Yearly Archives: 2014

Investors Buying Stock in NFL Player through First Fantex IPO

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, May 10, 2014
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The following post comes to us from Brian Korn, of counsel in the Corporate and Securities Practice Group of Pepper Hamilton LLP, and is based on a Pepper Hamilton publication by Mr. Korn and Andrew D. Kupchik.

On April 28, 2014, shares of Fantex, Inc. (Fantex), which are linked to the performance and earnings of Vernon Davis, star tight end of the San Francisco 49ers, were sold to the public. Other professional football players for whom Fantex has filed initial public offering (IPO) registration statements include quarterback EJ Manuel of the Buffalo Bills and running back Arian Foster of the Houston Texans.

What Is Fantex?

Fantex is an online securities exchange that is a member of the Securities Investor Protection Corporation (SIPC) and Financial Industry Regulatory Authority (FINRA).

How Does Fantex Work?

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The PCAOB Proposed Auditor’s Reporting Model

Posted by Alan L. Beller, Cleary Gottlieb Steen & Hamilton LLP, on
Friday, May 9, 2014
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Alan L. Beller is a partner focusing on complex securities, corporate governance and corporate matters at Cleary Gottlieb Steen & Hamilton LLP. This post is based on Mr. Beller’s testimony at the Public Company Accounting Oversight Board’s (PCAOB) public hearing in Washington, D.C. on proposed enhancements to the auditor’s reporting model; the complete text is available here. The views expressed in his testimony are based on his knowledge and experience as both a government official and a legal advisor to private clients.

The proposed enhancements to the auditor’s reporting model would be the first change to the standards in more than 70 years. Furthermore, they could significantly impact the content and format of auditors’ reports; the treatment of that information by investors and other users of financial statements; and the relationship and structure of interactions among management, audit committees and auditors as they have developed since the enactment of the Sarbanes-Oxley Act of 2002.

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Do Freezeouts Affect the Performance of the Controlling Shareholder?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, May 9, 2014
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The following post comes to us from Fernan Restrepo of Stanford Law School.

Some works in the literature on mergers and acquisitions suggest that mergers do not generate any efficiency for the acquirer and that, in fact, they have a negative effect on operating performance. This work examines whether freezeouts (that is, transactions in which a controlling shareholder acquires the remaining shares of a corporation for cash or stock) also produce a negative effect on the performance of the acquirer.

On a theoretical level, there are legitimate reasons to think that freezeouts should not generate any significant efficiency for the controlling shareholder, especially because, after completing the deal, he maintains control over the same assets he was already controlling before. From this perspective, the only gain arising from a freezeout is the savings in regulatory costs associated with the public status of the target, without much room for significant synergies. Moreover, it is possible that the reduction in public monitoring of the target that results from a freezeout could not only translate into long-term losses for that company, but also affect negatively the controlling shareholder in an indirect way. In this sense, a freezeout could actually be expected to lead to drops in the controlling shareholder’s operating performance.

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Curbing Short-Termism in Corporate America: Focus on Executive Compensation

Posted by Robert C. Pozen, Harvard Business School, on
Thursday, May 8, 2014
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Robert Pozen is a senior lecturer at Harvard Business School and a senior fellow at the Brookings Institution.

The protest against short termism in corporate America is rising. Business and political leaders are decrying the emphasis on quarterly results—which they claim is preventing corporations from making long-term investments needed for sustainable growth.

However, these critics of short termism have a skewed view of the facts and there are logical flaws in their arguments. Moreover, their proposals would dramatically cut back on shareholder rights to hold companies accountable.

The critics of short termism stress how much the average daily share volume has increased over the last few decades. Although this is factually correct, this sharp average increase is caused primarily by a tremendous rise in intraday trading.

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Shareholder Value Enhanced Through Sufficient Time to Generate Alternative Transaction

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, May 8, 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 and Peter Hong.

On April 2, 2014, Osisko Mining Corporation announced a superior alternative to Goldcorp Inc.’s unsolicited offer for Osisko in the form of a partnership with Yamana Gold Inc. resulting in Osisko’s shareholders receiving cash and share consideration with an implied value representing a 22% premium to Goldcorp’s offer. This transaction was announced 79 days after Goldcorp announced its intention to launch its unsolicited offer.

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Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 7, 2014
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The following post is based on a recent Columbia Law Review article, earlier issued as a working paper of the Harvard Law School Program on Corporate Governance, by Leo Strine, Chief Justice of the Delaware Supreme Court and a Senior Fellow of the Program. The article, Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, is available here. The article is a response essay to an earlier Columbia Law Review article by Professor Lucian Bebchuk, available here and discussed on the Forum here.

Leo Strine, Chief Justice of the Delaware Supreme Court Review and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently published in the Columbia Law Review a response essay to an essay by Professor Lucian Bebchuk published in the Columbia Law Review several months earlier. Professor Bebchuk’s essay, The Myth that Insulating Boards Serves Long-Term Value, is available here and was featured on the Forum here. Chief Justice Strine’s essay, titled Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, is available here.

