Monthly Archives: May 2013

Manager-Shareholder Alignment, Shareholder Dividend Tax Policy, and Corporate Tax Avoidance

The following post comes to us from Dan Amiram of the Accounting Division at Columbia University, Andrew Bauer of the Department of Accountancy at the University of Illinois at Urbana-Champaign, and Mary Margaret Frank of the Darden School of Business at the University of Virginia.

In our paper, Manager-Shareholder Alignment, Shareholder Dividend Tax Policy, and Corporate Tax Avoidance, which was recently made publicly available on SSRN, we move away from equity compensation as a measure of manager-shareholder alignment and exploit a unique setting exogenous to the firm to assess the effect of manager-shareholder alignment on corporate tax avoidance. Our setting capitalizes on variation in the value to shareholders from corporate tax avoidance, which is driven by a country’s shareholder dividend tax policy. Firms in the United States, such as the ones examined in the prior literature, are subject to a classical tax system. Corporate earnings are taxed at the firm level and then again at the shareholder level when they are distributed as a dividend (i.e., double taxation). Therefore, corporate tax avoidance increases after-tax cash flows creating either more private benefits for managers or higher after-tax cash flows to shareholders. Other countries around the world employ an imputation tax system. In contrast to a classical system, an imputation system imposes taxes on corporate earnings at the firm level, but these corporate taxes paid are credited against the shareholders’ taxes when earnings are distributed as dividends. This credit causes the total tax paid on earnings to be equal to the shareholders’ tax (i.e., single taxation), so corporate tax avoidance increases after-tax cash flows available for managers’ private benefits but does not increase the after-tax cash flows to shareholders. Because corporate tax avoidance is costly, it actually reduces the after-tax cash flows to shareholders under an imputation system and makes them worse off.


U.S. Insider Trading Enforcement Goes Global

The following post comes to us from Michael Feldberg, partner and head of the U.S. litigation practice at Allen & Overy LLP. This post is based on an Allen & Overy memorandum; the full text, including footnotes, is available here.

A recent inquiry into potential insider trading in Switzerland ahead of the acquisition of H.J. Heinz Company has drawn attention to the role of U.S. regulators in policing suspicious trading activities that take place outside of the United States. While the Heinz matter has attracted significant media attention, it is only the latest in a string of similar cross-border inquiries and enforcement actions undertaken recently by the U.S. Securities and Exchange Commission (SEC). As these matters demonstrate, the SEC has in recent years shown an increasing willingness to pursue insider trading enforcement actions with substantial international dimensions. In the words of former SEC Enforcement Chief Robert Khuzami, “offshore trading is not off-limits to U.S. law enforcement.”

Historically, many of the SEC’s insider trading cases with international angles were simply the outgrowth of cases that were primarily domestic in nature. In recent years, however, a number of the SEC’s insider trading matters have involved significant overseas conduct (e.g., foreign traders operating through foreign accounts) and consequently a high number of foreign defendants. In many of these matters, the jurisdictional nexus between the suspicious conduct and the U.S. market is increasingly attenuated (including at least one recent example in which the sole basis appears to have been that a particular securities transaction was cleared through a U.S. brokerage account). While individuals or firms who choose to litigate insider trading cases against the SEC may be able to raise defenses to the SEC’s arguably extraterritorial exercise of its jurisdiction under certain factual scenarios, the mere prospect of an SEC investigation – including significant legal costs and corresponding reputational impact – should cause internationally active firms to take note of the breadth and intensity of the SEC’s focus on cross-border insider trading matters.


Addressing Conflicts of Interest in the Credit Ratings Industry

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Credit Ratings Roundtable, available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I strongly support the Commission’s effort to evaluate ways to improve our credit ratings system. Effective oversight of Nationally Recognized Statistical Rating Organizations (“NRSROs”) is critical to ensuring accurate ratings and promoting investor confidence.

As an SEC Commissioner, I have focused singularly on how the SEC can best serve the needs of investors. It is clear that the role played by credit rating agencies can have an impact on the integrity of our markets and investor confidence. [1]

Today’s roundtable and the Commission’s December 2012 Report to Congress on Assigned Credit Ratings are direct outgrowths of industry practices that permitted inaccurate ratings to undermine the securities market and the integrity of the credit ratings industry. [2]


SEC Publishes Proposed Rules Regarding Cross-Border Security-Based Swap Transactions

The following post comes to us from Robert Buckholz, partner and co-coordinator of the Corporate and Finance Group at Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication.

