Yearly Archives: 2013

Banks and Commodities Trading

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, August 10, 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. The complete publication, including footnotes, is available here.

On July 19, 2013, Barbara Hagenbaugh, a spokeswoman for the Board of Governors of the Federal Reserve System (Federal Reserve) made the surprising announcement that the Federal Reserve “is reviewing the 2003 determination that certain commodity activities are complementary to financial activities and thus permissible for bank holding companies.” The statement, upon which the Federal Reserve did not elaborate, seems to call into question the physical commodities trading activities (Physical Commodities Trading) that certain financial holding companies (FHCs), both domestic and foreign, have engaged in for the better part of the last decade.

This post describes the justifications for the original Federal Reserve conclusion that, under Section 4(k) of the Bank Holding Company Act of 1956 (BHC Act), Physical Commodities Trading is complementary to a financial activity and does not pose a substantial risk to the safety and soundness of depository institutions or the financial system generally. It then analyzes these justifications in light of the current state of the financial system and enhanced regulatory environment, which support the conclusion that the Federal Reserve’s original view of Section 4(k) continues to be a reasonable interpretation of the statute.

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Current Thoughts About Activism

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Friday, August 9, 2013
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Steven A. Rosenblum, and Sabastian V. Niles. Work from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon P. Brav, and Wei Jiang.

A long-term oriented, well-functioning and responsible private sector is the country’s core engine for economic growth, national competitiveness, real innovation and sustained employment. Prudent reinvestment of corporate profits into research and development, capital projects and value-creating initiatives furthers these goals. Yet U.S. companies, including well-run, high-performing companies, increasingly face:

  • pressure to deliver short-term results at the expense of long-term value, whether through excessive risk-taking, avoiding investments that require long-term horizons or taking on substantial leverage to fund special payouts to shareholders;
  • challenges in trying to balance competing interests due to excessively empowered special interest and activist shareholders; and
  • significant strain from the misallocation of corporate resources and energy into mandated activist or governance initiatives that provide no meaningful benefit to investors or other critical stakeholders.

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Smart Regulation: A Worthy and Achievable Goal

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, August 9, 2013
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The following post comes to us from Andrew Liveris, President, Chairman and CEO of The Dow Chemical Company, and Chair of the Business Roundtable Select Committee on Smart Regulation.

Business Roundtable CEOs, who lead major U.S. companies representing every sector of the economy, understand that well-conceived, science-based regulations are essential to protect human health and safety. Regulations can help ensure that businesses retain the capacity to innovate and simultaneously promote the health and welfare of our employees, customers and communities. But overlapping, conflicting and poorly executed regulations can—and do—impose substantial costs on the U.S. economy, sometimes with only theoretical benefits.

That is why we have embraced a concept we call smart regulation that seeks to realize the goals of regulation without harming economic growth and job creation. About 18 months ago, we released a plan, Achieving Smarter Regulation, which laid out a roadmap for reform, including changes to current law and actions the Administration could take on its own, to streamline the federal regulatory process, reduce the economic burden of regulation and protect the public interest.

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Alternatives to LIBOR

Posted by Joseph Grundfest, Stanford Law School, on
Thursday, August 8, 2013
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Joseph A. Grundfest is the W. A. Franke Professor of Law and Business at Stanford University Law School. The following post is based on an article co-authored by Professor Grundfest and Rebecca Tabb.

Revelations that bank traders attempted to manipulate LIBOR, the London Interbank Offer Rate, on a widespread and routine basis over the course of many years have rocked the global financial community and fueled international calls for reform. In response, the U.K. Government completely overhauled the governance of LIBOR, adopting in full the recommendations of the Wheatley Review, an independent review of LIBOR led by Martin Wheatley, CEO of the new Financial Conduct Authority (FCA) in the UK. Among other reforms, effective April 1, 2013, both “providing information in relation to” LIBOR and administering LIBOR are regulated activities in the United Kingdom. In addition, a new, independent administrator will provide oversight of LIBOR. NYSE Euronext, selected as the first administrator under the new regime, will begin oversight of LIBOR at the beginning of next year.

These reform efforts are an important first step towards restoring the credibility of LIBOR as an interest rate benchmark. The reforms instituted to date, however, do not address more fundamental concerns with LIBOR. In particular, even non-manipulated submissions sometimes bear little relation to actual market transactions because few market transactions occur in certain interbank unsecured lending markets, particularly in times of market stress. As Mervyn King has observed, LIBOR “[i]s in many ways the rate at which banks do not lend to each other…it is not a rate at which anyone is actually borrowing.”

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FINRA Proposes to Disseminate Transaction Reports in Corporate Debt Securities

Posted by Russell D. Sacks, Shearman & Sterling LLP, on
Thursday, August 8, 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, Charles S. Gittleman, David L. Portilla, and Leo Wong.

FINRA has proposed a trade-reporting rule change that would result in the public dissemination of secondary market transactions in corporate debt securities sold under Securities Act Rule 144A. If adopted, this change could affect secondary market transactions in a number of assets classes, including high-yield debt securities.

Introduction

On July 8, 2013, the US Financial Industry Regulatory Authority, Inc. (“FINRA”) submitted an amendment to its Rule 6750 to the Securities and Exchange Commission (“SEC”). If adopted, the amendment would allow FINRA to disseminate information on transactions effected pursuant to Rule 144A under the Securities Act of 1933 (“Rule 144A”) through the Trade Reporting and Compliance Engine (“TRACE”), the principal trade-reporting system for fixed-income securities. The proposed amendment would allow FINRA to disseminate information regarding secondary transactions effected pursuant to Rule 144A. It would not require the reporting of primary transactions.

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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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