Yearly Archives: 2013

Harvard Convenes the Roundtable on Executive Compensation

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, July 2, 2013
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The Harvard Law School Program on Corporate Governance and the Harvard Law School Program on Institutional Investors convened its Roundtable on Executive Compensation last Thursday, June 27. This event brought together for a roundtable discussion prominent representatives of the investor, issuer, advisor, and academic communities. Participants in the event, and the topics of discussion, are set out below.

The Roundtable, which was co-organized by Lucian Bebchuk, Stephen Davis, and Scott Hirst, was sponsored by the CFA Institute and Pearl Meyer & Partners. In addition to the CFA Institute and Pearl Meyer & Partners, other sponsors were EMC Corporation, Equilar, Frederic W. Cook & Co., JPMorgan Chase, PepsiCo, Prudential Financial, Quest Diagnostics and the Society of Corporate Secretaries and Governance Professionals.

The first session of the Roundtable on Executive Compensation focused on issues relating to engagement between issuers and shareholders regarding pay arrangements. Among the issues discussed were issuer disclosure of pay arrangements, review by proxy advisors, and communications between issuers and investors.

The second session of the Roundtable on Executive Compensation focused on the terms of pay arrangements. Among the issues discussed were pay levels, the use of peer group data in determining pay levels, how pay should be measured and assessed, and the link between pay and long-term performance.

The participants in the Roundtable on Executive Compensation included:

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Should Your Company Adopt A Forum Selection Bylaw?

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, July 2, 2013
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Editor’s Note: Victor Lewkow is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Lewkow, Neil Whoriskey, and Julie Yip-Williams, 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. Additional reading about Boilermakers Local 154 Retirement Fund, et al. v. Chevron Corp., et al., and Iclub Inv. P’ship v. FedEx Corp. is available here.

In a much anticipated decision, the Delaware Chancery Court upheld on June 25, 2013 the validity of the forum selection bylaws adopted by the boards of directors of FedEx Corporation (“FedEx”) and Chevron Corporation (“Chevron”). Such bylaws provide that stockholders bringing derivative claims or claims alleging breaches of fiduciary duties, arising from the Delaware General Corporate Law (the “DGCL”) or otherwise implicating the internal affairs of the corporation be brought exclusively in Delaware state or federal courts. In rendering his opinion, Chancellor Leo Strine found that specifying the forum for litigating such matters is well within the statutorily permitted scope of bylaw provisions under Section 109(b) of the DGCL. Further, the Court found that these unilateral board actions to adopt such bylaws without the consent of stockholders were nonetheless contractually binding on stockholders because Section 109(b) of the DGCL allows a corporation, through its certificate of incorporation, to grant directors the power to adopt and amend bylaws unilaterally (which was the case here). When FedEx and Chevron stockholders invested in the respective corporations, they were deemed under Delaware law to be put on notice that the board could amend the bylaws to include provisions such as the one at issue.

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Legal Diversification

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, July 2, 2013
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The following post comes to us from Kelli A. Alces, Loula Fuller and Dan Myers Professor at Florida State University College of Law.

Diversification is the best protection investors have from the risks of capital investment. Modern portfolio theory requires that investors diversify their holdings by investing in firms whose financial returns are influenced by different factors. That has traditionally meant investing in firms in different industries. The object is to identify the factors that could cause a firm’s return to vary from what is expected and to invest in firms that differ with regard to those elements of risk. By employing this investment strategy, investors can “diversify away” firm-specific risks.

In my forthcoming Essay, Legal Diversification, I introduce a new dimension along which investors can diversify. “Legal diversification” is an investment strategy whereby investors purchase securities governed by different legal rules in order to diversify away the risk that any one set of legal rules will fail to adequately limit the agency costs of business management. An investor may hold a diversified portfolio of stocks in different kinds of public corporations, but that portfolio would not necessarily be legally diversified. A portfolio would be legally diversified if it contained various kinds of securities issued by privately held limited liability companies, public corporations, emerging growth companies, and various derivatives. By holding a diversified portfolio of investments in firms and securities governed by different legal rules, investors can enjoy some protection from the failures of a particular legal regime while also sampling the benefits more successful regimes offer.

