Monthly Archives: July 2013

Communication Practices in CEO Succession

Matteo Tonello is managing director at The Conference Board. This post relates to an issue of The Conference Board’s Chart of the Week series authored by Dr. Tonello.

A review of the CEO succession announcements made by S&P 500 companies in 2012 showed that they typically included details on when the succession would take effect, why the departing CEO is leaving, and whether the incoming CEO will be named board chairman; a statement by the departing CEO on his/her belief that the board has selected a qualified replacement; a statement by the lead independent director that the incoming CEO is the right choice for the company, given its current position, and thanking the departing CEO for his/her service; a statement from the incoming CEO that the existing management team is strong, the company is well positioned for the future, and expressing appreciation that the board has selected him/her as chief executive; and a description of the incoming CEO’s professional qualifications, and, if necessary, details on other director or senior management changes that will take place.


Final Capital Rules Adopted

The following post comes to us from Hugh C. Conroy, Jr., counsel at Cleary Gottlieb Steen & Hamilton LLP, and is based on the overview of a Cleary Gottlieb memorandum by Allison H. Breault, Mr. Conroy, and Patrick Fuller. The complete publication, including footnotes, is available here.

On July 2, 2013, the Board of Governors of the Federal Reserve System (the “Federal Reserve”) issued a final capital rule that overhauls its existing capital adequacy rules and implements both the Basel III Capital Framework issued by the Basel Committee on Banking Supervision (the “Basel Committee”) in 2010 and certain requirements imposed by the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). While the Final Rule consolidates and largely adopts unchanged the three proposals issued by the federal banking agencies (the “agencies”) last June, the rule contains several significant burden-reducing modifications adopted in response to comments from community banking organizations. By contrast, the rule provides little relief for the approximately 18 banking organizations subject to the advanced approaches capital rules (“advanced approaches banking organizations”), and increases the burden on these organizations in certain significant respects—most notably by expanding the application of the Collins Amendment Floor to the capital conservation and countercyclical capital buffers.

On July 9, the Federal Deposit Insurance Corporation (the “FDIC”) also voted to adopt the Final Rule, and was the first of the three agencies to issue an interagency notice of proposed rulemaking that would amend the Final Rule to significantly increase the supplementary leverage ratio requirement applicable to the eight U.S. banking organizations that have been identified as global systemically important banks (“G-SIBs”) by the Financial Stability Board (the “FSB”) (the “Supplementary Leverage Ratio Proposal”). Under the Supplementary Leverage Ratio Proposal, the eight U.S. G-SIBs would effectively be subject to a 5% supplementary leverage ratio minimum at the parent level and a 6% supplementary leverage ratio minimum at the level of each bank subsidiary—each of which represents a significant surcharge above the current Basel III 3% minimum leverage ratio applicable from January 1, 2018 to all advanced approaches banking organizations under the Final Rule.


2013 Mid-Year Update on Corporate Deferred Prosecution and Non-Prosecution Agreements

Joseph Warin is partner and chair of the litigation department at the Washington D.C. office of Gibson, Dunn & Crutcher. The following post and is based on a Gibson Dunn client alert; the full publication, including footnotes and appendix, is available here.

Deferred Prosecution Agreements (“DPAs”) and Non-Prosecution Agreements (“NPAs”) (collectively, “agreements”) continue to be a consistent vehicle for prosecutors and companies alike in resolving allegations of corporate wrongdoing. In the two decades since their emergence as an alternative to the extremes of indictment and outright declination, DPAs and NPAs have risen in prominence, frequency, and scope. Such agreements are now a mainstay of the U.S. corporate enforcement regime, with the U.S. Department of Justice (“DOJ”) leading the way, and the U.S. Securities and Exchange Commission (“SEC”) recently expanding its use of this tool. These types of agreements have achieved official acceptance as a middle ground between exclusively civil enforcement (or even no enforcement action at all) and a criminal conviction and sentence. With the United Kingdom’s recent enactment of its own DPA legislation, the trend toward use of these alternative means for resolving allegations of corporate wrongdoing is poised to continue.


The Capital Structure Decisions of New Firms

The following post comes to us from Alicia Robb, Senior Fellow with the Ewing Marion Kauffman Foundation, and David Robinson, Professor of Finance at Duke University.

Understanding how capital markets affect the growth and survival of newly created firms is perhaps the central question of entrepreneurial finance. Yet, much of what we know about entrepreneurial finance comes from firms that are already established, have already received venture capital funding, or are on the verge of going public—the dearth of data on very-early-stage firms makes it difficult for researchers to look further back in firms’ life histories. Even data sets that are oriented toward small businesses do not allow us to measure systematically the decisions that firms make at their founding. This article uses a novel data set, the Kauffman Firm Survey (KFS), to study the behavior and decision-making of newly founded firms. As such, it provides a first-time glimpse into the capital structure decisions of nascent firms.

