Monthly Archives: June 2013

PBGC Initiates Pension Plan Termination in Leveraged Acquisition

The following post comes to us from Lawrence K. Cagney, partner and chair of the Executive Compensation & Employee Benefits Group at Debevoise & Plimpton LLP, and is based on a Debevoise & Plimpton client update by Mr. Cagney, Jonathan F. Lewis, Elizabeth Pagel Serebransky, Alicia C. McCarthy, and Charles E. Wachsstock.

Buyers and sellers in typical leveraged buyouts of subsidiaries and divisions have long recognized that the Pension Benefit Guaranty Corporation (“PBGC”) could perceive its own interests as threatened in the transaction and, consequently, might choose to interfere with the parties’ bargain. This concern has to date been viewed as largely theoretical, as the PBGC typically either does not appear in a transaction at all, or, if it does appear, extracts relatively modest protections from the parties. Two recent developments suggest that the PBGC intends to become more active in buyout transactions:

  • In April, the PBGC initiated proceedings to terminate a pension plan in connection with Compagnie de Saint-Gobain’s sale of its US metal and glass containers business to Ardagh Group. Initiation of a plan termination is typically viewed as an attempt to scuttle a transaction.
  • In a recent interview, a senior PBGC official announced that the PBGC intends to become more aggressive in scrutinizing future buyout transactions and to allocate more of its resources in this area.


Pay Harmony: Peer Comparison and Executive Compensation

The following post comes to us from Claudine Gartenberg of the Department of Management and Organizations at New York University and Julie Wulf of the Strategy Unit at Harvard Business School.

In our paper, Pay Harmony: Peer Comparison and Executive Compensation, which was recently made publicly available on SSRN, we find evidence consistent with the presence of peer comparison influencing pay policies for executives inside firms. Our underlying approach is to measure changes in pay co-movement, disparity and productivity using a 1992 SEC ruling that mandated greater disclosure of top executive pay. We argue that this ruling led to greater awareness of pay and, hence, greater peer comparison throughout all managerial ranks, particularly in non-proximate managers who had natural information barriers prior to the ruling.

We present the results of three analyses that, taken together, support the argument that firms’ pay policies respond to peer comparison and concerns about internal equity. In general, we find evidence that pay variance within firms, pay distance between managers and division productivity all increased during this period. However, we find that these measures increased less among firms and managers that were more affected by the 1992 SEC disclosure rule. Specifically, after the new regulation, we find increases in PRS (pay-referent sensitivity)—or greater co-movement of division manager pay—and decreases in PPS (pay-performance sensitivity) in geographically-dispersed firms, but not in concentrated firms.


How Well Do You Know Your Shareholders?

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. This post is based on an edition of ProxyPulse™, a collaboration between Broadridge Financial Solutions and PwC’s Center for Board Governance; the full report, including additional figures, is available here.

ProxyPulse™ provides data and analysis on voting trends as the proxy season progresses. This first edition for the 2013 season covers the 549 annual meetings held between January 1, and April 23, 2013 and subsequent editions will incorporate May and June meetings. These reports are part of an ongoing commitment to provide valuable benchmarking data to the industry.

The analysis is based upon Broadridge’s processing of shares held in street name, which accounts for over 80% of all shares outstanding of U.S. publicly-listed companies. For purposes of this report, the term “institutional shareholders” refers to mutual funds, public and private pension funds, hedge funds, investment managers, managed accounts and voting by vote agents. The term “retail shareholders” refers to individuals whose shares are held beneficially in brokerage accounts.


Equator Principles III Enters Into Force This June

The following post comes to us from Jason Y. Pratt, member of the Real Estate Practice Group at Shearman & Sterling LLP. This post is on a Shearman & Sterling client publication by Mr. Pratt and Mehran Massih.

In the last 10 years, the Equator Principles or EPs have emerged as the industry standard for financial institutions to assess social and environmental risk in the project finance market. The EPs – which are based on the International Finance Corporation or IFC’s performance standards on social and environmental sustainability and the World Bank’s environmental, health and safety guidelines – have significantly increased attention on social/community responsibility, including as related to indigenous peoples, labour standards, and consultation with locally affected communities. They have also promoted convergence in the market: at present, 79 financial institutions in 32 countries have officially adopted the EPs, reportedly covering over 70% of international project finance debt in emerging markets.

This month saw the approval of the third version of the EPs, or EP III, completing a consultation process that was launched in July 2011. EP III will be effective from 4 June 2013 and financial institutions that are signatories to the EP, called EPFIs, will need to apply EP III to all new transactions by 1 January 2014.


Can Attorneys Be Award-Seeking SEC Whistleblowers?

Lawrence A. West is a partner focusing on securities-related enforcement matters at Latham & Watkins LLP. This post is based on a Latham & Watkins primer by Mr. West, Abigail E. Raish and Eric R. Swibel; the full publication, including endnotes and chart of Relevant Rules of the Fifty States and the District of Columbia, is available here.

