Monthly Archives: December 2013

The Economics of Solicited and Unsolicited Credit Ratings

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Sunday, December 29, 2013

Credit risk, Information asymmetries, Ratings agencies, Reputation
More from: Gunter Strobl, Han Xia, Paolo Fulghieri

The following post comes to us from Paolo Fulghieri, Professor of Finance at the University of North Carolina at Chapel Hill; Günter Strobl, Professor of Finance at the Frankfurt School of Finance and Management; and Han Xia of the Jindal School of Management at the University of Texas at Dallas.

In our paper, The Economics of Solicited and Unsolicited Credit Ratings, forthcoming in the Review of Financial Studies, we develop a dynamic rational expectations model to address the question of why rating agencies issue unsolicited credit ratings and why these ratings are, on average, lower than solicited ratings. We analyze the implications of this practice for credit rating standards, rating fees, and social welfare. Our model incorporates three critical elements of the credit rating industry: (i) the rating agencies’ ability to misreport the issuer’s credit quality, (ii) their ability to issue unsolicited ratings, and (iii) their reputational concerns.

The Corporate Social Responsibility Report and Effective Stakeholder Engagement

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Saturday, December 28, 2013

Climate change, Compliance & ethics, Corporate Social Responsibility, Environmental disclosure, Shareholder communications, Sustainability
More from: Bill Libit, Todd Freier, Chapman

The following post comes to us from Bill Libit, partner concentrating in corporate and securities and municipal finance at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Libit and Todd Freier.

Companies today are being called upon by their shareholders and other stakeholders to not only boost the bottom line, but also to help address some of the country’s most challenging problems, including those concerning economic development and the environment. While opinions differ on how responsibility should be allocated across the public and private sectors, corporate stakeholders (which typically include shareholders, employees, customers, suppliers, communities, governments and regulators) are demanding that companies recognize a broader scope of responsibility in addressing those problems. As a result, companies are increasingly working with stakeholders to understand their views and concerns on various environmental, social, corporate governance and economic issues (such issues often referred to as corporate social responsibility (“CSR”) issues) and to incorporate and address those views and concerns in the company’s strategic decision-making processes.

ISS Advises Against By-Law Restricting Shareholder Compensation of Board Nominees

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Friday, December 27, 2013

Boards of Directors, Charter & bylaws, Davies, Director nominations, ISS, Proxy advisors, Proxy contests, Shareholder activism, Shareholder nominations, Shareholder voting
More from: Alex Moore, Andrew Cooley, Berl Nadler

The following post comes to us from Berl Nadler, partner at Davies, Ward, Phillips & Vineberg LLP, and is based on a Davies publication by Mr. Nadler, Alex Moore, and Andrew Cooley.

In proxy contests earlier this year involving the boards of Agrium Inc. (“Agrium”) and Hess Corporation (“Hess”), the compensation by activist shareholders of their proposed director nominees was heavily criticized both by the target boards and by third party commentators. The Agrium and Hess contests have given rise to a debate over the merits and propriety of nominee compensation generally, with some institutional shareholders and commentators calling for the prohibition of the practice. In the face of this critical commentary, the recent experience of Provident Financial Holdings, Inc. (“Provident”), a U.S. bank holding company, suggests that efforts by boards to prohibit the practice entirely are likely to meet resistance.

Who Is Responsible for Libor Rate-Fixing?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Thursday, December 26, 2013

Antitrust, Banks, Collusion, Corporate crime, Corporate fraud, DOJ, European Commission, Financial institutions, Financial regulation, Foreign banks, International governance, LIBOR, UK
More from: Mark Patterson

The following post comes to us from Mark R. Patterson at Fordham University School of Law.

On December 4, the European Commission announced the imposition of €1.7 billion in fines on eight international banks for participation in cartels in euro- and yen-denominated interest-rate derivatives. The banks had conspired on submissions for euro and yen Libor rates, and the fines were imposed under European antitrust law. As EU Commissioner Joaquín Almunia said, “What is shocking about the LIBOR and EURIBOR scandals is not only the manipulation of benchmarks, which is being tackled by financial regulators worldwide, but also the collusion between banks who are supposed to be competing with each other.”

Commissioner Almunia’s comment might have been addressed specifically to U.S. antitrust enforcers. Although the Antitrust Division of the Department of Justice has been involved in some of the settlements that the department has reached with banks, to date none of those settlements has included antitrust liability. Instead, the banks have pled guilty or admitted liability only for fraud, even though the statements issued by the Justice Department when announcing the settlements describe just the sort of collusion to which Commissioner Almunia referred.

