Monthly Archives: July 2013

NYSE Eliminates 50% Quorum Requirement

The following post comes to us from Sullivan & Cromwell LLP, and is based on a publication by Robert W. Reeder III, Glen T. Schleyer and Kathryn C. Plunkett.

On July 11, 2013, the Securities and Exchange Commission published a proposal by the New York Stock Exchange to amend Section 312.07 of the Listed Company Manual, which became effective immediately. Section 312.07 has been revised to remove the requirement that the total votes cast on proposals requiring shareholder approval under the NYSE rules must represent over 50% in interest of all securities entitled to vote on the proposal. The release notes that listed companies are subject to quorum requirements under the laws of their states of incorporation and their governing documents and that requiring companies to comply with a separate NYSE quorum requirement causes confusion and is not necessary for investor protection. In addition, neither NASDAQ nor NYSE MKT has a similar quorum requirement and the removal eliminates a long-standing difference in the treatment of broker non-votes for quorum purposes.

The NYSE rules continue to provide that matters requiring shareholder approval under NYSE rules must receive the support of a majority of votes cast (that is, votes cast “for” must exceed votes cast “against” plus abstentions); the recent change eliminates only the separate quorum requirement.

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The Small-Cap M&A Litigation Problem

Steven M. Haas is a partner focusing on mergers and acquisitions, corporate law and corporate governance at Hunton & Williams LLP. The following post is based on a Hunton & Williams client alert by Mr. Haas that first appeared in the May 2013 issue of the M&A Lawyer; the complete publication, including footnotes, is available here. 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.

With the recent proliferation of lawsuits challenging M&A transactions, it has become increasingly common for stockholders to challenge “small-cap” transactions. Historically, small transactions were not challenged in the absence of a direct conflict of interest, such as a management-led buyout. Unfortunately, stockholder litigation brought against small-cap M&A deals can significantly increase the cost of the transaction. While larger companies may view the expenses associated with “deal litigation” as an accepted transaction cost, those expenses can be material relative to the value of a small-cap deal. In addition, many attorneys’ fee awards for so-called “therapeutic” benefits (i.e., settlements not involving any cash or other payment to stockholders) appear to be increasingly detached from the value that stockholders place on them. These trends are likely to harm target stockholders as buyers factor the cost of litigation into their valuations and reduce merger consideration accordingly.

One of the challenges involved in small-cap M&A litigation is computing fee awards for plaintiffs’ counsel. Delaware courts often award attorneys’ fees in “disclosure-only” settlements in the range of $400,000 to $500,000 for a small number of “meaningful” disclosures. Higher fee awards are available where plaintiffs obtain “particularly significant or exceptional disclosures.” Such fee awards, however, can be significant in the context of a small-cap M&A transaction.

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2013 Mid-Year Securities Enforcement Update

John Olson is a founding partner of Gibson, Dunn & Crutcher’s Washington, D.C. office and a visiting professor at the Georgetown Law Center. The following post is based on a Gibson Dunn memorandum; the full memorandum, including footnotes, is available here.

I. Overview of the First Half of 2013

The first six months of 2013 represented a time of transition for the SEC’s enforcement program, with a new Chairman and new Co-Directors for the Division of Enforcement at the helm. It is too soon to predict exactly how they may reshape the program—in contrast with this period four years ago, when Chairman Mary Schapiro and Enforcement Director Robert Khuzami assumed their positions in the wake of Madoff and the financial crisis and with a mandate for major reform, the new team is moving more incrementally. However, there can be little doubt that, when it comes to enforcement, the new leadership will be striking an aggressive tone. For the first time in the Commission’s history, the Chairman and the Enforcement Division leadership are all former criminal prosecutors. As Chair Mary Jo White recently emphasized: “The SEC is a law-enforcement agency. You have to be tough. You have to try to send as strong a message as you can, across as broad a swath of the market as you regulate.”

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Does the Location of Directors Matter?

The following post comes to us from Zinat Alam of the Department of Finance at Florida Atlantic University, Conrad Ciccotello of the Department of Risk Management, and Mark Chen and Harley Ryan, both of the Department of Finance at Georgia State University.

s delegated monitors of top management on behalf of shareholders, corporate boards of directors rely critically on information about the firm in making governance decisions. Theoretical research in corporate governance shows how a board’s ability to obtain and use information is closely related to key aspects of board structure, such as size and independence (Raheja (2005), Harris and Raviv (2008)). Complementing the theoretical literature, a number of empirical studies find evidence to suggest that board size and board independence can be explained to some extent by the complexity of firms’ operations and outside directors’ costs of acquiring information (see, e.g., Boone, Field, Karpoff, and Raheja (2007), Coles, Daniel, and Naveen (2008), and Linck, Netter, and Yang (2008)).

