Monthly Archives: March 2013

Plaintiffs’ Lawyers Target “Say-on-Pay” Disclosures in Annual Proxy Statements

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert by Abbye Atkinson and Paul J. Collins.

This post addresses an emerging litigation trend that entails a higher degree of litigation risk than in past years. Companies familiar with shareholder litigation in the context of mergers and acquisitions transactions know that virtually all material corporate transactions attract plaintiffs’ lawyers who, suing on behalf of shareholders, allege that proxy materials published ahead of a shareholder vote are, for one reason or another, false or misleading. These plaintiffs’ lawyers typically seek a quick settlement in which the issuer avoids a possible injunction delaying the shareholder vote on the proposed transaction by publishing “corrected” disclosure. In return, the plaintiffs’ lawyers demand a fee for the purported “benefit” to the shareholder class.

This proxy season, there has been an uptick in the number of cases in which plaintiffs’ lawyers assert similar claims in connection with “say-on-pay” proxy disclosures and approval of equity incentive plans. Although many of these cases have been dismissed, or motions for preliminary injunctive relief have been denied by the courts, some issuers are electing to settle such claims to avoid even a remote possibility of a delayed annual shareholder meeting and the burden and expense associated with litigation. Recent press reports highlight this growing trend. [1] We outline below the current trend and several suggested strategies for addressing this new proxy litigation.


Collateral Consequences of the UBS and RBS LIBOR Settlements

The following post comes to us from Paul A. Ferrillo, litigation counsel at Weil, Gotshal & Manges LLP. This post is based on an article by Christopher Garcia, Steven Tyrrell, Jill Baisinger, and Matthew Howatt.

In 2002, Arthur Andersen LLP collapsed in the wake of an obstruction of justice conviction. Since then, conventional wisdom has been that the U.S. Department of Justice (DOJ) resists filing criminal charges against large business entities because of fears of another similar failure. Indeed, the DOJ has consistently acknowledged that it considers such risks, and the U.S. Attorneys’ Manual expressly identifies “collateral consequences” as a factor that should be weighed in making charging decisions. In the wake of the Great Recession, however, the DOJ has been faced with competing pressures, especially with respect to financial institutions. On the one hand, the Lehman Brothers bankruptcy, among other bank failures and near-failures, suggested vulnerability on the part of some financial institutions and illustrated the potentially grave consequences that the collapse of a financial institution can have on the broader economy. The DOJ clearly does not want to cause a financial institution to fail. On the other hand, there is a pervasive public sentiment that large financial institutions were responsible for the economic collapse from which the country is only now emerging. Particularly in recent months, the DOJ has been criticized for its decision not to bring criminal charges against any major financial entity.


Dealing with the SEC’s Focus on Protecting Whistleblowers

The following post comes to us from Lawrence A. West, partner focusing on securities-related enforcement maters at Latham & Watkins LLP, and is based on a Latham & Watkins client alert by Mr. West, William R. Baker, and Eric R. Swibel. The full publication, including footnotes, is available here.

As a public company executive officer or general counsel, how should you deal with a disgruntled employee who is or could be an award-seeking SEC whistleblower?

The short answer is, of course, very carefully. For the longer answer, read on.

The SEC’s Cultivation of Whistleblowers

Corporate managers and the SEC tend to have very different views of employees complaining of possible violations. Corporations frequently have painful experiences with troubled employees who see violations that don’t exist. Although the SEC has had similar internal experiences, when it comes to employees of public companies and financial institutions, the SEC is, in the first instance, inclined to believe the employee and not the company.

The Commission and its enforcement staff are unabashedly enthusiastic about rewarding and protecting individual whistleblowers. Congress did not impose the whistleblower award provisions in the Dodd-Frank Act on the Commission. The Commission asked for those provisions, because it believes that many companies are not adequately policed by themselves or their auditors or attorneys, and will not willingly self-report possible violations of the federal securities laws.


