Monthly Archives: August 2013

German Legislator to Cap Bonuses for Bank Staff

The following post comes to us from Dr. Nicolas Roessler, partner in the Employment and Benefits practice at Mayer Brown LLP, and is based on a Mayer Brown publication by Dr. Roessler and Dr. Guido Zeppenfeld.

On July 5, 2013, the German Federal Council (Bundesrat) decided to raise no objection against the CRD IV Implementation Act passed by the German Federal Parliament (Bundestag) on June 27, 2013. The legislative procedure for this Act, which implements Directive 2013/36/EU (Capital Requirements Directive IV, “CRD IV”) into German law, is thus completed.

Together with Regulation (EU) No. 575/2013 (Capital Requirements Regulation, “CRR”), the CRD IV is part of the so-called “Single Rule Book”. The Single Rule Book enhances the capital adequacy of credit institutions and other institutions regulated by the German Banking Act (“Institutions”), provides for liquidity requirements harmonised throughout the EU, and harmonises the European banking supervisory legislation. Unlike the CRD IV, the CRR does not require implementation; it has a direct and immediate effect on the Institutions.

The Act implementing the requirements of CRD IV will enter into force on January 1, 2014. The German Banking Act (Kreditwesengesetz, “KWG”) will be changed, and a revision of the German Remuneration Regulation for Institutions (InstitutsVergütungsverordnung, “InstitutsVergV”) is expected. Under employment law aspects, the new regulations on bonus caps are of particular importance. This Legal Update outlines the main new regulations and their employment law implications.

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PCAOB Proposes Significant Changes to Audit Standards

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 and Michael J. Scanlon.

Today, the Public Company Accounting Oversight Board (“PCAOB”) proposed for public comment two audit standards that, if adopted, would significantly change the audit report model, and dramatically expand the auditor’s responsibilities in reporting on management’s disclosures outside the financial statements. PCAOB Chairman Doty remarked that the proposed standards—running to almost 300 pages—mark a “watershed moment” for auditing in the United States.

The first proposal—The Auditor’s Report on an Audit of Financial Statements—moves well beyond the traditional audit report and would require the following additional statements:

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2013 Proxy Season: A Turning Tide in Corporate Governance?

The following post comes to us from Robert A. Profusek, partner focusing on mergers and acquisitions at Jones Day, and is based on a Jones Day publication by Mr. Profusek, Lyle G. Ganske, and Lizanne Thomas.

The 2013 proxy season has ended, and many public companies are in a period of relative calm on the governance front before the season for shareholder proposal submissions begins in a few months. This post reflects on some of the highlights of the past proxy season and a few events and trends that may shape the 2014 season.

Declining Influence of Proxy Advisory Firms

Events in the 2013 proxy season have signaled that the era of blind adherence to proxy advisory firms’ recommendations may be waning, at least to some degree. JPMorganChase’s success in defeating a highly contested independent board chair proposal for the second year in a row provides some evidence that the influence of proxy advisory firms is decreasing, at least as to non-core governance issues outside the executive compensation area. The JPMorganChase shareholder proposal won the support of only 32.2 percent of the votes cast at its 2013 annual meeting, despite Glass Lewis’s and ISS’s recommendations in favor of the proposal. A Wall Street Journal article relating to the vote even included this gem of a quote from a VP of proxy research at Glass Lewis: “Our power is probably shrinking a bit.” Would that it were so—investors’ reclaiming the power of the shareholder franchise would be good news for corporations and their boards, and for investors as well.

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Delaware Court of Chancery Applies Business Judgment Rule

The following post comes to us from Alan Stone, partner in the Litigation & Arbitration Group at Milbank, Tweed, Hadley & McCloy LLP, and is based on a Milbank client alert by Mr. Stone & David Schwartz. 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.

In Southeastern Pennsylvania Transportation Authority v. Ernst Volgenau, et al [1] (the “SRA” decision), Vice Chancellor Noble continued a recent trend in Delaware case law involving acquisitions of companies with a controlling stockholder—if robust procedural protections are properly used (such as the recommendation of an empowered, disinterested special committee and the transaction is conditioned on a non-waivable vote of the majority of all minority target stockholders), the standard of judicial review applicable to such a transaction will be the deferential business judgment rule. Accordingly, when a target company is acquired by a third party unaffiliated with the target’s controlling stockholder, the target company can avoid “judicial review under the entire fairness standard and, perhaps in most instances, the burdens of trial.”

