Monthly Archives: April 2013

Federal Court Dismisses Delaware Law Compensation Disclosure Claim

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, Warren R. Stern, Jasand P. Mock, and Kim B. Goldberg. 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.

We have previously discussed a wave of “say-on-pay” lawsuits focused on allegedly inadequate proxy disclosures (in a memo, article, and memo). At least six courts (four state and two federal) have denied requests for injunctive relief against say-on-pay votes. Now, a federal court that had already denied preliminary injunctive relief has dismissed the complaint with prejudice. Noble v. AAR Corp., No. 12 C 7973 (N.D. Ill. Apr. 3, 2013).

Applying Delaware and federal law, the Northern District of Illinois held that Delaware law did not require a company soliciting proxies in advisory say-on-pay vote to disclose information beyond that specified in Regulation S-K:

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Significant Proposed Amendments to DGCL in 2013

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

Legislation proposing to amend the General Corporation Law of the State of Delaware (the “DGCL”) and related sections of title 8 of the Delaware Code has been submitted to the Corporation Law Section of the Delaware State Bar Association for approval. If the amendments become effective, they would result in several significant changes to the DGCL. The primary components of the proposed legislation, if adopted, would address the following:

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Wachtell Lipton Was Wrong About the Shareholder Rights Project

Lucian Bebchuk is the Director of the Shareholder Rights Project(SRP). 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. This post responds to four memoranda issued by Wachtell Lipton Rosen & Katz, available on the blog here, here, here, and here.

In a memorandum issued recently by the law firm Wachtell, Lipton, Rosen & Katz (WLRK), WLRK co-founder Martin Lipton criticized me for supporting shareholder activism that allegedly has detrimental effects in the long term. The memorandum followed two earlier, strongly-worded WLRK memoranda signed by Lipton and several other prominent corporate partners at the firm, titled “The Shareholder Rights Project is Wrong” and “The Shareholder Rights Project is Still Wrong“. Those memoranda criticized the work of a program I direct, the Shareholder Rights Project (SRP), for destroying long-term value by contributing to numerous board declassifications.

I am currently carrying out research work that addresses the view held by WLRK and others that investor activism is generally detrimental to the long-term interests of companies and their shareholders. In the meantime, however, the SRP’s recent release of its 2013 results provides an appropriate opportunity to respond to WLRK claims that the SRP’s work, in particular, has contributed to the destruction of long-term value. As I explain below, these results indicate that relevant institutional investors and corporate boards have largely rejected WLRK’s views – and require that WLRK reconsider its position.

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A Reply to Professor Bebchuk

Editor’s Note: 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 a reply to a simultaneously published post by Professor Lucian Bebchuk, which in turn responds to several Wachtell Lipton memoranda. Professor Bebchuk’s post is available here, and the four memoranda to which he responds are available here, here, here, and here.

I respectfully take issue with Professor Bebchuk’s analysis and conclusions. Professor Bebchuk’s empirical evidence consists basically of cherry-picked stock market prices and a unanimous vote in favor of shareholder-centric governance by institutional shareholders. Professor Bebchuk’s hyperbole cannot disguise the fact that his shareholder-centric model promotes short-termism and that it is this short-term focus on capital allocation and other business decisions that has led to the decline of the American economy and greater unemployment. When one attempts to parse his syllogism, it doesn’t hold-together. Apparently, Professor Bebchuk believes that classified boards can’t be bad unless directors are bad, or else they would have all committed ritual suicide rather than ever agree to declassification.

Should Shareholders Have a Say on Executive Compensation?

The following post comes to us from Marinilka Kimbro of the Department of Accounting at Seattle University and Danielle Xu of the Department of Finance at Gonzaga University.

