Yearly Archives: 2014

Key Trends in Financial Institutions M&A and Governance

Posted by Edward D. Herlihy, Wachtell, Lipton, Rosen & Katz, on
Tuesday, January 21, 2014
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Edward Herlihy is a partner and co-chairman of the Executive Committee at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton memorandum by Mr. Herlihy, Richard K. Kim, Lawrence S. Makow, Nicholas G. Demmo, and David E. Shapiro.

2013 was a year of continuing challenges and opportunities for U.S. banks. The low-interest rate environment continued to challenge the ability of banks to lend profitably. Already burdensome regulatory demands grew weightier with expanded Dodd-Frank stress testing and the finalization of the Volcker Rule, among other things. More than ever before, the responsibility of directors of financial institutions for regulatory compliance and bank safety and soundness is broadening, highlighted most recently by the OCC’s steps to formalize its program of supervisory “heightened expectations” for larger banks and their directors. Against this backdrop, the banking industry saw steady and creative deal activity, with a pronounced concentration among community banks.

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HLS Corporate Faculty Excels in SSRN’s 2013 Citation Rankings

Posted by Scott Hirst, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, January 21, 2014
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Statistics released by the Social Science Research Network (SSRN) indicate that, as of the end of 2013, Harvard Law School professors and senior fellows associated with the Program on Corporate Governance featured prominently on SSRN’s law author rankings. These professors and fellows captured ten of the top 100 slots among the top 100 law authors in all legal areas in terms of citations to their work. No corporate faculty group at any other law school comes even close to this level of citation prominence.

As in previous years, Professor Lucian Bebchuk was ranked first among all law school professors (a post about Professor Bebchuk’s ranking is available here and his papers are available on his SSRN page here). In addition, nine other professors and senior fellows associated with the Program on Corporate Governance are included among SSRN’s 2013 top 100 law authors:

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Blockholders and Corporate Governance

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, January 21, 2014
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The following post comes to us from Alex Edmans, Professor of Finance at the London Business School.

In the paper, Blockholders and Corporate Governance, forthcoming in the Annual Review of Financial Economics, I review the theoretical and empirical literature on the different channels through which blockholders (large shareholders) engage in corporate governance. Berle and Means’s (1932) seminal article highlighted the agency problems that arise from the separation of ownership and control. When a firm’s managers are distinct from its ultimate owners, they have inadequate incentives to maximize its value. For example, they may exert insufficient effort, engage in wasteful investment, or extract excessive salaries and perks. The potential for such value erosion leads to a first-order role for corporate governance—mechanisms to ensure that managers act in shareholders’ interest. The importance of firm-level governance for the economy as a whole has been highlighted by the recent financial crisis, which had substantial effects above and beyond the individual firms involved.

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Gender Diversity at Silicon Valley Public Companies 2013

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, January 20, 2014
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The following post comes to us from David A. Bell, partner in the corporate and securities group at Fenwick & West LLP. This post is based on a Fenwick publication, titled Gender Diversity in Silicon Valley: A Comparison of Large Public Companies and Silicon Valley Companies; the complete survey is available here.

Significantly expanding on the data in the Fenwick Corporate Governance Survey (discussed on the Forum here), Fenwick has published the first survey to analyze gender diversity on boards and executive management teams of companies in the technology and life science companies included in the Silicon Valley 150 Index (SV 150) compared to the very large public companies included in the Standard & Poor’s 100 Index (S&P 100). [1] The Fenwick Gender Diversity Survey analyzes eighteen years of public filings regarding boards and management teams—beginning with the 1996 proxy season and ending with the 2013 proxy season—to better understand changes in the leadership of some of our most important companies, and the gradual gender diversity improvements taking place. The 70-page report includes detailed analysis of:

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ISS To Revise QuickScore

Posted by Amy Goodman, Gibson, Dunn & Crutcher LLP, on
Sunday, January 19, 2014
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Amy Goodman is a partner and co-chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. The following post is based on a Gibson Dunn alert by Ms. Goodman and Elizabeth A. Ising.

On January 8, 2014, Institutional Shareholder Services, Inc. (“ISS”) announced that it will launch a new version of QuickScore (“QuickScore 2.0”) on February 18, 2014. QuickScore benchmarks a company’s governance risk against other companies in the Russell 3000 Index based on a number of weighted governance factors. QuickScore 2.0 will use a different method to score companies’ governance risk and will automatically reflect changes in companies’ governance structures based on publicly disclosed information.

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No Magic Bullet in Post-Credit Crisis Investment Litigation

Posted by Noam Noked, co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, January 18, 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 and Gregory Beaman. The complete publication, including footnotes, is available here.

