Yearly Archives: 2014

Compliance and Risk Management: Area for Legal Teaching and Scholarship?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, May 22, 2014
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The following post comes to us from Geoffrey P. Miller, Stuyvesant P. Comfort Professor of Law at New York University School of Law.

Compliance is hot.

Pick up the New York Times or the Wall Street Journal and you are likely to find a story about yet another huge fine for regulatory infractions.

In early May, to take a recent example, BNB Paribas, the big French bank, admitted that the $1.1 billion it had set aside for infractions involving sanctions regimes would not be nearly enough to cover its expected liability.

A billion dollars is a big number, but it is hardly the largest penalty we have seen in recent years. It is dwarfed, for example, by the more than $13 billion JPMorgan Chase agreed to pay to various regulatory agencies for mortgage infractions.

Numbers like these command attention.

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Settlements of Shareholder Litigation Involving M&A

Posted by John Gould, Cornerstone Research, on
Wednesday, May 21, 2014
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John Gould is senior vice president at Cornerstone Research. This post discusses a Cornerstone Research report by Olga Koumrian, titled “Settlements of Shareholder Litigation Involving Mergers and Acquisitions,” available here.

Only 2 percent of lawsuits filed in response to M&A deals that settled in 2013 produced monetary returns for shareholders. These findings are published in Settlements of Shareholder Litigation Involving Mergers and Acquisitions, which follows an earlier report on M&A filings and litigation outcomes issued this year by Cornerstone Research. Legal challenges to M&A deals resulted in only two monetary settlements in 2013, down from four in 2012 and seven in 2011.

The report also finds that plaintiff attorney fees awarded in disclosure-only settlements of M&A cases continued to drop in 2013. In addition, over the last four years, the Delaware Court of Chancery approved 80 percent of the fee amounts requested in such cases, compared with 90 percent in other courts.

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The Expanding Scope of Whistleblower Protections

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 21, 2014
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The following post comes to us from Jason M. Halper, partner at Cadwalader, Wickersham & Taft LLP, and is based on a Cadwalader publication by Mr. Halper, Lambrina Mathews, and William J. Foley. The complete publication, including footnotes, is available here.

The Sarbanes-Oxley Act of 2002 (“Sarbanes-Oxley”) was enacted following the accounting scandals of the early 2000s involving Enron, WorldCom and other public companies. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”) in 2010 following the global credit crisis that began a few years earlier. Both statutes offer protections for employees who face retaliation for “blowing the whistle” on corporate misconduct, and Dodd-Frank also provides enhanced monetary incentives to the employees who do so. Given the SEC’s recent and often-stated commitment to strict enforcement of the securities laws, coupled with the fact that the SEC has received over 6,000 whistleblower complaints in the past two years (and has made six awards since inception of its whistleblower reward program in 2011), whistleblowing activity now is a fact of corporate life that is likely to become even more prevalent as awareness spreads of the Dodd-Frank whistleblower reward program.

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Silicon Valley Venture Survey: First Quarter 2014

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 20, 2014
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The following post comes to us from Barry J. Kramer, partner in the corporate and securities group at Fenwick & West LLP and is based on a Fenwick publication by Mr. Kramer and Michael J. Patrick; the full publication, including detailed results and valuation data, is available here.

We analyzed the terms of 156 venture financings closed in the first quarter of 2014 by companies headquartered in Silicon Valley.

Overview of Fenwick & West Results

Valuation results in 1Q14 were very strong.

  • Up rounds exceeded down rounds 76% to 8% with 16% flat. The 68 point difference between up and down rounds was the largest since 2Q07, when the spread was 70 points
  • The Fenwick & West Venture Capital Barometer™ showed an average price increase of 85%, a significant increase from 57% in 4Q13.
  • The median price increase of financings in 1Q14 was 52%, a significant increase from 27% in 4Q13 and the highest amount since we began calculating medians in 2004.
  • Software and internet/digital media continued to be the strongest industry sectors, with life science, cleantech and hardware lagging but showing respectable results. The percentage of all financings that are for software companies has trended up in recent years, hitting 45% in this quarter.
  • The use of senior liquidation preference fell for the third quarter in a row, an indication of companies having leverage in negotiations with investors.

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Regulation and Self-Regulation of Related Party Transactions in Italy

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 20, 2014
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The following post comes to us from Luca Enriques, Professor of Business Law at LUISS University (Rome). The post is based on a paper co-authored by Professor Enriques, and Marcello Bianchi, Angela Ciavarella, Valerio Novembre and Rossella Signoretti of CONSOB (Commissione Nazionale per le Societa e la Borsa).

Agency problems and tunneling are traditional features of corporate governance in Italy. Where ownership is concentrated, dominant shareholders have both the incentives and the means to monitor managers but they may also extract private benefits through self-dealing transactions that favor the related party at the expense of minority shareholders. Pyramids and other control enhancing mechanisms (CEMs) make minorities more vulnerable to abusive self-dealing. The regulatory environment proved to be too lax. The late 1990s reforms failed to specifically address conflicts of interests in listed companies. Further, as a result of the 2003 corporate law reform, directors are allowed to vote even if their interests conflict with those of the firm and parent companies within integrated groups may legitimately force subsidiaries into possibly harmful transactions, provided some procedural and substantial requirements are met. With the exception of corporate governance codes, no specific new rule addressed the fairness of related party transactions (RPTs).