In our paper, Should Shareholders Have a Say on Executive Compensation? Evidence from Say-on-Pay in the United States, which was recently made publicly available on SSRN, we examine the SEC 2011 regulation requiring an advisory (non-binding) shareholder vote on the compensation of the top five highest paid executives – “say-on-pay” (SOP). In July of 2010, Section 951 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank) was signed into law requiring all public companies to give their shareholders the opportunity to cast a “non-binding” advisory vote to approve or disapprove the compensation of the 5 highest paid executives at least once every 3-years. The Securities and Exchange Commission (SEC) implemented “say-on-pay” (SOP) in January of 2011, and since then, shareholders in the US have “had their say” on executive compensation packages for two years: 2011 and 2012. To date, the SOP shareholders’ votes overwhelmingly approved the executive compensation proposals by a majority of votes (>than 50 percent) giving broad support to management pay packages (Cotter et al., 2012). Only 1.2 percent of the Russell 3000 failed the SOP proposal in 2011 and 2.5 percent failed in 2012 obtaining less than 50 percent approval. However, around 10 percent of firms received more than 30 percent opposition or “rejection” votes.

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Delaware Court Limits Non-Delaware Dismissal

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Mirvis, William Savitt, 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 the Delaware Supreme Court decision discussed below is available here.

The Delaware Supreme Court held that the Court of Chancery erred by failing to give preclusive effect to an earlier with-prejudice dismissal of a parallel derivative suit in another state, and by creating a presumption that all plaintiffs who file derivative suits without first conducting books-and-records inspections are inadequate representatives. Pyott v. La. Mun. Police Emps.’ Ret. Sys., No. 380, 2012 (Del. Apr. 4, 2013). The decision stresses the importance of interstate comity and the need to give full faith and credit to the decisions of other courts.

Allergan is a drug company that incurred losses in resolving civil and criminal investigations of off-label drug marketing. Derivative suits were filed in both federal court in California and the Court of Chancery alleging that Allergan’s directors were liable for the losses because they failed to properly monitor the company’s marketing practices. The Delaware shareholder plaintiff obtained documents through a books-and-records inspection under 8 Del. C. § 220 before filing suit. The California plaintiffs did not, but later amended their complaints when the Delaware plaintiff shared the documents. Defendants moved to dismiss in both jurisdictions. The California federal court ruled first, dismissing with prejudice for failure to establish demand futility. The Court of Chancery refused to give preclusive effect to that ruling, applying Delaware law to the preclusion question. Turning to the merits, Chancery disagreed with the federal court, holding that demand was futile and that the case should proceed.

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Managerial Attitudes and Corporate Actions

The follow post comes to us from John Graham, Campbell Harvey, and Manju Puri, all of the Fuqua School of Business at Duke University.

In our paper, Managerial Attitudes and Corporate Actions, forthcoming in the Journal of Financial Economics, we use a survey-based approach to provide new insight into the people and processes behind corporate decisions. This method allows us to address issues that traditional empirical work based on large archival data sources cannot. For example, we are able to administer psychometric personality tests, gauge risk-aversion, and measure other behavioral phenomena. Our mode of inquiry is similar to those of experimental economists (who often administer gambling experiments) and psychologists (who administer psychometric tests). As far as we are aware, no other study attempts to measure attitudes of senior management directly through personality tests to distinguish CEOs from others and U.S top level executives from non-US top level executives. We also relate CEO attributes to firm-level policies.

Our survey quantifies behavioral traits of senior executives and also harvests information related to career paths, education, and demographics. We ask these same questions of chief executives and chief financial officers, among public and private firms, and in both the US and overseas. We can thus compare traits and attitudes for US and non-US CEOs to see if there is indeed a significant difference in attitudes. We also ask questions related to standard corporate finance decisions such as leverage policy, debt maturity, and acquisition activity. This allows us to relate attitudes and managerial attributes to corporate actions. We also examine how managerial attributes such as risk-aversion and time preference relate to compensation at the firm level.

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Securities Class Action Settlement Amounts Increase from 2011

John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Ellen M. Ryan and Laura E. Simmons, titled “Securities Class Action Settlements—2012 Review and Analysis,” available here.

The 53 court-approved securities class action settlements reported in 2012 represent a 14-year low, according to Securities Class Action Settlements—2012 Review and Analysis by Cornerstone Research. This represents an 18 percent decrease from the number of approved settlements in 2011, and a decline of more than 45 percent from the 10-year average from 2002 through 2011.