In our paper, The Capital Structure Decisions of New Firms, forthcoming in the Review of Financial Studies, we use the confidential, restricted-access version of the KFS, which tracks nearly 5,000 firms from their birth in 2004 through their early years of operation. Because the survey identifies firms at their founding and follows the cohort over time, recording growth, death, and any later funding events, it provides a rich picture of firms’ early fund-raising decisions.


The Landscape of CEO Succession Issues

Brian V. Breheny is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. The following post is based on a Skadden memorandum by Mr. Breheny, Regina OlshanNeil M. LeffMarc S. GerberMichael R. Bergmann.

A board’s decision as to whether, when and how to terminate the employment of a CEO and hire a successor is among the most critical decisions facing the board of any company—large or small, public or private, established or start-up. In most cases, however, a CEO termination is a rare event and one with respect to which—as would be expected—the board, the company’s general counsel and its human resources professionals may have little or no experience. In addition, the situation is further complicated by contractual, regulatory and personal factors.

This post describes the substantive and procedural considerations that boards will want to take into account when there is a change of CEO. In it, we assume that the board has made the business decision relating to CEO succession and is focused on strategy, implementation and minimizing potentially costly and/or embarrassing oversights and errors. Many but not all of the same considerations apply in respect of executive officers other than the CEO, and some additional considerations may apply to such other officers; in any event, their relative significance likely will differ from the case of the CEO.


Shareholder Proposal Developments During the 2013 Proxy Season

Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert by Ms. Goodman, Gregory S. Belliston, Elizabeth A. Ising, Gillian McPhee, and Ronald O. Mueller.

Shareholder proposals continued to attract significant attention during the 2013 proxy season. This post provides an overview of shareholder proposals submitted to public companies during the 2013 proxy season, including statistics, notable decisions from the staff (the “Staff”) of the Securities and Exchange Commission (the “SEC”) on no-action requests [1] and other Staff guidance, majority votes on shareholder proposals and litigation seeking to exclude shareholder proposals.

1. Shareholder Proposal Statistics and Voting Results

According to data from Institutional Shareholder Services (“ISS”), shareholders submitted approximately 820 proposals to date for 2013 shareholder meetings, up from approximately 739 proposals submitted for 2012 shareholder meetings. [2] The most common 2013 shareholder proposal topics, along with the approximate number of proposals submitted, were:


Evidence on the Properties of Retiring CEOs’ Forecasts of Future Earnings

The following post comes to us from Cory Cassell of the Department of Accounting at the University of Arkansas, Shawn Huang of the School of Accountancy at Arizona State University, and Juan Manuel Sanchez of the Department of Accounting at Texas Tech University.

Theory suggests that Chief Executive Officers (CEOs) with short horizons with their firm have weaker incentives to act in the best interest of shareholders (Smith and Watts 1982). To date, research examining the “horizon problem” focuses on whether CEOs adopt myopic investment and accounting policies in their final years in office (e.g., Dechow and Sloan 1991; Davidson et al. 2007; Kalyta 2009; Antia et al. 2010). In our paper, Forecasting Without Consequence? Evidence on the Properties of Retiring CEOs’ Forecasts of Future Earnings, forthcoming in The Accounting Review, we extend this line of research by investigating whether retiring CEOs are more likely to engage in opportunistic forecasting behavior in their terminal year relative to other years during their tenure with the firm. Specifically, we contrast the properties (issuance, frequency, news, and bias) of earnings forecasts issued by retiring CEOs during pre-terminal years (where the CEO will be in office when the associated earnings are realized) with forecasts issued by retiring CEOs during their terminal year (where the CEO will no longer be in office when the associated earnings are realized). We also examine circumstances in which opportunistic terminal-year forecasting behavior is likely to be more or less pronounced.

Our predictions are based on several incentives that arise (or increase) during retiring CEOs’ terminal year with their firm. Specifically, relative to CEOs who will continue with their firm, retiring CEOs face strong incentives to engage in opportunistic terminal-year forecasting behavior in an attempt to inflate stock prices during the period leading up to their retirement. Deliberately misleading forecasts can be used to influence stock prices. Consistent with this argument, prior work shows that managers use voluntary disclosures opportunistically to influence stock prices (Noe 1999; Aboody and Kasznik 2000; Cheng and Lo 2006; Hamm et al. 2012) and that managers use opportunistic earnings forecasts to manipulate analysts’ (Cotter et al. 2006) and investors’ perceptions (Cheng and Lo 2006; Hamm et al. 2012) in an effort to maximize the value of their stock-based compensation (Aboody and Kasznik 2000). Moreover, because SEC trading rules related to CEOs’ post-retirement security transactions are less stringent than those in effect during their tenure with the firm, post-retirement transactions can be made before the earnings associated with the opportunistic forecast are realized and with reduced regulatory scrutiny.


