Monthly Archives: January 2013

Transition Period for Swaps Pushout Rule

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

The OCC has published long-awaited guidance notifying federally-chartered insured depository institutions (“IDIs”) that it is prepared to grant applications to delay compliance with Section 716 of the Dodd-Frank Act (the “Swaps Pushout Rule”) for up to two years. [1] The Swaps Pushout Rule will become effective on July 16, 2013. A federally-chartered IDI [2] must submit a formal request for a transition period to the OCC by January 31, 2013. The content of such requests is discussed further below.

We believe that the Federal Reserve and the FDIC will issue similar guidance to state-chartered IDIs subject to their primary supervision. But it remains to be seen whether such guidance will address the application of the Swaps Pushout Rule to uninsured U.S. branches and agencies of foreign banks.


Private Equity Trends in 2012

The following post comes to us from Douglas P. Warner, senior member of the Private Equity practice and head of the Hedge Fund practice at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal client alert by Mr. Warner and Michael Weisser.

We wish we could tell you something fascinating about what happened to the private equity industry in 2012. But it was just not that kind of year. Private equity deal volume was flat compared with 2011. New funds continued to be raised at a modest pace. There were no particularly interesting new developments in the deal market.

However, private equity, despite the challenges facing the industry and the harsh spotlight put on it by the presidential campaign, continued to thrive. This post looks back on some of the trends that we saw in the industry in 2012 and some predictions as to what awaits it in 2013 and beyond.

Trends in 2012

Some of the trends that we saw in the private equity industry in 2012 included:


White Collar and Regulatory Enforcement: Emerging Trends

Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Lawrence B. Pedowitz, John F. Savarese, David Gruenstein, and Ralph M. Levene.

Anyone watching white collar and regulatory enforcement developments unfold during 2012 knows that the government’s appetite for bringing huge cases against major companies, including massive fines, extensive remedial undertakings, and extended monitorships, has continued unabated. It is, admittedly, a gloomy picture, and most commentators (and law firms) have tended to outdo each other in stressing the storm clouds and challenges.

In this treacherous environment, making investments that may help to avoid criminal problems is a wise strategy. We have previously written about the many elements of an effective corporate compliance program, and such programs can materially reduce the risk of a severe and potentially crippling white collar criminal or regulatory enforcement proceeding. In our experience, however, the single most important element of such a program is a searching and well-informed survey, conducted periodically, aimed at identifying potential compliance risks. Nowadays, virtually every well-run corporation has training programs, a code of conduct, and a comprehensive set of compliance policies; the real distinguishing features of the best programs, in our view, are the capacity of a firm to (1) spot intelligently and quickly potential risks inherent in its business and then timely implement appropriate preventive measures before serious problems arise, and (2) respond promptly and appropriately if such a program detects potential wrongdoing.


How Costly Is Corporate Bankruptcy for Top Executives?

The following post comes to us from B. Espen Eckbo, Professor of Finance at the Tuck School of Business at Dartmouth College; Karin Thorburn, Professor of Finance at the Norwegian School of Economics; and Wei Wang, Assistant Professor of Finance at Queen’s School of Business.

To what extent are CEOs filing for bankruptcy tainted by the bankruptcy event? On the one hand, the CEO bears a major responsibility for the firm going broke. After all, the filing might have been avoided if the CEO had managed to reduce firm leverage or otherwise reorganize debt claims in time to stay out of court. On the other hand, CEOs going through bankruptcy likely gain valuable experience from the crisis. The net impact of these two opposing effects on executive reputation is an open empirical question.

In the paper, How Costly is Corporate Bankruptcy for Top Executives?, which was recently made publicly available on SSRN, we provide some first systematic estimates of top executives’ personal costs of corporate bankruptcy. The estimates are based on 324 large public companies filing for Chapter 11 bankruptcy over the past two decades.

