Yearly Archives: 2013

Delaware Court Declines to Enjoin Merger Vote, Affirming Single-Bidder Strategy

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 28, 2013
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The following post comes to us from Robert B. Schumer, 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.

In In re Plains Exploration & Production Co. S’holder Litig., the Delaware Court of Chancery denied the plaintiffs’ request to enjoin a merger between Plains Exploration & Production Company and Freeport-McMoran Copper & Gold even though the Plains board of directors (1) did not shop Plains before agreeing to be acquired by Freeport for a combination of cash and stock, (2) did not obtain price protection on the stock component of the merger consideration and (3) allowed its CEO (who Freeport had decided to retain after closing) to lead negotiations with Freeport. The Court also held that the estimates of future free cash flows prepared by Plains’ financial advisor did not need to be disclosed in Plains’ proxy materials because management’s estimates of cash flows were already disclosed.

In early 2012, the CEOs of Freeport and Plains discussed an acquisition of Plains by Freeport. The Plains board did not shop the company to other potential buyers or form a special committee, instead allowing the CEO to lead negotiations with Freeport even after becoming aware of the fact that Freeport had determined to retain the Plains CEO after the merger. The Court noted that the Plains CEO was “motivated to obtain the best deal possible” given that a higher merger price would have resulted in a larger payout to him as a substantial stockholder (although ultimately he agreed to roll his stock into the post-merger company).

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NY State Department of Financial Services at the One-Year Mark

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 28, 2013
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The following post comes to us from Jayant W. Tambe, partner focusing on litigation concerning securities, derivatives, and other financial products at Jones Day, and is based on a Jones Day commentary; the full text, including footnotes, is available here.

Since the New York State Department of Financial Services (“DFS”) began operations in late 2011, the agency appears to have lived up to its billing as an activist regulator of insurers and financial institutions. DFS has taken on several novel issues and will likely continue to do so. Insurers and financial institutions doing business in New York should keep DFS on their radar given the scope of its regulatory mandate and its initial enforcement activities since inception. Institutions outside New York may also want to monitor DFS’s initiatives, which may pique the interest of federal or state law enforcement and regulatory agencies in other jurisdictions and lead to similar or parallel initiatives.

DFS’s Actions Since Inception

On October 3, 2011, the former New York State Banking and Insurance Departments were combined to create DFS. The 4,400 entities DFS supervises have about $6.2 trillion in assets and include all insurance companies in New York, all depository institutions chartered in New York, the majority of United States-based branches and agencies of foreign banking institutions, mortgage brokers in New York, and other financial service providers.

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Sponsor-Backed Going Private Transactions

Posted by Douglas Warner, Weil, Gotshal & Manges LLP, on
Monday, May 27, 2013
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Douglas P. Warner is a partner and head of US Private Equity and Hedge Fund practices at Weil, Gotshal & Manges LLP. This post is based on the methodology and key findings of a Weil survey; the full publication is available here. The previous edition of this survey is available here.

Research Methodology

Weil surveyed 40 sponsor-backed going private transactions announced from January 1, 2012 through December 31, 2012 with a transaction value (i.e., enterprise value) of at least $100 million (excluding target companies that were real estate investment trusts).

For United States transactions to be included in the survey, the transaction must have closed or such transaction remains pending.

Twenty-four of the surveyed transactions in 2012 involved a target company in the United States, 10 involved a target company in Europe, and 6 involved a target company in Asia-Pacific. The publicly available information for certain surveyed transactions did not disclose all data points covered by our survey; therefore, the charts and graphs in this survey may not reflect information from all surveyed transactions.

The 40 surveyed transactions included the following target companies:

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Manager-Shareholder Alignment, Shareholder Dividend Tax Policy, and Corporate Tax Avoidance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 27, 2013
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The following post comes to us from Dan Amiram of the Accounting Division at Columbia University, Andrew Bauer of the Department of Accountancy at the University of Illinois at Urbana-Champaign, and Mary Margaret Frank of the Darden School of Business at the University of Virginia.

