Yearly Archives: 2013

Don’t Cry for Argentine Bondholders

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 27, 2013
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The following post comes to us from Antonia E. Stolper, head of the Capital Markets-Americas group and the Latin America affinity group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication by Ms. Stolper, Henry Weisburg, Stephen J. Marzen, and Patrick Clancy.

An update on the final round of appellate filings in the NML v. Argentina appeal.

On January 25, briefs were filed with the Second Circuit on behalf of two groups of plaintiff-appellees in the appeal from District Court Judge Griesa’s November 21 injunction, NML and Aurelius. And on February 1, four sets of reply briefs were filed, on behalf of appellants Argentina, Bank of New York Mellon (BNY Mellon), the Exchange Bondholders Group, and Fintech Advisory. Under the schedule set by the Second Circuit, briefing is now concluded, and the next major event will be oral argument before the Second Circuit on February 27.

Copies of all of these papers can be found on our Argentine Sovereign Debt webpage, at http://www.shearman.com/argentine-sovereign-debt/. Our summary of the prior briefing on this appeal can also be found there.

We summarize below the major points made in each of these six briefs, followed by our compilation of the major issues cutting across the virtual mountain of briefing confronting the three-judge panel that will decide this case.

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Bite the Apple; Poison the Apple; Paralyze the Company; Wreck the Economy

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Tuesday, February 26, 2013
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The activist-hedge-fund attack on Apple—in which one of the most successful, long-term-visionary companies of all time is being told by a money manager that Apple is doing things all wrong and should focus on short-term return of cash—is a clarion call for effective action to deal with the misuse of shareholder power. Institutional investors on average own more than 70% of the shares of the major public companies. Their voting power is being harnessed by a gaggle of activist hedge funds who troll through SEC filings looking for opportunities to demand a change in a company’s strategy or portfolio that will create a short-term profit without regard to the impact on the company’s long-term prospects. These self-seeking activists are aided and abetted by Harvard Law School Professor Lucian Bebchuk who leads a cohort of academics who have embraced the concept of “shareholder democracy” and close their eyes to the real-world effect of shareholder power, harnessed to activists seeking a quick profit, on a targeted company and the company’s employees and other stakeholders. They ignore the fact that it is the stakeholders and investors with a long-term perspective who are the true beneficiaries of most of the funds managed by institutional investors. Although essentially ignored by Professor Bebchuk, there is growing recognition of the fiduciary duties of institutional investors not to seek short-term profits at the expense of the pensioners and employees who are the beneficiaries of the pension and welfare plans and the owners of shares in the managed funds. In a series of brilliant speeches and articles, the problem of short-termism has been laid bare by Chancellor Leo E. Strine, Jr. of the Delaware Court of Chancery, e.g., One Fundamental Corporate Governance Question We Face: Can Corporations Be Managed for the Long Term Unless Their Powerful Electorates Also Act and Think Long Term?, and is the subject of a continuing Aspen Institute program, Overcoming Short-Termism.

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The 2013 Director Compensation and Board Practices Report

Posted by Matteo Tonello, The Conference Board, on
Tuesday, February 26, 2013
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Matteo Tonello is managing director of corporate leadership at the Conference Board. This post relates to a study of U.S. public company board practices led by Dr. Tonello; Frank Hatheway, Chief Economist at NASDAQ OMX, and Scott Cutler, Executive Vice President, Co-Head US Listings & Cash Execution, NYSE Euronext. For details regarding how to obtain a copy, contact matteo.tonello@conference-board.org.

The Conference Board, NASDAQ OMX and NYSE Euronext jointly released the 2013 edition of Director Compensation and Board Practices, a benchmarking study with more than 150 corporate governance data points searchable by company size (measurable by revenue and asset value) and 20 industrial sectors.

The report is based on a survey of public companies registered with the U.S. Securities and Exchange Commission. The Harvard Law School Forum on Corporate Governance and Financial Regulation, Stanford University’s Rock Center for Corporate Governance, the National Investor Relations Institute (NIRI), the Shareholder Forum and Compliance Week also endorsed the survey by distributing it to their members and readers.