The study provides evidence on the following three questions. First, do top executives experience large personal losses (both income and wealth) when filing for bankruptcy? Second, do creditor control rights influence the probability of CEO departure and the income losses? Third, do ex ante predicted personal losses affect CEO’s decision to leave the firm and their compensation contract design?


Harvard Convenes the Institutional Investors Roundtable

The Harvard Institutional Investor Roundtable convened last Thursday, January 24. This event brought together for a roundtable discussion the top governance officers of leading public pension funds, mutual funds, and other institutional investors, both from the US and from abroad. The institutions represented hold assets under management in excess of $14 trillion. Some academics, issuers, and advisers joined the proceedings to inform the discussion. Participants in the event, and the topics of discussion, are set out below.

The Roundtable is an event of the Harvard Institutional Investor Forum, directed by Lucian Bebchuk and operated by the Harvard Law School Program on Institutional Investors and Program on Corporate Governance. The Forum’s Advisory Board consists of representatives of institutional investors, including Jay Chaudhuri, Michelle Edkins, Jonathan Feigelson, Gavin Grant, Joyce Haboucha, Suzanne Hopgood, Andrew Letts, Michael McCauley, Meredith Miller, Manish Mital, Peter H. Mixon, Brandon Rees, Paul Schneider, Greg Smith, Alison Tarditi and Harlan Zimmerman.

The Roundtable, which was co-organized by Lucian Bebchuk, Stephen Davis, and Scott Hirst, was supported by American Express Company, Berman DeValerio, Broadridge Financial Solutions, Deloitte LLP, EMC Corporation, Innisfree, Pfizer Inc., Prudential Financial Inc., The Coca Cola Company and UnitedHealth Group.


Delaware Supreme Court Upholds Board Compensation Decision

Paul Rowe is a partner in the Litigation Department at Wachtell, Lipton, Rosen and Katz. This post is based on a Wachtell Lipton memorandum by Mr. Rowe and Jeremy L. Goldstein. 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 Delaware Supreme Court upheld a Chancery Court determination that a board did not commit waste by consciously deciding to pay bonuses that were non-deductible under Section 162(m) of the Internal Revenue Code (Freedman v. Adams, Del. Supr., __ A.2d __, No. 230, 2012, Berger J. (Jan 14, 2013)). Unlike claims of gross negligence, claims of waste are not subject to exculpation or indemnification by the company and therefore have the potential for personal liability of directors.

The original suit was brought in 2008 by a shareholder of XTO Energy (later acquired by ExxonMobil) as a derivative claim. The suit alleged that XTO’s board committed waste by failing to adopt a plan that could have made $130 million in bonus payments to senior executives tax deductible. The board was aware that, under a plan that qualifies for the “performance based compensation” exception of Section 162(m), the company could have deducted its bonus payments, but, as the company disclosed in its annual proxy statement, the board did not believe that its compensation decisions should be constrained by such a plan. The Chancery Court held that the shareholder failed to state a claim. The Supreme Court agreed, holding that the decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment.


Out of the Shadows and Into the Light

The following post comes to us from Jeremy Jennings-Mares, partner in the Capital Markets practice at Morrison & Foerster LLP, and is based on a Morrison & Foerster bulletin by Mr. Jennings-Mares, Peter Green, and Lewis Lee.

For the last four years, regulators and law makers have been focusing extraordinary efforts on ensuring that financial regulation is adequate to protect the financial system from risks emanating from the banking sector. However, it is only more recently that policy makers have turned their attention towards possible systemic risk related to entities which carry out similar functions to the banking sector or to which the banking sector is otherwise exposed. Such entities have, for convenience, been grouped under the heading of “shadow banks”, although no precise definition or description of shadow banking has yet been agreed upon by policy makers.

At their November 2010 Seoul Summit, the leaders of the G20 nations requested that the Financial Stability Board (FSB) develop recommendations to strengthen the oversight and regulation of the shadow banking system in collaboration with other international standard setting bodies, and in response to such request, the FSB formed a task force with the following objectives:


Assigning Value to Long-Term Incentive Pay

Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. This post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

“Then you should say what you mean,” the March Hare went on.