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Lucian Bebchuk Delivers Presidential Address to the Western Economic Association International

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Monday, July 1, 2013

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In the recent annual meeting of the Western Economic Association International (WEAI), held in Seattle this past weekend, Professor Lucian Bebchuk delivered a presidential address entitled “The Rent-Protection Theory of Corporate Ownership and Control.”

Bebchuk served as President of the WEAI during 2012-2013, its President-Elect during 2011-2012, and its Vice-President in 2010-2011.

Past presidents of the WEAI includes Nobel Laureates James Heckman (2007), Clive Granger (2003), Oliver Williamson (2000), Gary Becker (1997), Milton Friedman (1985), James Buchanan (1984), Kenneth Arrow (1981) and Douglass North (1976).

Founded in 1922, WEAI is a non-profit, educational organization of economists, with about 1,800 members around the world, dedicated to encouraging and communicating economic research and analysis.

Bebchuk’s presidential address is expected to be published next year in the WEAI’s journal Economic Inquiry.

Delaware Court Addresses Derivative Claim Value Extinguished by Merger

Posted by Allen M. Terrell, Jr., Richards, Layton & Finger, on
Monday, July 1, 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 In re Primedia, Inc. Shareholders Litigation, 2013 WL 2169415 (Del. Ch. May 10, 2013), Vice Chancellor Laster of the Court of Chancery held that plaintiffs whose standing to pursue derivative insider trading claims had been extinguished by merger had standing to challenge directly the entire fairness of that merger based on a claim that the target board of directors failed to obtain sufficient value in the merger for the pending derivative claims.

In late 2005 and early 2006, two plaintiffs filed derivative complaints on behalf of Primedia, Inc. (“Primedia” or the “Company”) generally asserting that the members of the Company’s board of directors had breached their fiduciary duties by causing Primedia to sell assets and redeem preferred stock in a manner that benefitted certain affiliates of KKR, Primedia’s controlling stockholder. Primedia’s board formed a special litigation committee (the “SLC”) and authorized it to investigate plaintiffs’ allegations. While the SLC’s investigation was ongoing, plaintiffs amended their complaint to assert corporate opportunity claims against the KKR affiliates and indicated to the SLC their belief that the documents produced to plaintiffs during the SLC’s investigation would support an insider trading claim against the KKR affiliates under Brophy v. Cities Service Co., 70 A.2d 5 (Del. Ch. 1949).

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Political Connectedness and Corporate Policies

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, July 1, 2013
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The following post comes to us from Ashley Newton and Vahap Uysal, both of the Division of Finance at the University of Oklahoma.

In our paper, “The Impact of Political Connectedness on Firm Value and Corporate Policies: Evidence from Citizens United,” we examine the reasons behind a company’s decision to become politically connected and what impact such connections have on firm value and corporate policies. Political connections may enhance or harm shareholder value. However, existing insights attempting to address the impact of corporate political connectedness on shareholder value are inconclusive. In an effort to test for the existence of a causal link between political connections and changes in shareholder value, we pose our research questions in the context of a natural experiment. Specifically, we focus on an exogenous enhancement in the value implications of political connectedness that accompanied the landmark Supreme Court case, Citizens United.

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UK Corporate Law Developments: Extending the Scope of Warranties?

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, June 30, 2013
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The following post comes to us from Jeffery Roberts, senior partner in the London office of Gibson, Dunn and Crutcher, and is based on a Gibson Dunn alert by Mr. Roberts, Amar K. Madhani, and Gareth Jones.

