Monthly Archives: August 2013

SEC Rejects Proposed Settlement with Harbinger Capital and Its Manager

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, August 7, 2013
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The following post comes to us from Richard M. Rosenfeld, partner and co-lead of the US Securities Litigation & Enforcement group at Mayer Brown LLP, and is based on a Mayer Brown legal update by Mr. Rosenfeld, Kelly B. Kramer, and Scott A. Claffee.

In a regulatory filing made on July 19, 2013, Harbinger Group, Inc. (Harbinger Group), a publicly traded investment company, announced that the US Securities and Exchange Commission (SEC) had rejected an agreement in principle that Harbinger Group had reached with the staff of the SEC’s Enforcement Division. The agreement was to settle allegations that Philip A. Falcone and the hedge fund he managed, Harbinger Capital Partners LLC (Harbinger Capital), misappropriated client assets, manipulated markets and betrayed clients.

The agreement would have resolved civil charges that the SEC filed last June in the US District Court for the Southern District of New York against Harbinger Capital, Falcone and Harbinger Capital’s former Chief Operating Officer Peter A. Jenson. The complaints charged Falcone and Harbinger Capital with violating Section 17(a) of the Securities Act, Section 10(b) of the Exchange Act and Rule 10b-5, and Sections 206(1), 206(2), 206(4) and 206(4)-8 of the Advisers Act. Falcone also was charged as a control person under Section 20(a) of the Exchange Act; Jenson was charged with aiding and abetting Falcone and Harbinger Capital’s alleged violations.

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Some Descriptive Data on Settlement Timing in Securities Class Actions

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, August 7, 2013
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The following post comes to us from Michael Klausner, Nancy and Charles Munger Professor of Business and Professor of Law at Stanford Law School, and Jason Hegland, Project Manager for Stanford Securities Litigation Analytics.

In a recent article in the PLUS Journal, we presented some simple statistics on settlement timing in securities class actions. The data cover cases filed between 2006 and 2010 and settled between 2006 and 2012. They come from a database we recently completed and will keep current. The article can be found on the PLUS website through their search bar, or here. Our plan is to follow up with a more detailed econometric analysis. In this post, we summarize some of the descriptive statistics included in that article, and we invite comment, interpretation and other reactions.

In order to summarize data on settlement timing, we divide a case into three phases:

  • Early Pleading—the period before the first motion to dismiss is ruled on. A settlement during this phase of a case reflects the parties’ decision not to risk a ruling on a motion to dismiss.
  • Late Pleading—the period after the first consolidated complaint has been dismissed without prejudice but before a motion to dismiss a later consolidated complaint has been denied. Parties who settle during this stage of the litigation have risked a ruling on at least one motion to dismiss but choose to settle before the judge has finally ruled on dismissal.
  • Discovery—the period after a motion to dismiss has been denied and a case heads toward discovery and potentially to trial. These cases settle sometime between the day the motion to dismiss is denied (in which case discovery has not actually begun) and the end of a trial.

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2013 Amendments to the DGCL and DLLCA

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, August 6, 2013
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The following post comes to us from Ariel J. Deckelbaum, partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client 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 Delaware General Assembly has adopted, and Delaware’s governor has signed into law, several important amendments to the State’s General Corporation Law (the “DGCL”) and Limited Liability Company Act (the “DLLCA”). Of particular interest to corporate and M&A practitioners are the following provisions:

  • New DGCL Section 251(h), which eliminates the need for stockholder approval of second-step mergers following tender offers if certain conditions are met, thus eliminating the need for workarounds such as top-up options and dual-track structures;
  • New DGCL Sections 204 and 205, which delineate a procedure to ratify defective corporate actions and to vest the Court of Chancery with jurisdiction over disputes regarding such actions;
  • New DGCL Sections 361 through 368 (Subchapter XV), which permit the creation of public benefit corporations (i.e., for-profit corporations formed for the benefit of constituencies other than stockholders, such as categories of persons, entities, communities or interests); and
  • Amended DLLCA Section 18-1104, which amendments confirm the default rule that fiduciary duties exist in the case of Delaware limited liability companies unless otherwise provided in the LLC agreement.

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Tax Avoidance and Geographic Earnings Disclosure

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, August 6, 2013
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The following post comes to us from Ole-Kristian Hope, Professor of Accounting at the University of Toronto; Mark (Shuai) Ma of the Department of Accounting at the University of Oklahoma; and Wayne Thomas, Professor of Accounting at the University of Oklahoma.