As securities class actions historically take a number of years to settle, the decrease in settlements may be due in part to the relatively low number of securities class actions filed in 2009 and 2010. Despite the decrease in the number of cases settled, total settlement amounts increased by more than 100 percent in 2012 compared with 2011, with the number of mega-settlements (settlements in excess of $100 million) accounting for nearly 75 percent of all 2012 settlement dollars. One-third of the settlements in 2012 were for issuers in the financial services industry, with the technology and pharmaceutical industries being the next most prevalent sectors.

The average reported settlement amount dramatically increased from 2011 levels—in excess of 150 percent (from the inflation-adjusted amount of $21.6 million in 2011 to $54.7 million in 2012). The average settlement amount in 2012, however, is closer to the average for all prior post–Reform Act cases.

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Shareholder Activism in the UK: An Introduction

The following post comes to us from Jeffery Roberts, a senior partner in the London office of Gibson, Dunn and Crutcher, and is based on a Gibson Dunn alert by Mr. Roberts, Gareth Jones, and Selina S. Sagayam.

This post provides a summary of certain principles of English law and UK and European regulation applicable to UK-listed public companies and their shareholders that may affect shareholder activism, namely (i) stake-building, (ii) shareholders’ rights to require companies to hold general meetings, (iii) shareholders’ rights to propose resolutions at annual general meetings and (iv) recent developments in these and related areas.

I Own or Am Intending to Acquire Shares; Do I Need To Make Any Disclosures?

The UK’s disclosure obligations (under the UK Listing Authority’s Disclosure and Transparency Rules (the “DTRs”)) apply once a person (or persons acting in concert) has (or together have) a holding of 3 per cent. or more of a listed company’s total voting rights and capital in issue (either as a shareholder or through a direct or indirect holding of relevant financial instruments) unless the relevant listed public company enters an “offer period” (as to which, see below). Thereafter, any changes to that holding that cause the size of the holding to reach, exceed or fall below every 1 per cent. above the 3 per cent. threshold (i.e. reaching, exceeding or falling below 4, 5, 6 per cent. etc.) must be disclosed by the relevant shareholder(s) to the listed company and the listed company is then obliged to announce those disclosures to the market. In addition, the disclosure obligations extend to the disclosure of voting rights held by a person as an indirect holder of shares, such as where a person is entitled to acquire, dispose of or exercise the voting rights attaching to shares (for example, via synthetic holdings or contract(s) for difference). It is important to note that any indirect holdings must be aggregated and separately identified in the relevant notification(s).

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Systemic Risk and Stability in Financial Networks

Daron Acemoglu is a Professor of Economics at Massachusetts Institute of Technology.

The recent financial crisis has rekindled interest in the relationship between the structure of the financial network and systemic risk. Two polar views on this relationship have been suggested in the academic literature and the policy world. The first maintains that the “incompleteness” of the financial network can be a source of instability, as individual banks are overly exposed to the liabilities of a handful of financial institutions. Thus, according to this argument, a more complete financial network, which limits the exposure of the banks to any one counterparty would be less prone to systemic failures. The second view, in stark contrast, hypothesizes that it is the highly interconnected nature of the financial system that contributes to its fragility, as it facilitates the spread of financial distress and solvency problems from one bank to the rest in an epidemic-like fashion.

In our recent NBER working paper, Systemic Risk and Stability in Financial Networks, my co-authors (Asuman Ozdaglar of MIT and Alireza Tahbaz-Salehi of Columbia Business School) and I provide a tractable theoretical framework for the study of the economic forces shaping the relationship between the structure of the financial network and systemic risk. We show that as long as the magnitude (or the number) of negative shocks is below a critical threshold, a more equal distribution of interbank obligations leads to less fragility. In particular, all else equal, the sparsely connected ring financial network (corresponding to a credit chain) is the most fragile of all configurations, whereas the highly interconnected complete financial network is the configuration least prone to contagion. In line with the observations made by Allen and Gale (2000), our results establish that, in the more complete networks, the losses of a distressed bank are passed to a larger number of counterparties, guaranteeing a more efficient use of the excess liquidity in the system in forestalling defaults.

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