Yesterday the Securities and Exchange Commission (“SEC”) proposed rules and interpretive guidance regarding the application of the U.S. regulatory regime to cross-border security-based swap (“SBS”) transactions. The proposals also address the impact of cross-border SBS transactions on the registration obligations of security-based swap dealers (“SBSDs”), major security-based swap participants (“MSBSPs”), SBS clearing agencies, SBS execution facilities and SBS swap data repositories (“SDRs”).

The proposed rules also would establish a framework of “substituted compliance” under which certain participants in the SBS market may comply with non-U.S. regulatory regimes that the SEC determines to be comparable with U.S. requirements, in lieu of the rules that would otherwise apply to these participants. The proposed rules will be open for comment for 90 days after the date of their publication in the Federal Register.

The SEC separately voted to reopen, for 60 days, the comment period for all rules relating to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) that are not yet final. This 60-day comment period also applies to the related SEC policy statement describing the expected order for these rules to take effect.

The proposing release is more than 600 pages long and requests public comment on numerous topics. This post provides a preliminary outline of a few key aspects of the proposals. We will publish a more detailed memorandum on the proposed rules and interpretive guidance shortly.


Comparative Company Law: Case Based Approach

The following post comes to us from Mathias Siems of Durham University and David Cabrelli of Edinburgh University, UK.

There has been an exponential growth in interest in comparative company law in recent years. For example, in the period from 2002 to 2011, no fewer than ten monographs or edited collections were published exploring this new field of enquiry. The burgeoning literature was mirrored by an increase in University Postgraduate courses or programs in comparative company law and corporate governance. Moreover, the dissolution of trade barriers and mass cross-border capital flows engendered by the forces of competition and globalization have necessitated legal practitioners to be conversant with the company laws of jurisdictions other than their own.

In Mathias Siems and David Cabrelli (eds.), Comparative Company Law: A Case Based Approach, Hart Publishing, 2013 (publisher’s website; introduction on SSRN) we have aimed to fill an important gap in this field. Existing books on comparative company law tend to focus on the institutional structure of the corporation but this approach risks overlooking specific cases and how the issues arising from disputes are resolved in different jurisdictions. For example, topics related to directors’ liability, creditor protection and shareholders’ rights may best be understood by analyzing how selected hypothetical cases would be solved in different countries.


Merely Cracking the Glass Ceiling is Not Enough

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Women’s Executive Circle of New York; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Throughout my tenure as an SEC Commissioner, I have spoken out repeatedly on the subject of diversity – and the benefits it can bring to our economy. I strongly believe in the importance of diversity and inclusion. I continue to be deeply concerned with the lack of significant progress in the recruitment, retention, and promotion of women and persons of color – whether in corporate boardrooms, Wall Street, or at my own agency, the SEC.

Today, although much of what I will say applies equally to other forms of diversity such as race and ethnicity, I will focus my remarks on the important issue of gender diversity in corporate America – particularly:

  • The wealth of talent and positive impact of gender diversity;
  • The dismal lack of progress in increasing gender diversity on corporate boards; and
  • Improving disclosures about diversity, or the lack thereof.


Disclosure of Non-GAAP Financial Measures

The following post comes to us from David J. Goldschmidt, partner in the corporate finance department at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert; the full text, including footnotes, is available here.

Companies commonly supplement their reported earnings under U.S. generally accepted accounting principles (GAAP) with non-GAAP financial measures that they believe more accurately reflect their results of operations or financial position or that are commonly used by investors to evaluate performance. A non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance, financial position or cash flows that includes or excludes amounts from the most directly comparable GAAP measure. Non-GAAP financial measures are used by companies to bridge the divide between corporate reporting that is standardized under GAAP and reporting that is tailored to a particular industry or circumstance.

The Securities and Exchange Commission (SEC) permits companies to present non-GAAP financial measures in their public disclosures as well as registration statements filed under the Securities Act of 1933 (Securities Act) and periodic reports filed under the Securities Exchange Act of 1934 (Exchange Act), subject to compliance with Regulation G and Item 10(e) of Regulation S-K (Item 10(e)). These regulations were adopted to ensure that investors are provided with financial information that is fulsome and not misleading.