Motivated by these studies, in our paper, Does the Location of Directors Matter? Information Acquisition and Board Decisions, forthcoming in the Journal of Quantitative and Financial Analysis published by Cambridge University Press, we examine empirically a new dimension of board structure that we expect to influence the costs of information acquisition, namely, geographic distance between directors and headquarters. Geographic distance has been shown to matter for the gathering of information in a wide variety of financial contexts, including bank lending (Petersen and Rajan (1994, 2002)), venture capital financing (Lerner (1995)), equity analysis (Malloy (2005), Bae, Stulz, and Tan (2008)), bond underwriting (Butler (2008)), investment management (Coval and Moskowitz (1999, 2001)), and regulatory enforcement (Kedia and Rajgopal (2011)). Recent research has also begun to examine the effects of geography on the structure and decisions of boards (Masulis, Wang, and Xie (2011); Knyazeva, Knyazeva, and Masulis (2012)). To date, the lack of detailed data on where individual directors reside vis-à-vis corporate headquarters has been an obstacle to extending research on board geography. In this paper, we overcome this obstacle by constructing a database of over 4,000 residential addresses of outside directors at S&P 1500 firms during 2004-2007.

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Proposed Changes to Basel III Leverage Ratio Framework

Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on the introduction to a Davis Polk client memorandum by Luigi L. De Ghenghi and Andrew S. Fei; the full publication, including visuals, tables, timelines and formulas, is available here.

On the heels of publishing the U.S. Basel III final rule, the U.S. banking agencies have proposed higher leverage capital requirements for the eight U.S. bank holding companies that have been identified as global systemically important banks (“Covered BHCs”) and their insured depository institution (“IDI”) subsidiaries. The higher leverage capital requirements, which we are calling the American Add-on, build upon the minimum Basel III supplementary leverage ratio in the U.S. Basel III final rule.

The proposed American Add-on would require a Covered BHC’s IDI subsidiaries to maintain a Basel III supplementary leverage ratio of at least 6% to be considered well-capitalized under the prompt corrective action framework. The American Add-on also requires Covered BHCs to maintain a leverage buffer that would function in a similar way to the capital conservation buffer in the U.S. Basel III final rule. A Covered BHC that does not maintain a Basel III supplementary leverage ratio of greater than 5%, i.e., a buffer of more than 2% on top of the 3% minimum, would be subject to increasingly stringent restrictions on its ability to make capital distributions and discretionary bonus payments. The proposed effective date of the American Add-on is January 1, 2018.

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Emerging Themes in Canadian Fiduciary Law for Pension Trustees

The following post comes to us from Edward J. Waitzer, partner at Stikeman Elliott LLP in Toronto and director of the Hennick Centre for Business and Law at York University. The post is based on a research by Mr. Waitzer and Douglas Sarro that received the 2013 IRRC Research Award.

As society increasingly faces governance challenges at all levels, there is a growing recognition of the need to take a longer term and more systemic view. Given the overwhelming incentives for myopic leadership (and action), our common law system—where courts respond to specific fact situations—may play a critical role. One avenue is likely through the concept of fiduciary duty—the legal obligation to act in the best interests of others.

The Supreme Court of Canada has been at the leading edge in developing a coherent view of the nature of fiduciary relationships and their consequences (largely through its recognition of a new class of fiduciary relationship between the Crown and Aboriginal peoples). The logic has permeated more broadly, with the Court focusing on the high degree of specialization and interdependence in society—where we increasingly rely on the services and expertise of strangers. This rise of “fiduciary society” is a classic non-zero-sum game, where we can all benefit but, if trust is eroded, the game fails (and everyone loses). Hence it is that values of trust and loyalty, shaped by “reasonable expectations”, have come to form the basis for the court’s broad standards.

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Changing Banking for Good or for Better?

The following post comes to us from Jeremy Jennings-Mares, partner in the Capital Markets practice at Morrison & Foerster LLP, and is based on a Morrison & Foerster client alert by Mr. Jennings-Mares, Peter J. Green and Nimesh Christie.

The UK Parliamentary Commission on Banking Standards (the “Commission”) published its much anticipated report (the “Report”) [1] on 19 June 2013 entitled “Changing Banking for Good”. The Government provided its response (the “Response”) [2] to the Report on 8 July 2013, stating that it agrees with the principal recommendations of the Report. It states, however, that there are certain recommendations that require more detailed work to ensure effective implementation, and other recommendations that the Government disagrees with, but intends to achieve the goals of the Commission in other ways. The implementation of the recommendations in the Report will change banking in the UK permanently; the question remains whether they will change banking for the better.

The Commission, chaired by Andrew Tyrie MP, was established in July 2012 following the very public recent controversies affecting banks, including issues arising from the setting of the LIBOR rate, to make recommendations regarding improving the culture, professional standards and governance of banks. The Report contains proposals which fall into five main categories:

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2013 Mid-Year FCPA Update

The following post comes to us from Lisa A. Alfaro, partner at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication; the full publication, including international implications, is available here.

