Yearly Archives: 2013

New Board Challenges for Global Governance

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, February 2, 2013
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The following post comes to us from Wayne Lord, president of the World Affairs Council of Atlanta. This post is based on a white paper report from the 2012 Global Strategic Leadership Forum by Dr. Lord, available here.

The second set of meetings in the World Affairs Council of Atlanta’s Global Strategic Leadership Forum series focused on the new challenges facing the boards of directors of contemporary global companies. Setting the stage for the Forum’s discussions was the recognition of the huge changes that have taken place as a result of globalization in tandem with the world financial crisis and economic slow-down. The premise of the Forum was that the expanding and complex issues facing global companies today require a re-examination of the wide set of risks generated by global expansion and the complicated and dynamic matrix of the regulatory environment. These developments have dramatically impacted the relationship between the board and the chief executive officer as they determine strategic direction for the company – a role that is increasingly becoming a joint responsibility.

The general consensus of the Forum’s participants was that in today’s business environment, a global company board needs to ask itself if it is doing all it can and should to evaluate the complicated new risks facing the company, while ensuring that the goals for growth and profitability remain a critical focus. Complicating this escalating level of risk are the increasingly onerous and complex regulatory frameworks, imposed not only by the United States, but by other sovereign jurisdictions. The Forum participants confirmed that many of these regulations have global reach and the Board of Directors has specific oversight responsibility, thus vastly increasing the amount of information that must be examined at the Board level.

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Preserving Balance in Corporate Governance

Posted by Holly Gregory, Weil, Gotshal & Manges LLP, on
Friday, February 1, 2013
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Holly J. Gregory is a corporate partner specializing in corporate governance at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal alert by Ms. Gregory, Ira Millstein and Rebecca Grapsas.

In our annual missive last year, we wrote about the need to restore trust in our system of corporate governance generally and in relations between boards of directors and shareholders specifically. We continue to be troubled by the tensions that have developed over roles and responsibilities in the corporate governance framework for public companies. The board’s fundamental mandate under state law – to “manage and direct” the operations of the company – is under pressure, facilitated by federal regulation that gives shareholders advisory votes on subjects where they do not have decision rights either under corporate law or charter. Some tensions between boards and shareholders are inherent in our governance system and are healthy. While we are concerned about further escalation, we do not view the current relationship between boards and shareholders as akin to a battle, let alone a revolution, as some media rhetoric about a “shareholder spring” might suggest. However, we do believe that boards and shareholders should work to smooth away excesses on both sides to ensure a framework in which decisions can be made in the best interests of the company and its varied body of shareholders.

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Second Circuit Rules on Short-Swing Profit

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, February 1, 2013
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The following post comes to us from Lewis Liman, partner focusing on commercial litigation at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Liman and Jennifer Kennedy Park.

On January 7, 2013, the Second Circuit Court of Appeals ruled that Section 16(b) of the Securities Exchange Act of 1934, which provides for the disgorgement of profits that corporate insiders realize “from any purchase and sale, or any sale and purchase, of any equity security” of the corporate issuer within any period of less than six months (the “short-swing profit rule”), does not apply to a corporate insider’s purchase and sale of shares of different types of stock in the same company where those securities are separately traded, nonconvertible stocks that have different voting rights. Gibbons v. Malone, No. 11 Civ. 3620, 2013 U.S. App. LEXIS 398 (2d Cir. Jan. 7, 2013). Throughout its analysis, the court characterized § 16(b) as a blunt, mechanical rule that prioritizes ease of enforcement over maximum deterrence. Acknowledging the policy reasons for a more flexible interpretation of the rule, the Second Circuit invited the SEC to consider interpreting the short-swing profit rule to cover “similar” equity securities.

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Do Outside Directors Face Labor Market Consequences?

Posted by Steven Davidoff, Ohio State University College of Law, on
Friday, February 1, 2013
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Steven M. Davidoff is an Associate Professor of Law and Finance at Ohio State University College of Law, Andrew Lund is an Associate Professor of Law at Pace University School of Law and Robert J. Schonlau is an Assistant Professor of Finance at Brigham Young University.

