Monthly Archives: February 2013

Prominent Role for Leverage Ratio in Capital Framework

Jeremiah O. Norton is a member of the Board of Directors of the Federal Deposit Insurance Corporation. This post is based on Director Norton’s recent remarks to the Florida Banker’s Association in Orlando, FL; the full text, including footnotes, is available here. The views expressed in this post are those of Director Norton and should not be attributed to the FDIC as a whole or any other members or staff.


As the banking industry emerges from the 2008 financial crisis, there is no question that it caused great strain on banks of all sizes. Hundreds of community banks failed, and the largest institutions were unable to continue operating without massive, unprecedented government intervention. This region in particular experienced the full impact of the crisis and the stress it placed on small institutions. A key ingredient in the market disruption was inadequate capital protection. Looking forward, it is important that the regulatory community arrive at a capital framework that is appropriate for the range and complexity of risks in today’s financial system.

As someone who served on the Treasury Department’s crisis response team in 2008, it became clear that the market was punishing firms and business models that took on too much risk without sufficient capitalization. Yet, upon returning recently to government service I have been surprised at what I see as a lack of progress towards constraining excessive leverage. Some policymakers point to advancements in the Basel III agreement, developed by the Basel Committee on Banking Supervision, which implements a global leverage ratio for the first time. However, I think that it is difficult to argue that achieving a Tier 1 leverage ratio of three percent my 2018 is significant reform, particularly as this leverage ratio requirement is not solely anchored in tangible common equity.


Regulation FD in the Age of Facebook and Twitter

Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School.

The Staff of the Securities and Exchange Commission has announced its intention to recommend to the Commission that enforcement proceedings alleging a violation of Regulation FD be instituted against Netflix, Inc. and its CEO, Reed Hastings, because of a posting on Mr. Hastings’ personal Facebook page. Mr. Hastings’ webpage had more than 200,000 followers, including reporters who covered the posting in the traditional press. The posting was also the subject of a tweet by TechCrunch, which has approximately 2.5 million followers on Twitter.

This article, Regulation FD in the Age of Facebook and Twitter: Should the SEC Sue Netflix?, is in the form of an amicus Wells Submission suggesting that the Commission would, for nine distinct reasons, be prudent not to initiate an action on the facts of the Netflix posting. In particular, the public record suggests that the posting did not contain material information, was not a selective disclosure, and because of its spread through social media constituted a “broad non-exclusionary distribution” that did not violate Regulation FD. A prosecution would also diverge dramatically from all prior Regulation FD enforcement proceedings, and would violate the Commission’s prior representations not to “second guess” good faith efforts to comply with Regulation FD. In addition, the posting is not inconsistent with the Commission’s 2008 Guidance on the Use of Company Webpages — guidance that is seriously outdated because of the emergence of social media.


Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups

Jesse Fried is a Professor of Law at Harvard Law School, and Brian Broughman is an Associate Professor of Law at the Maurer School of Law at Indiana University, Bloomington.

Venture capitalists (VCs) play a significant role in the financing of high-risk, technology-based business ventures. VC exits usually take one of three forms: an initial public offering (IPO) of a portfolio company’s shares, followed by the sale of the VC’s shares into the public market; a “trade sale” of the company to another firm; or dissolution and liquidation of the company.

Of these three types of exits, IPOs have received the most scrutiny. This attention is not surprising. IPO exits tend to involve the largest and most visible VC-backed firms. And, perhaps just as importantly, the IPO process triggers public-disclosure requirements under the securities laws, making data on IPO exits easily accessible to researchers.

But trade sales are actually much more common than IPOs and, in aggregate, are more financially important to VCs. Unlike IPOs, however, trade sales do not trigger the intense public-disclosure requirements of the securities laws; they take place in the shadows. Thus, although trade sales play a critical role in the venture capital cycle, relatively little is known about them.

In our paper, Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups recently made public on SSRN, Brian Broughman and I seek to shine more light on intra-firm dynamics around trade sales. In particular, we investigate how VCs induce the “entrepreneurial team” – the founder, other executives, and common shareholders – to go along with a trade sale that they might have an incentive to resist.


Don’t Cry for Argentine Bondholders

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 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.


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

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.


The 2013 Director Compensation and Board Practices Report

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 [email protected].

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:


FDIC’s Progress on Wall Street Reform

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.


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

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.


Proxy Voting Analytics (2008-2012)

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 [email protected].

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:


Independent Director Duties of Delaware Corporations with Foreign Operations

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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