The abstract of Chief Justice Strine’s essay summarizes it briefly as follows:

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Quack Corporate Governance, Round III?

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, May 7, 2014
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The following post comes to us from Luca Enriques at LUISS Guido Carli University Department of Law and the European Corporate Governance Institute (ECGI), and Dirk Zetzsche at the University of Liechtenstein and Director of the Center for Business & Corporate Law at Heinrich Heine University.

Like in the US, European policy-makers have taken a number of measures as a reaction to the financial crisis, some of which address corporate governance issues of credit institutions and investment firms (hereafter collectively referred to as “banks”). Other than in the U.S., however, and more consistently with the financial origins of the crisis, very little has made its way into legislation that applies to non-financial corporations.

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More Than You Wanted to Know: Failure of Mandated Disclosure

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, May 6, 2014
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The following post comes to us from Omri Ben-Shahar, the Leo & Eileen Herzel Professor of Law at the University of Chicago Law School.

“Mandated disclosure may be the most common and least successful regulatory technique in American law.” Thus opens our book, More Than You Wanted to Know: The Failure of Mandated Disclosure (Princeton Press, 2014).

Of mandated disclosure’s triumph there is no doubt. This blog’s readers see it everywhere. Corporate scandals and financial crises ceaselessly spawn new disclosure laws: the Securities Act of 1933, the Truth-in-Lending laws of the 60s and 70s, Sarbanes-Oxley in 2002, and, recently, Dodd-Frank. Disclosure pervades tort law (“duty to warn”), consumer protection (“truth in lending”), bioethics and health care (“informed consent”), online contracting (“opportunity to read”), food law (“nutrition data”), campaign finance regulation, privacy protection, insurance regulation, and more.

This triumph is understandable. Mandated disclosure aspires to help people making complex decisions while dealing with specialists by requiring the latter (disclosers) to give the former (disclosees) information so that disclosees choose sensibly and disclosers do not abuse their position. It is seductively plausible. (Don’t people make poor decisions because they have poor information? Won’t they make good decisions with good information?) It alluringly fits all ideologies. (Thaler and Sunstein like it because it is “libertarian paternalistic”; corporations would “rather disclose than be regulated”). So mandates are enacted unopposed. Literally.

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Rights Plans and Proxy Contests: Chancery Court Denies Activist’s Motion to Enjoin Sotheby’s Shareholder Meeting

Posted by Victor Lewkow, Cleary Gottlieb Steen & Hamilton LLP, on
Monday, May 5, 2014
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Victor Lewkow is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Benet J. O’Reilly and Aaron J. Meyers, and 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 2, 2014, the Delaware Chancery Court denied a motion to preliminarily enjoin Sotheby’s annual stockholder meeting based on allegations by an activist stockholder, Third Point LLC, that the Sotheby’s board of directors violated its fiduciary duties by adopting a rights plan (or “poison pill”) and refusing to provide a waiver from its terms in order to obtain an advantage in an ongoing proxy contest. Applying the two-prong Unocal test, Vice Chancellor Parsons held that the plaintiffs failed to demonstrate a reasonable probability of success on the merits of their claims. Notably, the Chancery Court accepted that the threat of “negative control” (i.e., disproportionate influence over major corporate decisions) by a stockholder with less than 20% ownership and without any express veto rights may constitute a threat to corporate policy justifying responsive action by a board, including the adoption and retention of a right plan.

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Chen v. Howard-Anderson

Posted by James C. Morphy, Sullivan & Cromwell LLP , on
Monday, May 5, 2014
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James C. Morphy is a partner at Sullivan & Cromwell LLP specializing in mergers & acquisitions and corporate governance. The following post is based on a Sullivan & Cromwell publication by Mr. Morphy, Alexandra Korry, Joseph Frumkin, and Brian Frawley. The complete publication, including footnotes, is available here. 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. Additional reading about Chen v. Howard-Anderson is available here.

In a summary judgment opinion issued on April 8, the Delaware Court of Chancery (VC Laster) held that in a change of control case governed by enhanced scrutiny, directors and officers could incur personal liability for a breach of their duty of loyalty if it is established that they acted unreasonably in conducting the sale process and allowed interests other than the pursuit of the best value reasonably available, i.e. an improper motive, to influence their decisions. The Court expressly rejected arguments that directors (or officers) could only be found to have acted in bad faith and thereby be personally liable for a breach of the duty of loyalty if it were determined that they were motivated by an intent to do harm or had consciously disregarded known obligations and utterly failed to attempt to obtain the best sale price, as articulated by the Delaware Supreme Court in Lyondell Chemical Company v. Ryan. Applying the new standard to the case before it, the Court concluded that the evidence against the director defendants was not sufficient to impose personal liability under the new standard, but that the evidence was sufficient to proceed to trial against the officers on the same theory.

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