Yearly Archives: 2013

No, GCs Should Not Be on the Board

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Wednesday, September 11, 2013
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Editor’s Note: Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an article that appeared in Corporate Counsel.

A provocative headline recently topped a CorpCounsel.com story: “Should GCs Be on the Board? GCs Say Yes.”

This former GC says “no.”

In fact, the story presented a much more modest and qualified account of that issue in describing “The General Counsel Excellence Report 2013,” prepared by the news site Global Legal Post, in association with legal referral network TerraLex and based on a survey of 270 chief legal officers globally.

Only 9 percent of the GCs surveyed were on their companies’ boards, and only 20 percent thought that GCs should be on the board. Those 20 percent, in my view, are wrong—and it is a mistake for a trend to develop among general counsel to aspire to membership on their company’s board.

As this site’s readers know well, the GC represents the company, not the CEO. The representative of the owners of the company—who protect both shareholder and stakeholder interests—is, of course, the board of directors. So, the directors are the day-to-day representatives of the company, not management, and thus the ultimate client of the GC.

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Court Curtails Territorial Reach of Criminal Liability Under Section 10(b)

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 11, 2013
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The following post comes to us from Jonathan R. Tuttle, partner in the litigation department at Debevoise & Plimpton LLP, and is based on a Debevoise & Plimpton client update.

On August 30, 2013, the United States Court of Appeals for the Second Circuit unanimously held that Section 10(b) of the Securities Exchange Act of 1934 (“Section 10(b)”) does not apply to extraterritorial conduct, “regardless of whether liability is sought criminally or civilly.” Interpreting the scope of the Supreme Court’s landmark ruling in Morrison v. National Australian Bank Ltd., [1] the Second Circuit’s significant decision in United States v. Vilar, et al. means that a criminal defendant may be convicted of fraud under Section 10(b) only if the defendant engaged in fraud “in connection with” a security listed on a United States exchange or a security “purchased or sold” in the United States. In reaching its conclusion, the court rejected the government’s attempts to distinguish criminal liability under Section 10(b) from the civil liability at issue in Morrison, holding that “[a] statute either applies extraterritorially or it does not, and once it is determined that a statute does not apply extraterritorially, the only question we must answer in the individual case is whether the relevant conduct occurred in the territory of a foreign sovereign.”

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What Should We Do About Multijurisdictional Litigation in M&A Deals?

Posted by Randall S. Thomas, Vanderbilt University, on
Tuesday, September 10, 2013
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Randall S. Thomas is a John Beasley II Professor of Law and Business at Vanderbilt Law School.

Companies and their investors have been battling over the value of representative shareholder litigation since at least the 1940’s. Investors argue that managerial agency costs are high and that class actions and derivative suits are key shareholder monitoring mechanisms that they can deploy to keep managers in line. Companies believe that representative litigation claims are lawyer-driven, reflecting the agency costs that arise out of contingency fee suits that make the lawyer the real party in interest in these cases. Over the decades, there have been numerous skirmishes between these two sets of actors. Yet, even though one side or the other may temporarily gain the upper hand, the war continues today unabated.

The latest round of this extended fight comes over multijurisdictional deal litigation. Many M&A transactions attract shareholder litigation challenging the fairness of the economic terms of the deal for the target shareholders. Since the end of the financial crisis, however, there has been a documented increase in the number of jurisdictions in which each individual transaction is attacked. The potential for multijurisdictional litigation over a single deal arises because shareholders that wish to challenge the proposed terms of an M&A transaction can, under existing rules of civil procedure, choose to do so either in a state court in the target corporation’s state of incorporation, in a state court in the location of the company’s headquarters (assuming the defendants have the necessary presence in the jurisdiction), or in a federal court in one of those two jurisdictions.

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Cross-Border Schemes of Arrangement and Forum Shopping

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, September 9, 2013
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The following post comes to us from Jennifer Payne, Professor of Corporate Finance Law at University of Oxford.

