Monthly Archives: March 2013

Leaning, Cleaning, and Macroprudence

The following post comes to us from Robert Hockett, Professor of Financial and International Economic Law at Cornell Law School.

Since the mid-1990s, and particularly since the global financial dramas of 2008-09, authorities on financial regulation have come increasingly to counsel the inclusion of macroprudential policy instruments in the standard ‘toolkit’ of finance-regulatory measures employed by financial regulators. The hallmark of this perspective is its focus not simply on the safety and soundness of individual financial institutions, as is characteristic of the traditional microprudential perspective, but also on certain structural features of financial systems that can imperil such systems as wholes. Systemic ‘financial stability’ thus comes to supplement, though not to supplant, institutional ‘safety and soundness’ as a regulatory desideratum.

Evidence of this shift from a once primarily microprudential to a now macroprudential-inclusive focus in financial oversight can be found not only in a wealth of scholarly and policy papers – including a great deal of work produced by the Bank for International Settlements (BIS), the Financial Stability Board (FSB), the International Monetary Fund (IMF, ‘Fund’), and sundry central banks worldwide over the past decade and a half – but also in many new treaty-based, statutory, and administrative provisions agreed or enacted in multiple jurisdictions over the past several years. One recent Fund paper, in fact, reports that some 50 jurisdictions, including all of the world’s most developed economies, have formally adopted one or more macroprudential finance-regulatory measures since early 2009. [1]


Takeover Litigation in 2012

Steven M. Davidoff is an Associate Professor of Law and Finance at Ohio State University College of Law, and Matthew D. Cain is an Assistant Professor of the University of Notre Dame.

Takeover litigation continued unabated in 2012 according to our just released annual report Takeover Litigation in 2012.

We find that 91.7% of transactions in 2012 experienced litigation almost at an almost identical rate as 2011 when 91.4% of transactions experienced litigation. This figure continues the increasing trend of takeover litigation which is now brought at a rate almost 2.5 times that of 2005.

The number of complaints brought per transaction remained about constant in 2012 at 5.0 lawsuits per transaction – identical to the rate in 2011. While the number of lawsuits (and rough approximation of law firms) remained steady from 2011 to 2012, this still represents a more than doubling from the mean number in 2005 of 2.2 lawsuits.

Multi-jurisdictional litigation also remained similar in 2012 with 50.6% of transactions with litigation experiencing litigation in multiple states. This compares to 53.0% of transactions with multi-state litigation in 2011. This rate continues what has been described as the biggest phenomena in takeover litigation. Multi-state litigation has gone from 8.3% of litigations in 2005 to half of all transactions in 2012.


Friendly Tender Offers and Related Issues – A Teaching Tool

Richard Climan is a partner in the Mergers & Acquisitions practice group at Weil, Gotshal & Manges LLP. The edited transcripts mentioned below are available here (part one) and here (part two).

In late 2011, I had the privilege of chairing a panel presentation in New York City on negotiating acquisitions of public companies in transactions structured as friendly tender offers. In September 2012, I chaired a follow-up panel presentation on the same topic. Both presentations took place at the annual Institute on Corporate, Securities, and Related Aspects of Mergers & Acquisitions, sponsored jointly by the Penn State Center for the Study of Mergers and Acquisitions and the New York City Bar Association. Several of the other panelists – including Gar Bason of Davis Polk, Joel Greenberg of Kaye Scholer, and Fred Green of Weil – are widely considered among the top M&A practitioners in the nation. For much of our presentations, we utilized the format of an interactive, “mock” negotiation of key issues, with various panelists playing the roles of outside counsel for the buyer, outside counsel for the target company, and special Delaware counsel.

The other panelists and I edited the transcripts of both presentations and added comprehensive footnotes. Our goal was to create a teaching tool that would be useful to students, practitioners, and others seeking to learn about the negotiating dynamics in friendly acquisitions structured as tender offers.

Both edited transcripts have been published in the Penn State Law Review. The edited transcript of the 2011 presentation is part of the Symposium Issue of the Penn State Law Review titled “The Deal Lawyers’ Guide to Public and Private Company Acquisitions.” The edited transcripts can be accessed here (Climan et al., Negotiating Acquisitions of Public Companies in Transactions Structured as Friendly Tender Offers, 116 Penn St. L. Rev. 615 (2012)) and here (Climan et al., Negotiating Acquisitions of Public Companies—A Follow-Up, 117 Penn St. L. Rev. 647 (2013)).


Bank Regulation and Supervision in 180 Countries from 1999 to 2011

Ross Levine is Professor of Economics at UC, Berkeley.

Motivating an investigation of bank regulation and supervision is easy. One can point to the global banking crisis of 2007-2009, the banking problems still plaguing many European countries in 2013, and the more than 100 systemic banking crises that have devastated economies around the world since 1970. All these crises reflect, at least partially, defects in bank regulation and supervision. One can also point to research showing that banks matter for human welfare beyond periodic crises. Banks influence economic growth, poverty, entrepreneurship, labor market conditions, and the economic opportunities available to people. Thus, examining the type and impact of bank regulatory and supervisory policies in countries is a critical area of inquiry.

