Monthly Archives: February 2014

Who Knew that CLOs were Hedge Funds?

Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on a Davis Polk client memorandum.

U.S. financial regulators found themselves on the receiving end of an outpouring of concern from law makers last Wednesday about the risks to the banking sector and debt markets from the treatment of collateralized loan obligations (“CLOs”) in the Volcker Rule final regulations. Regulators and others have come to realize that treating CLOs as if they were hedge funds is a problem and we now understand from Governor Tarullo’s testimony that the treatment of CLOs is at the top of the list for the new interagency Volcker task force. But what, if any, solutions regulators will offer—and whether they will be enough to allow the banking sector to continue to hold CLOs and reduce the risks facing debt markets—remains to be seen.


Delaware’s Choice

Guhan Subramanian is the Joseph Flom Professor of Law and Business at the Harvard Law School and the H. Douglas Weaver Professor of Business Law at Harvard Business School. The following post is based on Professor Subramanian’s lecture delivered at the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. 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 November 2013 I delivered the 29th Annual Francis G. Pileggi Distinguished Lecture in Law in Wilmington, Delaware. My lecture, entitled “Delaware’s Choice,” presented four uncontested facts from my prior research: (1) in the 1980s, federal courts established the principle that Section 203 must give bidders a “meaningful opportunity for success” in order to withstand scrutiny under the Supremacy Clause of the U.S. Constitution; (2) federal courts upheld Section 203 at the time, based on empirical evidence from 1985-1988 purporting to show that Section 203 did in fact give bidders a meaningful opportunity for success; (3) between 1990 and 2010, not a single bidder was able to achieve the 85% threshold required by Section 203, thereby calling into question whether Section 203 has in fact given bidders a meaningful opportunity for success; and (4) perhaps most damning, the original evidence that the courts relied upon to conclude that Section 203 gave bidders a meaningful opportunity for success was seriously flawed—so flawed, in fact, that even this original evidence supports the opposite conclusion: that Section 203 did not give bidders a meaningful opportunity for success.


Top Ten 2013 Delaware Corporate and Commercial Decisions

Francis G.X. Pileggi is Member-in-Charge of the Wilmington office of Eckert Seamans Cherin & Mellott, LLC and publisher of the Delaware Corporate and Commercial Litigation Blog. This post is based on an article by Mr. Pileggi, Kevin F. Brady, and Jill K. Agro. This post is part of the Delaware law series, which is co-sponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

This is our ninth annual review of key Delaware corporate and commercial decisions. During 2013, we reviewed and summarized over 200 decisions from Delaware’s Supreme Court and Court of Chancery on corporate and commercial issues. Among the decisions with the most far-reaching application and importance during 2013 are the “top ten” that we are highlighting in this short overview. We are providing links to the more complete blog summaries, and the actual court rulings, for each of the cases that we highlight below.


2013 Year-End Securities Litigation Update

The following post comes to us from Jonathan C. Dickey, partner and Co-Chair of the National Securities Litigation Practice Group at Gibson, Dunn & Crutcher LLP, and is based on portions of a Gibson Dunn publication. The complete publication is available here.

2013 proved to be a watershed year for securities litigation, and 2014 is shaping up to be a “career killing” year for plaintiffs’ lawyers specializing in 10b-5 class actions. In what may turn out to be one of the most important cases in the last three decades, the Supreme Court will address the long debated fraud-on-the-market theory in Halliburton II, and address head on whether the Court’s decades-old ruling in Basic v. Levinson establishing that theory should be overruled. The case for overruling Basic is a strong one, with at least four justices having expressed serious concerns about the fraud-on-the-market theory in the Court’s 2013 decision in Amgen. See “A Shot Across the Basic Bow,” in our 2013 Mid-Year Securities Litigation Update. If, as many court observers predict, the Court in fact overturns the fraud-on-the-market theory, securities class actions as we know them may be consigned to the dust heap.


CEO Employment Agreements in a “Say on Pay” World

The following post comes to us from Michael S. Katzke, a founding partner of Katzke & Morgenbesser LLP, and is based on a Katzke & Morgenbesser publication by Mr. Katzke and Henry I. Morgenbesser.

Although much has been written and discussed in the past few years about the impact of “Say on Pay” and Dodd-Frank on CEO compensation practices (including the narrowing or elimination of employment agreement provisions such as excise tax and other tax gross-ups and automatic “evergreen” renewal terms which have not been viewed as shareholder friendly), there has been less discussion as to whether employment agreements remain a viable option in a Say on Pay world. In spite of the complicated relationship between a CEO hire and the company, some companies, as a policy matter, do not put the terms of such relationship in writing. Complexities that are often spelled out in a written agreement include duties and responsibilities of the CEO, compensation (including formulaic increases during the term), the duration of the term of employment, termination provisions, severance payments under certain termination scenarios, and post-employment restrictive covenants. As discussed below, in our view, written employment agreements continue to be viable and recommended, particularly in the case of CEOs hired from outside the company.


