Monthly Archives: August 2013

CFTC Adopts Final Rule Amendments for CPOs and CTAs

The following post comes to us from Sullivan & Cromwell LLP, and is based on a publication by Donald R. Crawshaw, David J. Gilberg, Frederick Wertheim, and Saul P. Sarrett.

On August 13, 2013, the CFTC adopted final rule amendments to accept compliance with the disclosure, reporting and recordkeeping regime administered by the SEC as substituted compliance for substantially all of part 4 of the CFTC’s regulations that are applicable to CPOs of funds registered under the Investment Company Act of 1940. [1] The adopting release broadens the approach set forth in the harmonization proposals issued by the CFTC in February 2012 [2] and provides, among other things, that if the CPO of registered funds satisfies all applicable SEC rules for such funds as well as certain other conditions, it will be deemed in compliance with the CFTC’s rules regarding:

  • delivery of disclosure documents to each prospective participant in any pool that a CPO operates (Section 4.21); [3]
  • distribution of account statements to each participant in any pool that a CPO operates (Sections 4.22(a) and (b));
  • provision of information that must appear in a CPO’s disclosure documents (Section 4.24), including performance disclosures (Section 4.25); and
  • the use, amendment and filing of disclosure documents (Section 4.26).

Additionally, the CFTC’s final rule amendments modify certain CFTC disclosure and reporting requirements that are applicable to all CPOs and CTAs:


Key Issues From the 2013 Proxy Season

The following post comes to us from Ted Wallace, Senior Vice President in the Proxy Solicitation Group at Alliance Advisors LLC, and is based on an Alliance Advisors newsletter by Shirley Westcott. The full text, including tables and footnotes, is available here.

During this year’s annual meeting season, issuers experienced better outcomes on say on pay (SOP) and shareholder resolutions, underpinned by a high degree of engagement and responsiveness to past votes. With SOP in its third year, companies addressed many of investors’ and proxy advisors’ pivotal compensation concerns, which was reflected in a modest improvement in average SOP support and proportionately fewer failed votes.

Similarly, although the volume of shareholder resolutions on ballots was nearly comparable to the first half of 2012, average support declined across many categories and there were 27% fewer majority votes (See Table 1). This was due in large part to corporate actions on resolutions that are traditionally high vote-getters, such as board declassification, adoption of majority voting in director elections, and the repeal of supermajority voting provisions, resulting in the withdrawal or omission of the shareholder proposal. Indeed, issuers made a conscious effort to avoid the prospect of majority votes, mindful of potential fallout against directors by proxy advisory firms. Beginning in 2014, ISS will oppose board members who fail to adequately address shareholder resolutions that are approved by a majority of votes cast in the prior year, while Glass Lewis is scrutinizing board responses to those that receive as little as 25% support (see our January newsletter).


The Value of Local Political Connections in a Low-Corruption Environment

The following post comes to us from Mario Daniele Amore of the Department of Management and Technology at Bocconi University and Morten Bennedsen, Professor of Economics and Political Science at INSEAD.

Connections between firms and politicians are widespread around the world. Faccio (2006) documents the existence of publicly traded firms with national political connections in 35 of 45 countries; these firms account for nearly 8% of the world’s stock market capitalization. She also documents that national political connections are valuable, especially in countries with weak political institutions.

In our paper, The Value of Local Political Connections in a Low-Corruption Environment, forthcoming in the Journal of Financial Economics, we explore the value of local political connections in a low-corruption environment. We use an administrative reform that generates exogenous variations in the size of local municipalities in Denmark to establish the effect of changes in political power on the profitability of firms that have family ties with local politicians. On average, we find that (1) doubling the political power (as measured by population per elected politician) doubles the performance of politically connected firms, and (2) the effect is larger in industries delivering goods and services to the public sector.


Fed To Charge Big-Banks for Supervision Under Dodd-Frank

Bradley Sabel is partner and co-head of the Financial Institutions Advisory & Financial Regulatory practice group at Shearman & Sterling LLP. The following post is based on a Shearman & Sterling client publication by Mr. Sabel and Donald N. Lamson.

