Yearly Archives: 2014

Global Banks at a Strategic Crossroad

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, November 28, 2014
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The following post comes to us from Rakhi Kumar, Head of Corporate Governance at State Street Global Advisors, and is based on an SSgA publication; the complete publication, including appendix, is available here.

In Q1 and early Q2 2014, SSgA actively engaged with 15 global banks ahead of the proxy voting season. These engagements were conducted jointly with members of SSgA’s investment and governance teams. Our engagement addressed specific governance issues at each bank and also encompassed a wider discussion on the changing regulatory landscape and its impact on business strategy, capital requirements, operations and risk management, and the bank’s global footprint. Below we have provided the perspectives and insights gleaned from our engagement activities with banks this year.

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New York Appeals Court Applies Business Judgment Rule to Going Private Transaction

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, November 26, 2014
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The following post comes to us from Tariq Mundiya, partner in the litigation department of Willkie Farr & Gallagher LLP, and is based on a Willkie client memorandum by Mr. Mundiya, Sameer Advani, and Benjamin McCallen.

On November 20, 2014, the New York Appellate Division, First Department, in a case of first impression under New York law, ruled in favor of Kenneth Cole in a litigation where minority shareholders had challenged the fashion designer’s transaction to take private Kenneth Cole Productions, Inc. Mr. Cole controlled approximately 89% of KCP’s voting power and owned a 46% economic interest in KCP. Willkie Farr & Gallagher LLP represented Mr. Cole in the transaction and the class action litigation.

The Appellate Division found that the business judgment standard of review—and not the heightened entire fairness standard—applied to judicial review of breach of fiduciary claims because the transaction had been structured at the outset with dual protections of an independent special committee review and the vote of a “majority of the minority” (that is, non-Cole) shareholders. The judicial standard of review can have important litigation consequences, as cases governed by the business judgment rule can be dismissed at an early stage, as occurred here, whereas transactions governed by the “entire fairness” standard generally require discovery and further proceedings, which can be burdensome and expensive.

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Advantages of Board Actions on a “Clear Day”

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on
Wednesday, November 26, 2014
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Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf, Sarkis Jebejian, and Matthew Solum. 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.

In its landmark 1971 Chris-Craft decision, the Delaware Supreme Court observed that “inequitable action does not become permissible simply because it is legally possible.” This quote aptly captures the two-stage inquiry that Delaware courts will apply when reviewing a challenged board action—first determining the legality of the action, and second appraising the equity, or fairness, of the act and its application under the specific circumstances.

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Protecting the Technological Infrastructure of Our Capital Markets

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Tuesday, November 25, 2014
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Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [November 19, 2014], the Commission considers adopting Regulation Systems, Compliance, and Integrity (or Regulation SCI). These rules and amendments are intended to establish a foundational regulatory framework for the technological market infrastructure that has become increasingly intertwined with the functioning of our securities markets. The rules being considered for adoption today represent a clear improvement over the proposed version, which offered only a hollow promise that our markets would be safer, more resilient, and more stable.

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Lawyers as Professionals and Citizens: Key Roles and Responsibilities in the 21st Century

Posted by Benjamin W. Heineman, Jr., Harvard Law School Program on Corporate Governance and Harvard Kennedy School of Government, on
Tuesday, November 25, 2014
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Ben W. Heineman, Jr. is a former GE senior vice president for law and public affairs and a senior fellow at Harvard University’s schools of law and government. This post is based on an essay by Mr. Heineman, William F. Lee, and David B. Wilkins; the complete publication is available here.

We have written a detailed essay presenting practical vision of the responsibilities of lawyers as both professionals and as citizens at the beginning of the 21st century. Specifically, we seek to define and give content to four ethical responsibilities that we believe are of signal importance to lawyers in their fundamental roles as expert technicians, wise counselors, and effective leaders: responsibilities to their clients and stakeholders; responsibilities to the legal system; responsibilities to their institutions; and responsibilities to society at large. Our fundamental point is that the ethical dimensions of lawyering for this era must be given equal attention to—and must be highlighted and integrated with—the significant economic, political, and cultural changes affecting major legal institutions and the people and institutions lawyers serve.

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The Next Wave of Proxy Access Proposals

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, November 24, 2014
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The following post comes to us from David J. Berger, partner focusing on corporate governance at Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert memorandum.

The Comptroller of the City of New York, who oversees pension funds with a combined $160 billion in assets, recently submitted proxy access shareholder proposals at 75 U.S. public companies as part of its Boardroom Accountability Project. [1] These 75 companies, representing a wide range of industries and market capitalizations, were targeted based on three “priority issues”: climate change, board diversity, and executive compensation.

