Monthly Archives: May 2013

The Circuits Split on Securities Act Pleading Standards

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, Eric M. Roth, and Warren R. Stern.

Last week, the United States Court of Appeals for the Sixth Circuit held that a claim alleging a false statement of opinion or belief in a registration statement may proceed under Section 11 of the Securities Act notwithstanding the absence of allegations showing that the defendants did not actually hold the opinion or believe the statement. Indiana State District Council of Laborers & Hod Carriers Pension & Welfare Fund v. Omnicare, Inc., (6th Cir. May 23, 2013). The Sixth Circuit’s decision conflicts with decisions of the Second and Ninth Circuits holding that liability under Section 11 for a statement of belief or opinion would exist only if the statement was both objectively and subjectively false or misleading. See Fait v. Regions Financial Corp., 655 F.3d 105 (2d Cir. 2011); Rubke v. Capital Bancorp Ltd., 551 F.3d 1156 (9th Cir. 2009). Under that standard, a Section 11 complaint that fails to plausibly allege that a defendant did not actually believe the false statement or hold the opinion would be dismissed.


Board Evaluation – A Window into the Boardroom

The following post comes to us from Maria Cristina Ungureanu, a consultant at Crisci & Partners.

Board behavior and effectiveness are becoming increasingly visible to investors and other stakeholders. In the past few years, the European Commission has reinforced its focus on the corporate governance matters, issuing several rules and guidelines in this regard. Most of these raise, among other aspects, the issue of increased board responsibility in the corporate governance framework through better functioning and more appropriate structures.

In accordance with most best practice requirements laid out in corporate governance codes, the majority of European listed companies are now conducting board performance evaluations. Board evaluation is increasingly acknowledged as a vital process for improving board performance and dynamics, whatever the size, status or type of organization. If thoroughly conducted, a board evaluation (also called “board assessment”, “board review”) has the potential to significantly enhance board effectiveness, maximize strengths and tackle weaknesses.


Forthcoming Changes to UK’s City Code on Takeovers and Mergers

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 alert by Mr. Roberts, Gareth Jones, and Selina S. Sagayam.

This post provides a brief summary of recent updates to the UK’s City Code on Takeovers and Mergers (the “Code”), the primary rule book governing the regulation of takeovers in the UK, and in particular those relating to the categories of companies that are subject to the Code, as well as certain issues affecting the trustees of offeree companies’ defined-benefit pension schemes.


On April 22, 2013, the Code Committee of the UK Takeover Panel (the “Code Committee”) published its Response Statement to its consultation paper on certain pension scheme issues. This was followed by a Response Statement to its consultation paper on the type of companies that fall within the jurisdiction of the Code, which was published on May 15, 2013. [1] The amendments to the Code to be introduced in relation to those proposals relating to offeree company pension schemes will come into force on May 20, 2013 and an amended version of the Code will be published on that date. The amendments to the Code in relation to those companies and offers that are subject to the Code will take effect on September 30, 2013 (so as to allow any companies that may be affected to make any changes to their constitutional documents and/or operational procedures they feel are appropriate in light of those changes), although the updated Code will apply to any transactions that straddle that date.


Identifying the Valuation Effects and Agency Costs of Corporate Diversification

The following post comes to us from Martin Goetz of the Federal Reserve Bank of Boston; Luc Laeven of the International Monetary Fund and Professor of Finance at Tilburg University; and Ross Levine, Professor of Economics at UC Berkeley.

In our paper, Identifying the Valuation Effects and Agency Costs of Corporate Diversification: Evidence from the Geographic Diversification of U.S. Banks, forthcoming in the Review of Financial Studies, we develop and implement two new approaches for identifying the causal impact of the geographic diversification of bank holding company (BHC) assets on their market valuations. Although we provide some evidence about the factors underlying observed changes in market valuations, our major contribution is in improving identification, not in constructing better measures of scale economies, agency problems, or other factors associated with market valuations. Furthermore, although we primarily use both identification strategies to evaluate the net effect of geographic diversification on BHC valuations, they can be employed to assess an array of questions about bank behavior.