This is a primer on attorneys as award-seeking SEC whistleblowers. It digests the relevant law and explains how it applies in real situations. That law includes the SEC attorney conduct and whistleblower award rules and each state’s ethics rules applicable to attorney disclosure. Fully assessing a particular situation will often require referring to the relevant rules for each state that might come into play for a particular lawyer in a particular situation. We therefore include information about choice of law and a chart summarizing the relevant rules in each of 51 US jurisdictions.

Our hope is that with this primer close at hand, attorneys and companies will not only be equipped to spot issues and apply the law, but will also understand how limited the circumstances are that will allow a lawyer to disclose confidential information to the SEC without client consent and seek a monetary award. This is true even though the SEC has expanded the circumstances allowing disclosure beyond those recognized in many states.

We will end with steps companies can take to deal with risks related to attorneys who are actual or would-be whistleblowers.


Independent Directors’ Dissent on Boards

The following post comes to us from Tarun Khanna and Juan Ma, both of the Strategy Unit at Harvard Business School.

Independent directors are an integral part of corporate governance. Despite the copious scholarly debates surrounding board independence, little progress has been made in studying the inner workings of public boards. Taking China as an empirical site, in our paper, Independent Directors’ Dissent on Boards: Evidence from Listed Companies in China, which was recently made publicly available on SSRN, we offer one of the first statistical investigations of the circumstances under which so-called “independent” directors voice their independent views. Unlike most of the previous models that view boards as a monolithic entity that “shares a common agenda on all matters” (Hermalin and Weisbach, 2003), our data allow us to see boards as consisting of individuals with different utility functions and to examine board behaviors at the individual director level. We view this as the first step in a long research journey.


SEC Guidance on Conflict Mineral and Resource Extraction Disclosure Requirements

David M. Lynn is a partner and co-chair of the Global Public Companies and Securities practice at Morrison & Foerster LLP. This post is based on a Morrison & Foerster client alert by Mr. Lynn, Lawrence R. Bard, and Daniel R. Kahan.

On May 30, 2013, the staff (the “Staff”) of the U.S. Securities and Exchange Commission (the “SEC”) published Frequently Asked Questions (“FAQs”) regarding certain disclosures required under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”). [1] The new FAQs provide important guidance to issuers regarding disclosures they may be required to make in connection with products containing conflict minerals and certain payments made by resource extraction issuers.


Title XV of the Dodd-Frank Act, entitled “Miscellaneous Provisions,” contains these “specialized corporate disclosure” provisions, which include:


Too Early to Tell if Dodd-Frank Ends “Too Big To Fail”

Bradley Sabel is partner and co-head of the Financial Institutions Advisory & Financial Regulatory practice group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Donald N. Lamson and David L. Portilla; the full text, including footnotes, diagram, and chart, is available here.

The debate regarding “too big to fail” (“TBTF”) has reemerged as a focus of regulators, legislators and the media. We review the regulatory activity since the Dodd-Frank Act was enacted and show that new proposals intended to address TBTF tend to put the policy cart before the regulatory implementation horse.

By our count, regulators have amassed over 1,650 pages in proposed and final rules that seek to address TBTF, which we roughly define as proposals that seek to limit the size of financial institutions, the scope of their activities or otherwise seek to protect the Federal safety net (which we use as a term to refer to any Federal assistance, including deposit insurance). In addition, there are provisions in the Dodd-Frank Wall Street Reform and Consumer Protection Act (“DFA”) which address TBTF that do not require rulemaking.

Despite this volume of regulatory work to implement the DFA’s reforms, which is mostly not yet complete, proposals for new measures are being put forward, including:


NYSE Proposes to Streamline Listing Application Materials and Processes

James C. Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. The following post is based on a Sullivan & Cromwell publication.

On May 13, 2013, the Securities and Exchange Commission published proposed changes to the New York Stock Exchange Listed Company Manual and listing application materials. The NYSE is proposing to remove the forms of listing agreements and listing applications from the Manual, adopt simplified listing application materials that will be posted on the NYSE’s website and adopt new rules that will codify existing NYSE policies. The proposed changes are an effort to streamline the NYSE’s existing listing application process, remove requirements that are duplicative of NYSE and SEC rules and remove obsolete provisions from the Manual.

Comments on the proposal were due by June 7, 2013. The proposing release does not mention a transition period, and it is possible that the changes will take effect immediately upon SEC approval. Companies that are planning to list securities on the NYSE should monitor the status of this proposal to ensure that they are using the listing materials and processes that are in effect at the time of listing.


Facts Behind 2013 Failed Say on Pay Votes

The following post comes to us from David Drake, President of Georgeson Inc, and is based on a Georgeson report by Mr. Drake, Rajeev Kumar, and Rhonda Brauer; the full report, including tables, is available here.

The 2013 proxy season marks the third year of Advisory Vote on Executive Compensation proposals (Management Say on Pay (MSOP)) as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. In 2011, 36 U.S. corporations failed to receive majority shareholder support for their MSOP proposal and in 2012 that number increased to 59. Based on the YTD results for 2013, it seems that there could be fewer MSOP failures this year compared to 2012. In this report, we present some interesting facts relating to the 20 failed MSOP votes for annual meetings through May 17. [1]


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