Halliburton: The Morning After

Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. The views expressed in this post are those of Mr. Feldman and do not reflect those of his firm or clients. Doru Gavril also contributed to this post. The Supreme Court’s expected reconsideration of Basic is also discussed in a Harvard Law School Discussion Paper by Professors Lucian Bebchuk and Allen Ferrell, Rethinking Basic, discussed on the Forum here.

The blogosphere is abuzz over Halliburton. [1] Will the Supreme Court overturn Basic [2] and abolish the fraud-on-the-market presumption? Will the decision end shareholder class actions as we have known them? Presumably, by the Fourth of July, we will know.

The purpose of this post is not to predict the outcome of Halliburton. Rather, it is to begin thinking about ways in which the plaintiffs’ bar may respond if the Court does overturn Basic. Those who think that plaintiffs’ lawyers will go quiet into the night are, in my opinion, ignoring the lessons of history.


Recent Trends in Securities Class Action Litigation: 2013 Review

The following post comes to us from Dr. Renzo Comolli and Svetlana Starykh, Senior Consultants at NERA Economic Consulting, and is based on portions of a NERA publication. The complete publication, including analysis of motions, trends in resolutions and settlements, and footnotes, is available here.

Legal developments have dominated the news about federal securities class actions in 2013. Last February, the Supreme Court decision in Amgen resolved certain questions about materiality but focused the debate on Basic and the presumption of reliance, which are now back to the Supreme Court after certiorari was granted for the second time in Halliburton.

Against this legal backdrop, 2013 saw a small increase in the number of complaints filed for securities class actions in general and for class actions alleging violation of Rule 10b-5 in particular. Filings in the 5th Circuit doubled, while filings in the 9th Circuit bounced back after having dipped in 2012.


The SEC in 2014

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s remarks to the 41st Annual Securities Regulation Institute Conference; the full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

For nearly 80 years, the Securities and Exchange Commission has been playing a vital role in the economic strength of our nation. Year after year, the agency has steadfastly sought to protect investors, make it possible for companies of all sizes to raise the funds needed to grow, and to ensure that our markets are operating fairly and efficiently.

That is our three-part mission.

But, while commitment to this mission has remained constant and strong over the years, the world in which we operate continuously changes, sometimes dramatically.

When the Commission’s formative statutes were drafted, no one was prepared for today’s market technology or the sheer speed at which trades are now executed. No one dreamed of the complex financial products that are traded today. And, not even science fiction writers would have bet that individuals would so soon communicate instantaneously in so many different ways.


The Governance Structure of Shadow Banking

Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at Duke University School of Law.

In prior articles (see, e.g., Regulating Shadows: Financial Regulation and Responsibility Failure, 70 Wash. & Lee L. Rev. 1781 (2013)), I have argued that shadow banking is so radically transforming finance that regulatory scholars need to rethink certain of their basic assumptions. In a forthcoming new article, The Governance Structure of Shadow Banking: Rethinking Assumptions About Limited Liability, I argue that the governance structure of shadow banking should be redesigned to make certain investors financially responsible, by reason of their ownership interests, for their firm’s liabilities beyond the capital they have invested. This argument challenges the longstanding assumption of the optimality of limited liability.


Introduction to the SDX Protocol

James Woolery is Deputy Chairman of Cadwalader, Wickersham & Taft LLP, Co-Chair of its Corporate Department and head of its Business Development Group. This post is based on an excerpt from the Shareholder Director Exchange (SDX) Protocol, a framework to guide engagement between directors, which is sponsored by Cadwalader, Wickersham & Taft LLP, Teneo Holdings, LLC, Tapestry Networks, Inc. and the participating directors and investor representatives of the SDX™. The complete publication is available here.

The Shareholder-Director Exchange (SDX™) [1] is a working group of leading independent directors and representatives from some of the largest and most influential long-term institutional investors. [2] SDX participants came together to discuss shareholder-director engagement and to use their collective experience to develop the SDX Protocol, a set of guidelines to provide a framework for shareholder-director engagements. While the decision to engage directly with investors should be made in consultation with or at the request of management, the 10-point SDX Protocol offers guidance to US public company boards and shareholders on when such engagement is appropriate and how to make these engagements valuable and effective.


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