Yearly Archives: 2013

A Few Observations in the Private Fund Space

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, April 18, 2013
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The following post comes to us from David W. Blass, chief counsel of the Division of Trading and Markets, U.S. Securities and Exchange Commission, and is based on Mr. Blass’ remarks before the American Bar Association’s Trading and Markets Subcommittee in Washington, D.C., available here. The views expressed in this post are those of Mr. Blass and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

I have had the great pleasure over the last year or so to work with Dana [Fleischman, Chair of the Trading and Markets Subcommittee] and other members of the Trading and Markets Subcommittee and other ABA groups on a number of initiatives surrounding one broad and oftentimes tricky question: when is a person required to register with the SEC as a broker-dealer? Not exactly a prime subject for a TED Talk, but this group knows how vitally important it is to settle some of the questions that have been open for a decade or more about who needs to register with the SEC as a broker-dealer.

I and my staff have already begun talking with you about such perennial hits as placement agents, so-called “finders,” and business or M&A brokers. Most recently, we have had lengthy discussions with various members of this subcommittee about Rule 15a-6, the rule exempting from registration certain non-U.S. resident persons engaged in business as a broker or dealer entirely outside the U.S. These discussions led the staff to publish responses to frequently asked questions about the rule to address some of the issues that you have told us have been a source of confusion. [1] We view the FAQs as an initial set of staff guidance about issues that commonly arise under Rule 15a-6. They do not break new ground, but I believe they are important to ensuring that regulators and market participants are operating under a common understanding of how the rule works. We are very much open to exploring opportunities for additional guidance through subsequent FAQs.

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SEC Issues SOX 402 Guidance

Posted by Michael G. Oxley, Baker & Hostetler LLP, on
Thursday, April 18, 2013
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Michael Oxley is of counsel at Baker & Hostetler LLP, and is former Congressman and Chairman of the House Financial Services Committee. Mr. Oxley co-authored the landmark Sarbanes-Oxley Act of 2002. The following post is based on a BakerHostetler memorandum by Mr. Oxley, Andrew W. Reich, and Thomas S. Gallagher.

The SEC staff for the first time issued interpretive guidance regarding Section 402 of the Sarbanes-Oxley Act of 2002 (SOX). To date, in the absence of authoritative guidance, issuers have largely steered clear of activities arguably within the ambit of SOX 402’s prohibition on personal loans to officers and directors. The staff’s new letter provides a measure of clarity regarding SOX 402’s scope.

SOX 402, codified as Section 13(k) of the Securities Exchange Act of 1934, makes it unlawful for an issuer “directly or indirectly … to extend or maintain credit, to arrange for the extension of credit, or to renew an extension of credit, in the form of a personal loan” to any of its directors or executive officers. Violations of SOX 402 can subject issuers to civil and criminal penalties under Sections 21B and 32(a) of the Exchange Act.

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Judicial Review and Gains of Minority Shareholders in Freeze-Out Transactions

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, April 18, 2013
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The following post comes to us from Fernan Restrepo of Stanford Law School. 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.

Freeze-outs have been subject to different standards of judicial review in Delaware since 2001, when the Delaware Chancery Court, in In re Siliconix Inc. Shareholders Litigation, Civ. A. No. 18700, 2001 WL 716787 (Del. June 19, 2001), introduced a distinction based on the form in which the transaction is executed. In particular, in Siliconix, the chancery court held that, unlike freeze-outs executed as a merger (which have been subject to “entire fairness review” since 1952), freeze-outs executed as a tender offer were exempted from that standard of review. According to the court, tender offers do not warrant entire fairness because, in these transactions, in contrast to a merger, minority shareholders are protected by the decision itself of tendering or not tendering. Moreover, one month after Siliconix, in Glassman v. Unocal Exploration Corporation, 777 A.2d. 242 (Del 2001), the Delaware Supreme Court held that a short-form merger is also excluded from entire fairness review. As a result of these two decisions, a controlling shareholder was allowed to completely avoid entire fairness by acquiring the remaining shares from minority shareholders through a tender offer followed by a short-form merger.