The English scheme of arrangement has existed for over a century as a flexible tool for reorganising a company’s capital structure. Schemes of arrangement can be used in a wide variety of ways. In theory a scheme of arrangement can be a compromise or arrangement between a company and its creditors or members about anything which they can properly agree amongst themselves. It is common to see both member-focused schemes and creditor-focused schemes. In practice the most common schemes are those which seek to transfer control of a company, as an alternative to a takeover offer, and those which restructure the debts of a financially distressed company with a view to rescuing the company or its business.

In recent years schemes of arrangement have proved popular as a restructuring tool not only for English companies but also for non-English companies. A number of recent high profile cases have allowed non-English companies to make use of the English scheme jurisdiction to restructure their debts, including Re Rodenstock GmbH [2011] EWHC 1104 (Ch), Primacom Holdings GmbH [2012] EWHC 164 (Ch), Re NEF Telecom Co BV [2012] EWHC 2944 (Comm), Re Cortefiel SA [2012] EWHC 2998 (Ch) and Re Seat Pagine Gialle SpA [2012] EWHC 3686 (Ch). Typically, these cases involve financially distressed companies registered in another EU Member State making use of an English scheme of arrangement without moving either their seat or Centre of Main Interest (COMI). In general, the main connection to England is the senior lenders’ choice of English law and English jurisdiction as governing their lending relationship with the company.

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Taking a Fresh Look at Board Composition

Posted by Mary Ann Cloyd, PricewaterhouseCoopers LLP, on
Monday, September 9, 2013
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Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. This post is based on a PwC Center for Board Governance newsletter.

Many boards today are trying to figure out if they have the proper skills and experience to guide their companies now and in the future. Each board needs to consider whether the backgrounds and experience of its existing directors are appropriate or if new skills are needed. Recently, some critics have been outspoken about their perception of deficiencies in the current state of board renewal.

Some board members themselves are questioning the competency of their fellow directors. While a majority of directors at companies with annual elections are elected with at least 90% of the vote, there are still plenty of directors dissatisfied with their current board’s composition. Early results from PwC’s 2013 Annual Corporate Directors Survey (the “PwC Survey”) show that 35% of the 934 directors responding say someone on their board should be replaced; up from 31% a year ago. The top three reasons cited are diminished performance because of aging, lack of expertise, and lack of preparation for meetings.

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Dodd-Frank Moratorium Ends on Bank Charters for Commercial Firms

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, September 8, 2013
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The following post comes to us from Arthur S. Long, partner in the Financial Institutions and Securities Regulation practice groups at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication by Mr. Long, Alexander G. Acree, Kimble C. Cannon, C.F. Muckenfuss III, and Colin C. Richard.

This post addresses the end of the Dodd-Frank Act moratorium on the ability of “commercial firms” to acquire FDIC-insured banks that are excluded from the definition of “bank” in the Bank Holding Company Act: industrial banks (or “ILCs,” as they are commonly labeled) and credit card banks. The moratorium, set forth in section 603 of the Dodd-Frank Act, ended on July 21, 2013, and it is now again legally permissible for any type of company—retailer, manufacturer, or any type of nonfinancial firm—to seek to acquire or establish such an FDIC-insured bank.

Federal law has contained provisions expressly permitting any type of company to control an ILC or credit card bank for decades, but the Federal Reserve Board and, more recently, the FDIC have expressed policy concerns with the control of insured banks by commercial firms. The Dodd-Frank moratorium followed a similar moratorium on approvals for an ILC to be controlled by a non-financial firm, which the FDIC implemented in 2006-2008 and then continued de facto after it formally ended. We understand that at least three applications filed before the beginning of the FDIC moratorium were not acted on even though the moratorium did not apply to them. Section 603 of Dodd-Frank reflected the same policy concerns, but it has now expired, and the underlying provisions of law permitting control by commercial firms remain in effect.

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SEC Adopts Changes to Broker-Dealer Rules

Posted by Russell D. Sacks, Shearman & Sterling LLP, on
Saturday, September 7, 2013
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Russell D. Sacks is a partner in the Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. The following post is based on a Shearman & Sterling publication by Mr. Sacks, Sylvia Favretto, Charles S. Gittleman, and David L. Portilla. The complete publication, including footnotes and appendices, is available here.