Significant FCPA developments continued apace during the first six months of 2013. After a relative downtick in 2012, the first half of 2013 saw criminal enforcement of the statute return to the robust levels of recent years. With approximately 60 devoted prosecutors and enforcement attorneys, whose efforts are frequently supplemented by their colleagues in the U.S. Attorneys’ and regional enforcement offices across the country, the Government’s efforts to enforce the statute have never been stronger.

This client update provides an overview of the Foreign Corrupt Practices Act (“FCPA”) as well as domestic and international cross-border anti-corruption enforcement, litigation, and policy developments from the first half of 2013. There is much for us to report—the last six months witnessed a series of judicial decisions that further define the FCPA’s scope, a plethora of enforcement actions, Corporate America’s response to the U.S. government’s Resource Guide to the U.S. Foreign Corrupt Practices Act, and increasingly vigorous anti-corruption enforcement and legislative activities from around the world.

FCPA Overview

The FCPA’s anti-bribery provisions make it illegal to corruptly offer or provide money or anything of value to officials of foreign governments or foreign political parties with the intent to obtain or retain business. These provisions apply to “issuers,” “domestic concerns,” and “agents” acting on behalf of issuers and domestic concerns, as well as to “any person” that violates the FCPA while in the territory of the United States. The term “issuer” covers any business entity that is registered under 15 U.S.C. § 78l or that is required to file reports under 15 U.S.C. § 78o(d). In this context, foreign issuers whose American Depository Receipts (“ADRs”) are listed on a U.S. exchange are “issuers” for purposes of the FCPA. The term “domestic concern” is even broader and includes any U.S. citizen, national, or resident, as well as any business entity that is organized under the laws of a U.S. state or that has its principal place of business in the United States.

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SEC’s New Reg D Rules and Private Fund Offerings

The following post comes to us from Marco V. Masotti, partner and co-head of the Private Funds Group at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum.

On July 10, 2013, the U.S. Securities and Exchange Commission (the “SEC”) approved final rules that eliminate the prohibition against general solicitation and general advertising (collectively referred to herein as “general solicitation”) in certain offerings of securities pursuant to Rule 506 of Regulation D (“Reg D”) and Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”). The SEC also approved final rules disqualifying felons and other “bad actors” from Rule 506 offerings, and proposed related amendments to Reg D, Form D and Rule 156 under the Securities Act. The final rules become effective 60 days after publication in the Federal Register (with an estimated effective date of September 13, 2013). The proposed amendments will be open for comment for a period of 60 days after publication.

I. Rules Permitting General Solicitation in Private Offerings

The final rules create a new form of offering under Rule 506(c) that permits issuers to use general solicitation in connection with the sale of securities in private placements if: (i) the purchasers of all securities are “accredited investors;” [1] and (ii) the issuer takes reasonable steps to verify that the purchasers are accredited investors. The new rules leave intact Section 4(a)(2) of the Securities Act (which exempts from registration transactions by an issuer “not involving any public offering”) and existing Rule 506(b) (which provides a safe harbor under Section 4(a)(2) for offerings conducted without general solicitation).

Although new Rule 506(c) allows for the use of advertising in connection with fundraising activities, there are certain limitations for private funds relying on Rule 506(c):

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Boards-R-Us: Reconceptualizing Corporate Boards

M. Todd Henderson is Professor of Law and Aaron Director Teaching Scholar at the University of Chicago Law School. The following post is based on an article co-authored by Professor Henderson and Stephen M. Bainbridge, Professor of Law at the UCLA School of Law.

Imagine there were a state law requiring legal services to be provided by individual sole proprietorships. Companies would have to hire individual lawyers, who could then contract with others for information, expertise, support, and so on. Such a law might be motivated by a belief that lawyers would be more careful acting alone or that conflicts of interest arising from pooling legal resources outweigh the gains or some other reason. But whatever the reason, such a rule would generate widespread opposition from lawyers arguing that by pooling their resources they could offer better services to their clients. Clients would object too. While some clients might prefer to hire lawyers unaffiliated with a large firm, others might prefer the costs and benefits of hiring a firm instead of a single lawyer. Business associations allow individuals to pool their resources to share risks, obtain gains from economies of scale and scope, optimize the deployment of various resources across space and time, devote time and effort to innovation, and develop large reputational assets that can constrain opportunism. In Coase’s framework, ringing the boundary of the law firm around multiple lawyers would bring efficiencies in the provision of legal services.

These benefits seem as applicable or even more so in the context of corporate director services. But state corporate law requires director services be provided by “natural persons.” Therefore, corporate boards are currently composed of ten or so part time sole proprietorships, who are forced to contract with others, be they inside or outside of the company, for information, expertise, support, and risk pooling (that is, insurance). This state of affairs is the source of many of the most severe problems of corporate governance identified by scholars and governance experts. Managerial domination of boards, such as it is, is founded primarily on the weakness of individual board members and the information asymmetries between managers and board members. And yet, governance experts take the sole proprietor board model for granted, and offer reforms, such as greater independence or destaggered boards, that merely tinker at the edges of this system.

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