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Dealmaking in a Distressed Environment

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Wednesday, April 17, 2013
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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 the introduction of a Wachtell Litpon publication, titled “Dealmaking in a Distressed

 

The topic of this outline is mergers and acquisitions where the target company is “distressed.” Distress for these purposes generally means that a company is having difficulty dealing with its liabilities—whether in making required payments on borrowed money, obtaining or paying down trade credit, addressing debt covenant breaches, or raising additional debt to address funding needs.

Distressed companies can represent attractive acquisition targets. Their stock and their debt often trade at prices reflecting the difficulties they face, and they may be under pressure to sell assets or securities quickly to raise capital or pay down debt. Accordingly, prospective acquirors may have an opportunity to acquire attractive assets or securities at a discount. This outline considers how best to acquire a distressed company from every possible point of entry, whether that consists of buying existing or newly-issued stock, merging with the target, buying assets, or buying existing debt in the hope that it converts into ownership.

Some modestly distressed companies require a mere “band-aid” (such as a temporary waiver of a financial maintenance covenant when the macroeconomy has led to a temporary decline in earnings, but the company is able to meet all of its obligations as they come due). Others require “major surgery” (as where the company is fundamentally over-levered and must radically reduce debt).

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Sustainability in the Boardroom: A 2013 Update

Posted by Matteo Tonello, The Conference Board, on
Wednesday, April 17, 2013
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Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Dr. Tonello and available here.

In a Director Note recently published, The Conference Board assesses how and to what extent social and environmental issues are integrated into the strategic agenda of the board of directors of U.S. public companies. The report is based on findings from a survey of 359 SEC-registered business corporations conducted by The Conference Board in collaboration with NASDAQ OMX and NYSE Euronext. Data are categorized and analyzed according to 22 industry groups (using their Standard Industrial Classification [SIC] codes), seven annual revenue groups (based on data received from manufacturing and nonfinancial services companies) and five asset value groups (based on data reported by financial companies, which tend to use this type of benchmarking).

The study updates a previous edition of “Sustainability in the Boardroom,” released by The Conference Board in June 2010.

The following are the main findings discussed in the study.

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Fighting on Behalf of Investors Despite Efforts to Weaken Protections

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Tuesday, April 16, 2013
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Editor’s Note: Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the North American Securities Administrators Association’s Annual NASAA/SEC 19(d) Conference; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

This Annual Conference is an important opportunity for representatives of NASAA and the SEC to come together to discuss how best to accomplish our common goal of protecting investors. These annual conferences provide an opportunity to increase collaboration, communication, and cooperation for the benefit of investors, and to promote fair and orderly markets. I have been honored to have served as the SEC’s liaison to NASAA for the past four years. I know and appreciate NASAA’s mission of protecting main street investors and the critical role that state securities regulators play in the enforcement of the securities laws. You are often the first to receive complaints from investors and identify the latest scams devised to steal from investors.

I want to take this opportunity to highlight some of the recent achievements of NASAA’s members. According to the latest statistics, as of October 2012:

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How to Use Social Media for Regulation FD Compliance

Posted by Richard J. Sandler, Davis Polk & Wardwell LLP, on
Tuesday, April 16, 2013
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Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

Regulation FD, adopted by the SEC in 2000, prohibits “selective disclosure” by requiring public companies to disclose material information through broadly accessible channels. Thirteen years ago, this meant EDGAR filings, press releases and quarterly earnings calls.

The SEC recently issued a report of investigation under Section 21(a) of the Securities Exchange Act of 1934 regarding its inquiry into a post by Netflix’s CEO on his personal Facebook page. In the report, the SEC affirmed that a company may use social media to communicate with investors without violating Regulation FD – as long as the company had adequately informed the market that material information would be disclosed in this manner. The report states that whether a company’s social media disclosure satisfies Regulation FD will depend upon the principles outlined in the SEC’s 2008 guidance, Commission Guidance on the Use of Company Web Sites, while recapping that guidance in a way that should make these principles more workable for companies that want to use websites, social media and other evolving communication methods to disclose important information to the market.