The UK Court of Appeal recently held in the Belfairs Management case [1] that a warranty in a sale and purchase agreement should be interpreted with regard to all of the background knowledge reasonably available to the parties at the time the agreement was entered into. The decision highlights the growing trend of the UK courts to adopt a more purposive, rather than a literal, approach to the interpretation of contracts under English law in order to give effect to the commercial intentions of the parties where the facts underlying the dispute clearly support such an interpretation and where those commercial intentions are clear. This post provides a short summary of the facts of the Belfairs Management case, as well as a discussion of the potential implications of the decision for buyers, sellers and their advisers.

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Public Companies and the “End-User Exception” for Swaps

Posted by Amy L. Goodman, Gibson, Dunn & Crutcher LLP, on
Saturday, June 29, 2013
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Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert.

Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 and new Commodity Futures Trading Commission (CFTC) rules require that, subject to certain exceptions, swap counterparties clear swaps at a clearing house and execute them on a facility or exchange. One of these exceptions is the “end-user exception,” which may be available for companies that are not “financial entities” and that use swaps to manage risk. There are several requirements that these entities must meet in order to rely on the end-user exception. For public companies, these include taking certain governance steps that involve board-level approval of the company’s use of uncleared swaps and review of company policies on swaps. With the CFTC clearing requirements applicable to non-financial entities scheduled to take effect September 9, public companies can position themselves to take advantage of the end-user exception by completing these steps in the next few months.

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Activist Shareholders in the US: A Changing Landscape

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, June 28, 2013
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The following post comes to us from Stephen F. Arcano, partner concentrating in mergers and acquisitions and other corporate matters at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert by Mr. Arcano and Richard J. Grossman.

Shareholder activism in the U.S. has increased significantly over the past several years, with activist campaigns increasingly targeting well-known, larger market capitalization companies, such as Apple, Hess, Procter & Gamble and Sony. In 2013, the number, nature and degree of success of these campaigns has garnered the attention of boards of directors, shareholders and the media. While the continued level of success of activists is uncertain, and the longer-term impact of activism is unknown, at the moment shareholder activism is exerting considerable influence in the M&A and corporate governance arenas. In this evolving landscape, public company boards and their managements need to be aware that virtually any company is a potential target for shareholder activism.

Key Factors Influencing the Current Paradigm

Activism has become a viable and increasingly applied (arguably mainstream) tool for shareholders to seek to influence corporate policy. Several changes have occurred over the past few years that have contributed to the heightened — although not universal — success now being enjoyed by activism, including factors related to the activists, institutional investors and corporate defenses.

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The Sustainability Business Case

Posted by Matteo Tonello, The Conference Board, on
Friday, June 28, 2013
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Matteo Tonello is managing director at The Conference Board. This post relates to an issue of The Conference Board’s Director Notes series authored by Marc Bertoneche and Cornis van der Lugt; the full publication, including footnotes, is available here.

While much has been published on the business case for sustainability during the last decade, businesses have been slow to adopt the green innovation and sustainability agenda. Reasons include a lack of consistency in the indicators employed by analysts, and a failure to effectively incorporate financial value drivers into the equation. This article defines a green business case model that includes seven core financial value drivers of special interest to financial analysts.

Researchers, management experts, and activists have published extensively over the last decade on the business case for sustainability. The accumulated evidence and experience makes it clear that sustainability actions do not have a negative or neutral impact on the financial performance of a business. Rather, it is a question of the degree to which sustainability actions have a positive impact on financial performance. One research overview has identified more than 60 benefits, clustered into seven overall business benefit areas.

As greater attention is paid today to integrated thinking and more sustainable business models, the link between sustainability actions and corporate financial performance remains central. However, the business case evidence collected to date has failed to have the expected scale of impact. One reason for this is the lack of consistency in indicators employed by analysts in their examination of possible cause and effect relations. Another is the gap in discipline between sustainability experts and financial officers, with each community conversing in its own language (jargon). Sustainability activists have failed to get a better grasp on corporate finance, while financial officers have failed to get a better grasp on the sustainability agenda.

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