indicated a statistically significant reduction. Multivariate estimation indicated a stable, negative effect of captain-ownership on the likelihood of being captured by privateers, although the statistical significance of this relation-ship varied across models. Overall, the use of equity ownership by Liverpool vessel owners, and the effect of equity ownership on vessel captains’ behavior, appears to be largely consistent with agency theory’s predictions about the modern use and effect of equity on shareholder and top management behavior.

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SEC Settlement Trends

Posted by Elaine Buckberg, NERA Economic Consulting, on
Sunday, July 15, 2012
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Elaine Buckberg is Senior Vice President at NERA Economic Consulting. This post is based on a NERA publication by Ms. Buckberg and James A. Overdahl; the full publication (including charts and footnotes) is available here.

Trends in the Number of Settlements

The SEC’s promise to hold more individuals accountable was realized in 1H12 in a 20% jump in the number of SEC settlements with individuals. The SEC settled 286 cases with individuals in the first half of this year, putting it on pace for 572 settlements in FY12, which would be the most since 2005. This marks a shift from the end of fiscal 2011, when we reported that the SEC’s promise to hold more individuals accountable was borne out in the value, but not in the number, of settlements with individuals.

Total SEC settlements are also up, but the increase is entirely explained by the rise in settlements with individuals. The SEC settled with 379 defendants in 1H12, putting it on pace for 758 settlements in FY12. This would constitute a 13% increase from the SEC’s 670 settlements in 2011 and would constitute the most annual settlements since 2005. The pace of settlements with companies is down slightly, with 93 settlements, consistent with an annual pace of 186, as compared with 196 in FY11.

The increase in individual settlements is driven primarily by allegations relating to insider trading. The increase from 63 insider trading settlements in FY11 to an annualized number of 120 projected for FY12 accounts for over half of the observed increase in settlements in 2012. The SEC also increased its settlement activity with individuals in matters relating to Ponzi schemes. Settlements with individuals relating to public company misstatements rose to an annualized pace of 78 settlements, up from a low of 60 in 2011, but still well below the 91 settlements in 2010.

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Say on Pay 2012

Posted by Jeremy L. Goldstein, Wachtell, Lipton, Rosen & Katz, on
Saturday, July 14, 2012
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Jeremy Goldstein is a partner at Wachtell, Lipton, Rosen & Katz active in the firm’s Executive Compensation and Benefits practice. This post is based on a Wachtell Lipton firm memorandum by Mr. Goldstein, Michael J. Segal, and Jeannemarie O’Brien.

The following are our observations on the second year of mandatory “say on pay” votes for U.S. public companies under Dodd-Frank thus far this proxy season.

Results of Vote. As of June 25, 2012, of the companies that have reported results for 2012, 54 have failed their say on pay votes. This is an increase from 2011 and there remain a number of companies left to report. Four companies have failed two years in a row. 396 companies in the S&P 500 have reported say on pay results as of June 22, 2012, of which 384 received majority shareholder support (97%). Similar to last year, the mean level of shareholder approval is 89% and the median level of shareholder approval is 95%.

Influence of ISS. The recommendation of ISS continues to have a measurable impact on voting results. ISS has recommended against say on pay proposals at approximately 14% of the S&P 500 companies as of June 22, 2012. Of companies receiving unfavorable vote recommendations from ISS, 21% of those that had reported results as of June 22, 2012 failed to receive majority support. Companies receiving negative ISS recommendations that have nonetheless received majority support have generally done so with considerably lower margins than those receiving a favorable ISS recommendation. According to a recent study by Pay Governance, a negative ISS recommendation results in an average shareholder support level of 65% versus 95% for those receiving a positive ISS recommendation (for S&P 500 companies, the difference in support levels based on such recommendations is 59% versus 94%). According to the same study, this is a 10% increase over last year’s correlation. During the approximately two years of mandatory say on pay proposals under Dodd-Frank, only one company that received a positive ISS recommendation failed to receive majority shareholder support. The median change in voting results following a year-over-year change in ISS recommendation is approximately 27%.

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