Monthly Archives: May 2014

Second Circuit’s Recent Decision on LIBOR Claims

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

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

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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Who’s Responsible for the Walmart Mexico Scandal?

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 article that appeared in the Harvard Business Review online, which is available here.

The Walmart bribery scandal is one of the most closely-watched cases of alleged malfeasance by a global company. It broke into the open in April, 2012, when the New York Times published a lengthy investigative piece alleging Walmart bribery in a Mexican subsidiary and a cover-up in its Bentonville, Arkansas, global headquarters. The piece, which won a Pulitzer Prize for reporter David Barstow, raised a host of personal accountability and corporate governance issues for the company.

Late last month, on the second anniversary of the story nearly to the day, Walmart released its first Global Compliance Report (GCR). The report describes the company’s governance response and changed compliance framework—from holding 20 audit committee meetings in 2014, to substantial organizational restructuring, to enhanced education and training. On paper, Walmart appears to have adopted many best practices and to have set out a sound plan for moving forward. However, questions of accountability remain unanswered, when it comes to determining what actually happened in the past, what systems failed, and who was responsible for possible violations of the Foreign Corrupt Practices Act, which bars bribery of foreign officials. A lengthy internal inquiry continues, as well as investigations by the Justice Department and the SEC, with the scope broadened to include possible Walmart improprieties in Brazil, China and India.

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Shareholder Governance through Disclosure

The following post comes to us from Jordan Schoenfeld of the Department of Accounting at the University of Michigan.

Index fund sponsors today oversee about 18% of all mutual fund and ETF assets (or $2.3 trillion), but their ability to govern is hampered by a pressing need to keep expense ratios low (ICI, 2013). Thus traditional governance channels, such as evaluating and guiding project selection by managers (intervention), are foreclosed to them. Neither can these fund sponsors strategically trade in response to private information, because they must hold the index. Nonetheless, index fund sponsors would still like to govern their portfolio companies, because high index returns mean more inflows into their funds and fees. In my paper, Shareholder Governance through Disclosure, which was recently made publicly available on SSRN, I conjecture that index fund sponsors govern by asking management of firms to disclose more about their activities. These disclosures can facilitate the monitoring activities of all stakeholders and increase firm value, thus benefiting the index fund sponsor. For example, more disclosure enhances other blockholders’ monitoring activities and makes stock prices more informative about management’s actions. In addition, eliciting such disclosures about current projects undertaken by management does not require the index fund sponsor to invest in and acquire specific skills about how to run the business. This feature of disclosure makes it particularly attractive to index fund sponsors, who compete by keeping their expenses low.

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CII Urges SEC to Require Disclosure of Third-Party Director Compensation

Sabastian V. Niles is counsel in the Corporate Department at Wachtell, Lipton, Rosen & Katz, where he focuses on rapid response shareholder activism, takeover defense and corporate governance. This post is based on a Wachtell Lipton firm memorandum by Mr. Niles, Trevor Norwitz, Andrew R. Brownstein, and David C. Karp.

As we have previously written, special compensation arrangements between public company directors and third parties, such as activist hedge funds or other nominating shareholders, pose serious threats to the integrity of boardroom decision-making and have been sharply criticized by commentators and many institutional shareholders. The Council of Institutional Investors (CII), which has previously declared that third-party director incentive schemes “blatantly contradict” CII policies on director compensation, has now taken the additional step of encouraging the SEC to act to ensure investors are fully informed about such arrangements between nominating shareholders and their director candidates.

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Delaware Court Endorses “Fee-Shifting” Bylaw

The following post comes to us from Wilson Sonsini Goodrich & Rosati, and is based on a WSGR Alert memorandum by Chancellor William Chandler, David Berger, Katherine Henderson, Steven Guggenheim, Amy Simmerman, and Tamika Montgomery-Reeves. 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 8, 2014, the Delaware Supreme Court provided an en banc answer to a certified question of law from the U.S. District Court for the District of Delaware captioned ATP Tour, Inc. v. Deutscher Tennis Bund, concluding that fee-shifting provisions in the bylaws of a Delaware corporation are facially valid under Delaware law and enforceable even against parties who joined the corporation before the bylaw was adopted. [1] Although this opinion arose in the context of a non-stock corporation, as discussed below, the opinion is relevant to traditional stock corporations as well. Further, the court acknowledged that the bylaw would not necessarily be rendered unenforceable as an equitable matter if adopted with the “intent to deter litigation.”

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The Statistical Significance of Excess Dollar Returns

The following post comes to us from Tiago Duarte-Silva and Maria Tripolski-Kimel, both of Charles River Associates.

The literature on event studies has long established the properties of excess returns and tests of their statistical significance. However, it is useful in certain settings to examine excess dollar returns. For example, mergers and acquisitions often require the examination of dollar returns to assess the impact on the wealth of securities’ holders. Other examples include the analysis of managerial skill on actively managed funds, of the magnitude of price manipulation, or of the impact of disclosure events on prices in securities litigation.

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Does Hiring M&A Advisers Matter For Private Sellers?

The following post comes to us from Anup Agrawal, Powell Chair of Finance at the University of Alabama; Tommy Cooper of the Department of Finance at the University of Mississippi; and Qin Lian and Qiming Wang, both of the Department of Economics and Finance at Louisiana Tech University.

M&A transactions result from negotiations between buyers and sellers. In a negotiation, the outcome often depends on the relative bargaining strength of the two parties. A party’s bargaining strength depends on some factors that are beyond its control and others within its control. In an M&A transaction, hiring an M&A adviser is a step that either side can take to increase its bargaining power. While the decision and the benefit of hiring an M&A adviser by a public acquirer have been examined extensively, to our knowledge, the decision and benefit of hiring an M&A adviser by a private target have not been empirically examined. In our paper, Does Hiring M&A Advisers Matter For Private Sellers?, which was recently made publicly available on SSRN, we investigate the determinants of private targets’ choice of whether to hire M&A advisers (or top-tier M&A advisers) and the effect of this choice on deal valuations.

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Stress Testing: A Look Into the Fed’s Black Box

The following post comes to us from Dan Ryan, Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP, and is based on a PwC publication; the complete publication, including graphs, tables, and appendix, is available here.

On March 26th, the Federal Reserve (Fed) announced the results of its annual Comprehensive Capital Analysis and Review (CCAR). [1] This year the Fed assessed the capital plans of 30 bank holding companies (BHCs)—12 more than last year—and objected to five plans (four due to deficiencies in the quality of capital planning process, and one for falling below quantitative minimum capital ratios). Two other US BHCs had to “take a mulligan” and quickly resubmit their plans with reduced capital actions to remain above the quantitative floors.

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