Yearly Archives: 2013

Questions Surrounding Share Repurchases

Posted by Peter Atkins, Skadden, Arps, Slate, Meagher & Flom LLP, on
Thursday, March 14, 2013
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Peter Atkins is a partner of corporate and securities law matters at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden, Arps memorandum by Phyllis Korff, Michael Zeidel, Stacy Kanter, Michael Schwartz, Donnie Clay, and Yossi Vebman; the full text, including footnotes, is available here.

In recent months, a number of companies have repurchased or announced plans to repurchase their shares. Management and boards of directors overseeing companies with significant cash stockpiles yet finding fewer mechanisms to boost earnings may soon need to decide whether or not a share repurchase is the most productive use of their cash. This post addresses the questions surrounding share repurchases that companies should consider as they evaluate the advantages, disadvantages, legal implications and strategic considerations of share repurchases.

Overview

What are the ways a company can repurchase its shares?

There are four principal ways a company can repurchase its shares, all of which are discussed below:

(1) open market purchases;

(2) issuer tender offers;

(3) privately-negotiated repurchases; and

(4) structural programs, including accelerated share repurchase programs.

Most share repurchases are effected over time through open market purchases. These are often referred to as share repurchase programs or plans.

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SEC Speaks 2013: Waiting for the New Guard

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, March 14, 2013
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The following post comes to us from Jonathan Polkes, co-chair of the Securities Litigation Practice Group, and Christian Bartholomew, partner in the Securities Litigation and Complex Commercial Litigation practices, both at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal alert by Mr. Bartholomew, Christopher Garcia and Jill Baisinger, with the assistance of Erin Yates. The full text, including footnotes, is available here.

To be blunt, this year’s “SEC Speaks” conference in Washington, D.C., sponsored by the Practicing Law Institute, was perhaps most remarkable for what did not happen: Mary Jo White, who is widely expected to be easily confirmed as Chairman of the Commission, did not attend. This was, of course, proper and to be expected, but it nevertheless cast a shadow over the proceedings, since none of the speakers could speak definitively to Ms. White’s and her new team’s regulatory and enforcement priorities. Indeed, given that three of the four SEC division directors who spoke—including the director of the Enforcement Division—are acting directors who may be replaced, it was not surprising that none set out bold or groundbreaking initiatives. Instead, with some important exceptions, this year’s conference largely updated issues that had been covered in 2012.

This is not to say that the conference failed to provide useful information. All four of the sitting commissioners emphasized different issues. Elisse Walter, the current Chairman, emphasized the SEC’s role in developing fair and transparent markets and promoting entrepreneurship, capital growth, and job-building. Luis Aguilar discussed signs of “weakness and instability” in the market’s infrastructure and recommended that the SEC regulate and address these technological issues by, among other things, developing a “kill switch” for each exchange. Troy Paredes (who is expected to leave the Commission this summer) argued that “too much disclosure may actually obscure useful information and result in worse decision-making by investors,” and called for a “top-to-bottom review” of the current disclosure regime. Finally, Daniel Gallagher emphasized the importance of maintaining the SEC’s independence, and strongly questioned whether new legislative mandates (particularly those contained in the Dodd-Frank legislation) and the Financial Stability Oversight Council compromised that independence and minimized the SEC’s effectiveness. Whether the initiatives proposed by Commissioners Aguilar and Paredes come to fruition under Ms. White’s leadership remains to be seen.

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Delaware Court Rules on Reverse Triangular Mergers and Anti-Assignment Provisions

Posted by Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Wednesday, March 13, 2013
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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 alert by David H. Kennedy, Brian M. Gingold, Phil Kenny, Travis P. Davis, and James D. Lee. 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 February 22, 2013, in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. 2013), Vice Chancellor Parsons of the Delaware Court of Chancery ruled that a provision in a license agreement prohibiting an assignment by operation of law did not apply to a reverse triangular merger. This ruling eliminates the uncertainty Vice Chancellor Parsons created in his April 2011 motion to dismiss decision in which he indicated that there may be circumstances where a reverse triangular merger could be considered an assignment by operation of law for purposes of an anti-assignment clause.