The US Securities and Exchange Commission recently adopted important changes to the financial responsibility rules for securities broker-dealers, including changes to the regulatory capital and regulatory reporting rules. The new rules include important regulatory capital changes in relation to acting as agent in securities lending, assumption of broker-dealer expenses, and important new recordkeeping and reporting rules relating to compliance with risk mitigation and financial responsibility.

Introduction

Summary of the Rule Changes

On July 30, 2013, the US Securities and Exchange Commission (the “SEC”) adopted changes to its financial responsibility rules for securities broker-dealers, and, in particular, adopted important changes to Rule 15c3-1, the “net capital rule.” [1] The net capital rule is the principal SEC rule governing regulatory capital requirements for securities broker-dealers in the United States.

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When Do Shareholders Care About CEO Pay?

Posted by Matteo Tonello, The Conference Board, on
Friday, September 6, 2013
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Matteo Tonello is managing director of corporate leadership at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Ryan Krause, Kimberly A. Whitler, and Matthew Semadeni.

With recent legislation mandating that publicly traded corporations submit CEO compensation for a nonbinding shareholder vote, a systematic understanding of how shareholders vote under such circumstances has never been so important. Using simulated say-on-pay votes, this post investigates how different levels of CEO pay and company performance can interact to influence how shareholders vote.

In July of 2010, President Barack Obama signed the Dodd-Frank Wall Street Reform and Consumer Protection Act, which, among other things, mandated that all publicly traded U.S. corporations solicit a non-binding advisory vote from their shareholders to approve or reject the compensation of the most highly compensated executives, commonly referred to as “say-on-pay” (SOP) votes. In the short time since the passage of Dodd-Frank, these votes have already made waves. In 2011, the shareholders of Stanley Black and Decker issued a “no” vote, and the board subsequently lowered the CEO’s pay by 63 percent, raised the minimum officer stock requirements, altered its severance agreements to be less CEO friendly, and ended the practice of staggered board terms. [1]

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Agencies Re-Propose Rule Implementing Risk Retention Requirements of Dodd-Frank Act

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, September 6, 2013
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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 William E. Stern, Brandon T. Thompson, and Brian M. Baum.

On August 28, 2013, the FDIC, OCC, FRB, SEC, Federal Housing Finance Agency, and Department of Housing and Urban Development (collectively, the “Agencies”) issued a second Notice of Proposed Rulemaking (the “revised proposal”) that would implement the risk retention requirements of Section 941 of the Dodd-Frank Act, which amended the Securities Exchange Act of 1934 (the “Exchange Act”) by adding a new Section 15G. Section 15G requires the Agencies to issue rules that would generally require that a securitizer of asset-backed securities (“ABS”) retain an economic interest in not less than 5% of the credit risk of the assets collateralizing such ABS. As discussed in the April 19, 2011 Financial Services Alert, the first Notice of Proposed Rulemaking (the “original proposal”) was jointly approved in April 2011 by the Agencies. In response to numerous comments received on the original proposal, the Agencies collectively developed the revised proposal, which includes significant modifications.

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Facts Behind 2013 “Turnaround” Success for Say on Pay Votes

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, September 5, 2013
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The following post comes to us from David Drake, President of Georgeson Inc, and is based on a Georgeson report by Mr. Drake, Rajeev Kumar, and Rhonda Brauer; the full report, including tables, is available here.

The 2013 proxy season marked the third year of Advisory Vote on Executive Compensation (a.k.a. Management Say on Pay, or MSOP proposals) as required under the Dodd-Frank Wall Street Reform and Consumer Protection Act. This post looks at some of the interesting facts relating to the 39 companies that received majority shareholder support for their MSOP vote in 2013 (for meetings held on or before July 31) after failing the vote in 2012 (turnaround companies [1]). The factors that contributed to turnaround success included improved total shareholder return, significant shareholder outreach, changes in compensation programs, support of proxy advisory firms, and utilization of compensation consultants and proxy solicitors.

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