Yearly Archives: 2013

Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions

Posted by June Rhee, 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 S. Michael Sirkin, an attorney at Seitz Ross Aronstam & Moritz LLP. 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.

My article, Standing at the Singularity of the Effective Time: Reconfiguring Delaware’s Law of Standing Following Mergers and Acquisitions, examines the doctrine of standing as applied to mergers and acquisitions of Delaware corporations with pending derivative claims. The settled rules of direct and derivative standing break down at the “singularity of the effective time” of a merger, yielding to conflicting principles of standing, corporation law and policy, and basic equity. The path-dependent network of rules and exceptions that has developed is an outgrowth of case-by-case adjudication that now begs for a one-time, wholesale reconfiguration.

The article takes on that task, proposing three straightforward rules that need no exceptions:

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Adjusting to Shareholder Activism as the New Normal

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, September 4, 2013
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The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Joseph B. Frumkin, H. Rodgin Cohen, Francis J. Aquila, James C. Morphy and Glen T. Schleyer.

The results of the 2013 proxy season and other recent corporate governance developments have demonstrated that boards and management teams should thoughtfully assess their approach to dealing with hedge funds and other “long” investors that are considered “activist.” Responding effectively to these activist shareholders in today’s environment requires more continuous engagement with shareholders, a recognition of the broad support given to many activist campaigns by traditional investors and advance preparation.

The universe of “activist” shareholders has expanded and their supporters more so. There is a broad spectrum of activist behavior that many traditional institutional investors—mutual funds, pension funds, sovereign wealth funds and others—increasingly see as essential to enhancing their returns. This trend is reflected both in the increasing investor inflow into funds managed by hedge fund activists, which has permitted them to initiate action at larger companies, and in the increased voting support traditional institutional investors give to activist campaigns. To a greater or lesser extent, today many institutional investors are activist investors. These developments have highlighted the importance of management preparedness, board awareness and active, regular investor engagement on issues of importance to investors.

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Delaware Court of Chancery Upholds Trados Transaction as Entirely Fair

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, September 3, 2013
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The following post comes to us from David J. Berger, partner focusing on corporate governance at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert 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. Additional reading about In re Trados Inc. Shareholder Litigation is available here.

On August 16, 2013, the Delaware Court of Chancery issued a much-anticipated post-trial decision in In Re Trados Incorporated Shareholder Litigation, holding that the sale of Trados to SDL was entirely fair to the Trados common stockholders and that the Trados directors had not breached their fiduciary duties in approving the transaction. [1] The case involved a common fact pattern: the sale of a venture-backed company where (1) the holders of preferred stock, with designees on the board, receive all of the proceeds but less than their full liquidation preference, (2) the common stockholders receive nothing, and (3) members of management receive payments under a management incentive plan.

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SEC Practice In Targeting and Penalizing Individual Defendants

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, September 3, 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.

The recent trial of Fabrice Tourre has raised again the issue of whether the SEC should prosecute individuals who engage in misconduct or the firms that employ them. In the case of Tourre, some complained that the SEC targeted a relatively low level employee of Goldman Sachs rather than Goldman Sachs itself. Some even described him as a scapegoat. Not long ago, in the Bank of America case, Judge Rakoff leveled the opposite criticism at the SEC. Why was the agency seeking to impose a monetary penalty on BofA rather than prosecuting and penalizing individuals within BofA who had engaged in misconduct?

Each time this issue has come up, it seems that commentators assume that the practice in question is the predominant practice of the SEC—for example, the SEC predominantly goes after the corporation rather than individuals, or the SEC predominantly goes after low level employees rather than the corporation. We have recently completed, and intend to maintain, a database of SEC enforcement practices, and in this post, we shed some factual light on what the SEC actually does with respect to prosecuting and penalizing individual and corporate defendants. Specifically, we answer three questions: First, who does the SEC name as defendants—high level executives, lower level employees, the corporation itself? Second, to what extent does the SEC impose penalties on individual defendants? Third, how often does the SEC impose a monetary penalty on corporate defendants? We address these questions within the universe of SEC enforcement actions involving nationally listed firms for violation of disclosure-related rules—fraud, books and records and internal control rules. Our dataset covers cases filed from 2000 to the present.