Multinational firms can avoid taxes through structured transactions among different jurisdictions (e.g., Rego 2003), such as reallocating taxable income from high-tax jurisdictions to low-tax ones (Collins et al. 1998). This type of income shifting significantly reduces tax revenues of governments in high-tax jurisdictions and potentially hinders domestic economic growth and other social benefits (e.g., GAO 2008; U.S. Senate 2006). Policy makers around the world, including the United States, European Union, and Canada, have either enacted or are considering regulations related to multinational firms’ cross-jurisdictional income shifting and tax avoidance behavior. However, relatively little is known about multinational corporate tax avoidance behavior (Hanlon and Heitzman 2010), though such knowledge provides a basis for making and enforcing related rules. Further, the relation between firms’ tax avoidance and financial disclosures is not well established. In our paper, Tax Avoidance and Geographic Earnings Disclosure, forthcoming in the Journal of Accounting and Economics, we investigate how geographic earnings disclosure in firms’ financial reports relates to multinational firms’ tax avoidance behavior.

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2013 Proxy Season Review

Posted by James R. Copland, Manhattan Institute, on
Monday, August 5, 2013
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James R. Copland is the director of the Manhattan Institute’s Center for Legal Policy. The following post is based on a memorandum from the Proxy Monitor project; the complete publication, including footnotes, is available here.

Corporate America’s “proxy season” has now wrapped up: most of America’s large publicly traded companies hold annual meetings to vote on business, including shareholder proposals, between April 15 and the end of June. Among the 250 largest U.S. public companies by revenues that constitute the Manhattan Institute’s Proxy Monitor database, 214 had held meetings by July 1.

In 2013, companies faced more shareholder proposals, on average, than in 2012, but the average support for proposals fell and a smaller percentage of proposals received the support of a majority of shareholders. The most commonly introduced type of proposal, as in 2012, involved companies’ political spending or lobbying; but as in 2012, none of these proposals passed, and shareholder support for this class of proposals held steady at a modest 18 percent.

This post discusses these results in more detail. First, the post summarizes 2013 shareholder proposals, including their rate of introduction and a breakdown of shareholder proposal types and shareholder proposal sponsorship. Next, the post examines voting results. Finally, the post looks in more depth at the most common class of proposal: that involving political spending or lobbying.

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Renewed Focus on “Unbundling”

Posted by Barbara Becker and Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Monday, August 5, 2013
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Barbara L. Becker is partner and co-chair of the Mergers and Acquisitions Practice Group at Gibson, Dunn & Crutcher LLP, and Eduardo Gallardo is a partner focusing on mergers and acquisitions, also at Gibson Dunn. The following post is based on a Gibson Dunn M&A report excerpt by James Moloney and Matthew N. Walsh. The full publication is available here. Work from the Program on Corporate Governance about bundling includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar, discussed on the Forum here.

The recent decision by the U.S. District Court for the Southern District of New York in Greenlight Capital LP v. Apple Inc. [1] serves as a good reminder of the importance of ensuring that management proposals do not run afoul of the Securities and Exchange Commission’s (“SEC”) unbundling rules. Impermissible “bundling” of management proposals, as covered by Rules 14a4(a)(3) and 14a-4(b)(1) promulgated under the Securities Exchange Act of 1934, as amended, is the practice of combining two or more separate matters as one proposal, such that shareholders must evaluate and vote on issues as a single matter, rather than voting on each matter individually. The Greenlight decision focused on the disclosure in Apple’s proxy statement, which included a proposed amendment to Apple’s articles of incorporation that, if approved, would: (1) facilitate majority voting for incumbent members of Apple’s directors; (2) revoke the board of director’s power to unilaterally issue preferred stock; (3) establish a par value for Apple’s common stock; and (4) eliminate certain obsolete provisions, such as references to preferred stock.

Plaintiff, Greenlight Capital, alleged that Apple’s proposal violated the SEC proxy rules prohibiting the “bundling” of multiple items. Judge Richard J. Sullivan rejected Apple’s argument that the proposal was merely a single proposal to amend its articles of incorporation, and ordered the matters unbundled. Importantly, the court noted that Apple could not simply rely upon the prevailing market practice (coupled with apparent SEC inaction) with respect to bundling management proposals—the court was compelled to exercise its “independent judgment” regarding the matter.

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2013 Mid-Year Securities Litigation Update

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, August 4, 2013
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The following post comes to us from Jonathan C. Dickey, partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication.

Filing and Settlement Trends

Filing and settlement trends continue to reflect “business as usual” for the plaintiffs’ bar—hundreds of suits and significant settlement values can be expected for the rest of 2013, based on results from the early half of the year. According to a recent study by NERA Economic Consulting, the annualized rate of new class action filings based on results in the first half of 2013 is expected to be slightly up from the prior six-year averages. Through June 2013, new securities class action filings were annualizing at 222 cases for the full year, representing an uptick from the six-year average of 219 suits. On the other hand, median settlement amounts were somewhat lower that the six-year average: $8.8 million in the first quarter of 2013, versus the six-year average of $9.3 million, but higher than four out of those six years. The average settlement value in the first quarter of 2013 was more than double the six-year average: $78 million, versus the six-year average of $35 million. Finally, median settlement amounts as a percentage of investor losses in the first half of 2013 were 2.0%, up from 1.8% for the full year 2012, but slightly lower than the six-year average of 2.

