Monthly Archives: April 2013

The Myth that Insulating Boards Serves Long-Term Value

Posted by Lucian Bebchuk, Harvard Law School, on
Monday, April 22, 2013
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Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. This post is based on his article, The Myth that Insulating Boards Serves Long-Term Value, forthcoming this fall in the Columbia Law Review, available here.

In a new study, The Myth that Insulating Boards Serves Long-Term Value (forthcoming, Columbia Law Review, October 2013), I comprehensively analyze – and  debunk – the view that insulating corporate boards serves long-term value.

Advocates of board insulation claim that shareholder interventions, and the fear of such interventions, lead companies to take myopic actions that are costly in the long term – and that insulating boards from such pressure therefore serves the long-term interests of companies and their shareholders. This claim is regularly invoked to support limits on the rights and involvement of shareholders and has had considerable influence. I show, however, that this claim has a shaky conceptual foundation and is not supported by the data.

In contrast to what insulation advocates commonly assume, short investment horizons and imperfect market pricing do not imply that board insulation will be value-increasing in the long term. I show that, even assuming such short horizons and imperfect pricing, shareholder activism, and the fear of shareholder intervention, will produce not only long-term costs but also some significant countervailing long-term benefits.

Furthermore, there is a good basis for concluding that, on balance, the negative long-term costs of board insulation exceeds its long-term benefits. To begin, the behavior of informed market participants reflects their beliefs that shareholder activism, and the arrangements facilitating it, are overall beneficial for the long-term interest of companies and their shareholders. Moreover, a review of the available empirical evidence provides no support for the claim that board insulation is overall beneficial in the long term; to the contrary, the body of evidence favors the view that shareholder engagement, and arrangements that facilitate it, serve the long-term interests of companies and their shareholders.

I conclude that, going forward, policy makers and institutional investors should reject arguments for board insulation in the name of long-term value.

Here is a more detailed account of the analysis in the article:

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Basel Committee Proposes to Double Down on Counterparty Exposure Limits

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 22, 2013
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The following post comes to us from Charles Horn, partner focusing on banking and financial services matters at Morrison & Foerster LLP, and is based on a client alert by Mr. Horn, Oliver Ireland and Jeremy Jennings-Mares.

On March 26, the Basel Committee on Banking Supervision (“Basel Committee”) published a Consultative Document in which it proposes a revised supervisory framework for measuring and controlling large counterparty exposures (“Proposal,” or “Exposure Framework”) of systemically important financial institutions (“SIFIs”). Comments on the Proposal are due by June 28, 2013.

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Empty Voting Revisited: The Telus Saga

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 22, 2013
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The following post comes to us from Wolf-Georg Ringe, Professor of International Commercial Law at Copenhagen Business School.

This blog has repeatedly reported on the use of empty voting strategies at the Canadian telecommunications provider Telus Corporation. (see, e.g., here and here). Empty voting – that is, the strategic separation of economic risk from voting rights – has been considered by courts, regulators and academics over the past years in various forms. The latest account is the case of Canadian telecommunications company Telus, which became the target of US hedge fund Mason Capital. After a lengthy battle in various courtrooms, the dust has settled around this conflict. The Telus saga sheds new light on how empty voting structures are used by businesses in practice and supports calls for regulatory activity. In my recent paper, Empty Voting Revisited: The Telus Saga, I analyze the various instances of this important legal battle and develop regulatory implications.

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Federal Reserve Board Approves Final Rule for Nonbank Firms

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, April 21, 2013
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The following post comes to us from Charles Horn, partner focusing on banking and financial services matters at Morrison & Foerster LLP, and is based on a Morrison & Foerster memorandum by Mr. Horn.

On April 3, the Federal Reserve Board (“Board”) published a final rule (“Rule”) specifying when a financial company that may be made subject to systemic regulation under Title I of the Dodd-Frank Wall Street Accountability and Consumer Protection Act (“Dodd-Frank Act”) is “predominantly engaged in financial activities” for purposes of being designated for systemic regulation under the Dodd-Frank Act. The Rule is effective on May 6, 2013.

As discussed below, the net effect of the Rule would be to expand the types of activities that might qualify as financial activities for purposes of applying the “predominantly engaged” test, and thus broaden the population of large nonbank firms that might be designated as systemically important financial firms, under the Dodd-Frank Act. Accordingly, large nonbank financial firms should pay close attention to the Rule’s requirements and its potential impact on them.

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Apple’s Cash-Flow Problem

Posted by Mark Roe, Harvard Law School, on
Saturday, April 20, 2013
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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 most recent op-ed written for the international association of newspapers Project Syndicate, which can be found here.

I recently examined the problem of corporate short-termism from two nonstandard angles. One was that some short-termism is sensible. Large firms face an increasingly fluid economic, technological, and political environment – owing to more global and competitive markets, to the greater potential of technological change to alter firms’ business environment, and to governments’ growing influence over what makes business sense. In this kind of a fluid environment, large companies must be cautious before making large, long-term commitments.

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Bank Regulators Tackle Leveraged Lending

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, April 20, 2013
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The following post comes to us from Derrick D. Cephas, partner in the Corporate Department at Weil, Gotshal & Manges LLP and head of the firm’s Financial Institutions Regulatory practice group. The following post is based on a Weil Gotshal alert by Mr. Cephas and Dimia Fogam.