An obscure section of the Dodd-Frank Act has been implemented by the Federal Reserve, to be effective later this year. Traditionally the Federal Reserve has not charged examination or similar fees for institutions under its supervision, but Congress determined that the largest institutions should be assessed an amount intended to reimburse the Federal Reserve for supervising them. This will likely impose an additional aggregate cost on the order of $400 to $500 million per year on these institutions, thereby further hiking up the price of size.

Section 318 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requires that the Federal Reserve collect a total amount of assessments from the largest bank and thrift holding companies equal to the total expenses that it estimates are “necessary or appropriate” to carry out the Federal Reserve’s supervisory and regulatory responsibilities. [1] The Federal Reserve adopted a final regulation on August 15, called Regulation TT, to be effective on October 25. The first notice of assessment is expected to be sent shortly after October 25 and will likely be payable by December 15. Thereafter, notices of assessment are scheduled to be sent by June 30 of each year and paid by September 15.


Lock-Up Creep

Steven M. Davidoff is Professor of Law and Finance at Ohio State University College of Law. The post is based on a paper co-authored by Professor Davidoff and Christina M. Sautter, Cynthia Felder Fayard Associate Professor of Law at Louisiana State University Paul M. Hebert Law Center.

If you have regularly read merger agreements over the past decade, you may have had a creeping feeling. You also may not be alone. Over the past decade the number and type of merger agreement lock-ups have materially increased. We examine this phenomenon in our article Lock-Up Creep, prepared for the Journal of Corporation Law symposium: Ten Years After Omnicare: The Evolving Market for Deal Protection Devices held at University of Iowa College of Law. Not only have new lock-ups arisen, but the terms of these lock-ups have become more varied as attorneys negotiate ever more intricate terms.

In our article we examine lock-up creep in detail. Lock-ups existed in many forms for decades, but in recent years, new lock-ups have appeared or been widely adopted, such as matching rights, which give a bidder the right to match a competing offer, as well as don’t ask, don’t waive standstills, which prevent losing bidders from making a competing bid or even requesting that a target waive such a requirement. The end result is that merger agreements contain increasingly scripted procedures for how and when a board should deal with competing bids.


Delaware Court Confirms Accounting Experts’ Authority to Decide Disputes

The following post comes to us from Elizabeth C. Kitslaar, partner in the corporate practice at Jones Day, and is based on a Jones Day publication by Ms. Kitslaar and James A. White. 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.

On July 16, the Delaware Supreme Court [1] published an opinion that confirms and clarifies the scope of an accounting expert’s authority to resolve post-closing financial disputes that parties have agreed to submit for resolution under the terms of a definitive business acquisition agreement. This decision reaffirms alternative dispute resolution as the procedure of choice for quickly resolving complicated, technical financial issues that sometimes arise in the context of purchase price adjustments.

Post-closing purchase price adjustments are almost universally present in definitive agreements for the sale of a business. [2] These provisions—which include earn-out clauses, working capital adjustments, and debt/net debt true-ups—require an adjustment to the purchase price paid at closing, based on calculations relative to pre-closing targets, standards, or formulas. Such provisions set forth not only the methodology for determining the amount of the adjustment, but also a resolution process in the event the parties disagree on the amounts to be paid. These processes typically include (i) an exchange of the relevant financial calculations and access to work papers and supporting documentation, (ii) submission by the recipient party of objections to the calculation, (iii) a period of time within which the parties will attempt to resolve the dispute in good faith, and (iv) submission of the unresolved issues to a neutral accounting firm for ultimate resolution. [3]


SEC Adopts Final Amendments to Broker-Dealers Rules

The following post comes to us from Eric R. Fischer, partner in the Business Law Department at Goodwin Procter LLP, and is based on a Goodwin Procter Financial Services Alert by Peter W. LaVigne.

On July 30, 2013, the SEC adopted final amendments (the “Final Amendments”) to the financial responsibility rules for broker-dealers (SEC Release No. 34-70072) (the “Release”). The Final Amendments make changes to the net capital, customer protection, books and records, and notification rules for broker-dealers. The SEC first proposed the rule changes in March 2007 and re-opened the public comment period on May 3, 2012. The Final Amendments will be effective 60 days after publication in the Federal Register (about the week of October 14) (the “Effective Date”). This article summarizes the principal elements of the Final Amendments.