Class Action Filings

Overall filing rates are reflected in Figure 1 below (all charts courtesy of NERA Economic Consulting). NERA reports an average of 219 new cases filed in the period 2007 to 2012. Annualized filings in the first half 2013 are projected to be higher than the prior six-year average, at 222 cases. Notably, these figures do not include the many such class suits filed in state courts, including the Delaware Court of Chancery.

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Investor Organizations Oppose Tightening of Canadian Disclosure Regime

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, August 3, 2013
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The following post comes to us from Alex Moore, partner at Davies, Ward, Phillips & Vineberg LLP, and discusses an MFA and AIMA joint comment letter submitted with the Canadian Securities Administrators. The comment letter is available here.

The Managed Funds Association (“MFA”) and the Alternative Investment Management Association (“AIMA”) and have jointly submitted a comment letter with the Canadian Securities Administrators with respect to proposed changes to Canada’s block shareholder reporting regimes known in Canada as the Early Warning Reporting (“EWR”) system and the Alternative Monthly Reporting (“AMR”) system. The EWR and AMR systems are the Canadian equivalents to Schedule 13(d) and 13(g) disclosure in the United States.

The comment letter provides an extensive discussion of the importance of shareholder engagement and activist investing and the consequential benefits from such activity that accrue to all shareholders, as well as to target companies and the economy more generally. The letter submits that the CSA’s proposed tightening of Canada’s block shareholder reporting rules will stifle shareholder engagement and democracy and insulate incumbent managers from owners. The full text of the MFA and AIMA comment letter is available here: http://www.osc.gov.on.ca/documents/en/Securities-Category6-Comments/com_20130712_62-104_kaswellsj.pdf.

The changes to the EWR and AMRS regimes proposed by the CSA include:

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Golden Parachute Compensation Practice Pointers

Posted by Barbara Becker and Eduardo Gallardo, Gibson, Dunn & Crutcher LLP, on
Friday, August 2, 2013
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Barbara L. Becker is partner and co-chair of the Mergers and Acquisitions Practice Group at Gibson, Dunn & Crutcher LLP, and Eduardo Gallardo is a partner focusing on mergers and acquisitions, also at Gibson Dunn. The following post is based on a Gibson Dunn M&A report excerpt by Stephen W. Fackler and Michael Collins. The full publication is available here.

For a variety of practical and legal reasons, compensation to be paid in connection with the sale of a public company (which this article will refer to as “golden parachute compensation”) is best addressed well before an M&A transaction is being contemplated. There are a multitude of issues that are raised when designing these sorts of compensation arrangements, which generally focus on protecting a company’s executives if their employment is involuntarily terminated following a change in control, and below is a checklist to assist companies in approaching many of the important considerations.

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District Court Upholds SEC Conflict Minerals Rule

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 2, 2013
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The following post comes to us from Adam M. Givertz, partner in the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP, and is based on a Paul Weiss client memorandum by Mr. Givertz, Christopher J. Cummings, Andrew J. Foley, Edwin S. Maynard, and Stephen C. Centa.

On July 23, 2013, the District Court for the District of Columbia upheld Rule 13p-1 under the Securities Exchange Act of 1934, as amended (the “Exchange Act“), which was promulgated by the Securities and Exchange Commission (the “SEC”) pursuant to Section 1502 of the Dodd-Frank Wall Street Reform and Consumer Protection Act. Rule 13p-1 requires issuers to disclose their use of coltan, cassiterite, gold and wolframite originating in the Democratic Republic of the Congo (the “DRC”) or an adjoining country (“Conflict Minerals”) in their manufactured products.

The plaintiffs — the National Association of Manufacturers, the Chamber of Commerce, and the Business Roundtable (collectively, the “Plaintiffs”) — challenged Rule 13p-1 on several grounds. First, the Plaintiffs claimed that Rule 13p-1 was “arbitrary and capricious” within the meaning of the Administrative Procedure Act (the “APA”) and, therefore, unlawful. Specifically, the Plaintiffs argued that the SEC failed to adequately analyze the humanitarian costs and benefits of Rule 13p-1. The District Court found this contention to lack merit as the Court interpreted the Exchange Act to only require that the SEC “consider the impact that a rule or regulation may have on various economic-related factors—efficiency, competition, and capital formation” and not to “consider whether [Rule 13p-1] would actually achieve the humanitarian benefits identified by Congress.” The District Court also rejected the Plaintiffs’ argument that the SEC’s estimates of the costs of implementing the rule were flawed, finding that the SEC’s methodology in reaching such estimates to be “eminently appropriate.”

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