Monthly Archives: March 2013

Anti-Terrorism Act Liability for Financial Institutions

Michael Wiseman is a managing partner of the Financial Institutions Group at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell LLP publication.

The past decade has seen a surge in the number of cases brought against financial institutions and other major corporations under the Anti-Terrorism Act, 18 U.S.C. § 2331 et seq. (“ATA”). Plaintiffs alleging injuries by acts of international terrorism have sought to recover treble damages for their injuries from financial institutions on the theory that the financial institutions supplied, directly or indirectly, financial services to the terrorist groups. The frequency with which such suits are filed is unlikely to diminish, particularly because Congress recently extended the statute of limitations for ATA claims from four to ten years, and in some circumstances even longer. On February 14, 2013, the United States Court of Appeals for the Second Circuit issued a significant opinion with respect to the ATA’s causation requirements. In Rothstein v. UBS AG, the Court held that the plaintiffs had failed adequately to allege that UBS’s transfers of funds for the government of Iran were the proximate cause of the plaintiffs’ injuries suffered in terrorist attacks by Hamas and Hizbollah in Israel. Rothstein will be an important precedent for financial institutions and other companies in defending themselves against ATA lawsuits.

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Debunking Myths about Activist Investors

Charles Nathan is partner and head of the Corporate Governance Practice at RLM Finsbury. This post is based on an RLM Finsbury commentary by Mr. Nathan.

Activist investing has become quite the rage in the equity marketplace. Activist investors are proliferating, and there is a marked inflow of new capital to this asset class. The discipline of activist investing is popping up in more conversations about the nature and role of equity investors. As a result, it is occupying the thoughts, and sometimes the nightmares, of an increasing number of corporate executives and their advisers. The phenomenon has even become a topic du jour of academics, who are busily finding sufficient economic value in the function of activist investing to justify urging the SEC not to shorten the historic minimum time frames for reporting accumulations of more than 5% of a company’s stock explicitly to permit activists to accumulate larger blocks before disclosure of their activities results in a rise in market trading values for the stock in question.

Activist investing has a long pedigree in the equity markets dating back to the late 1970’s. Back then and throughout the 1980’s, activist investors were known by less flattering sobriquets such as corporate raiders, bust-up artists and worse. Activist investing has changed since those heady, junk bond fueled days. Then, the favorite game plan of activist investing was to threaten or launch a cash tender offer for all, or at least a majority, of the target company’s outstanding stock with funding through an issuance of high yield bonds. Today, activist investors rarely seek equity stakes in target companies above 10%, and their financing comes not from the public debt or equity markets but rather through private hedge funds that they sponsor and manage.

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Delaware Court Raises Bar for Use of “Poison Put” Provisions

David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. This post is based on a Wachtell Lipton memorandum by Mr. Katz, Igor Kirman and Ryan A. McLeod. 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. Further reading about Kallick v. SandRidge Energy, Inc. is available here.

In a recent case that arose in the context of a consent solicitation seeking a change of control of a public company, the Delaware Court of Chancery found the target board in breach of its fiduciary duties for not approving a dissident slate for the purposes of preventing a change-of-control-triggered put right in the company’s debt agreements. Kallick v. SandRidge Energy, Inc., C.A. No. 8182-CS (Del. Ch. Mar. 8, 2013). Chancellor Strine’s ruling extends prior Delaware law on the topic and provides cautionary guidance about the future effectiveness of such clauses, which are common features of debt documents and other commercial arrangements.

The case arose out of a hedge fund’s efforts to destagger and replace a majority of the board of directors of SandRidge Energy via a consent solicitation. In opposing the consent solicitation, the company initially warned shareholders that a change in the majority of the board that was not approved by the company’s directors would obligate the company to offer to repurchase $4.3 billion of debt at 101% of par pursuant to certain provisions in its debt instruments—provisions sometimes called “poison puts” or “proxy puts.” The company subsequently changed its public posture and noted that the put was “unlikely” to be harmful, because the debt was then trading above par, making it doubtful that the put would be exercised. However, the board failed to decide whether to “approve” the dissident nominees for purposes of the debt documents, thus leaving a cloud of uncertainty regarding the put and drawing a legal challenge from a shareholder.

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Bias and Efficiency: Comparison of Analyst Forecasts and Management Forecasts

The following post comes to us from Urooj Khan, Oded Rozenbaum, and Gil Sadka, all of the Accounting Division at Columbia Business School.