The following are the major findings from the 2013 edition of the study:

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FDIC’s Progress on Wall Street Reform

Posted by Martin J. Gruenberg, Chairman, Federal Deposit Insurance Corporation, on
Monday, February 25, 2013
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Martin J. Gruenberg is chairman of the Federal Deposit Insurance Corporation. This post is based on Chairman Gruenberg’s testimony before the U.S. Senate Committee on Banking, Housing, and Urban Affairs, available here.

The economic dislocations experienced in recent years, which far exceeded any since the 1930s, were the direct result of the financial crisis of 2007-08. The reforms enacted by Congress in the Dodd-Frank Act were aimed at addressing the causes of the crisis. The reforms included changes to the FDIC’s deposit insurance program, a series of measures to curb excessive risk-taking at large, complex banks and non-bank financial companies and a mechanism for orderly resolution of large, nonbank financial companies.

The regulatory changes mandated by the Dodd-Frank Act require careful implementation to ensure they address the risks posed by the largest, most complex institutions while being sensitive to the impact on community banks that did not contribute significantly to the crisis. As implementation moves forward, the FDIC has been engaged as well in an extensive effort to better understand the forces driving long-term change among U.S. community banks and to solicit input from community bankers on these trends and on the regulatory process.

My testimony will address the impact of the Dodd-Frank Act on the restoration of the Deposit Insurance Fund (DIF), our efforts to carry out the requirement of the Act to develop the ability to resolve large, systemic financial institutions, and our progress on some of the key rulemakings. In addition, I will briefly discuss the results of our recent community banking initiative.

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Firms, Countries, and Quality of Corporate Governance in Developing Countries

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, February 25, 2013
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The following post comes to us from Andrea Hugill and Jordan Siegel, both of the Strategy Unit at Harvard Business School.

Variation in firms’ corporate governance is an important topic of debate in the governance literature. One of the main questions is whether weak and/or incomplete public institutions in emerging economies dictate the governance quality of local firms. The most recent scholarship on the subject has generally argued that country characteristics strongly predict governance (Krishnamurti, Sevic, and Sevic (2006)). Doidge, Karolyi, and Stulz (2007) find that country variables explain 39-73% of governance variance while firms explain only 4-22%. Moreover, they argue that firm characteristics explain almost none of the governance variation in “less-developed countries.” In our paper, Which Does More to Determine the Quality of Corporate Governance in Emerging Economies, Firms or Countries?, which was recently made publicly available on SSRN, we offer a new understanding of firm and country characteristics’ contribution to emerging economies’ governance.

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Proxy Voting Analytics (2008-2012)

Posted by Matteo Tonello, The Conference Board, on
Sunday, February 24, 2013
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Matteo Tonello is managing director of corporate leadership at the Conference Board. This post relates to a report released jointly by The Conference Board and FactSet and authored by Dr. Tonello, Melissa Aguilar, and Thomas Singer of the Conference Board. For details regarding how to obtain a copy, contact matteo.tonello@conference-board.org.

The effects of say on pay on shareholder engagement, the introduction of proxy access proposals, and the resurgence of board declassification resolutions were the principal themes of the last proxy season and are expected to continue to take center stage in 2013, according to a report issued today by The Conference Board in collaboration with FactSet Research Systems Inc.

Proxy Voting Analytics (2008-2012) analyzes data on voting by shareholders of U.S. companies that held their annual general meetings (AGMs) in the January 1-June 30 period during the last five years. Aggregate data on shareholder proposals, management proposals, and proxy contests is examined and segmented based on market index (whether the Russell 3000 or the S&P 500) and 20 business industry groups.

The report is supplemented with an appendix offering detailed recommendations from Conference Board experts for companies facing situations of shareholder activism.