At the core of both identification strategies, we exploit the cross-state, cross-time variation in the removal of interstate bank branching prohibitions to identify an exogenous increase in geographic diversity. From the 1970s through the 1990s, individual states of the United States removed restrictions on the entry of out-of-state banks. Not only did states start deregulating in different years, but states also signed bilateral and multilateral reciprocal interstate banking agreements in a somewhat chaotic manner over time. There is enormous cross-state variation in the twenty-year process of interstate bank deregulation, which culminated in the Riegle-Neal Interstate Banking and Branching Efficiency Act of 1995.


From Vigilance to Vision

Jennifer Mailander is director of CSCPublishing at Corporation Service Company. This post is an excerpt from the 2013 Edition of The Directors’ Handbook, by Thomas J. Dougherty, partner and head of the Litigation Group of Skadden, Arps, Slate, Meagher & Flom LLP.

Directors receive a continuous stream of information and try to be vigilant in order to discern from the mix of background and foreground company data those dissonant notes, those underappreciated inputs, those gaps in analysis. They listen to identify the things that don’t add up.

But it’s getting harder to detect those subtle yet critical notes buried in the morass of reading material now available to directors. Only a few years ago, the volume of pre-meeting materials was limited to the width of a three-ring binder and the size of a standard FedEx box, which typically arrived at the director’s office or home a few days before the meeting. As I’ve pointed out in this Handbook, the director most up-to-speed on these “pre-reading” materials was often the director who made the longest plane trip to attend the meeting. Those directors, poring through their binders stuffed with pre-reading materials, were a common sight in the first-class sections of commercial airliners. The binder was a bulky carry-on, but at least its size limited the volume of pre-reading. Not so anymore.

Today, services like BoardLink permit companies to transmit vast amounts of information to dedicated devices supplied by boards to their directors. There is a consequent proliferation of PowerPoints, appendices, memos, advisories, agendas, draft minutes, and so on. There is also a potential collapse in timing, because content can be added or revised and resent without FedEx deadlines. The result: significantly more pre-reading, less time.

Directors need the board to put reasonable limits and priorities on this phenomenon. It is true that so long as directors make well-informed decisions without conflict of interest, they should not be held liable for business judgments that do not lead to successful outcomes, and under Delaware law can be exonerated from personal liability by company charter so long as they meet that standard of conduct. However, having more data does not necessarily mean that directors are better informed.


Federal Reserve Board Governor Tarullo Outlines Potential Regulatory Initiatives

H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell publication by Mr. Cohen and Samuel R. Woodall III.

On May 3, 2013, Federal Reserve Board Governor Daniel Tarullo delivered a speech outlining potential regulatory initiatives before the Peterson Institute for International Economics in Washington, D.C. In this speech, entitled “Evaluating Progress in Regulatory Reforms to Promote Financial Stability,” Governor Tarullo acknowledged that substantial progress has been made in achieving financial regulatory reform, but he maintains that much more is still needed. [1]

Even beyond the substantive impact of the reforms proposed by Governor Tarullo, his speech is particularly noteworthy for two reasons. First, Governor Tarullo oversees the Federal Reserve Board’s banking supervision and regulation function and was recently appointed as Chairman of the Financial Stability Board’s Standing Committee on Supervisory and Regulatory Cooperation. Second, in the past, Governor Tarullo has used similar speeches to forecast the Federal Reserve’s upcoming regulatory initiatives.

Governor Tarullo’s speech focuses on three general areas of increased regulatory scrutiny: (1) large financial institutions generally; (2) large financial institutions that rely on short-term wholesale funding; and (3) short-term wholesale funding markets, in particular those for securities financing transactions (SFTs). Governor Tarullo proposes a number of regulatory requirements to address what he perceives as the unfinished business of regulatory reform, including both macro- and micro-prudential requirements at an institution-specific level and market practice level.


Harvard Convenes the M&A Roundtable

The Harvard Law School Program on Corporate Governance convened its Mergers & Acquisitions Roundtable last Wednesday, May 22. The M&A Roundtable brought leading experts in the M&A field from the judiciary, legal practice, the academy, investment banking, proxy advising and soliciting, and the investor community. The topics of discussion and participants in the event are set out below.