In our paper, Bias and Efficiency: A Comparison of Analyst Forecasts and Management Forecasts, we compare the forecast characteristics of analyst forecasts and management forecasts. Frequently, analysts and managers provide similar type of information to investors, namely forecasts. Since managers and analysts have different incentives and different information sets, we empirically test whether those differences are manifested in their forecast characteristics. Specifically, we compare the bias, a systematic deviation of management and analyst EPS forecasts from the actual realized EPS, and efficiency, the ability of managers and analysts to incorporate prior publicly available information in their forecasts.

When comparing management forecasts and analyst forecasts, it is important to consider the implications of the difference in incentives and information available to analysts and managers. Since prior literature documents an optimistic bias in analyst forecasts, we expect that, given management incentives and cognitive biases, management forecasts will be at least as biased as analyst forecasts. In addition, since companies’ managers are exposed to private information, we expect management forecasts to better incorporate prior available information.

We find several striking results. First, we find that prior stock returns do not predict management forecast errors while they predict analyst forecast errors. Furthermore, while we find an optimistic bias in a broad sample of both management forecasts and analyst forecasts, the optimistic bias in analyst forecasts disappears in months in which management forecasts are issued. The bias is still apparent for these firms when managers do not provide forecasts.

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Substantial 2013 Results Already Produced by SRP and SRP-Represented Investors

Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is the SRP’s Counsel. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

In its news alert released yesterday, the Shareholder Rights Project (SRP), working on behalf of eight SRP-represented investors, announced that proposals submitted for 2013 meetings have already had significant impact. As discussed below, major results obtained so far include the following:

  • Following active engagement, 46 S&P 500 and Fortune 500 companies that received shareholder proposals for 2013 annual meetings have already agreed to move towards annual elections.
  • These 46 companies represent more than 60% of the companies receiving shareholder proposals from SRP-represented investors for the 2013 proxy season.
  • Together with the 2012 work of the SRP, 91 companies — about three-quarters of the S&P 500 and Fortune 500 companies that received proposals in 2012, 2013 or both — have agreed to move towards annual elections. The aggregate market capitalization of these 91 companies exceeded one trillion dollars as of March 1, 2013.

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Questions Surrounding Share Repurchases

Peter Atkins is a partner of corporate and securities law matters at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden, Arps memorandum by Phyllis Korff, Michael Zeidel, Stacy Kanter, Michael Schwartz, Donnie Clay, and Yossi Vebman; the full text, including footnotes, is available here.

In recent months, a number of companies have repurchased or announced plans to repurchase their shares. Management and boards of directors overseeing companies with significant cash stockpiles yet finding fewer mechanisms to boost earnings may soon need to decide whether or not a share repurchase is the most productive use of their cash. This post addresses the questions surrounding share repurchases that companies should consider as they evaluate the advantages, disadvantages, legal implications and strategic considerations of share repurchases.

Overview

What are the ways a company can repurchase its shares?

There are four principal ways a company can repurchase its shares, all of which are discussed below:

(1) open market purchases;

(2) issuer tender offers;

(3) privately-negotiated repurchases; and

(4) structural programs, including accelerated share repurchase programs.

Most share repurchases are effected over time through open market purchases. These are often referred to as share repurchase programs or plans.

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SEC Speaks 2013: Waiting for the New Guard

The following post comes to us from Jonathan Polkes, co-chair of the Securities Litigation Practice Group, and Christian Bartholomew, partner in the Securities Litigation and Complex Commercial Litigation practices, both at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal alert by Mr. Bartholomew, Christopher Garcia and Jill Baisinger, with the assistance of Erin Yates. The full text, including footnotes, is available here.

To be blunt, this year’s “SEC Speaks” conference in Washington, D.C., sponsored by the Practicing Law Institute, was perhaps most remarkable for what did not happen: Mary Jo White, who is widely expected to be easily confirmed as Chairman of the Commission, did not attend. This was, of course, proper and to be expected, but it nevertheless cast a shadow over the proceedings, since none of the speakers could speak definitively to Ms. White’s and her new team’s regulatory and enforcement priorities. Indeed, given that three of the four SEC division directors who spoke—including the director of the Enforcement Division—are acting directors who may be replaced, it was not surprising that none set out bold or groundbreaking initiatives. Instead, with some important exceptions, this year’s conference largely updated issues that had been covered in 2012.