In our paper, Manager-Shareholder Alignment, Shareholder Dividend Tax Policy, and Corporate Tax Avoidance, which was recently made publicly available on SSRN, we move away from equity compensation as a measure of manager-shareholder alignment and exploit a unique setting exogenous to the firm to assess the effect of manager-shareholder alignment on corporate tax avoidance. Our setting capitalizes on variation in the value to shareholders from corporate tax avoidance, which is driven by a country’s shareholder dividend tax policy. Firms in the United States, such as the ones examined in the prior literature, are subject to a classical tax system. Corporate earnings are taxed at the firm level and then again at the shareholder level when they are distributed as a dividend (i.e., double taxation). Therefore, corporate tax avoidance increases after-tax cash flows creating either more private benefits for managers or higher after-tax cash flows to shareholders. Other countries around the world employ an imputation tax system. In contrast to a classical system, an imputation system imposes taxes on corporate earnings at the firm level, but these corporate taxes paid are credited against the shareholders’ taxes when earnings are distributed as dividends. This credit causes the total tax paid on earnings to be equal to the shareholders’ tax (i.e., single taxation), so corporate tax avoidance increases after-tax cash flows available for managers’ private benefits but does not increase the after-tax cash flows to shareholders. Because corporate tax avoidance is costly, it actually reduces the after-tax cash flows to shareholders under an imputation system and makes them worse off.

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U.S. Insider Trading Enforcement Goes Global

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, May 26, 2013
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The following post comes to us from Michael Feldberg, partner and head of the U.S. litigation practice at Allen & Overy LLP. This post is based on an Allen & Overy memorandum; the full text, including footnotes, is available here.

A recent inquiry into potential insider trading in Switzerland ahead of the acquisition of H.J. Heinz Company has drawn attention to the role of U.S. regulators in policing suspicious trading activities that take place outside of the United States. While the Heinz matter has attracted significant media attention, it is only the latest in a string of similar cross-border inquiries and enforcement actions undertaken recently by the U.S. Securities and Exchange Commission (SEC). As these matters demonstrate, the SEC has in recent years shown an increasing willingness to pursue insider trading enforcement actions with substantial international dimensions. In the words of former SEC Enforcement Chief Robert Khuzami, “offshore trading is not off-limits to U.S. law enforcement.”

Historically, many of the SEC’s insider trading cases with international angles were simply the outgrowth of cases that were primarily domestic in nature. In recent years, however, a number of the SEC’s insider trading matters have involved significant overseas conduct (e.g., foreign traders operating through foreign accounts) and consequently a high number of foreign defendants. In many of these matters, the jurisdictional nexus between the suspicious conduct and the U.S. market is increasingly attenuated (including at least one recent example in which the sole basis appears to have been that a particular securities transaction was cleared through a U.S. brokerage account). While individuals or firms who choose to litigate insider trading cases against the SEC may be able to raise defenses to the SEC’s arguably extraterritorial exercise of its jurisdiction under certain factual scenarios, the mere prospect of an SEC investigation – including significant legal costs and corresponding reputational impact – should cause internationally active firms to take note of the breadth and intensity of the SEC’s focus on cross-border insider trading matters.

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Addressing Conflicts of Interest in the Credit Ratings Industry

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Saturday, May 25, 2013
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Credit Ratings Roundtable, available here. 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.

I strongly support the Commission’s effort to evaluate ways to improve our credit ratings system. Effective oversight of Nationally Recognized Statistical Rating Organizations (“NRSROs”) is critical to ensuring accurate ratings and promoting investor confidence.

As an SEC Commissioner, I have focused singularly on how the SEC can best serve the needs of investors. It is clear that the role played by credit rating agencies can have an impact on the integrity of our markets and investor confidence. [1]

Today’s roundtable and the Commission’s December 2012 Report to Congress on Assigned Credit Ratings are direct outgrowths of industry practices that permitted inaccurate ratings to undermine the securities market and the integrity of the credit ratings industry. [2]

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SEC Publishes Proposed Rules Regarding Cross-Border Security-Based Swap Transactions

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 24, 2013
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The following post comes to us from Robert Buckholz, partner and co-coordinator of the Corporate and Finance Group at Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication.