The problem, however, is that measuring bank regulation and supervision around the world is hard. Hundreds of laws and regulations, emanating from different parts of national and local governments, define policies regarding bank capital standards, the entry requirements of new domestic and foreign banks, bank ownership restrictions, and loan provisioning guidelines. Numerous pages of regulations in most countries delineate the permitted activities of banks and provide shape and substance to deposit insurance schemes and the nature and timing of the information that banks must disclose to regulators and the public. And, extensive statutes define the powers of regulatory and supervisory officials over banks — and the limits of those powers. There are daunting challenges associated with acquiring data on all of the laws, regulations, and practices that apply to banks in countries and then aggregating this information into useful statistics that capture different and important aspects of regulatory regimes. This helps explain why the systematic collection of data on bank regulatory and supervisory policies is only in its nascent stages. Yet, without sound measures of banking policies across countries and over time, researchers will be correspondingly constrained in assessing which policies work best to promote well-functioning banking systems, and in proposing socially beneficial reforms to banking policies in need of improvement.


London Whale is the Cost of Too Big to Fail

Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is Professor Roe’s recent op-ed written for The Financial Times, which can be found here.

The report by the US Senate staff on JPMorgan Chase’s “London Whale” trades, delivered last Friday, excoriates the bank for failing to make the full extent of the problem known to regulators and the public. But a focus on who knew what when can result in missing the big point: the cost of our too-big-to-fail banks is even heftier than is widely appreciated.

The conventional wisdom in many circles is that the losses caused by the trades are regrettable but we can all move on. After all, JPMorgan’s equity cushion can readily absorb it. Private shareholders and managers have paid the price – shareholders lost $6bn and several senior managers have black marks against their names. The episode is embarrassing but the bank can earn more than $20bn a year. “A tempest in a teapot,” said Jamie Dimon, its chief executive, last year.

But before the London Whale sinks from view, consider what would befall a conventional industrial company that suffered such a horrendous, expensive managerial lapse. If JPMorgan were in the business of making things, it would have already attracted significant corporate governance activity. The loss might be the trigger for a takeover and break-up effort.


Are All MOEs Created Equal?

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, Sarkis Jebejian, Joshua M. Zachariah, and David B. Feirstein.

With valuations stabilizing and the M&A market heating up, a rebirth of stock-for-stock deals, after a long period of dominance for all-cash transactions, may be in the offing. If this happens, we expect to see renewed use of the term “merger of equals” (MOE) to describe some of these all-equity combinations. As a starting point, it may be helpful to define what an MOE is and, equally important, what it isn’t. The term itself lacks legal significance or definition, with no requirements to qualify as an MOE and no specific rules and doctrines applicable as a result of the label. Rather, the designation is mostly about market perception (and attempts to shape that perception), with the intent of presenting the deal as a combination of two relatively equal enterprises rather than a takeover of one by the other. That said, MOEs generally share certain common characteristics. First, a significant percentage of the equity of the surviving company will be received by each party’s shareholders. Second, a low or no premium to the pre-announcement price is paid to shareholders of the parties. Finally, there is some meaningful sharing or participation by both parties in “social” aspects of the surviving company.

While each of the aspects of an MOE deal will fall along a continuum of “equality” for the shareholders of each party, there are a handful of key issues that require special attention in an MOE transaction:


Financial Services Act 2012: A New UK Financial Regulatory Framework

The following post comes to us from Jeffery Roberts, senior partner in the London office of Gibson, Dunn and Crutcher, and is based on a Gibson Dunn memorandum by Mr. Roberts and Edward A. Tran.

The Financial Services Act 2012 (the “Act”), which comes into force on 1 April 2013, contains the UK government’s reforms of the UK financial services regulatory structure and will create a new regulatory framework for the supervision and management of the UK’s banking and financial services industry. The Act gives the Bank of England macro-prudential responsibility for oversight of the financial system and day-to-day prudential supervision of financial services firms managing significant balance-sheet risk. Three new bodies will be formed under the Act: the Financial Policy Committee (“FPC”), the Prudential Regulatory Authority (“PRA”) and the Financial Conduct Authority (“FCA”). While the Act mainly contains the core provisions for the UK government’s structural reforms and will therefore make extensive changes to Financial Services and Markets Act 2000 (“FSMA”), as well as to the Bank of England Act 1998 and the Banking Act 2009, it also includes freestanding provisions in Part 3 (“mutual societies”), Part 4 (“collaboration between Treasury and Bank of England, FCA or PRA”), Part 5 (“inquiries and investigations”), Part 6 (“investigation of complaints against regulators”) and Part 7 (“offences relating to financial services”). With respect to the last of these, it should be noted that:


Corporate America and the SEC Should Reflect America

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a statement by Commissioner Aguilar; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Recently I have had the privilege to speak at a number of forums to discuss the importance of diversity and inclusion in corporate America and in government agencies such as the SEC. I strongly believe that regulators and corporate America should reflect the broad range of American society. The following remarks are a compilation of my remarks delivered on (i) March 5, 2012, at the Greenlining Institute’s Diversity Summit in Washington, DC, (ii) March 5, 2013, at the SEC’s Unconscious Bias Training Seminar in Washington DC, (iii) March 16, 2013, at the Renaissance Gathering Dinner in Atlanta, Georgia, and (iv) March 19, 2013, at the Chicago United Annual Meeting in Chicago, Illinois.