This is not to say that the conference failed to provide useful information. All four of the sitting commissioners emphasized different issues. Elisse Walter, the current Chairman, emphasized the SEC’s role in developing fair and transparent markets and promoting entrepreneurship, capital growth, and job-building. Luis Aguilar discussed signs of “weakness and instability” in the market’s infrastructure and recommended that the SEC regulate and address these technological issues by, among other things, developing a “kill switch” for each exchange. Troy Paredes (who is expected to leave the Commission this summer) argued that “too much disclosure may actually obscure useful information and result in worse decision-making by investors,” and called for a “top-to-bottom review” of the current disclosure regime. Finally, Daniel Gallagher emphasized the importance of maintaining the SEC’s independence, and strongly questioned whether new legislative mandates (particularly those contained in the Dodd-Frank legislation) and the Financial Stability Oversight Council compromised that independence and minimized the SEC’s effectiveness. Whether the initiatives proposed by Commissioners Aguilar and Paredes come to fruition under Ms. White’s leadership remains to be seen.

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Delaware Court Rules on Reverse Triangular Mergers and Anti-Assignment Provisions

Eduardo Gallardo is a partner focusing on mergers and acquisitions at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn alert by David H. Kennedy, Brian M. GingoldPhil KennyTravis P. Davis, and James D. Lee. 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 22, 2013, in Meso Scale Diagnostics, LLC v. Roche Diagnostics GmbH, C.A. No. 5589-VCP (Del. Ch. 2013), Vice Chancellor Parsons of the Delaware Court of Chancery ruled that a provision in a license agreement prohibiting an assignment by operation of law did not apply to a reverse triangular merger. This ruling eliminates the uncertainty Vice Chancellor Parsons created in his April 2011 motion to dismiss decision in which he indicated that there may be circumstances where a reverse triangular merger could be considered an assignment by operation of law for purposes of an anti-assignment clause.

Background

On June 22, 2010, the plaintiffs filed a complaint alleging that the acquisition by Roche Diagnostics GmbH, C.A. (“Roche”) of BioVeris Corporation (“BioVeris”) through a reverse triangular merger violated the anti-assignment clause found in a 2003 agreement between the plaintiffs and the predecessor entity to BioVeris, among others. The anti-assignment clause that the plaintiffs alleged was breached stated as follows:

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2012 Board Practices Report

The following post comes to us from Maureen Errity, Director, Center for Corporate Governance at Deloitte LLP, and is based on the introduction and key findings of a Deloitte and Society of Corporate Secretaries and Governance Professionals’ report, titled “2012 Board Practices Report;” the full text, including survey results, figures, and appendices, is available here.

The 2012 Board Practices Report (the “Report”) is the eighth edition published by the Society of Corporate Secretaries and Governance Professionals. The Report presents findings from a survey conducted in July and August 2012 of the Society’s membership, which includes 3,000 individuals from more than 1,600 companies of varying sizes, industries, and organizational structures. The questions cover 16 board governance areas, including both established board practices and new trends in board activity.

The Report and its accompanying questionnaire were developed with Deloitte LLP’s Center for Corporate Governance.

Methodology

The survey, administered via an online application, contained a total of 78 questions, not including the sub-questions applicable to questions 16, 17, 19, 37, 50, and 74. A total of 195 individuals participated in the survey, although not all questions were answered by all respondents. In such cases, an “n” value is included with the result. Results from the 2011 Board Practices Report are included where available to show trends in various sections of the Report.

Percentages are based on the number of respondents to a particular question, and in some instances, percentages that should together form a whole may not add up to 100% (e.g., 28% “Yes,” 73% “No”), due to rounding to the nearest whole digit.

Participation in the survey was confidential, and the results provided cannot be attributed to a specific company.

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Who Lives in the C-Suite?

The following post comes to us from Maria Guadalupe of the Economics and Political Science Department at INSEAD, Hongyi Li of the School of Economics at UNSW, and Julie Wulf of the Strategy Unit at Harvard Business School.

In our paper, Who Lives in the C-Suite? Organizational Structure and the Division of Labor in Top Management, which was recently made publicly available on SSRN, we show that top management structures in large US firms have changed significantly since the mid-1980s. Using panel data on senior management positions, we explore the relationship between changes in the structure of the executive team, firm diversification, and IT investments.

We document significant changes in executive team structure over approximately two decades in Fortune 500 firms, with three-fourths of the doubling in the number of positions reporting directly to the CEO being driven by the increased presence of corporate-level functional managers.

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