Monthly Archives: January 2013

Applying Securities Laws to Social Media Communications

Posted by Holly Gregory, Weil, Gotshal & Manges LLP, on
Saturday, January 5, 2013
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Holly J. Gregory is a corporate partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil alert by Christopher Garcia and Melanie Conroy; the full document, including footnotes, is available here.

This month marked an important milestone in the development of securities law at its newest frontier: social media. For the first time, the Enforcement Division of the U.S. Securities and Exchange Commission (“SEC”) issued a Wells Notice based on a social media communication. This Wells Notice, which notified Netflix, Inc. and its CEO of the Enforcement Division’s intent to recommend an enforcement case to the Commission, demonstrates the potential for liability arising from disclosures by corporate officers through social media. Although the SEC itself uses social media to disclose important information, the agency has yet to offer formal guidance concerning the use of social media to communicate with the investing public. For this reason, the outcome of the SEC’s investigation into Netflix and its CEO’s social media usage will prove instructive to issuers, directors, corporate officers, investors, and members of the securities and white collar bars.

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PE Funds Are Not Subject to “Controlled Group” Liability

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, January 4, 2013
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The following post comes to us from Regina Olshan, partner in the executive compensation and benefits practice at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert.

Private equity funds (PE funds) and their advisors long have been concerned that a fund (or its other portfolio companies) may be liable for unfunded pension plan liabilities of one of its portfolio companies. However, in a decision published last month, the U.S. District Court of Massachusetts held that three PE funds sponsored by Sun Capital were not liable for any portion of the withdrawal liability incurred by a portfolio company in which the funds collectively held a controlling interest. In reaching this decision, the court expressly rejected the analysis contained in a 2007 Pension Benefit Guaranty Corporation (PBGC) Appeals Board opinion, which found that the investment activities of a PE fund constitute a “trade or business” and thus subjected the PE funds to joint and several liability under Title IV of the Employee Retirement Income Security Act (ERISA) for a portfolio company’s unfunded pension liabilities.

Although the Sun Capital Partners case provides a foundation for cautious optimism on the issue of whether PE funds can be held jointly and severally liable for the pension-related liabilities incurred by portfolio companies in which they invest, it remains to be seen whether its analysis will be adopted by other courts and whether the district court’s decision will be upheld on appeal to the First Circuit. PE funds should continue to view control group liability as a potential risk in the acquisition context and, in order to minimize exposure to unfunded pension liabilities, PE funds should consult counsel when encountering these issues.

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Replacing the LIBOR with a Transparent and Reliable Index

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, January 4, 2013
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The following post comes to us from Rosa M. Abrantes-Metz, Principal at Global Economics Group and Adjunct Associate Professor at New York University Stern School of Business, and David S. Evans, Chairman of the Global Economics Group in the firm’s Boston office.

Our LIBOR Reform Articles describe the main problems with the current LIBOR setting, put forward a proposal on how to reform LIBOR through a committed quote system (“CLIBOR”), and explain why the final Wheatley Review proposal on how to reform LIBOR, and its reasons for stopping short of our proposals, are not satisfactory for putting LIBOR on solid ground.

We have developed an alternative process of providing and disseminating reliable information on interbank lending and borrowing that we call “Committed LIBOR” or “CLIBOR.” We submitted this to the Wheatley Review for its consideration. The new process would stand on three pillars: Commitment, Transparency, and Governance.

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Dodd-Frank Enhanced Prudential Standards for Foreign Banking Organizations

Posted by Margaret E. Tahyar, Davis Polk & Wardwell LLP, on
Thursday, January 3, 2013
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Margaret E. Tahyar is a partner in Davis Polk & Wardwell LLP’s Financial Institutions Group. This post is based on a client memorandum by a team of attorneys at Davis Polk; the full publication, including footnotes, is available here. Key aspects of the Federal Reserve’s proposal for foreign banks are illustrated in a set of Davis Polk visuals, available here.