Background

On June 22, 2010, the plaintiffs filed a complaint alleging that the acquisition by Roche Diagnostics GmbH, C.A. (“Roche”) of BioVeris Corporation (“BioVeris”) through a reverse triangular merger violated the anti-assignment clause found in a 2003 agreement between the plaintiffs and the predecessor entity to BioVeris, among others. The anti-assignment clause that the plaintiffs alleged was breached stated as follows:

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2012 Board Practices Report

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, March 13, 2013
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The following post comes to us from Maureen Errity, Director, Center for Corporate Governance at Deloitte LLP, and is based on the introduction and key findings of a Deloitte and Society of Corporate Secretaries and Governance Professionals’ report, titled “2012 Board Practices Report;” the full text, including survey results, figures, and appendices, is available here.

The 2012 Board Practices Report (the “Report”) is the eighth edition published by the Society of Corporate Secretaries and Governance Professionals. The Report presents findings from a survey conducted in July and August 2012 of the Society’s membership, which includes 3,000 individuals from more than 1,600 companies of varying sizes, industries, and organizational structures. The questions cover 16 board governance areas, including both established board practices and new trends in board activity.

The Report and its accompanying questionnaire were developed with Deloitte LLP’s Center for Corporate Governance.

Methodology

The survey, administered via an online application, contained a total of 78 questions, not including the sub-questions applicable to questions 16, 17, 19, 37, 50, and 74. A total of 195 individuals participated in the survey, although not all questions were answered by all respondents. In such cases, an “n” value is included with the result. Results from the 2011 Board Practices Report are included where available to show trends in various sections of the Report.

Percentages are based on the number of respondents to a particular question, and in some instances, percentages that should together form a whole may not add up to 100% (e.g., 28% “Yes,” 73% “No”), due to rounding to the nearest whole digit.

Participation in the survey was confidential, and the results provided cannot be attributed to a specific company.

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Who Lives in the C-Suite?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, March 13, 2013
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The following post comes to us from Maria Guadalupe of the Economics and Political Science Department at INSEAD, Hongyi Li of the School of Economics at UNSW, and Julie Wulf of the Strategy Unit at Harvard Business School.

In our paper, Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management, which was recently made publicly available on SSRN, we show that top management structures in large US firms have changed significantly since the mid-1980s. Using panel data on senior management positions, we explore the relationship between changes in the structure of the executive team, firm diversification, and IT investments.

We document significant changes in executive team structure over approximately two decades in Fortune 500 firms, with three-fourths of the doubling in the number of positions reporting directly to the CEO being driven by the increased presence of corporate-level functional managers.

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Plaintiffs’ Lawyers Target “Say-on-Pay” Disclosures in Annual Proxy Statements

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP and Georgetown Law Center, on
Tuesday, March 12, 2013
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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 Abbye Atkinson and Paul J. Collins.

This post addresses an emerging litigation trend that entails a higher degree of litigation risk than in past years. Companies familiar with shareholder litigation in the context of mergers and acquisitions transactions know that virtually all material corporate transactions attract plaintiffs’ lawyers who, suing on behalf of shareholders, allege that proxy materials published ahead of a shareholder vote are, for one reason or another, false or misleading. These plaintiffs’ lawyers typically seek a quick settlement in which the issuer avoids a possible injunction delaying the shareholder vote on the proposed transaction by publishing “corrected” disclosure. In return, the plaintiffs’ lawyers demand a fee for the purported “benefit” to the shareholder class.

This proxy season, there has been an uptick in the number of cases in which plaintiffs’ lawyers assert similar claims in connection with “say-on-pay” proxy disclosures and approval of equity incentive plans. Although many of these cases have been dismissed, or motions for preliminary injunctive relief have been denied by the courts, some issuers are electing to settle such claims to avoid even a remote possibility of a delayed annual shareholder meeting and the burden and expense associated with litigation. Recent press reports highlight this growing trend. [1] We outline below the current trend and several suggested strategies for addressing this new proxy litigation.

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Collateral Consequences of the UBS and RBS LIBOR Settlements

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, March 12, 2013
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The following post comes to us from Paul A. Ferrillo, litigation counsel at Weil, Gotshal & Manges LLP. This post is based on an article by Christopher Garcia, Steven Tyrrell, Jill Baisinger, and Matthew Howatt.