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Delaware Court Supports Morton’s Sale Process and PE Exit Motives

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, September 1, 2013
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The following post comes to us from Alfred O. Rose, partner and head of the Private Equity Transactions practice group at Ropes & Gray LLP, and is based on a Ropes & Gray publication. 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 a recent decision of note concerning the 2012 sale of Morton’s Restaurant Group to Landry’s, Inc., Chancellor Strine of the Delaware Court of Chancery found that a private equity firm with a 28 percent stake in Morton’s was not a controlling stockholder, applied the business judgment rule, and dismissed the stockholder plaintiffs’ challenge to the sale at the motion to dismiss stage of litigation. The Morton’s decision will provide comfort to PE sponsors who hold minority positions in public companies, as it acknowledges the economic reality that even with a finite investment horizon, PE sponsors are incentivized to maximize an exit price and, as a result, bestow a control premium on all stockholders.

In his ruling, Chancellor Strine emphasized the fact that Castle Harlan, the 28 percent stockholder and Morton’s former PE sponsor, had not exercised undue influence over the fulsome nine-month sale process, and that all of Morton’s stockholders received equal consideration in the transaction. The Chancellor explained that this equal treatment among Morton’s stockholders acted as a “safe harbor”; unless there were strong indications to the contrary, he would presume that Castle Harlan’s interest in obtaining the best price in the transaction was aligned with the interests of the other stockholders.

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CFTC Adopts Final Rule Amendments for CPOs and CTAs

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, August 31, 2013
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The following post comes to us from Sullivan & Cromwell LLP, and is based on a publication by Donald R. Crawshaw, David J. Gilberg, Frederick Wertheim, and Saul P. Sarrett.

On August 13, 2013, the CFTC adopted final rule amendments to accept compliance with the disclosure, reporting and recordkeeping regime administered by the SEC as substituted compliance for substantially all of part 4 of the CFTC’s regulations that are applicable to CPOs of funds registered under the Investment Company Act of 1940. [1] The adopting release broadens the approach set forth in the harmonization proposals issued by the CFTC in February 2012 [2] and provides, among other things, that if the CPO of registered funds satisfies all applicable SEC rules for such funds as well as certain other conditions, it will be deemed in compliance with the CFTC’s rules regarding:

  • delivery of disclosure documents to each prospective participant in any pool that a CPO operates (Section 4.21); [3]
  • distribution of account statements to each participant in any pool that a CPO operates (Sections 4.22(a) and (b));
  • provision of information that must appear in a CPO’s disclosure documents (Section 4.24), including performance disclosures (Section 4.25); and
  • the use, amendment and filing of disclosure documents (Section 4.26).

Additionally, the CFTC’s final rule amendments modify certain CFTC disclosure and reporting requirements that are applicable to all CPOs and CTAs:

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Key Issues From the 2013 Proxy Season

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 30, 2013
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The following post comes to us from Ted Wallace, Senior Vice President in the Proxy Solicitation Group at Alliance Advisors LLC, and is based on an Alliance Advisors newsletter by Shirley Westcott. The full text, including tables and footnotes, is available here.

During this year’s annual meeting season, issuers experienced better outcomes on say on pay (SOP) and shareholder resolutions, underpinned by a high degree of engagement and responsiveness to past votes. With SOP in its third year, companies addressed many of investors’ and proxy advisors’ pivotal compensation concerns, which was reflected in a modest improvement in average SOP support and proportionately fewer failed votes.

Similarly, although the volume of shareholder resolutions on ballots was nearly comparable to the first half of 2012, average support declined across many categories and there were 27% fewer majority votes (See Table 1). This was due in large part to corporate actions on resolutions that are traditionally high vote-getters, such as board declassification, adoption of majority voting in director elections, and the repeal of supermajority voting provisions, resulting in the withdrawal or omission of the shareholder proposal. Indeed, issuers made a conscious effort to avoid the prospect of majority votes, mindful of potential fallout against directors by proxy advisory firms. Beginning in 2014, ISS will oppose board members who fail to adequately address shareholder resolutions that are approved by a majority of votes cast in the prior year, while Glass Lewis is scrutinizing board responses to those that receive as little as 25% support (see our January newsletter).