Following closely on the heels of Federal Reserve Governor Daniel K. Tarullo’s November 2012 speech, the Federal Reserve has proposed a tiered approach for applying U.S. capital, liquidity and other Dodd-Frank enhanced prudential standards, including single counterparty credit limits, risk management, stress testing and early remediation requirements, to the U.S. operations of foreign banking organizations with total global consolidated assets of $50 billion or more (“Large FBOs”). Most Large FBOs would have to create a separately capitalized top-tier U.S. intermediate holding company (“IHC”) that would hold all U.S. bank and nonbank subsidiaries. A Large FBO with combined U.S. assets of less than $10 billion, excluding its U.S. branch and agency assets, would not be required to form an IHC.

The IHC would be subject to U.S. capital, liquidity and other enhanced prudential standards on a consolidated basis. In addition, the Federal Reserve would have the authority to examine any IHC and any subsidiary of an IHC. Although the U.S. branches and agencies of a Large FBO’s foreign bank would not be required to be held beneath the IHC, they too would be subject to liquidity, single counterparty credit limits and, in certain circumstances, asset maintenance requirements. Large FBOs not required to form an IHC would also be subject to many of the new enhanced prudential standards.

This memorandum provides an overview of key aspects of the Federal Reserve’s proposal, which would become effective on July 1, 2015. We invite you to also read the accompanying diagrams and tables for a visual representation of these new requirements, available here. The comment period for the proposal ends on March 31, 2013.

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Some Improvement in U.S. Public Equity Capital Market Competitiveness

Posted by Hal Scott, Harvard Law School, on
Wednesday, January 2, 2013
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Hal Scott is the director of the Program on International Financial Systems at Harvard Law School and the director of the Committee on Capital Markets Regulation. This post is based on a statement from the committee, available here.

The Committee on Capital Markets Regulation (CCMR), an independent and nonpartisan research organization dedicated to improving regulation and enhancing the competitiveness of U.S. public equity capital markets, today released data from the third quarter of 2012. According to the new study, U.S. capital markets reversed the second quarter downgrade and showed slightly improved competitiveness, though most measures of competitiveness still fall short of historical averages. Hal S. Scott, Director of the Committee said, “While foreign companies continue to prefer non-U.S. financial markets for raising capital outside their home markets, and regulatory reform is still needed, this quarter’s data offers a promising sign that competitiveness can be restored to U.S. markets.”

Of the global initial equity offerings conducted outside a company’s home market, 18.3% of these IPOs, by value, were listed on a U.S. exchange. While this measure is at its highest level over the past five years, the U.S. share of this volume remains well below its historical average of 28.7% (1996-2006). These percentages include all IPOs by foreign companies listed on either U.S. public markets or issued through private Rule 144A offerings. Excluding global IPOs that use the Rule 144A markets, the percentage of global IPOs listed on a U.S. exchange rises to 55.9%. However, the total value of these IPOs has decreased from $79.8 billion in 2010 and $39.3 billion in 2011 to only $9 billion thus far in 2012.

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Shareholder Empowerment and Bank Bailouts

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, January 2, 2013
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The following post comes to us from Daniel Ferreira, Professor of Finance at London School of Economics, David Kershaw, Professor of Law at London School of Economics, Tom Kirchmaier, Lecturer in Business Economics and Strategy at University of Manchester, and Edmund-Philipp Schuster, Lecturer in Law at London School of Economics.

One, of several, regulatory responses to the financial crisis has been to consider the extent to which bank failure can be explained by flaws in banks’ corporate governance arrangements.

In many jurisdictions this diagnosis has generated calls upon shareholders to act as effective owners and hold boards of banks to account, as well as calls to empower shareholders to enable them to do so. But what do we know about the relationship between shareholder power and bank failure? To date scholarly attention has been paid to the relationship between board independence and bank failure, but limited attention has been given to the relationship between bank failure and the core corporate governance rules that determine the ease with which shareholders can remove and replace management. In our paper, Shareholder Empowerment and Bank Bailouts, we examine the relationship between shareholder power — and, thus, managerial accountability — and the probability of bank bailouts.

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