On March 22, 2013, the Office of the Comptroller of the Currency (OCC), the Board of Governors of the Federal Reserve System (FRB), and the Federal Deposit Insurance Corporation (FDIC) (collectively, the “bank regulators”) released their final guidance on leveraged lending activities. [1] The final guidance does not deviate significantly from the proposed guidance released last year on March 26, 2012, but does attempt to provide clarity in response to the many comment letters relating to the proposed guidance received by the bank regulators. The final guidance is the latest revision and update to the interagency leveraged finance guidance first issued in April 2001. [2]

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Getting Back to Basics with Rule 10b5-1 Trading Plans

Posted by Brian Breheny, Skadden, Arps, Slate, Meagher & Flom LLP, on
Friday, April 19, 2013
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Brian V. Breheny is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. The following post is based on a Skadden memorandum by Mr. Breheny, Katherine D. Ashley, and Amber K. Hillard.

In late 2012, The Wall Street Journal published a number of articles that analyzed the trading practices of certain public company executives, in many cases under trading plans that were entered into in accordance with the affirmative defense provisions adopted by the U.S. Securities and Exchange Commission (SEC) pursuant to Rule 10b5-1 under the Securities Exchange Act of 1934. [1] The trades examined in the Journal articles were called into question because they were sizable and were reported to have occurred shortly before company news updates. The articles also compared returns by executives who traded irregularly against those who followed a consistent pattern, and concluded that irregular trading resulted in greater gains. These articles have reignited interest in “best practices” for Rule 10b5-1 trading plans.

The Council of Institutional Investors (CII), a group of pension funds that oversees more than $3 trillion in assets, has picked up on the issue of potential misuse of Rule 10b5-1 trading plans and submitted a rulemaking petition to the SEC requesting interpretive guidance or amendments to Rule 10b5-1. [2] CII recommends that the SEC:

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Delaware M&A Quarterly

Posted by Toby S. Myerson, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Friday, April 19, 2013
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Toby Myerson is a partner in the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-head of the firm’s Global Mergers and Acquisitions Group. The following post is based on a Paul Weiss memorandum, and 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.

In this issue, we discuss several cases of significance to the M&A practice, including In re Ancestry.com, In re Bioclinica, In re BJ’s Wholesale Club, Kallick v. Sandridge Energy and Meso Scale Diagnostics v. Roche Diagnostics, as well as some market trends that may be of interest.

Board Enjoined From Impeding Consent Solicitation Until It Approves Insurgent Slate for Purposes of Credit Agreement

In Kallick v. SandRidge Energy, Inc., the Delaware Court of Chancery, in an opinion by Chancellor Strine, enjoined the incumbent board of SandRidge Energy, which faced a consent solicitation initiated by a large stockholder seeking to de-stagger and replace the board, from, among other things, soliciting against or otherwise impeding the consent solicitation until the board approved the rival slate for purposes of a “proxy put” provision in SandRidge’s credit agreements. The Kallick decision, along with the Court of Chancery’s earlier decision in San Antonio Fire & Police Pension Fund v. Amylin Pharmaceuticals, confirm that corporations, as a matter of process, should carefully consider and review whether proxy put and other similar change-of- control provisions in credit agreements and indentures are truly in the best interests of the stockholders. For more detail, click here.

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Rethinking “One Share, One Vote”

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, April 19, 2013
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Simon C.Y. Wong is a partner at Governance for Owners, an adjunct professor of law at the Northwestern University School of Law, and a visiting fellow at the London School of Economics and Political Science.

“One-share, one-vote,” a bedrock principle of Anglo-Saxon corporate governance, is back in the spotlight. Except this time the aim is to diminish its application rather than to extend its global footprint. Rising short-termism among investors — which threatens to destabilize both companies and the wider economy — is prompting a reconsideration of the principle that all shareholders should have equal say.

Prominent commentators such as former U.S. Vice President Al Gore, McKinsey Managing Director Dominic Barton and blog, and Vanguard Group founder John Bogle have advocated bolstering the voting rights of long-term shareholders or, conversely, withholding them from short-term investors. Significantly, the Financial Times reported last week that the European Commission was preparing a proposal to give “loyal” shareholders extra voting influence.

Seeking insulation from near-term pressures, Facebook, LinkedIn, Groupon, and other Silicon Valley outfits went public in recent years with dual-class shares that gave their founders — believed to be the most committed to their long-term success — voting power of up to 150 times greater than those accorded outside investors. Google, which adopted a similar share structure at the time of its initial public offering in 2004, has gone further with its decision last spring to issue non-voting stock.

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A Few Observations in the Private Fund Space

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, April 18, 2013
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The following post comes to us from David W. Blass, chief counsel of the Division of Trading and Markets, U.S. Securities and Exchange Commission, and is based on Mr. Blass’ remarks before the American Bar Association’s Trading and Markets Subcommittee in Washington, D.C., available here. The views expressed in this post are those of Mr. Blass and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

I have had the great pleasure over the last year or so to work with Dana [Fleischman, Chair of the Trading and Markets Subcommittee] and other members of the Trading and Markets Subcommittee and other ABA groups on a number of initiatives surrounding one broad and oftentimes tricky question: when is a person required to register with the SEC as a broker-dealer? Not exactly a prime subject for a TED Talk, but this group knows how vitally important it is to settle some of the questions that have been open for a decade or more about who needs to register with the SEC as a broker-dealer.

I and my staff have already begun talking with you about such perennial hits as placement agents, so-called “finders,” and business or M&A brokers. Most recently, we have had lengthy discussions with various members of this subcommittee about Rule 15a-6, the rule exempting from registration certain non-U.S. resident persons engaged in business as a broker or dealer entirely outside the U.S. These discussions led the staff to publish responses to frequently asked questions about the rule to address some of the issues that you have told us have been a source of confusion. [1] We view the FAQs as an initial set of staff guidance about issues that commonly arise under Rule 15a-6. They do not break new ground, but I believe they are important to ensuring that regulators and market participants are operating under a common understanding of how the rule works. We are very much open to exploring opportunities for additional guidance through subsequent FAQs.

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