Rule 15c3-1—Net Capital Rule

Rule 15c3-1 under the Exchange Act (the “Net Capital Rule”) requires a broker-dealer to maintain, at all times, a minimum amount of net capital depending on the nature of its business. The capital standard in the rule is a net liquid assets test, which imposes standardized deductions (or “haircuts”) on securities, with less-liquid securities subject to deeper haircuts. The Rule also does not allow certain items to be included in net capital and requires certain other items to be included as liabilities. Amendments to the Net Capital Rule include the following:


The Bebchuk Syllogism

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, Eric S. Robinson, Karessa L. Cain, and Sabastian V. Niles. This post focuses on a recent study by Lucian Bebchuk, Alon Brav, and Wei Jiang, The Long-Term Effects of Hedge Fund Activism, available here, and discussed in a post by the authors here. An earlier post by Martin Lipton including a criticism of this study is available here. A related article by Lucian Bebchuk, The Myth that Insulating Boards Serves Long-Term Value, is discussed on the Forum here.

Empirical studies show that attacks on companies by activist hedge funds benefit, and do not have an adverse effect on, the targets over the five-year period following the attack.

Only anecdotal evidence and claimed real-world experience show that attacks on companies by activist hedge funds have an adverse effect on the targets and other companies that adjust management strategy to avoid attacks.

Empirical studies are better than anecdotal evidence and real-world experience.

Therefore, attacks by activist hedge funds should not be restrained but should be encouraged.

Harvard Law School Professor Lucian A. Bebchuk is now touting this syllogism and his obsession with shareholder-centric corporate governance in an article entitled, “The Long-Term Effects of Hedge Fund Activism” (previously discussed here). In evaluating Professor Bebchuk’s article, it should be noted that:


Private and Judicial Resolution of Business Deadlock

The following post comes to us from Claudia M. Landeo, Associate Professor of Economics at the University of Alberta, and Kathryn E. Spier, Domenico de Sole Professor of Law at the Harvard Law School and Research Associate at the National Bureau of Economic Research.

The process of resolving business deadlocks is time consuming and expensive, typically requiring the services of lawyers, financial experts and judges. Prolonged resolution processes, cost-inefficient administration of those processes, and inequitable outcomes impose high monetary and non-monetary costs on the parties themselves and on society as a whole.

Asset valuation, which is required to complete the transfer of assets in a business divorce, can pose particular problems for closely-held businesses. In contrast to publicly-traded companies with active markets for equity ownership, closely-held companies may be very difficult for outsider investors and appraisers to evaluate. The economic value of closely-held businesses is often intertwined with the human capital of the founders, their relationships with business associates (including key suppliers and customers), and their tacit business knowledge. The true economic value of closely-held businesses may not be fully reflected in the official business documents and financial statements; instead, the best wisdom concerning the value of the business may lie in the minds of the business owners themselves.

Our article, Shotguns and Deadlocks, forthcoming in the Yale Journal on Regulation, studies business deadlocks and their resolution. We advance a proposal to reform the way that courts resolve business deadlocks and value business assets. Specifically, we argue that Shotgun mechanisms, where the courts mandates one owner to name a single buy-sell price and compels the other owner to either buy or sell shares at the named price, should play a larger role in the judicial management of business divorce. Since the party proposing the offer may end up either buying or selling shares, the party has an incentive to identify and name a fair price. In addition, inefficient delays and administration cost associated with external appraisers and public auctions will be avoided. Our proposal is aligned with current statutory rules and case law. General partnerships and limited liability companies (LLCs), the most commonly chosen legal entities, are the focus of this study.


Court Affirms Dismissal of Stockholder Complaint as Derivative Following Merger

The following post comes to us from David J. Berger, partner focusing on corporate governance at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert 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.

On August 12, 2013, the U.S. Court of Appeals for the Fifth Circuit affirmed the dismissal of a lawsuit contending that alleged controlling stockholders of Ascension Orthopedics, Inc. had expropriated voting and economic control from the minority stockholders via a series of financing transactions that occurred before Ascension merged with another company. The Fifth Circuit affirmed the district court’s decision that, under applicable Delaware law, the claims by the minority stockholders were derivative rather than direct, and thus were extinguished by the merger. Wilson Sonsini Goodrich & Rosati represented the former directors of Ascension in the litigation and represented Ascension in the financing and acquisition transactions.


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