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Powerful Independent Directors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 19, 2014
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The following post comes to us from Kathy Fogel of the Department of Finance at Suffolk University, Liping Ma of the Department of Finance and Managerial Economics at the University of Texas at Dallas, and Randall Morck, Professor of Finance at the University of Alberta.

In our recent NBER working paper, Powerful Independent Directors, we find that independent directors who are powerful elevate shareholder wealth—in part at least by preventing value-destroying decisions such as economically unsound merger bids and excessive free cash flow retention, by meaningfully linking CEO pay to firm performance, and by forcing out underperforming CEOs. Independent directors who are not powerful do none of these things. These findings may explain why a robust link between independent directors on boards and firm value has proved so elusive; and thereby reconcile Fama’s (1980) thesis that independent directors can maximize shareholder valuations by advising and, where necessary, disciplining or replacing CEOs with the observation of Bebchuk and Fried (2006) that independent directors often do no such thing.

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Canadian Court Takes Hybrid Approach to Poison Pill

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, May 19, 2014
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The following post comes to us from Berl Nadler, partner at Davies, Ward, Phillips & Vineberg LLP, and is based on a Davies publication by Kevin J. Thomson, Peter Hong, and Gilles R. Comeau.

On May 2, 2014, the British Columbia Securities Commission (the “BCSC”) determined to allow the shareholder rights plan of Augusta Resource Corporation (“Augusta”) to remain in effect for at least 156 days after the announcement of the unsolicited offer by HudBay Minerals Inc. (“HudBay”) to acquire the shares of Augusta. The BCSC order was issued at a hearing held shortly after the continuance of the rights plan was approved by the shareholders of Augusta.

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Second Circuit’s Recent Decision on LIBOR Claims

Posted by Brad Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Sunday, May 18, 2014
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Brad Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

In Carpenters Pension Trust Fund of St. Louis, et al. v. Barclays PLC, et al., one of a recent spate of lawsuits arising out of matters concerning LIBOR, the Second Circuit addressed three pleading issues that frequently arise in securities class actions: loss causation, disclosures that amount to “puffery,” and control person liability. Most significantly, it rejected efforts by the plaintiffs to base a misrepresentation claim on general statements about corporate internal controls that did not specify the particular area in which alleged misconduct later occurred.

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Court of Appeals Invalidates Part of SEC’s Conflict Minerals Rule

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, May 17, 2014
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The following post comes to us from Yafit Cohn, Associate at Simpson Thacher & Bartlett LLP, and is based on a Simpson Thacher memorandum.

On April 14, 2014, in National Association of Manufacturers v. Securities and Exchange Commission, the United States Court of Appeals for the District of Columbia Circuit partially invalidated the final rule of the Securities and Exchange Commission (“SEC”) requiring public companies to investigate and disclose the origin of certain minerals found in the war-ridden Congo region (“conflict minerals”). [1] While upholding most aspects of the rule, the Court concluded that the rule and the statutory provisions on which it is based violate the First Amendment “to the extent the statute and rule require regulated entities to report to the Commission and to state on their website that any of their products have not been found to be ‘DRC conflict free.’” [2] On April 29, 2014, amid uncertainty regarding the impact of the Court’s decision on issuers’ obligations under the rule, the Director of the SEC’s Division of Corporation Finance announced that the SEC expects issuers to comply with those aspects of the rule that were upheld by the Court.

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Important Decisions regarding Morrison and Extraterritoriality

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 16, 2014
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The following post comes to us from Lawrence Portnoy, partner in the Litigation Department at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Michael S. Flynn. 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.

On May 6, 2014, the United States Court of Appeals for the Second Circuit issued the following decision in the City of Pontiac Policemen’s & Firemen’s Ret. Sys. et al. v. UBS AG et al., No. 12-4355 (2d Cir. May 6, 2014). The decision is one of first impression in the Second Circuit with respect to two questions arising out of the Supreme Court’s decision in Morrison v. National Australia Bank Ltd., 561 U.S. 247 (2010). First, does Morrison bar Exchange Act Section 10(b) claims with respect to the purchase or sale of securities on foreign exchanges when those same securities are cross-listed on a U.S. exchange? The Second Circuit answered with a “yes.” Second, is the mere placement of a buy order in the United States for the purchase of foreign securities on a foreign exchange sufficient to allege that a purchaser incurred irrevocable liability in the United States, such that the U.S. securities laws govern the purchase of those securities under the Second Circuit’s decision in Absolute Activist Value Master Fund Ltd v. Ficeto, 677 F.3d 60 (2d Cir. 2012)? The Second Circuit answered with a “no.”

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