Yearly Archives: 2013

Section 13(r) Disclosure Guidance for Public Companies

Posted by Brian Breheny, Skadden, Arps, Slate, Meagher & Flom LLP, on
Thursday, February 21, 2013
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Brian V. Breheny is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on an Eight Law Firm Consensus Report by Gibson, Dunn & Crutcher LLP; Hogan Lovells US LLP; Latham & Watkins LLP; Mayer Brown LLP; Morrison & Foerster LLP; O’Melveny & Myers LLP; Skadden, Arps, Slate, Meagher & Flom LLP; and Weil, Gotshal & Manges LLP.

Starting in February 2013, the Iran Threat Reduction and Syria Human Rights Act (the “Threat Reduction Act”) will impose new reporting requirements on U.S. domestic and foreign companies that are required to file reports with the U.S. Securities and Exchange Commission (the “SEC”) pursuant to Section 13(a) of the Securities Exchange Act of 1934 (the “Exchange Act”). In particular, Section 219 of the Threat Reduction Act added new Section 13(r) to the Exchange Act. Under Section 13(r), Annual Reports on Form 10-K, Annual Reports on Form 20-F and Quarterly Reports on Form 10-Q filed pursuant to Exchange Act Section 13(a) must include disclosure of contracts, transactions and “dealings” with Iranian and other entities. Section 13(r) is effective beginning with reports with a due date after February 6, 2013.

The Staff of the Division of Corporation Finance of the SEC (the “SEC Staff”) has provided helpful guidance on implementation of these new requirements in Exchange Act Compliance and Disclosure Interpretations Questions 147.01-147.07 (available at http://www.sec.gov/divisions/corpfin/guidance/exchangeactsections-interps.htm). However, many questions remain, and the following questions and answers represent the consensus views of the undersigned law firms.

None of the firms subscribing to this report intends thereby to give legal advice to any person. The undersigned firms recommend that counsel be consulted with respect to matters addressed in this report. The answers below may need to be modified based upon unique facts and circumstances.

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Performance Metrics and Their Link to Value

Posted by Michael McCauley, Florida State Board of Administration, on
Wednesday, February 20, 2013
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Michael McCauley is Senior Officer, Investment Programs & Governance, of the Florida State Board of Administration (the “SBA”). This post is based on a Farient Advisors study, titled “Performance Metrics and Their Link to Value,” which was sponsored by the Florida SBA. The full study is available here.

The State Board of Administration (SBA) sponsored an executive compensation research study by Farient Advisors LLC, covering 1,800 companies, 24 Industry groups, and fourteen years of data (from 1998-2011). The research project identifies the primary metrics used in executive compensation plans, overall and by industry, company size, and valuation premiums, and then tests these metrics to determine whether the metrics being used have the highest impact on total stock returns.

The study provides the most definitive answer to date on a critical question—are companies choosing their long-term incentive metrics wisely for the most sustainable benefit to shareowners?

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Bank Regulation with Private-Party Risk Assessments

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, February 20, 2013
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The following post comes to us from Milton Harris, Professor of Finance at the University of Chicago; Christian Opp of the Department of Finance at the University of Pennsylvania; and Marcus Opp of the Finance Group at the University of California, Berkeley.

Triggered by the recent financial crisis, the regulation of banks has gained new traction among academics, regulators, and politicians. One of the key challenges in effective regulation is time inconsistency of regulation. While a regulator would like to commit not to bail out banks in order to set the right ex-ante incentives, this threat is generally not credible since the government does not follow through in the event of a crisis. Banks therefore have an incentive to expose themselves to risk that is partially insured by the government.

To mitigate this problem, regulators attempt to reduce the likelihood of banking crises by regulating both banks’ asset side and liability side. While there has been a recent push to focus on the liability side by mandating higher equity capital requirements, the very nature of a deposit-taking institution implies that leverage is an integral part of the business model of banks, unlike for other firms. In this paper, we therefore focus on the regulation of banks’ asset holdings. The starting point of our paper is the natural assumption that a regulator cannot directly observe the riskiness of assets, but needs to rely on an external (private) assessment of risk. Since the introduction of the Basel I framework, credit ratings have played an important role in bank regulation as “objective” measures of credit risk. This role has been confirmed in the Basel III (2011) guidelines, which still rely on credit ratings as measures of creditworthiness.