Alignment of General and Limited Partner Interests in PE Funds

The following post comes to us from Martin Steindl, former Senior Corporate Governance Officer for the International Finance Corporation (IFC) based in Cairo and Mumbai and now a Senior Corporate Governance Officer for the Netherlands Development Finance Company (FMO) based in Hague. The author would like to thank Gordon I. Myers, Chief Counsel in IFC’s Technology and Private Equity Legal Department, Tom Rotherham, Associate Director for Hermes Equity Ownership Services, and Meera Narayanaswamy, Senior Investment Officer in IFC’s Private Equity Funds Department, for their comments, guidance, and valuable input throughout the drafting process. The views expressed in this post are those of Mr. Steindl and do not reflect those of FMO, IFC, or Hermes Equity Ownership Services.

There are arguably two broad objectives to the governance of any entity including private equity (PE) funds: i) effective and accountable decision-making and ii) aligning interests of different stakeholders. This article focuses on the second of these objectives describing in more detail the difficulties in aligning interests between a general partner (GP) and a limited partner (LP) in a PE fund.

The governance of PE funds is increasingly coming into the spotlight. The Institutional Limited Partners Association (ILPA) revised its Private Equity Principles in 2011 to establish a set of best practices to govern the relationship between GPs and LPs. Also, the UNEP Finance Initiative for Responsible Investment (UNPRI) issued a second version of its guide for LPs in 2011. There are contributions from the European Private Equity and Venture Capital Association (EVCA), the Australian Private Equity & Venture Capital Association Limited (AVCAL), as well as most recently from the International Corporate Governance Network (ICGN)—all on the same topic.


Challenges for the SEC’s Independence

Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Gallagher’s remarks at the Practicing Law Institute’s SEC Speaks in 2013 Program, available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

On a number of occasions since returning to the SEC as a Commissioner, I’ve spoken about the Commission’s priorities, both in terms of what the Commission is doing and what it should be doing in order effectively to carry out its mandate to protect investors, ensure fair and efficient markets, and facilitate capital formation. Needless to say, the Commission does not operate in a vacuum, and for various reasons, it’s not always easy to execute those priorities as we see fit. The constant stream of external influences on the Commission’s work serves as a significant impediment to its ability to focus on the core mission, including the vital, basic “blocking and tackling” of securities regulation. Therefore, I’d like to talk about the Commission’s origin and role as an expert, independent agency — as well as the challenges to that independence — in what has become in recent years a difficult environment for independent agencies.


Important Questions about Activist Hedge Funds

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, Theodore N. Mirvis, Adam O. Emmerich, David C. Karp, Mark Gordon, and Sabastian V. Niles.

In what can only be considered a form of extortion, activist hedge funds are preying on American corporations to create short-term increases in the market price of their stock at the expense of long-term value. Prominent academics are serving the narrow interests of activist hedge funds by arguing that the activists perform an important service by uncovering “under-valued” or “under-managed” corporations and marshaling the voting power of institutional investors to force sale, liquidation or restructuring transactions to gain a pop in the price of their stock. The activist hedge fund leads the attack, and most institutional investors make little or no effort to determine long-term value (and how much of it is being destroyed). Nor do the activist hedge funds and institutional investors (much less, their academic cheerleaders) make any effort to take into account the consequences to employees and communities of the corporations that are attacked. Nor do they pay any attention to the impact of the short-termism that their raids impose and enforce on all corporations, and the concomitant adverse impact on capital investment, research and development, innovation and the economy and society as a whole.


EU Reaches Deal on Proposed Ratio Cap on Bank Bonuses

This post comes to us from John J. Cannon, partner in the Executive Compensation and Employee Benefits Group at Shearman & Sterling LLP.

On 27 February 2013 the European Union (“EU”) reached a provisional deal on imposing a cap on the variable remuneration that can be paid by financial institutions in the EU. If, as expected, this provisional deal is formally approved by the EU Parliament and Council later this year, far-reaching changes will need to be implemented in the remuneration structures of many EU-headquartered banks and non-EU headquartered banks operating in the EU.