Do directors face consequences for their poor performance?  We examine this question in Do Outside Directors Face Labor Market Consequences? A Natural Experiment from the Financial Crisis, a draft of which we recently posted to the SSRN.

We theorize that the exogenous shock of the financial crisis made shareholders and regulators particularly attuned to financial firm performance. We thus use the financial crisis as a natural experiment to study labor market consequences for outside directors at banks and other financial companies. In particular, we explore the question of whether shareholders and regulators acted to penalize directors for poor firm performance during the financial crisis.
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Transition Period for Swaps Pushout Rule

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Thursday, January 31, 2013
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Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. This post is based on a Davis Polk client memorandum.

The OCC has published long-awaited guidance notifying federally-chartered insured depository institutions (“IDIs”) that it is prepared to grant applications to delay compliance with Section 716 of the Dodd-Frank Act (the “Swaps Pushout Rule”) for up to two years. [1] The Swaps Pushout Rule will become effective on July 16, 2013. A federally-chartered IDI [2] must submit a formal request for a transition period to the OCC by January 31, 2013. The content of such requests is discussed further below.

We believe that the Federal Reserve and the FDIC will issue similar guidance to state-chartered IDIs subject to their primary supervision. But it remains to be seen whether such guidance will address the application of the Swaps Pushout Rule to uninsured U.S. branches and agencies of foreign banks.

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Private Equity Trends in 2012

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, January 31, 2013

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The following post comes to us from Douglas P. Warner, senior member of the Private Equity practice and head of the Hedge Fund practice at Weil, Gotshal & Manges LLP. This post is based on a Weil Gotshal client alert by Mr. Warner and Michael Weisser.

We wish we could tell you something fascinating about what happened to the private equity industry in 2012. But it was just not that kind of year. Private equity deal volume was flat compared with 2011. New funds continued to be raised at a modest pace. There were no particularly interesting new developments in the deal market.

However, private equity, despite the challenges facing the industry and the harsh spotlight put on it by the presidential campaign, continued to thrive. This post looks back on some of the trends that we saw in the industry in 2012 and some predictions as to what awaits it in 2013 and beyond.

Trends in 2012

Some of the trends that we saw in the private equity industry in 2012 included:

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White Collar and Regulatory Enforcement: Emerging Trends

Posted by Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Wednesday, January 30, 2013
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Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Lawrence B. Pedowitz, John F. Savarese, David Gruenstein, and Ralph M. Levene.

Anyone watching white collar and regulatory enforcement developments unfold during 2012 knows that the government’s appetite for bringing huge cases against major companies, including massive fines, extensive remedial undertakings, and extended monitorships, has continued unabated. It is, admittedly, a gloomy picture, and most commentators (and law firms) have tended to outdo each other in stressing the storm clouds and challenges.

In this treacherous environment, making investments that may help to avoid criminal problems is a wise strategy. We have previously written about the many elements of an effective corporate compliance program, and such programs can materially reduce the risk of a severe and potentially crippling white collar criminal or regulatory enforcement proceeding. In our experience, however, the single most important element of such a program is a searching and well-informed survey, conducted periodically, aimed at identifying potential compliance risks. Nowadays, virtually every well-run corporation has training programs, a code of conduct, and a comprehensive set of compliance policies; the real distinguishing features of the best programs, in our view, are the capacity of a firm to (1) spot intelligently and quickly potential risks inherent in its business and then timely implement appropriate preventive measures before serious problems arise, and (2) respond promptly and appropriately if such a program detects potential wrongdoing.

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How Costly Is Corporate Bankruptcy for Top Executives?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, January 30, 2013
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The following post comes to us from B. Espen Eckbo, Professor of Finance at the Tuck School of Business at Dartmouth College; Karin Thorburn, Professor of Finance at the Norwegian School of Economics; and Wei Wang, Assistant Professor of Finance at Queen’s School of Business.