Only a few weeks ago, in a precedent setting decision, Chancellor Strine held that the standard of judicial review applicable to going private mergers with controlling stockholders (i.e., transactions in which the buyer is affiliated with or is the controlling stockholder) should also be the deferential business judgment rule if certain similar robust procedural protections were properly employed. [2]

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Private Company Financing Trends for 1H 2013

The following post comes to us from Craig Sherman, partner focusing on corporate and securities law at Wilson Sonsini Goodrich & Rosati, and first appeared in the firm’s Entrepreneurs Report.

In Q2 2013, up rounds (including several second-stage seed financings) as a percentage of total deals increased modestly compared with Q1 2013. While pre-money valuations remained strong for both venture-led and angel Series A deals that had closings in Q2, valuations of companies doing Series B and later rounds declined significantly. Median amounts raised increased modestly for angel-backed Series A deals but fell for venture-backed companies, while amounts raised increased for Series B deals, but fell for Series C and later rounds.

Deal terms remained broadly similar in 1H 2013 as compared with 2012, with a couple of notable exceptions. First, the use of uncapped participation rights in both up and down rounds continued to decline. Second, down rounds also saw a shift away from the use of senior liquidation preferences.

Up and Down Rounds

Up rounds represented 67% of all new financings in Q2 2013, an increase from 60% in Q1 2013 but still down markedly from the 76% figure for up rounds in Q4 2012. Similarly, down rounds as a percentage of total deals declined from 26% in Q1 2013 to 18% in Q2 2013, but were still higher than the 14% figure for Q4 2012. The percentage of flat rounds grew slightly, from 14% of all deals in Q1 2013 to 15% in Q2 2013.

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MD&A Disclosure and the Firm’s Ability to Continue as a Going Concern

The following post comes to us from Bill Mayew, Mani Sethuraman, and Mohan Venkatachalam, all of the Accounting Area at Duke University.

In January 2012, the Financial Accounting Standards Board decided by a narrow margin of 4-3 not to require management to perform an assessment of the entity’s ability to continue as a going concern. By May 2012, the FASB reconsidered this requirement and in June 2013 issued an exposure draft that mandates going concern disclosures as part of the financial report. Proponents of this requirement contend that more information is needed from management to inform investors and creditors of impending firm failure, particularly given the spate of recent bankruptcies that have occurred seemingly without warning from either the management or the firm’s auditors. Opponents contend, among other reasons, that managers already disclose sufficient information in their MD&A voluntarily. As such, their view is that an additional disclosure mandate would be an unnecessary imposition on management. In our paper, MD&A Disclosure and the Firm’s Ability to Continue as a Going Concern, which was recently made publicly available on SSRN, we directly inform this debate by assessing whether, to what extent, and when existing disclosures in a firm’s MD&A inform about a firm’s ability to continue as a going concern.

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Enhancing the Promise of Exclusive Forum Clauses

The following post comes to us from Mitchell Lowenthal, partner at Cleary Gottlieb Steen & Hamilton LLP, and is based on a Cleary Gottlieb 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.

The multiplicity of cases brought on behalf of the same stockholder group (or as derivative actions) against the same defendants, based on the same conduct and asserting the same fiduciary duty claims is now well documented. The benefits of consolidating such litigation in a single forum have also been well established.

Most such litigation takes place in state courts, particularly where the litigation concerns transformative corporate events like mergers. Within the federal system, there is a specialized tribunal—the Judicial Panel on Multidistrict Litigation—charged with allocating business among the different federal district courts when the same or similar cases are pending in several such courts. There is nothing similar, however, in the state court systems that can allocate cases among courts of different states.

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The Costs and Benefits of Mandatory Securities Regulation

The following post comes to us from Dhammika Dharmapala, professor at University of Illinois College of Law, and Vikramaditya S. Khanna, William W. Cook Professor of Law at University of Michigan Law School.