Data analyzed in the report includes:

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Independent Director Duties of Delaware Corporations with Foreign Operations

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, February 23, 2013
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The following post comes to us from Tariq Mundiya, partner in the litigation department of Willkie Farr & Gallagher LLP, and is based on a Willkie client memorandum by Mr. Mundiya. 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 6, 2013, Chancellor Strine of the Delaware Chancery Court issued a bench ruling addressing the duty of independent directors of a Delaware corporation with significant operations or assets outside the United States. In re Puda Coal, Inc. Stockholders Litigation, C.A. No. 6476-CS (Del. Ch. Feb. 6, 2013). In a short but important bench ruling, Chancellor Strine refused to dismiss a breach of fiduciary duty claim against independent directors of a Delaware corporation who had failed to discover the unauthorized sale of assets located in China by the company’s chairman. Importantly, Chancellor Strine’s remarks implicated the duty of loyalty, which creates a risk of personal liability for directors and, potentially, the absence of corporate indemnification. While the facts in the case were somewhat extreme, the ruling in Puda Coal highlights the risks and challenges that may exist for directors of Delaware corporations with significant foreign assets or operations. Although Chancellor Strine recognized that each situation is undoubtedly dependent on its facts and will turn on the nature of the foreign operations, his ruling did include the following remarks:

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Crown Jewels — Restoring the Luster to Creative Deal Lock-ups?

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on
Friday, February 22, 2013

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Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, David B. Feirstein and Joshua M. Zachariah.

The “crown jewel” lock-up, a staple of high-stakes dealmaking technology in the 1980s M&A boom, has been showing some signs of life in the contemporary deal landscape, albeit often in creative new forms. As traditionally conceived, a crown jewel lock-up is an agreement entered into between the target and buyer that gives the buyer an option to acquire key assets of the target (its “crown jewels”) separate and apart from the merger itself. In the event that the merger fails to close, including as a result of a topping bid, the original buyer retains the option to acquire those assets. By agreeing to sell some of the most valuable pieces of the target business to the initial buyer, the traditional crown jewel lock-up can serve as a significant deterrent to competing bidders and, in some circumstances, a poison pill of sorts.

Given the potentially preclusive nature of traditional crown jewel lock-ups, it is not surprising that they did not fare well when challenged in the Delaware courts in the late 1980s. As the Supreme Court opined in the seminal Revlon case, “[W]hile those lock-ups which draw bidders into a battle benefit shareholders, similar measures which end an active auction and foreclose further bidding operate to the shareholders detriment.” Building on the holding in Revlon, the court in Macmillan said that “Even if the lockup is permissible, when it involves ‘crown jewel’ assets careful board scrutiny attends the decision. When the intended effect is to end an active auction, at the very least the independent members of the board must attempt to negotiate alternative bids before granting such a significant concession.” Although crown jewel lock-ups fell out of favor following these rulings, modern and modified versions of the traditional crown jewel lock-up have been finding their way back into the dealmakers’ toolkit.

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Multi-Forum Merger Litigation and the “Market for Preclusion”

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 22, 2013
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The following post comes to us from Sean J. Griffith, T.J. Maloney Chair in Business Law at Fordham University School of Law. 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.

The recent discovery that corporate law litigation very often takes place in courts outside of Delaware has rattled the academic consensus that Delaware won the corporate law “race” by providing a well-managed forum staffed with expert judges willing to decide complex deal cases quickly. In an apparent affront to this settled understanding, recent research shows that more cases are filed against Delaware corporations in other states than in Delaware itself. [1] As a forum for corporate litigation, in other words, Delaware no longer dominates.

Shaken from their settled understandings, commentators have sounded the alarm that fewer cases decided in Delaware could, over time, reduce the expertise of the Delaware judiciary in corporate law matters. Worse, the decisions reached by non-Delaware “dilettantes” threaten to adulterate and degrade the basic Delaware product. In sum, prior commentary on the out-of-Delaware trend has treated it as very bad for corporate defendants, very bad for shareholder plaintiffs, and very bad for Delaware.

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Securities Class Action Filings in 2012

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, February 21, 2013
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The following post comes to us from Alexander Aganin, vice president at Cornerstone Research. This post is based on the introduction of a Cornerstone Research report, titled “Securities Class Action Filings: 2012 Year in Review.” For more information, contact Mr. Aganin. The full report is available here.

Federal securities fraud class action filing activity slowed sharply in 2012. There were 152 filings in 2012 compared with 188 in 2011. The number of federal securities fraud class actions (also referred to in this report as filings, class actions, or cases) filed was 21 percent below the annual average of 193 filings observed between 1997 and 2011 (Figure 1).


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The following trends are noteworthy for 2012:

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