To what extent are CEOs filing for bankruptcy tainted by the bankruptcy event? On the one hand, the CEO bears a major responsibility for the firm going broke. After all, the filing might have been avoided if the CEO had managed to reduce firm leverage or otherwise reorganize debt claims in time to stay out of court. On the other hand, CEOs going through bankruptcy likely gain valuable experience from the crisis. The net impact of these two opposing effects on executive reputation is an open empirical question.

In the paper, How Costly is Corporate Bankruptcy for Top Executives?, which was recently made publicly available on SSRN, we provide some first systematic estimates of top executives’ personal costs of corporate bankruptcy. The estimates are based on 324 large public companies filing for Chapter 11 bankruptcy over the past two decades.

The study provides evidence on the following three questions. First, do top executives experience large personal losses (both income and wealth) when filing for bankruptcy? Second, do creditor control rights influence the probability of CEO departure and the income losses? Third, do ex ante predicted personal losses affect CEO’s decision to leave the firm and their compensation contract design?

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Harvard Convenes the Institutional Investors Roundtable

Posted by the Harvard Law School Forum on Corporate Governance & Financial Regulation, on
Tuesday, January 29, 2013
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The Harvard Institutional Investor Roundtable convened last Thursday, January 24. This event brought together for a roundtable discussion the top governance officers of leading public pension funds, mutual funds, and other institutional investors, both from the US and from abroad. The institutions represented hold assets under management in excess of $14 trillion. Some academics, issuers, and advisers joined the proceedings to inform the discussion. Participants in the event, and the topics of discussion, are set out below.

The Roundtable is an event of the Harvard Institutional Investor Forum, directed by Lucian Bebchuk and operated by the Harvard Law School Program on Institutional Investors and Program on Corporate Governance. The Forum’s Advisory Board consists of representatives of institutional investors, including Jay Chaudhuri, Michelle Edkins, Jonathan Feigelson, Gavin Grant, Joyce Haboucha, Suzanne Hopgood, Andrew Letts, Michael McCauley, Meredith Miller, Manish Mital, Peter H. Mixon, Brandon Rees, Paul Schneider, Greg Smith, Alison Tarditi and Harlan Zimmerman.

The Roundtable, which was co-organized by Lucian Bebchuk, Stephen Davis, and Scott Hirst, was supported by American Express Company, Berman DeValerio, Broadridge Financial Solutions, Deloitte LLP, EMC Corporation, Innisfree, Pfizer Inc., Prudential Financial Inc., The Coca Cola Company and UnitedHealth Group.

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Delaware Supreme Court Upholds Board Compensation Decision

Posted by Paul Rowe, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 29, 2013
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Paul Rowe is a partner in the Litigation Department at Wachtell, Lipton, Rosen and Katz. This post is based on a Wachtell Lipton memorandum by Mr. Rowe and Jeremy L. Goldstein. 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 Supreme Court upheld a Chancery Court determination that a board did not commit waste by consciously deciding to pay bonuses that were non-deductible under Section 162(m) of the Internal Revenue Code (Freedman v. Adams, Del. Supr., __ A.2d __, No. 230, 2012, Berger J. (Jan 14, 2013)). Unlike claims of gross negligence, claims of waste are not subject to exculpation or indemnification by the company and therefore have the potential for personal liability of directors.

The original suit was brought in 2008 by a shareholder of XTO Energy (later acquired by ExxonMobil) as a derivative claim. The suit alleged that XTO’s board committed waste by failing to adopt a plan that could have made $130 million in bonus payments to senior executives tax deductible. The board was aware that, under a plan that qualifies for the “performance based compensation” exception of Section 162(m), the company could have deducted its bonus payments, but, as the company disclosed in its annual proxy statement, the board did not believe that its compensation decisions should be constrained by such a plan. The Chancery Court held that the shareholder failed to state a claim. The Supreme Court agreed, holding that the decision to sacrifice some tax savings in order to retain flexibility in compensation decisions is a classic exercise of business judgment.

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