Yesterday the Securities and Exchange Commission (“SEC”) proposed rules and interpretive guidance regarding the application of the U.S. regulatory regime to cross-border security-based swap (“SBS”) transactions. The proposals also address the impact of cross-border SBS transactions on the registration obligations of security-based swap dealers (“SBSDs”), major security-based swap participants (“MSBSPs”), SBS clearing agencies, SBS execution facilities and SBS swap data repositories (“SDRs”).

The proposed rules also would establish a framework of “substituted compliance” under which certain participants in the SBS market may comply with non-U.S. regulatory regimes that the SEC determines to be comparable with U.S. requirements, in lieu of the rules that would otherwise apply to these participants. The proposed rules will be open for comment for 90 days after the date of their publication in the Federal Register.

The SEC separately voted to reopen, for 60 days, the comment period for all rules relating to Title VII of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) that are not yet final. This 60-day comment period also applies to the related SEC policy statement describing the expected order for these rules to take effect.

The proposing release is more than 600 pages long and requests public comment on numerous topics. This post provides a preliminary outline of a few key aspects of the proposals. We will publish a more detailed memorandum on the proposed rules and interpretive guidance shortly.

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Comparative Company Law: Case Based Approach

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 24, 2013
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The following post comes to us from Mathias Siems of Durham University and David Cabrelli of Edinburgh University, UK.

There has been an exponential growth in interest in comparative company law in recent years. For example, in the period from 2002 to 2011, no fewer than ten monographs or edited collections were published exploring this new field of enquiry. The burgeoning literature was mirrored by an increase in University Postgraduate courses or programs in comparative company law and corporate governance. Moreover, the dissolution of trade barriers and mass cross-border capital flows engendered by the forces of competition and globalization have necessitated legal practitioners to be conversant with the company laws of jurisdictions other than their own.

In Mathias Siems and David Cabrelli (eds.), Comparative Company Law: A Case Based Approach, Hart Publishing, 2013 (publisher’s website; introduction on SSRN) we have aimed to fill an important gap in this field. Existing books on comparative company law tend to focus on the institutional structure of the corporation but this approach risks overlooking specific cases and how the issues arising from disputes are resolved in different jurisdictions. For example, topics related to directors’ liability, creditor protection and shareholders’ rights may best be understood by analyzing how selected hypothetical cases would be solved in different countries.

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Merely Cracking the Glass Ceiling is Not Enough

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Thursday, May 23, 2013
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at the Women’s Executive Circle of New York; the full text, including footnotes, is available here. 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.

Throughout my tenure as an SEC Commissioner, I have spoken out repeatedly on the subject of diversity – and the benefits it can bring to our economy. I strongly believe in the importance of diversity and inclusion. I continue to be deeply concerned with the lack of significant progress in the recruitment, retention, and promotion of women and persons of color – whether in corporate boardrooms, Wall Street, or at my own agency, the SEC.

Today, although much of what I will say applies equally to other forms of diversity such as race and ethnicity, I will focus my remarks on the important issue of gender diversity in corporate America – particularly:

  • The wealth of talent and positive impact of gender diversity;
  • The dismal lack of progress in increasing gender diversity on corporate boards; and
  • Improving disclosures about diversity, or the lack thereof.

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Disclosure of Non-GAAP Financial Measures

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, May 23, 2013
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The following post comes to us from David J. Goldschmidt, partner in the corporate finance department at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert; the full text, including footnotes, is available here.

Companies commonly supplement their reported earnings under U.S. generally accepted accounting principles (GAAP) with non-GAAP financial measures that they believe more accurately reflect their results of operations or financial position or that are commonly used by investors to evaluate performance. A non-GAAP financial measure is a numerical measure of a company’s historical or future financial performance, financial position or cash flows that includes or excludes amounts from the most directly comparable GAAP measure. Non-GAAP financial measures are used by companies to bridge the divide between corporate reporting that is standardized under GAAP and reporting that is tailored to a particular industry or circumstance.

The Securities and Exchange Commission (SEC) permits companies to present non-GAAP financial measures in their public disclosures as well as registration statements filed under the Securities Act of 1933 (Securities Act) and periodic reports filed under the Securities Exchange Act of 1934 (Exchange Act), subject to compliance with Regulation G and Item 10(e) of Regulation S-K (Item 10(e)). These regulations were adopted to ensure that investors are provided with financial information that is fulsome and not misleading.

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