The morning session of the M&A Roundtable focused on issues concerning acquisitions, both friendly and hostile. Among the issues discussed were management buyouts and private equity buyouts; deal-protection terms and go-shop provisions; the proliferation of M&A litigation; forum shopping and forum selection and arbitration clauses; reform of Section 13(d); and poison pills and other takeover defenses.

The afternoon session of the M&A Roundtable focused on hedge fund activism and shareholder activism more generally. Among the issues discussed were compensation for dissident directors, proxy advisors, universal ballots, and the short-term and long-term effects of shareholder activism.

The participants in the M&A Roundtable included:


Delaware Court Declines to Enjoin Merger Vote, Affirming Single-Bidder Strategy

The following post comes to us from Robert B. Schumer, chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum. 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.

In In re Plains Exploration & Production Co. S’holder Litig., the Delaware Court of Chancery denied the plaintiffs’ request to enjoin a merger between Plains Exploration & Production Company and Freeport-McMoran Copper & Gold even though the Plains board of directors (1) did not shop Plains before agreeing to be acquired by Freeport for a combination of cash and stock, (2) did not obtain price protection on the stock component of the merger consideration and (3) allowed its CEO (who Freeport had decided to retain after closing) to lead negotiations with Freeport. The Court also held that the estimates of future free cash flows prepared by Plains’ financial advisor did not need to be disclosed in Plains’ proxy materials because management’s estimates of cash flows were already disclosed.

In early 2012, the CEOs of Freeport and Plains discussed an acquisition of Plains by Freeport. The Plains board did not shop the company to other potential buyers or form a special committee, instead allowing the CEO to lead negotiations with Freeport even after becoming aware of the fact that Freeport had determined to retain the Plains CEO after the merger. The Court noted that the Plains CEO was “motivated to obtain the best deal possible” given that a higher merger price would have resulted in a larger payout to him as a substantial stockholder (although ultimately he agreed to roll his stock into the post-merger company).


NY State Department of Financial Services at the One-Year Mark

The following post comes to us from Jayant W. Tambe, partner focusing on litigation concerning securities, derivatives, and other financial products at Jones Day, and is based on a Jones Day commentary; the full text, including footnotes, is available here.

Since the New York State Department of Financial Services (“DFS”) began operations in late 2011, the agency appears to have lived up to its billing as an activist regulator of insurers and financial institutions. DFS has taken on several novel issues and will likely continue to do so. Insurers and financial institutions doing business in New York should keep DFS on their radar given the scope of its regulatory mandate and its initial enforcement activities since inception. Institutions outside New York may also want to monitor DFS’s initiatives, which may pique the interest of federal or state law enforcement and regulatory agencies in other jurisdictions and lead to similar or parallel initiatives.

DFS’s Actions Since Inception

On October 3, 2011, the former New York State Banking and Insurance Departments were combined to create DFS. The 4,400 entities DFS supervises have about $6.2 trillion in assets and include all insurance companies in New York, all depository institutions chartered in New York, the majority of United States-based branches and agencies of foreign banking institutions, mortgage brokers in New York, and other financial service providers.


Sponsor-Backed Going Private Transactions

Douglas P. Warner is a partner and head of US Private Equity and Hedge Fund practices at Weil, Gotshal & Manges LLP. This post is based on the methodology and key findings of a Weil survey; the full publication is available here. The previous edition of this survey is available here.

Research Methodology

Weil surveyed 40 sponsor-backed going private transactions announced from January 1, 2012 through December 31, 2012 with a transaction value (i.e., enterprise value) of at least $100 million (excluding target companies that were real estate investment trusts).

For United States transactions to be included in the survey, the transaction must have closed or such transaction remains pending.

Twenty-four of the surveyed transactions in 2012 involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific. The publicly available information for certain surveyed transactions did not disclose all data points covered by our survey; therefore, the charts and graphs in this survey may not reflect information from all surveyed transactions.

The 40 surveyed transactions included the following target companies:


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