Shackling Short Sellers: The 2008 Shorting Ban

The following post comes to us from Ekkehart Boehmer, Professor of Finance at EDHEC Business School; Charles Jones, Professor of Finance and Economics at Columbia University; and Xiaoyan Zhang of the Krannert School of Management at Purdue University.

In September 2008, the U.S. Securities and Exchange Commission (SEC) temporarily banned most short sales in nearly 1,000 financial stocks. In our paper, Shackling Short Sellers: The 2008 Shorting Ban, forthcoming in the Review of Financial Studies, we examine the ban’s effect on market quality, shorting activity, the aggressiveness of short sellers, and stock prices. For the most part, financial economists consider short sellers to be the “good guys,” unearthing overvalued companies and contributing to efficient stock prices. Even as late as the summer of 2007, regulators in the United States seemed to share this view, as they made life easier for short sellers by repealing the New York Stock Exchange’s (NYSE’s) uptick rule and other short-sale price tests that had impeded shorting activity since the Great Depression (see Boehmer, Jones, and Zhang (2009) for an analysis of this event). However, short sellers are often the scapegoats when share prices fall sharply, and regulators in the United States did a sharp U-turn in 2008, imposing tight new restrictions on short sellers as the financial crisis worsened. In September 2008, the U.S. Securities and Exchange Commission (SEC) surprised the investment community by adopting an emergency order that temporarily banned most short sales in nearly 1,000 financial stocks. In this paper, we study changes in various liquidity measures, the rate of short sales, the aggressiveness of short sellers, and in stock prices before, during, and after the shorting ban. We compare banned stocks to a control group of nonbanned stocks to identify these effects.


SRP Mid-Proxy-Season Results: 19 Boards Declassified, 13 Precatory Declassification Proposals Passed

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 Counsel at the 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. The work of the SRP has been discussed in other posts on the Forum available here.

This post describes the results produced so far during the 2013 proxy season as a result of the work that the Shareholder Rights Project (SRP) has done on behalf of SRP-represented clients. Thus far, this work has already resulted in the following 2013 outcomes:

  • 19 boards of S&P 500 and Fortune 500 companies declassified following the adoption of agreed-upon management proposals at 2013 annual meetings; and
  • 13 precatory proposals passed at the 2013 annual meetings of S&P 500 and Fortune 500 companies, with an average support of 78%.

Further details about these results (including lists of all the relevant S&P 500 and Fortune 500 companies) are provided below. We note that these results add to those obtained during 2012 in which the work of the SRP and SRP-represented investors resulted in:


The Case for an Unbiased Takeover Law

The following post comes to us from Luca Enriques, Nomura Visiting Professor of International Financial Systems at Harvard Law School and Professor of Business Law at LUISS University (Rome), Ronald J. Gilson, Charles J. Meyers Professor of Law and Business at Stanford Law School and Marc and Eva Stern Professor of Law and Business at Columbia University School of Law, and Alessio M. Pacces, Professor of Law & Finance, Erasmus School of Law, Rotterdam.

Takeovers remain the most controversial corporate governance mechanism. According to pro-takeover commentators, takeovers are generally beneficial for corporate governance. Takeovers can displace poorly performing managers and facilitate corporate restructuring. From this perspective, regulation should encourage takeovers. On the opposite side of the debate, those who oppose hostile takeovers argue that they can disrupt well-functioning companies and encourage short-termism. From this point of view, policies that hamper takeovers are favored.

In our paper The Case for an Unbiased Takeover Law (with an Application to the European Union), we reject a categorical pro- or anti-takeover position. While hostile and friendly takeovers may be efficient in the aggregate, individual takeovers and individual companies’ exposure thereto are efficient or inefficient depending on a variety of factors. These factors include the production functions of companies, the conditions in the relevant industry, the problems confronting the corporation and the best response to those problems. Because these all may differ from company to company and over time, so also may the appropriate stance to takeovers differ. Consequently, we posit that takeover regulation should sanction the efforts by individual companies to devise a takeover regime appropriate to their own, mutable circumstances. In other words, takeover regulation should be limited to a set of optional rules.


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