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The Value of Local Political Connections in a Low-Corruption Environment

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, August 29, 2013
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The following post comes to us from Mario Daniele Amore of the Department of Management and Technology at Bocconi University and Morten Bennedsen, Professor of Economics and Political Science at INSEAD.

Connections between firms and politicians are widespread around the world. Faccio (2006) documents the existence of publicly traded firms with national political connections in 35 of 45 countries; these firms account for nearly 8% of the world’s stock market capitalization. She also documents that national political connections are valuable, especially in countries with weak political institutions.

In our paper, The Value of Local Political Connections in a Low-Corruption Environment, forthcoming in the Journal of Financial Economics, we explore the value of local political connections in a low-corruption environment. We use an administrative reform that generates exogenous variations in the size of local municipalities in Denmark to establish the effect of changes in political power on the profitability of firms that have family ties with local politicians. On average, we find that (1) doubling the political power (as measured by population per elected politician) doubles the performance of politically connected firms, and (2) the effect is larger in industries delivering goods and services to the public sector.

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Fed To Charge Big-Banks for Supervision Under Dodd-Frank

Posted by Bradley K. Sabel, Shearman & Sterling LLP, on
Thursday, August 29, 2013
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Bradley Sabel is partner and co-head of the Financial Institutions Advisory & Financial Regulatory practice group at Shearman & Sterling LLP. The following post is based on a Shearman & Sterling client publication by Mr. Sabel and Donald N. Lamson.

An obscure section of the Dodd-Frank Act has been implemented by the Federal Reserve, to be effective later this year. Traditionally the Federal Reserve has not charged examination or similar fees for institutions under its supervision, but Congress determined that the largest institutions should be assessed an amount intended to reimburse the Federal Reserve for supervising them. This will likely impose an additional aggregate cost on the order of $400 to $500 million per year on these institutions, thereby further hiking up the price of size.

Section 318 of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”) requires that the Federal Reserve collect a total amount of assessments from the largest bank and thrift holding companies equal to the total expenses that it estimates are “necessary or appropriate” to carry out the Federal Reserve’s supervisory and regulatory responsibilities. [1] The Federal Reserve adopted a final regulation on August 15, called Regulation TT, to be effective on October 25. The first notice of assessment is expected to be sent shortly after October 25 and will likely be payable by December 15. Thereafter, notices of assessment are scheduled to be sent by June 30 of each year and paid by September 15.

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Lock-Up Creep

Posted by Steven Davidoff, Ohio State University College of Law, on
Wednesday, August 28, 2013
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Steven M. Davidoff is Professor of Law and Finance at Ohio State University College of Law. The post is based on a paper co-authored by Professor Davidoff and Christina M. Sautter, Cynthia Felder Fayard Associate Professor of Law at Louisiana State University Paul M. Hebert Law Center.

If you have regularly read merger agreements over the past decade, you may have had a creeping feeling. You also may not be alone. Over the past decade the number and type of merger agreement lock-ups have materially increased. We examine this phenomenon in our article Lock-Up Creep, prepared for the Journal of Corporation Law symposium: Ten Years After Omnicare: The Evolving Market for Deal Protection Devices held at University of Iowa College of Law. Not only have new lock-ups arisen, but the terms of these lock-ups have become more varied as attorneys negotiate ever more intricate terms.

In our article we examine lock-up creep in detail. Lock-ups existed in many forms for decades, but in recent years, new lock-ups have appeared or been widely adopted, such as matching rights, which give a bidder the right to match a competing offer, as well as don’t ask, don’t waive standstills, which prevent losing bidders from making a competing bid or even requesting that a target waive such a requirement. The end result is that merger agreements contain increasingly scripted procedures for how and when a board should deal with competing bids.

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