There is a long-standing debate across law, economics and finance regarding the justifications for a mandatory disclosure regime of the type exemplified by US securities law, and a related literature on the empirical question of whether mandatory securities regulation increases the value of firms (i.e. whether the benefits of regulation exceed the compliance costs). In our working paper The Costs and Benefits of Mandatory Securities Regulation: Evidence from Market Reactions to the JOBS Act of 2012 recently made publicly available on SSRN, we use a recent securities law reform to shed new light on this old question.

The Jumpstart Our Business Startups (“JOBS”) Act was passed by Congress in March 2012, and signed by the President on April 5, 2012. It relaxed disclosure and compliance obligations for a new category of firms defined by the Act, known as “emerging growth companies” (EGCs), that satisfied certain criteria (including, most prominently, generating less than $1 billion of revenue in its most recently completed fiscal year). The Act relaxed existing requirements for EGCs conducting initial public offerings (IPOs) on US equity markets, and also relaxed EGCs’ post-IPO disclosure and compliance obligations for a 5-year period. Perhaps most importantly, EGCs were permitted an exemption from auditor attestation of internal controls under Section 404(b) of the Sarbanes-Oxley Act of 2002, as well as exemption from certain future changes to accounting rules.

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Exit as Governance

The following paper comes to us from Sreedhar Bharath of the Department of Finance at Arizona State University, Sudarshan Jayaraman of the Accounting Area at Washington University in Saint Louis, and Venky Nagar of the Department of Accounting at the University of Michigan.

Traditional theories of blockholder governance have focused primarily on blockholder intervention in management decisions. However, recent theories posit that blockholders can govern firms even when they have no intervention power. These theories view blockholders as informed traders who control management through “exit,” i.e., selling a firm’s stock based on private information (Admati and Pfleiderer 2009, Edmans 2009, Edmans and Manso 2011). Blockholder exit in these models exerts downward pressure on the stock price, which hurts management through its equity interest in the firm. Management therefore wants to make sure its actions are such that blockholders are willing to stay with the firm.

When blockholders are informed traders, management undertakes productive effort and investment in order to improve firm value and dissuade blockholders from exiting. The true governance force therefore comes from the threat of blockholder exit, not actual exit. Even if no exit is observed, blockholders could be governing effectively because their exit threat is sufficient to discipline management.

In our paper, Exit as Governance: An Empirical Analysis, forthcoming in the Journal of Finance, we empirically test the governance impact of blockholder exit threats. Since threats cannot be directly observed, this study focuses instead on a key mechanism that facilitates exit threats, namely stock liquidity. The exit threat models suggest that stock liquidity enhances the power of exit threats and improves firm value. For example, in Edmans (2009), the manager is compensated on the stock price and can take fundamental actions to improve firm value. Stock liquidity encourages strategic traders to acquire more information on firm fundamentals and trade on it in larger volumes (or blocks). The manager is sensitive to the resulting stock price, and therefore takes actions to increase firm value and induce (informed) blockholders to stay. Liquidity thus enhances the power of blockholder exit threats and improves firm value. This theoretical prediction forms the basis of our empirical tests.

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Central European Distribution Corporation’s Chapter 11 Plan Incorporates Dutch Auction

The following post comes to us from Mark S. Chehi, a partner in the Corporate Restructuring Group of Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden memorandum by Mr. Chehi, Glenn S. Walter, Jay M. Goffman, and Mark A. McDermott.

On May 13, 2013, the U.S. Bankruptcy Court for the District of Delaware confirmed a prepackaged Chapter 11 plan of reorganization in the case of Central European Distribution Corporation (CEDC) [1] that incorporated an unmodified reverse Dutch auction. A reverse Dutch auction is a type of auction employed when a single buyer accepts bids from numerous sellers, and lowest-priced seller bids are accepted as winning bids.

The CEDC plan is perhaps the first instance of a Dutch auction process being incorporated successfully into a Chapter 11 reorganization plan. This precedent provides guidance for the use of Dutch auctions that may offer creditors distribution alternatives and maximize the utility of limited cash (or other limited property) available for distribution under a plan.

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