In 2002, Arthur Andersen LLP collapsed in the wake of an obstruction of justice conviction. Since then, conventional wisdom has been that the U.S. Department of Justice (DOJ) resists filing criminal charges against large business entities because of fears of another similar failure. Indeed, the DOJ has consistently acknowledged that it considers such risks, and the U.S. Attorneys’ Manual expressly identifies “collateral consequences” as a factor that should be weighed in making charging decisions. In the wake of the Great Recession, however, the DOJ has been faced with competing pressures, especially with respect to financial institutions. On the one hand, the Lehman Brothers bankruptcy, among other bank failures and near-failures, suggested vulnerability on the part of some financial institutions and illustrated the potentially grave consequences that the collapse of a financial institution can have on the broader economy. The DOJ clearly does not want to cause a financial institution to fail. On the other hand, there is a pervasive public sentiment that large financial institutions were responsible for the economic collapse from which the country is only now emerging. Particularly in recent months, the DOJ has been criticized for its decision not to bring criminal charges against any major financial entity.

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Dealing with the SEC’s Focus on Protecting Whistleblowers

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, March 11, 2013
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The following post comes to us from Lawrence A. West, partner focusing on securities-related enforcement maters at Latham & Watkins LLP, and is based on a Latham & Watkins client alert by Mr. West, William R. Baker, and Eric R. Swibel. The full publication, including footnotes, is available here.

As a public company executive officer or general counsel, how should you deal with a disgruntled employee who is or could be an award-seeking SEC whistleblower?

The short answer is, of course, very carefully. For the longer answer, read on.

The SEC’s Cultivation of Whistleblowers

Corporate managers and the SEC tend to have very different views of employees complaining of possible violations. Corporations frequently have painful experiences with troubled employees who see violations that don’t exist. Although the SEC has had similar internal experiences, when it comes to employees of public companies and financial institutions, the SEC is, in the first instance, inclined to believe the employee and not the company.

The Commission and its enforcement staff are unabashedly enthusiastic about rewarding and protecting individual whistleblowers. Congress did not impose the whistleblower award provisions in the Dodd-Frank Act on the Commission. The Commission asked for those provisions, because it believes that many companies are not adequately policed by themselves or their auditors or attorneys, and will not willingly self-report possible violations of the federal securities laws.

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Alignment of General and Limited Partner Interests in PE Funds

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, March 11, 2013
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The following post comes to us from Martin Steindl, former Senior Corporate Governance Officer for the International Finance Corporation (IFC) based in Cairo and Mumbai and now a Senior Corporate Governance Officer for the Netherlands Development Finance Company (FMO) based in Hague. The author would like to thank Gordon I. Myers, Chief Counsel in IFC’s Technology and Private Equity Legal Department, Tom Rotherham, Associate Director for Hermes Equity Ownership Services, and Meera Narayanaswamy, Senior Investment Officer in IFC’s Private Equity Funds Department, for their comments, guidance, and valuable input throughout the drafting process. The views expressed in this post are those of Mr. Steindl and do not reflect those of FMO, IFC, or Hermes Equity Ownership Services.

There are arguably two broad objectives to the governance of any entity including private equity (PE) funds: i) effective and accountable decision-making and ii) aligning interests of different stakeholders. This article focuses on the second of these objectives describing in more detail the difficulties in aligning interests between a general partner (GP) and a limited partner (LP) in a PE fund.

The governance of PE funds is increasingly coming into the spotlight. The Institutional Limited Partners Association (ILPA) revised its Private Equity Principles in 2011 to establish a set of best practices to govern the relationship between GPs and LPs. Also, the UNEP Finance Initiative for Responsible Investment (UNPRI) issued a second version of its guide for LPs in 2011. There are contributions from the European Private Equity and Venture Capital Association (EVCA), the Australian Private Equity & Venture Capital Association Limited (AVCAL), as well as most recently from the International Corporate Governance Network (ICGN)—all on the same topic.

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Challenges for the SEC’s Independence

Posted by Daniel M. Gallagher, Commissioner, U.S. Securities and Exchange Commission, on
Sunday, March 10, 2013
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Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Gallagher’s remarks at the Practicing Law Institute’s SEC Speaks in 2013 Program, available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

On a number of occasions since returning to the SEC as a Commissioner, I’ve spoken about the Commission’s priorities, both in terms of what the Commission is doing and what it should be doing in order effectively to carry out its mandate to protect investors, ensure fair and efficient markets, and facilitate capital formation. Needless to say, the Commission does not operate in a vacuum, and for various reasons, it’s not always easy to execute those priorities as we see fit. The constant stream of external influences on the Commission’s work serves as a significant impediment to its ability to focus on the core mission, including the vital, basic “blocking and tackling” of securities regulation. Therefore, I’d like to talk about the Commission’s origin and role as an expert, independent agency — as well as the challenges to that independence — in what has become in recent years a difficult environment for independent agencies.

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