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European Commission Proposes Amendments to Premerger Notification Regime

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, April 16, 2013
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The following post comes to us from Franco Castelli, attorney at Wachtell, Lipton, Rosen & Katz focusing on antitrust aspects of U.S. and cross-border mergers, acquisitions, and joint ventures. This post is based on a Wachtell Lipton memorandum by Mr. Castelli.

Last week, the European Commission announced proposed amendments to the notification forms that companies must complete to report mergers subject to antitrust review in the EU, with the stated intention of reducing burdens on filing parties. If adopted, the proposed changes would reduce the amount of information parties must provide in transactions that are unlikely to raise competitive concerns.

The EC proposes to expand the categories of mergers that are eligible for review under a simplified procedure that allows companies to file “short form” notifications with more limited information requirements. Under the proposed changes, the simplified procedure would apply to all mergers that result in the combined firm holding a market share of less than 20% in any market in which both parties are active, up from the current threshold of 15%. In addition, at the EC’s discretion, filing parties would be permitted to use the “short form” when a merger results in a small market share increase, even if the combined firm’s market share exceeds 20%. For vertical mergers, the market share threshold for the simplified procedure would increase from 25% to 30%. The EC estimates that, as a result of these changes, an additional 10% of all reportable mergers could be reviewed under the simplified procedure, with significant benefits—in terms of both time and costs—for companies no longer required to complete the full notification.

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Adoptive Expectations: Rising Sons in Japanese Family Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, April 16, 2013
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The following post comes to us from Vikas Mehrotra, Professor of Finance at the University of Alberta; Randall Morck, Professor of Finance at the University of Alberta; Jungwook Shim of the Faculty of Economics at Kyoto Sangyo University; and Yupana Wiwattanakantang, Associate Professor of Finance at the National University of Singapore.

In our paper, Adoptive Expectations: Rising Sons in Japanese Family Firms, forthcoming in the Journal of Financial Economics, we examine a 40-year postwar panel of listed companies in Japan. In developed economies, inherited control is linked to poor firm performance (Morck, Stangeland, and Yeung, 2000; Smith and Amoako-Adu, 2005; Bertrand and Schoar 2006; Perez-Gonzalez, 2006; Bennedsen, Perez-Gonzalez, and Wolfenzon, 2007). Our panel of nearly all Japanese firms listed from 1949 (when markets reopened after World War II) to 1970, and followed until 2000, reveals inherited control more common than generally thought (Chandler, 1977; Porter, 1990) and heir-run firms performing well. These results are robust, and analysis of succession events shows heir control “causing” good performance.

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Responding to Objections to Shining Light on Corporate Political Spending (3): The Claim that Political Spending is Good for Shareholders

Posted by Lucian Bebchuk, Harvard Law School, and Robert J. Jackson, Jr., Columbia Law School, on
Monday, April 15, 2013
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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. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending, discussed on the Forum here. Bebchuk and Jackson are also co-authors of Corporate Political Speech: Who Decides? and Shining Light on Corporate Political Spending, coming out this month in the Georgetown Law Journal. This post is the third in a series of posts, based on the Shining Light article, in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending; the full series of posts is available here.

The SEC is expected to consider a rulemaking petition requesting that the SEC develop rules requiring that public companies disclose their spending on politics. The petition has received significant support—including nearly half a million comment letters urging the SEC to act as advocated by the petition—but has also attracted opponents. In our article Shining Light on Corporate Political Spending and in this post series, we respond to each of the objections that opponents of the petition have raised.

In our first two posts (available here and here), we explained why opponents’ claims that corporate spending on politics is immaterial to investors, and that disclosure in this area would empower special interest investors, provide no basis for opposing rules requiring public companies to disclose their political spending. In this post, we focus on a third objection that opponents of these rules have raised: the claim that political spending is good for shareholders—and that disclosure will discourage directors and executives from engaging in spending on politics that would be beneficial for investors.

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