“I do,” Alice hastily replied; “at least—at least I mean what I say—that’s the same thing, you know.”

“Not the same thing a bit!” said the Hatter. “You might just as well say that ‘I see what I eat’ is the same thing as ‘I eat what I see’!”

Alice in Wonderland, Lewis Carroll (1865)

The Preamble to SEC Disclosure Regulations (2006) [1] states: “We believe that plain English principles should apply to the disclosure requirements that we are adopting, so disclosure provided in response to those requirements is easier to read and understand. Clearer, more concise presentation of executive and director compensation…can facilitate more informed investing and voting decisions in the face of complex information about these important areas.”

To which the Mad Hatter might have responded: “You can assume plain English conveys clear thinking, but what happens if plain English is not fed by clear thinking?”


Selected Issues for Boards of Directors in 2013

Victor Lewkow is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lewkow, Alan Beller, Mitchell Lowenthal, Janet Fisher, Arthur Kohn, David Leinwand, and Ethan Klingsberg.

In the years since the financial reporting scandals and the Sarbanes-Oxley Act of 2002, and in particular following the financial crisis and the Dodd-Frank Act of 2010, boards of directors have faced greater burdens and more intense scrutiny of their activities and performance. One manifestation of this has been pressure to change the role of directors from one of partnership with and oversight of management to one of an almost quasi-governmental watchdog directly responsible for monitoring management’s performance, including its compliance with increasingly complex and burdensome regulation. In addition, activist investors continue to publicly push some boards to pursue strategies focused on short-term returns, even in instances where those strategies are inconsistent with the directors’ preferred, sustainable long-term strategies for the corporation.

In recent years, we have advised that directors regularly work with their advisors to monitor and adapt to the continually changing landscape. Among other things, we have suggested more frequent, well-structured engagement with shareholders, a focus on the ability to communicate the corporation’s and board’s policies in a way that is understandable and convincing to the corporation’s constituencies, and that directors prepare to respond to increasing external pressures in a manner that both thoughtfully takes those pressures into account and fully reflects the director’s carefully considered view of the long-term interests of the corporation.

In addition to these general points, we also have seen developing during 2012 a series of additional specific issues, discussed below, on which we believe boards of directors and corporations should focus in 2013.


The Evolution of Corporate Governance in Brazil

The following post comes to us from Bernard Black, the Nicholas D. Chabraja Professor at Northwestern University School of Law and Kellogg School of Management, and Antonio Gledson de Carvalho, Associate Professor at Fundacao Getulio Vargas School of Business at Sao Paulo, and Joelson Oliveira Sampaio at Fundacao Getulio Vargas School of Business at Sao Paulo.

In the past decades the Brazilian economy has undergone major changes such as macroeconomic stability; achievement of investment grade status for the debt of the government and many individual firms; strong economic growth; and development of pension funds, which became major investors in public company shares. Significant changes were also observed in the stock market. Through the early 2000s, Brazil was seen as having relatively weak corporate governance. Examples of expropriation of minority shareholders by controlling shareholders were common.

In 2000, in response to concern about weak protection for minority shareholders (including extensive use of non-voting shares, few outside directors, and low levels of disclosure), the São Paulo Stock Exchange (BM&FBovespa) created three high-governance markets (Novo Mercado, Level I and Level II). This contributed to a surge in initial public offerings, which had been nearly nonexistent until 2004; a leveling off in the number of listed companies, which had been shrinking; and sharply rising trading volume and liquidity. Most new listings were at one of the premium listing levels; some older companies also migrated their listings to a higher level. In spite of these major changes in the economy and the stock market, little is known about how corporate governance standards have been changing. This article, The Evolution of Corporate Governance in Brazil, aims at filling this gap by providing a picture of the evolution of corporate governance practices in Brazil.


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