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NBIM Publishes Corporate Governance Note

Posted by Stephen Davis and Scott Hirst, Harvard Law School Program on Institutional Investors, on
Tuesday, February 19, 2013
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The following post comes to us from Gavin Grant, Head of Active Ownership at Norges Bank Investment Management, and is based on an NBIM discussion note, available here.

The Oslo-based Norges Bank Investment Management (NBIM), which manages the USD 650 billion Government Pension Fund Global, has published a discussion note setting out its expectations on corporate governance in equities it owns around the world. In particular, the firm outlines reasons it concentrates ownership resources on board accountability and equal treatment of shareholders.

In defining its expectations, NBIM has considered the challenges of protecting its interests as a globally diversified minority shareholder in light of empirical and theoretical evidence. Such a perspective has led the firm to question the basis for the near-universal consensus in support of features appearing in corporate governance codes, given that NBIM finds gaps in academic evidence for many of them. The discussion note takes the view that principles should be seen as best practices only. Deviations from them, if well thought out and persuasively justified, should be both expected and welcomed, in NBIM’s view.

NBIM’s intention is not to provide another code of corporate governance for companies to comply with or report against. Rather, it seeks to set out priorities for corporate governance as a means to foster dialogue and mutual understanding. Underlying the firm’s expectation statement is the idea that market practices should conform to high-level universal principles rather than to detailed prescriptive rules. To this end, NBIM invited input and testing of its views by a number of practitioner and stakeholder groups. The firm continues to welcome comments from all stakeholders, as mentioned at the end of the discussion note.

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Time for Self-Reflection and Pragmatism in the Boardroom

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, February 19, 2013
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The following post comes to us from George L. Davis, co-leader of the Global Board Practice at Egon Zehnder. Additional readings on board succession and board diversity are available here and here.

The recent study by the well-respected women business leadership group The Boston Club, in their Census of Women Directors and Executive Officers in Massachusetts Public Companies exposed “We are frustrated by the large numbers of companies that persist in ignoring the business imperative for a diverse board.”

The diversity quotient is indeed problematic as the Census found that across Massachusetts’ largest 100 public companies, only 12.7% of board directors are women – and this a 1.6 % increase over 2011. More than a third of the top 100 companies still have all male boards. And, interestingly, less than 2% of the 850 director seats in the Census are held by women of color.

So while diversity is championed by many with virtually no opposition, the progress is slow to materialize at the highest levels of corporate governance. Some ponder that the mindset of a “culture of the familiar” permeates people decision-making in the boardroom, where like meets like and relationships have historically been key to nominations and ultimately appointments of new board members. And, since only a select number of openings arise each year on boards, the slow turnover process only exaggerates an already lagging pace of change.

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The JOBS Act: Lessons from the First Nine Months

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, February 18, 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.

Nine months have passed since the Jumpstart Our Business Startups Act (the JOBS Act), a package of legislative measures intended to ease regulatory burdens on smaller companies and facilitate public and private capital formation, was signed into law. While certain portions of the JOBS Act have yet to be implemented pending SEC rulemaking, the provisions related to IPOs have been effective since enactment. These provisions seek to encourage companies with less than $1 billion in annual revenue to pursue an IPO by codifying a number of changes to the IPO process and establishing a transitional “on-ramp” that provides for scaled-down public disclosures for a new category of issuers termed emerging growth companies (EGCs).

Using nine-month data from the final prospectuses of 53 EGCs that successfully completed underwritten IPOs with gross proceeds of at least $75 million between April 5, 2012, and December 15, 2012, below is a summary of a number of developing market practices for EGC IPOs and certain related interpretative guidance issued by the staff of the U.S. Securities and Exchange Commission (Staff and SEC, respectively).