“Proxy access” proposals seek to provide shareholders with a mechanism for placing their nominees for director in a company’s proxy statement and on its proxy card, thereby avoiding the cost to a shareholder of sending out its own proxy statement. Under a typical proxy access bylaw, shareholders must hold a specified amount of stock in the company (e.g., 3 percent) for a certain period (e.g., 3 years), in addition to meeting other procedural requirements. Proponents of proxy access argue that it provides shareholders with a cost-effective means of running their own candidates for director, providing all shareholders with greater ability to shape the composition of the board.

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Revisiting Executive Pay in Family-Controlled Firms

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, November 24, 2014
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The following post comes to us from Juyoung Cheong of the Korea Advanced Institute of Science and Technology and Woochan Kim of the Department of Finance at Korea University Business School.

In our paper, Revisiting Executive Pay in Family-Controlled Firms, which was recently made publicly available on SSRN, we reexamine executive pay in family-controlled firms and challenge the findings in the existing literature.

According to the prior literature, family executives of family-controlled firms receive lower compensation than non-family executives. Using 82 family-controlled firms in the U.S. in 1988, McConaughy (2000) report that family CEOs are paid lower compensation than non-family CEOs. Likewise, Gomez-Mejia, Larraza-Kintana, and Makri (2003) show similar findings using a sample of 253 family-controlled firms in the U.S. during 1995-98.

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Successful Motions to Dismiss Securities Class Actions in 2014

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, November 23, 2014
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The following post comes to us from Jon N. Eisenberg, partner in the Government Enforcement practice at K&L Gates LLP, and is based on a K&L Gates publication by Mr. Eisenberg; the complete publication, including footnotes, is available here.

Motions to dismiss have been called “the main event” in securities class actions. They are filed in over 90% of securities class actions and they result in dismissal close to 50% of the time they are filed. In contrast, out of 4,226 class actions filed between 1995 and 2013, only 14 were resolved through a trial, and of those, only five resulted in verdicts for the defendant. In between a denial of a motion to dismiss and a trial are i) discovery, ii) opposition to class certification, iii) motion for summary judgment, iv) mediation, and v) settlement. Unfortunately for defendants in securities class actions, class certification is granted in whole or in part 84% of the time, and there is no summary judgment decision at all over 90% of the time. Thus, for most defendants in securities class actions, a denial of a motion to dismiss usually results in writing a settlement check, often after years of costly discovery. Defendants that fail to give adequate attention to motions to dismiss are shortchanging the very best opportunity they have to avoid what may otherwise become multi-year, expensive litigation.

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Operational Risk Capital: Nowhere to Hide

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Saturday, November 22, 2014
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The following post comes to us from PricewaterhouseCoopers LLP and is based on a PwC publication by Dietmar Serbee, Helene Katz, and Geoffrey Allbutt; the complete publication, including appendix and footnotes, is available here.

The Basel Committee on Banking Supervision (BCBS) last month proposed revisions to its operational risk capital framework. The proposal sets out a new standardized approach (SA) to replace both the basic indicator approach (BIA) and the standardized approach (TSA) for calculating operational risk capital. In our view, four key points are worth highlighting with respect to the proposal and its possible implications:
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Are Securities Lawyers Stuck in a Time Warp?

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, November 21, 2014
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The following post comes to us from Phillip Goldstein of Bulldog Investors.

“[T]he fact that a federal statute has been violated and some person harmed does not automatically give rise to a private cause of action in favor of that person.”
—Touche Ross & Co. v. Redington, 442 U.S. 560, 568, 99 S.Ct. 2479, 61 L.Ed.2d 82 (1979).

In June 2008, I posted a short piece on this website entitled A Different Perspective on CSX/TCI: Should Courts Reject a Private Right of Action Under Section 13(d)? In that posting, I questioned whether, after Alexander v. Sandoval, 532 U.S. 275 (2001), a private right of action existed to enforce the Williams Act, in that case, section 13(d) of the 1934 Securities and Exchange Act. It drew a grand total of zero comments.

Let’s fast forward to the lawsuit du jour. Allergan and one of its employees who was a shareholder that sold some shares while Bill Ackman was buying and before Valeant announced its intent to acquire Allergan have sued Ackman in the United States District Court for the Central District of California for allegedly violating Rule 14e-3. Judge David O. Carter concluded that Allergan did not have standing to sue Ackman but that that a selling shareholder did have standing and that there were “serious questions” that need to be decided by a jury to determine whether Ackman violated Rule 14e-3. A number of respected commentators have weighed in on the merits of the case and about a potential class action lawsuit to recoup Ackman’s “illegal” profits.

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