Monthly Archives: December 2013

No Free Shop

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, December 16, 2013
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The following post comes to us from Charles Calomiris, Professor of Finance at Columbia University.

In the paper, No Free Shop: Why Target Companies in MBOs and Private Equity Transactions Sometimes Choose Not to Buy ‘Go-Shop’ Options, which was recently made publicly available on SSRN, my co-authors (Adonis Antoniades and Donna Hitscherich) and I study the decisions by targets in private equity and MBO transactions whether to actively “shop” executed merger agreements prior to shareholder approval.

We construct a theoretical framework for explaining the choice of go-shop clauses by acquisition targets, which takes account of value-maximizing motivations, as well as agency problems related to conflicts of interest of management, investment bankers, and lawyers. On the basis of that framework, we empirically investigate the determinants of the go-shop decision, and the effects of the go-shop choice on acquisition premia and on target firm value, using a regression methodology that explicitly allows for the endogeneity of the go-shop decision. Our sample includes data on 306 cash acquisition deals for the period 2004-2011.

We allow many aspects of target firms to enter into their go-shop decision, including the nature of their legal counsel, their ownership structure, their size, and various other firm, and deal characteristics. We find that legal advisor characteristics, ownership structure, and the extent to which the transaction was widely marketed prior to the first accepted offer all matter for the go-shop decision.

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Delaware Court Upholds CEO Removal and Determines Board Composition

Posted by Allen M. Terrell, Jr., Richards, Layton & Finger, on
Sunday, December 15, 2013
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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 Klaassen v. Allegro Development Corporation, 2013 WL 5739680 (Del. Ch. Oct. 11, 2013), Eldon Klaassen, the former CEO of Allegro Development Corporation (“Allegro”), brought an action under Section 225 of the Delaware General Corporation Law, requesting that the Court of Chancery declare that he: (1) was still the CEO of Allegro, (2) had validly removed two of Allegro’s directors and appointed their replacements, and (3) had validly filled a preexisting director vacancy. Klaassen claimed that his removal as CEO of Allegro by the board of directors (the “Board”) was void. If he was indeed still CEO, he had the power to remove directors and appoint new ones under Allegro’s governing documents. In a post-trial opinion, the Court of Chancery found that Klaassen was barred from challenging his removal as CEO by the equitable doctrines of laches and acquiescence. Regarding his changes to the Board, the Court of Chancery determined that Klaassen did succeed in removing one director and filling the preexisting vacancy on the Allegro Board, but that he did not remove the second director and new CEO, nor validly appoint a replacement for the removed director.

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Silicon Valley Venture Survey—Third Quarter 2013

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, December 14, 2013
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The following post comes to us from Barry J. Kramer, partner in the corporate and securities group at Fenwick & West LLP and is based on a Fenwick publication by Mr. Kramer and Michael J. Patrick; the full publication, including expanded detailed results and valuation data, is available here.

We analyzed the terms of venture financings for 128 companies headquartered in Silicon Valley that reported raising money in the third quarter of 2013.

Overview of Fenwick & West Results

Valuation results in 3Q13 showed a noticeable increase over 2Q13, including the greatest difference between up and down rounds in over six years. The software industry was especially strong, not only valuation-wise, but also in the number of deals.

Here are the more detailed results:

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SEC’s Non-Decision Decision on Corporate Political Activity a Policy and Political Mistake

Posted by John Coates, Harvard Law School, on
Friday, December 13, 2013
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John Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. His empirical work on corporate political spending includes Corporate Governance and Corporate Political Activity: What Effect Will Citizens United Have on Shareholder Wealth?, Fulfilling Kennedy’s Promise: Why the SEC Should Mandate Disclosure of Corporate Political Activity (with Taylor Lincoln), and Corporate Politics, Governance, and Value Before and after Citizens United.

The SEC’s recent decision to take disclosure of political activities off the SEC’s agenda is a policy mistake, as it ignores the best research on the point, described below, and perpetuates a key loophole in the investor-relevant disclosure rules, allowing large companies to omit material information about the politically inflected risks they run with other people’s money. It is also a political mistake, as it repudiates the 600,000+ investors who have written to the SEC personally to ask it to adopt a rule requiring such disclosure, and will let entrenched business interests focus their lobbying solely on watering down regulation mandated under the Dodd-Frank Act and the 2012 securities law statute, rather than having also to work to influence a disclosure regime.

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Florida SBA 2013 Corporate Governance Annual Summary

Posted by Michael McCauley, Florida State Board of Administration, on
Friday, December 13, 2013
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Editor’s Note: Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on an excerpt from the SBA’s 2013 Corporate Governance Report by Mr. McCauley, Jacob Williams and Lucy Reams. Mr. Williams and Ms. Reams are Corporate Governance Manager and Senior Corporate Governance Analyst, respectively, at the SBA.

The Florida State Board of Administration (the “SBA”) takes steps on behalf of its participants, beneficiaries, retirees, and other clients to strengthen shareowner rights and promote leading corporate governance practices among its equity investments in both U.S. and international capital markets. The SBA adopts and reports clearly stated, understandable, and consistent policies to guide its approach to key issues. These policies are disclosed to all clients and beneficiaries.

The SBA supports the adoption of internationally recognized governance practices for well-managed corporations including independent boards, transparent board procedures, performance-based executive compensation, accurate accounting and audit practices, and policies covering issues such as succession planning and meaningful shareowner participation. The SBA also expects companies to adopt rigorous stock ownership and retention guidelines, and implement well designed incentive plans with disclosures that clearly explain board decisions surrounding executive compensation.