Diversity at the SEC

Before speaking about the many benefits of diversity and inclusion in Corporate America, I need to be upfront about my agency’s own diversity. For those not familiar with the SEC, let me describe our role. The SEC is the agency responsible for overseeing most of Wall Street and the capital markets. This includes oversight of approximately 35,000 entities, including about 12,600 investment advisers, 9,900 mutual funds and exchange traded funds (ETFs), and over 4,500 broker-dealers with more than 160,000 branch offices. In addition, we have the responsibility for administering a disclosure regime that covers more than 9,100 reporting companies.

When all is said and done, the SEC’s core mission is to protect investors. I strongly believe that a diverse workforce at the SEC is critical in order for the SEC to achieve its core mission; however, and, to put my cards on the table, the SEC has much to do in order for its workforce to reflect the communities we live in. The statistics reflect that 31.6% of the SEC’s workforce was comprised of people of color in 2012, and that just 12.9% were at the senior employee level. The most telling numbers are those relating to our senior officers. As of fiscal year 2012, the SEC’s senior officers were approximately 86.7% white, while 5.5% were African-American, 3.9% Hispanic, and 3.1% Asian-American. The gender breakdown among these officers is 68.8% male and 31.3% female. Clearly these numbers can be improved. Unfortunately, though our lack of diversity is well-known and has been publicly discussed, the SEC’s recent hiring activity has not resulted in much improvement in our numbers. The SEC just hired 567 employees for fiscal year 2012 and the first quarter for fiscal year 2013, and, with respect to the attorneys hired by the SEC, 38.5% were women and only 16.6% were persons of color. We can, and must, do better.


Class Certification and Federal Jurisdiction under CAFA: Supreme Court Ruling

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt, Peter C. Hein, and Martin J.E. Arms.

The United States Supreme Court ruled unanimously that a plaintiff’s pre-class certification stipulation, under which plaintiff committed not to seek damages on behalf of the proposed class in excess of $5,000,000 (the federal jurisdictional threshold under the Class Action Fairness Act (“CAFA”)), cannot bind absent class members and therefore cannot be used to defeat federal jurisdiction. Standard Fire Ins. Co. v. Knowles, No. 11-1450 (Mar. 19, 2013).

In 2005, Congress enacted CAFA, which provides that federal district courts have jurisdiction over class actions (subject to certain exceptions, including a carve-out for many state-law class actions for breach of fiduciary duty) if the proposed class has 100 or more members, the parties are minimally diverse (meaning that, for example, one member of the plaintiff class and one defendant are from different states) and the “matter in controversy” exceeds the sum or value of $5,000,000.

In Standard Fire, plaintiff sought to circumvent the federal jurisdiction provisions in CAFA by filing a class action in a state court on behalf of a proposed class of members from that state and stipulating that the plaintiff and the class would not seek to recover total aggregate damages of more than $5,000,000. The defendant nevertheless removed the case to federal court. The district court found that, absent the stipulation, the amount in controversy would have been just above the $5,000,000 jurisdictional threshold. But in light of the stipulation, the district court concluded that the amount in controversy was below the threshold and remanded the case to state court. The Court of Appeals declined to hear the appeal.


Shareholder Litigation Involving Mergers and Acquisitions: February 2013 Update

The following post comes to us from Cornerstone Research, and is based on a Cornerstone report by Olga Koumrian, principal researcher at Cornerstone Research, and Robert M. Daines, Pritzker Professor of Law and Business at Standford Law School. The publication is available for download here.

This report looks at litigation challenging M&A transactions, filed by shareholders of large U.S. public target companies. These lawsuits usually take the form of class actions. Plaintiff attorneys typically allege that the target’s board of directors violated its fiduciary duties by conducting a flawed sales process that failed to maximize shareholder value. Common allegations include the failure to conduct a sufficiently competitive sale, the existence of restrictive deal protections that discouraged additional bids, and conflicts of interests, such as executive retention or change-of-control payments to executives. Another typical allegation is that the target board failed to disclose enough information about the sale process and the financial advisor’s valuation.

We used Thomson Reuters’ SDC database to obtain a list of all acquisitions of U.S. public targets valued at or over $100 million, announced in each year. We searched the SEC filings of the targets and acquirers for discussion of shareholder litigation. After the deals were closed, we used court dockets to trace litigation outcomes.


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