The Key Proposals

As part of negotiations on the new capital requirements under the Basel III rules, a provisional deal has been reached on proposed ratio caps on variable pay. The key proposals are: [1]


Optimal Corporate Governance in the Presence of an Activist Investor

The following post comes to us from Jonathan Cohn of the Department of Finance at the University of Texas at Austin and Uday Rajan of the Department of Finance at the University of Michigan.

In our paper, Optimal Corporate Governance in the Presence of an Activist Investor, forthcoming in the Review of Financial Studies, we provide a model of governance in which a board arbitrates between an activist investor and a manager facing reputational concerns. Shareholder activism to force policy changes at publicly-traded firms represents an increasingly important dimension of the market for corporate control. While activist investors represent a source of corporate governance that is external to a firm’s power structure, they differ dramatically from the corporate raiders that are the focus of earlier theories of external governance. In most cases, activist investors accumulate relatively small stakes and so cannot exert direct control. Rather, they must rely on persuasion and the firm’s internal governance mechanisms to implement changes. As Brav et al. (2008) show, activist hedge funds are often successful in influencing managers and boards, and their efforts have a substantial impact on firm value.

How does the presence of such an external governance force affect internal governance policy? To address this question, we analyze a model in which a board, recognizing that an activist shareholder may exert discipline on a manager, chooses an appropriate level of internal governance. To our knowledge, this is the first theoretical article to consider the interaction between an activist, the board, and a manager. We argue that the possibility of disputes between an activist and management creates a natural but novel role for the board of directors that has not been considered previously: It functions as an arbitrator between different stakeholders who wish to take the firm in different directions.


Materiality and Class Certification in Fraud-on-the-Market Cases

Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum and elaborates on a previous post we featured regarding Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, available here.

In Amgen Inc. v. Connecticut Retirement Plans & Trust Funds, No. 11-1085, 2013 WL 691001 (Feb. 27, 2013), the Supreme Court of the United States decided a significant issue concerning the requirements for class certification in actions based on alleged misrepresentations in violation of the federal securities laws. Under Amgen, a plaintiff in such an action is not required to prove the materiality of the alleged misrepresentation in order to obtain class certification. The Amgen decision will make it at least marginally easier for plaintiffs to obtain class certification in some Circuits.

Amgen is likely to be influential in ways that go well beyond its immediate holding. For example, the various opinions in Amgen debate the continuing vitality of the Supreme Court’s decision in Basic Inc. v. Levinson, 485 U.S. 224 (1988), which established the fundamental structure enabling claims under the federal securities laws to be litigated as class actions. These and other implications of the decision are discussed below. Readers not requiring a summary of the framework established in Basic may wish to go directly to section 2.


Complexities of Capital Markets Regulation

Daniel M. Gallagher is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Gallagher’s keynote speech at the 7th Gulf Cooperation Council Regulators’ Summit in Doha, Qatar; the full speech, including footnotes, is available here. The views expressed in the post are those of Commissioner Gallagher and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

We in America often remark that we are blessed by our geography. And there is no doubt that Qataris feel the same about this incredibly unique and beautiful country. In the United States during the post World War II era, our geographical position and natural resources helped our economy develop while others experienced severe disruptions, particularly in Europe. That promoted the development of our capital markets to the great benefit of our citizens, as well as investors foreign and domestic and our partners-in-trade around the world.

It is certainly true that we have suffered our share of economic and financial crises, most recently the crisis that erupted in 2008. Even so, our free market economy and robust capital markets have conferred an enviable prosperity on our people over many years. Indeed, notwithstanding financial crises large and small, it is fair to point out that few in America can remember a time when the United States did not have strong and competitive capital markets.

The risk, however, is that the very resilience of our capital markets has, over time, fostered a latent complacency — a tendency to think strong and competitive markets are, somehow, ours by right — that we are entitled to them when, in reality, we must constantly act — and sometimes decide not to act — in order to preserve the vitality of our markets.

An important part of my job, and that of my colleagues on the Commission, is to ensure that America’s capital markets remain strong and competitive. That’s not just good for U.S. investors, I submit, but equally good for others — for all of you. And, of course, rising global markets are good for the United States.


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