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Lessons from a Jury Trial

Posted by Paul Vizcarrondo, Wachtell, Lipton, Rosen & Katz, on
Monday, February 18, 2013
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Paul Vizcarrondo is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz specializing in corporate and securities litigation and regulatory and white collar criminal matters. This post is based on a Wachtell Lipton memorandum by Mr. Vizcarrondo, John F. Lynch, Carrie M. Reilly, Lindsey M. Weiss, and Molly K. Grovak.

A recent Yale Law Journal article describes a “striking trend in the administration of civil justice in the United States”—“the virtual abandonment of the centuries-old institution of trial.” In recent times, only approximately 1% of federal civil cases end in jury trials. Deep-pocketed companies often settle before trial because they fear that jurors will sympathize with individual plaintiffs and that jurors may lack the patience and ability to weigh complicated evidence. This is especially true for financial institutions in the current public-relations climate. But our recent experience co-defending Goldman Sachs in a five-week jury trial demonstrates that corporate defendants need not avoid juries at all costs, especially where important principles are at stake and there is a strong belief that the claims are baseless.

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Hedge Fund Activism Canadian Style

Posted by Brian R. Cheffins, University of Cambridge, on
Monday, February 18, 2013
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Brian Cheffins is a Professor of Corporate Law at the University of Cambridge.

Hedge funds first began engaging in the assertive form of shareholder activism for which they are renowned in the United States, and the United States is where hedge fund activism has become most firmly entrenched as part of the corporate governance landscape. Nevertheless, hedge fund activism is a global phenomenon, with companies in numerous countries being targeted. The United Kingdom, Japan and Canada are the three countries other than the U.S. where hedge fund activism has been most prevalent. The efforts of hedge fund activists in Britain and Japan have begun to capture the attention of academics (e.g. Iris Chiu, The Foundations and Anatomy of Shareholder Activism (2010) and John Buchanan, Dominic Chai and Simon Deakin, Hedge Fund Activism in Japan: The Limits of Shareholder Primacy (2012)). In the case of Canada, however, little has been said about hedge fund activism in the academic literature. Correspondingly in “Hedge Fund Activism Canadian Style,” recently published on SSRN, I describe the emergence of hedge fund activism in Canada, identify the legal and economic variables that account for its rise to prominence and offer predictions on whether the trend will be sustained.

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Benefits Trust and Walgreens Collaborate on Political Spending Disclosure

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, February 17, 2013
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The following post comes to us from Meredith Miller, Chief Corporate Governance Officer, and Cambria Allen, Corporate Governance Director, of the UAW Retiree Medical Benefits Trust, which provides health care benefits to over 800,000 UAW retirees and their dependents and has $52 billion under management. This post is based on a January 8, 2013 Press Release, available here.

The UAW Retiree Medical Benefits Trust (Trust) and leading drugstore chain Walgreen Co. (Walgreens) recently announced an agreement to a multi-year collaboration in which the company would develop a best practice policy approach to corporate political spending and lobbying activities. A product of constructive dialogue between the Trust and Walgreens, the agreement highlights the utility of the shareholder engagement process by underscoring that companies and shareholders can work together to their collective long-term interest.

Walgreens is to be applauded for coming to the table and developing an agreement to work together with the Trust.

The main components of the agreement are:

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Acquisition Financing: The Year Behind and the Year Ahead

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, February 16, 2013
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The following post comes to us from Eric M. Rosof, partner focusing on financing for corporate transactions at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Rosof, Joshua A. Feltman, Gregory E. Pessin, Michael S. Benn and Austin T. Witt.

Just like 2007… and not much like it at all.

So it was in the financing markets in 2012. Capital flowed to non-investment grade issuers in amounts reminiscent of the earlier time. However, those issuers mainly seized upon rising debt investor confidence in order to consummate refinancings, repricings and dividend recapitalizations, while the banks that arrange leveraged loan and high yield bond deals remained cautious in providing committed financing for acquisitions. Meanwhile, acquisitions, spinoffs and other transactions by investment grade issuers received strong support from arrangers and investors alike, with significant availability of committed financing for complex deals and favorable execution of debt issuances to close transactions. If the first few weeks are a guide, and barring any significant disruption in the interest rate environment, 2013 promises more of the same, but whether committed financing for high yield deals will continue its slow recovery remains to be seen.

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