Nearly a decade ago, the United States Supreme Court in Dura Pharmaceuticals Inc. v. Broudo, 544 U.S. 336, 345 (2005), emphasized that a securities fraud suit is not an investor’s insurance policy against market losses. As courts continue to address the fallout from the financial crisis that began in 2007, the court’s admonition is alive and well, and frequently appearing in decisions addressing claims under § 10(b) of the Securities Exchange Act of 1934 and common law claims involving structured products such as mortgage-backed securities. Just recently, two federal courts observed in the § 10(b) context that “[t]he securities laws are not an insurance policy for investments gone wrong, inexperience, bad luck, poor choices, or unexpected market events,” nor are they “a prophylaxis against the normal risks attendant to speculation and investment in the financial markets.”

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“SPOE” Resolution Strategy for SIFIs under Dodd-Frank

Posted by H. Rodgin Cohen, Sullivan & Cromwell LLP, on
Friday, January 17, 2014
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H. Rodgin Cohen is a partner and senior chairman of Sullivan & Cromwell LLP focusing on acquisition, corporate governance, regulatory and securities law matters. This post is based on a Sullivan & Cromwell publication by Mr. Cohen, Rebecca J. Simmons, Mark J. Welshimer, and Stephen T. Milligan.

On December 10, 2013, the Federal Deposit Insurance Corporation (the “FDIC”) proposed for public comment a notice (the “Notice”) describing its “Single Point of Entry” (“SPOE”) strategy for resolving systemically important financial institutions (“SIFIs”) in default or in danger of default under the orderly liquidation authority granted by Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”). [1] The Notice follows the FDIC’s endorsement of the SPOE model in its joint paper issued with the Bank of England last year.

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Do Managers Manipulate Earnings Prior to Management Buyouts?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, January 17, 2014
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The following post comes to us from Yaping Mao and Luc Renneboog, both of the Department of Finance at Tilburg University.

In the paper, Do Managers Manipulate Earnings Prior to Management Buyouts?, which was recently made publicly available on SSRN, we investigate accounting manipulation prior to buyout transactions in the UK during the second buyout wave of 1997 to 2007. Prior to management buyouts (MBOs), managers have an incentive to deflate the reported earnings numbers by accounting manipulation in the hope of lowering the subsequent stock price. If they succeed, they will be able to acquire (a large part of) the company on the cheap. It is important to note that accounting manipulation in a buyout transaction may have severe consequences for the shareholders who sell out in the transaction: if the earnings distortion is reflected in the stock price, the stock price decline cannot be undone and the wealth loss of shareholders is irreversible if the company goes private subsequent to the buyout. Mispriced stock and false financial statements are still issues frequently mentioned when MBO transactions are evaluated. The UK’s Financial Services Authority (FSA, 2006) ranks market abuse as one of the highest risks and suggests more intensive supervision of leveraged buyouts (LBOs). The concerns about mispriced buyouts are therefore a motive to test empirically whether earnings numbers are manipulated preceding buyout transactions.

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ISS Publishes Guidance on Director Compensation (and Other Qualification) Bylaws

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Thursday, January 16, 2014
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Andrew R. Brownstein, Steven A. Rosenblum, Trevor S. Norwitz, David C. Karp, and Sabastian V. Niles.

In the latest instance of proxy advisors establishing a governance standard without offering evidence that it will improve corporate governance or corporate performance, ISS has adopted a new policy position that appears designed to chill board efforts to protect against “golden leash” incentive bonus schemes. These bonus schemes have been used by some activist hedge funds to recruit director candidates to stand for election in support of whatever business strategy the fund seeks to impose on a company.

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Carried Interests: Current Developments

Posted by Joseph Bachelder, McCarter & English, LLP, on
Thursday, January 16, 2014
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Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. This post is based on an article by Mr. Bachelder which first appeared in the New York Law Journal.

The tax status of so-called “carried interests,” held by private equity fund sponsors (and benefitting, in particular, the individual managers of those sponsors) is the subject of this post. A decision by the U.S. Court of Appeals for the First Circuit holding that a private equity fund was engaged in a trade or business for purposes of the withdrawal liability provisions of ERISA (Employee Retirement Income Security Act) has caused considerable comment on the issue of whether a private equity fund might also be held to be in a trade or business (and not just a passive investor) for purposes of capital gains tax treatment on the sale of its portfolio companies. Proposed federal income tax legislation, beginning in 2007 and continuing into 2013, also has raised concern as to the status of capital gains tax treatment for holders of carried interests. The following post addresses both of these developments.

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