SEC Forecasts an Increase in Whistleblower Cases and Awards

The following post comes to us from Michael T. Jones, partner in the Litigation Department at Goodwin Procter, and is based on a Goodwin Procter client alert by Mr. Jones and Jennifer Chunias.

On June 12, 2013, the U.S. Securities & Exchange Commission announced its second-ever whistleblower award under the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Having received over 3,000 whistleblower tips in the first year of the revamped program, the SEC made its first whistleblower award in August of 2012 and is expected to issue an increasing number of awards in the coming months.

Among other things, Dodd-Frank provides a direct mechanism for whistleblower complaints to the SEC and enhanced protection for eligible whistleblowers who come forward and cooperate in SEC investigations and proceedings involving the corporation that employs them. Dodd-Frank also authorized the SEC to provide incentives in the form of financial awards to eligible whistleblowers who voluntarily provide the SEC with original information about a violation of federal securities laws that leads to successful enforcement proceedings—10 to 30 percent for penalties collected over $1 million. Particularly in light of the recent awards and the expected uptick in the coming months, companies that fail to take appropriate steps to respond to the increased risks associated with the program could pay a steep price.


The STOCK Act and the Political Intelligence Industry

The following post comes to us from Daniel A. Nathan, partner in the Securities, Enforcement, and White-Collar Defense Group at Morrison & Foerster LLP, and is based on a Morrison & Foerster client alert by Mr. Nathan, Ana-Maria Ignat, and Kevin J. Matta.

Investors who hire political intelligence firms to collect information from government sources should take notice of the Stop Trading on Congressional Knowledge (STOCK) Act, according to panelists at a recent American Bar Association event. The panel, which included Stephen Cohen of the SEC’s Division of Enforcement, gathered in the wake of recent scandals and increased government scrutiny of the political intelligence industry—in particular, the SEC’s investigation of Height Securities, a political research and advisory firm. According to The Wall Street Journal, on April 1, 2013, Height Securities alerted investors to a government decision to reverse funding cuts to certain health-care companies before the agency formally announced its decision. In the 18 minutes before the markets closed, investors traded the suddenly promising health-care stocks, making exorbitant profits.


Under the STOCK Act, investors who rely on material, non-public information obtained through government channels can be liable under the federal securities laws for insider trading. Irrespective of the Act, insider-trading laws prohibit trading in securities while in possession of material non-public information obtained in breach of a fiduciary duty. The Act explicitly expanded insider-trading restrictions to members of Congress and legislative branch employees, and made clear that a government employee owes a duty to the United States with respect to material non-public information derived from his or her position.


Goldilocks, Porridge and General Solicitation

David M. Lynn is a partner and co-chair of the Corporate Finance practice at Morrison & Foerster LLP. This post is based on a Morrison & Foerster client alert by Mr. Lynn, Jay Baris, and Anna Pinedo.

At long last, the U.S. Securities and Exchange Commission (SEC) took action July 10, 2013 to implement rules that complied with the JOBS Act mandate to relax the prohibition against general solicitation in certain private offerings of securities. The original SEC proposal from August 2012, proposing amendments to Rule 506 of Regulation D and Rule 144A under the Securities Act, had drawn significant comments. The final rule, as well as the SEC’s proposed rules relating to private offerings discussed below, are likely to generate additional commentary. One might say that the July 10, 2013 webcast of the SEC’s open meeting provided a glimpse into the too-hot/too-cold Goldilocks-type debate that will continue to play out over the next few months regarding the appropriate balance between measures that facilitate capital formation and investor protection provisions.

In addition to promulgating rules to relax the ban on general solicitation, which will have a significant market impact, the SEC also adopted the bad actor provisions for Rule 506 offerings that it was required to implement pursuant to the Dodd-Frank Act. The bad actor proposal had been released in 2011, and SEC action had been anticipated on the bad actor proposal for some time. The SEC also approved a series of proposals relating to private offerings that are intended to safeguard investors in the new world of general advertising and general solicitation. All told, will these measures encourage or discourage issuers and their financial intermediaries from availing themselves of the opportunity to use general solicitation? Will this new ability to reach investors with whom neither the issuer nor its intermediary have a pre-existing relationship create serious investor protection concerns? Will the proposed investor protection measures be sufficient to address the concerns of consumer and investor advocacy groups, or will we ultimately see revamped investor accreditation standards?

Below we provide a very brief summary of the July 10, 2013 actions.


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