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Poll Ranks Harvard First in Strength of Business Law Faculty

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Thursday, December 12, 2013

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A new poll, conducted by Brian Leitter of the University of Chicago Law School, and published here, identifies the top business law faculties. Harvard Law School was ranked first, coming ahead of second-place Columbia Law School by a large margin. The poll ranks faculties in terms of their strength in the business law areas, including antitrust, bankruptcy, commercial law, contracts, corporate law and finance, and securities regulation.

The HLS business law faculty listed by the poll’s conductors are Lucian Bebchuk, Robert C. Clark, John Coates, Einer Elhauge, Allen Ferrell, Jesse Fried, Louis Kaplow, Reinier Kraakmann, J. Mark Ramseyer, Mark J. Roe, Holger Spamann, Kathryn Spier, and Guhan Subramanian.

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Liquidity and Governance

Posted by Alexander Ljungqvist, New York University, on
Thursday, December 12, 2013
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Alexander Ljungqvist is Professor of Finance at New York University’s Stern School of Business.

Is greater trading liquidity good or bad for corporate governance? In the paper, Liquidity and Governance, which was recently made publicly available on SSRN, my co-authors (Kerry Back and Tao Li) and I address this question both theoretically and empirically. A liquid secondary market in shares facilitates capital formation but may be deleterious for corporate governance. Bhide (1993) argues that greater liquidity reduces the cost to a blockholder of selling her stake in response to managerial problems (‘taking the Wall Street walk’), resulting in too little monitoring by large shareholders. Bhide’s work has spawned an active literature on the effects of liquidity on governance. The present paper makes two contributions to that literature: (i) we solve a theoretical model consisting of an IPO followed by a dynamic Kyle (1985) market in which the large investor’s private information concerns her own plans for taking an active role in governance and show that greater liquidity leads to lower blockholder activism, and (ii) we verify the negative theoretical relation between liquidity and activism using three distinct natural experiments.

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Statement on the Volcker Rule and Reducing Systemic Risk

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Wednesday, December 11, 2013
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on a public statement by Commissioner Aguilar regarding the SEC’s adoption of a final rule to implement the Volcker Rule. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The recent financial crisis and subsequent events [1] show the dangers that can result when banks trade for their own accounts while disregarding their customers’ interests. During the financial crisis, U.S. taxpayers were forced to cover losses sustained by major financial institutions that resulted from speculative proprietary trading activities. [2] While several factors combined to cause the financial crisis, proprietary trading by major financial institutions was a key contributor to that crisis. [3] In particular, proprietary trading by deposit-taking institutions exposed a bank’s capital—and FDIC-insured deposits—to unacceptable risks and saddled taxpayers with massive losses. [4]

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Ready for the Volcker Rule? What to Look For

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, December 11, 2013
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The following post comes to us from Donald N. Lamson, partner in the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP, and is based on a Shearman & Sterling client publication.

Over two years after publication of a proposed regulation, a final regulation implementing the so-called “Volcker Rule” is expected to be adopted tomorrow by the five US Federal financial regulatory agencies. [1] Two of them—the Federal Reserve and the Commodity Futures Trading Commission—are expected to adopt the regulation at public meetings. According to reports, the explanation and regulatory language may be over a thousand pages long.

Assuming that the agencies go forward as announced, the most important points to look for in a final regulation are:

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Towards Board Declassification at 100 S&P 500 and Fortune 500 Companies: Advancing Annual Elections in the 2014 Proxy Season

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, December 10, 2013
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Editor’s Note: Lucian Bebchuk is the Director of the Shareholder Rights Project (SRP), Scott Hirst is the SRP’s Associate Director, and June Rhee is the SRP’s Counsel. The SRP, a clinical program operating at Harvard Law School, works on behalf of public pension funds and charitable organizations seeking to improve corporate governance at publicly traded companies, as well as on research and policy projects related to corporate governance. Any views expressed and positions taken by the SRP and its representatives should be attributed solely to the SRP and not to Harvard Law School or Harvard University. The work of the SRP has been discussed in other posts on the Forum available here.

In a news alert released last week, the Shareholder Rights Project (SRP) announced the work that SRP-represented investors and the SRP are undertaking for the 2014 proxy season, and the significant contribution that this work is expected to make in moving 100 S&P 500 and Fortune 500 companies towards annual elections.

  • 31 shareholder proposals for board declassification have been submitted to S&P 500 and Fortune 500 companies for a vote at their 2014 annual meetings (listed here);
  • 7 companies—about one quarter of the 31 companies receiving proposals—have already entered into agreements to bring management declassification proposals to a shareholder vote;
  • These 7 companies are in addition to 8 other S&P 500 and Fortune 500 companies that have committed to bring agreed-upon management proposals to a vote in future annual meetings following 2012 and 2013 precatory proposals by SRP-represented investors;
  • The 15 agreed-upon management proposals to declassify, coupled with board declassifications that have already taken place at 80 S&P 500 and Fortune 500 companies as a result of the work by the SRP and SRP-represented investors (listed here), can be expected to contribute to the wide-scale move toward annual elections; and
  • The agreements already obtained following the submission of 2014 proposals, and the ongoing engagements by the SRP and SRP-represented investors with companies receiving 2014 proposals that have not yet entered into such agreements, reinforce the SRP’s expectation that, as a result of the work by the SRP and SRP-represented investors, close to 100 S&P 500 and Fortune 500 companies will have moved toward board declassification by the end of 2014.

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