Nasdaq Proposes Tweaks to Compensation Committee Independence Requirements

Posted by Arthur H. Kohn, Cleary Gottlieb Steen & Hamilton LLP, on

Tuesday, December 24, 2013

Board independence, Boards of Directors, Compensation committees, Director compensation, Exchange Act, Listing standards, NASDAQ, Securities regulation
More from: Arthur Kohn, Jonathan Reinstein, Mary Alcock, Michael Albano, Cleary Gottlieb

Arthur H. Kohn is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Michael Albano, Mary Alcock, and Jonathan Reinstein.

On November 26, 2013, the Nasdaq Stock Market filed a proposal to amend its listing rules implementing Rule 10C-1 of the Securities Exchange Act of 1934, governing the independence of compensation committee members. [1] Currently, Nasdaq Listing Rule 5605(d)(2)(A) and IM-5605-6 employ a bright line test for independence that prohibits compensation committee members from accepting directly or indirectly any consulting, advisory or other compensatory fees from the company or any subsidiary. The requirement is subject to exceptions for fees received for serving on the board of directors (or any of its committees) or fixed amounts of compensation under a retirement plan for prior service with the company provided that such compensation is not contingent on continued service.

The Evolving Direction and Increasing Influence of Shareholder Activism

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Monday, December 23, 2013

Boards of Directors, Decision-making, Hedge funds, Institutional Investors, Shareholder activism, Shareholder communications
More from: John Madden, Shearman & Sterling

The following post comes to us from John J. Madden, Of Counsel and member of the Mergers & Acquisitions Group at Shearman & Sterling LLP, and is based on an article that first appeared in Directors & Boards.

When we convened our Corporate Governance Symposium last year (October 2012), we highlighted the increasingly important role shareholders were playing in the corporate decision-making process, commenting as follows:

“Over the course of the past year, we have continued to see shareholders making their voices heard, in some cases rather forcefully and effectively, on a broad range of corporate issues. In many ways, the recent developments in corporate governance reinforce the growing perception that we are, and have been for several years, experiencing a potentially fundamental shift in the balance of authority, or influence, between boards of directors and shareholders in the corporate decision-making process, moving further away from the longstanding board primacy model of corporate governance.”

Are Hedge Fund Managers Systematically Misreporting? Or Not?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on

Monday, December 23, 2013

Firm valuation, Fund managers, Hedge funds, Incentives, Misreporting, Performance measures, Risk
More from: Christopher Schwarz

The following post comes to us from Philippe Jorion and Christopher Schwarz, both of the Finance Area at the University of California at Irvine.

The hedge fund industry has grown tremendously over the last two decades. While this growth is due to a number of factors, one explanation is that its performance-based compensation system creates incentives for managers to generate alpha. This incentive system, however, could also motivate some managers to manipulate net asset values or commit outright fraud. Due to the light regulatory environment hedge funds operate in and their secretive nature, monitoring managers is generally difficult for investors and regulators.

In response, recent research has attempted to infer malfeasance directly from the distribution of hedge fund returns. In particular, the finding of a pervasive discontinuity in the distribution of net returns around zero has been interpreted as evidence that hedge fund managers systematically manipulate the reporting of NAVs to minimize the frequency of losses. This literature, however, has not recognized that performance fees distort the pattern of net returns.

In our paper, Are Hedge Fund Managers Systematically Misreporting? Or Not?, forthcoming in the Journal of Financial Economics, we show that inferring misreporting based on a kink at zero can be misleading when ignoring incentive fees. Because these fees are applied asymmetrically to positive and negative returns, the distribution of net returns should display a natural discontinuity around zero. In other words, there is a mechanical explanation for the observed kink in the distribution of net returns. We demonstrate this effect by showing that funds without incentive fees have no discontinuity at zero until we add hypothetical incentive fees to their returns.

Delaware Court: Corporation’s Own Stock Purchases not a “Business Combination”

Posted by Allen M. Terrell, Jr., Richards, Layton & Finger, on

Sunday, December 22, 2013

Acquisition agreements, Class actions, Delaware cases, Delaware law, Shareholder suits
More from: Allen Terrell, Richards Layton

Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Activision Blizzard, Inc. v. Hayes, No. 497, 2013 (Del. Nov. 15, 2013), the Delaware Supreme Court addressed the question of whether the purchase by Activision Blizzard, Inc. (“Activision”) of shares of its own stock, as well as net operating loss carryforwards (“NOLs”), from Vivendi, S.A. (“Vivendi”) constituted a “merger, business combination or similar transaction” under Activision’s amended certificate of incorporation and, as a result, required the approval of stockholders. The Court held that, despite its form as the combination of two entities, the transaction at issue did not require the approval of stockholders. “Indeed,” observed the Court, “it is the opposite of a business combination. Two companies will be separating their business connection.”

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Monthly Archives: December 2013

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