Monthly Archives: June 2014

Whose Trojan Horse? The Dynamics of Resistance against IFRS

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, June 5, 2014
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The following post comes to us from Martin Gelter, Associate Professor of Law at Fordham University. The post is drafted based on a paper co-authored by Professor Gelter and Zehra G. Kavame of Fordham Law School.

The US is the last major economy that has not yet adopted International Financial Reporting Standards (IFRS) while, from Europe to Canada, from Australia to China, around 120 countries are already requiring or permitting IFRS; this figure will likely rise to 150 countries in the near future. The introduction of IFRS has been debated in the United States for several years. The Securities and Exchange Commission (SEC) first issued a paper that includes a plan for possible implementation, and several SEC Staff Reports followed up until the July 2012 Final Staff Report with regard to the work plan. However, whether domestic issuers should be permitted to use IFRS is still very controversial.

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Activist Hedge Funds Find Ways to Profit from M&A Transactions

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, June 4, 2014
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The following post comes to us from Spencer D. Klein, partner in the Corporate Department and co-chair of the global Mergers & Acquisitions Group at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Klein, Enrico Granata, and Isaac Young; the complete publication, including footnotes, is available here.

Activist hedge funds continue to find ways to use public M&A transactions as a tool to generate returns for their investors. As a result, market participants need to consider potential activist strategies in determining how to structure, announce and execute their deals.

Activists have used three principal strategies to extract additional value from public M&A transactions. The first strategy involves directly challenging the announced deal in an effort to extract a higher price, defeat the merger and/or pursue an alternative transaction or stand-alone strategy. The second strategy involves attempting to use statutory appraisal rights to create value for the activist. And the third strategy involves making an unsolicited offer to acquire a target, either independently or in conjunction with a strategic acquirer, to put the target in play. In this article, we discuss examples of recent uses of these strategies by activist investors and point out some general implications of these examples for transaction planners.

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The Ownership of Japanese Corporations in the 20th Century

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, June 4, 2014
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The following post comes to us from Julian Franks, Professor of Finance at London Business School; Colin Mayer, Professor of Management Studies at Saïd Business School, University of Oxford; and Hideaki Miyajima, Professor of Commerce at Waseda University.

The Japanese insider ownership system began to fall apart approximately twenty years after it came into operation at the beginning of the 1970s. In our paper, The Ownership of Japanese Corporations in the 20th Century, which was recently made publicly available on SSRN, we suggest that the insider system emerged in the first place because the alternative institutions for promoting outside ownership failed. The problem was not with the legal framework, which was relatively strong in Japan. Instead, the failure was due to the absence of institutional reputational capital in equity markets equivalent to that embedded in the business coordinators and zaibatsu earlier in the century. The first point that this brings out is that the destruction of institutions, such as zaibatsu, can be serious in terms of economic performance. The second point is that the creation of new institutions of trust to replace previous institutions is complex and not readily achieved by design.

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Private Equity Management of Fees and Expenses: A Cautionary Tale

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, June 3, 2014
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The following post comes to us from Veronica E. Rendón, partner at Arnold & Porter LLP and co-chair of the firm’s Securities Enforcement and Litigation practice. This post is a based on an Arnold & Porter memorandum.

In recent weeks, the Securities and Exchange Commission (SEC) has revealed that it is closely reviewing how private equity fund advisers disclose the allocation of fees and expenses to their investors. The SEC is primarily implementing this review through the Presence Exam Initiative (the Initiative), which has been initiated through the SEC’s Office of Compliance Inspections and Examinations (OCIE). [1] Under the Initiative, the SEC has examined more than 150 newly-registered private equity advisers. According to the OCIE, the goal is to examine 25% of the new private fund registrants by the end of the year. The SEC has indicated that over 50% of the newly-registered private equity fund advisers that it has examined to date have either violated the law or have demonstrated material weaknesses in their controls related to the allocation of fees and expenses. The SEC has identified inadequate policies and procedures and inadequate disclosure as related issues, with deficiencies in these arenas running between 40% and 60% of all adviser examinations conducted, depending on the year. This sheer number of perceived deficiencies likely will result in increased regulatory investigations, enforcement activity and possible sanctions, as well as increased exposure to investor-initiated lawsuits. As a result, (i) sophisticated fund investors will likely start asking questions to determine whether their fund managers engage in these practices and (ii) private equity firms should consider compliance and disclosure practices that can help limit this exposure.

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Communications Challenges of the Valeant/Pershing Square Bid for Allergan

Posted by Charles Nathan, RLM Finsbury, on
Monday, June 2, 2014
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Charles Nathan is partner and head of the Corporate Governance Practice at RLM Finsbury. This post is based on an RLM Finsbury commentary by Mr. Nathan.

The bid by Valeant and Pershing Square to acquire Allergan has made a very big splash in the M&A and corporate governance world. In brief, Pershing and Valeant have teamed up in a campaign to pressure Allergan to sell to Valeant in an unsolicited cash and stock deal. What distinguishes the Valeant/Pershing deal from a conventional public bear hug (such as Pfizer’s recent effort to acquire AstraZeneca) is that, by pre-arrangement, Pershing Square acquired a 9.7% equity stake in Allergan immediately prior to the first public announcement of Valeant’s bear hug. This unusual deal structure is a first and, if successful, may pioneer a new paradigm for unsolicited takeovers of public companies.

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CEO Ownership, Stock Market Performance, and Managerial Discretion

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, June 2, 2014
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The following post comes to us from Ulf von Lilienfeld-Toal of the Department of Finance at the Stockholm School of Economics and Stefan Ruenzi, Professor of Finance at the University of Mannheim.

In our paper, CEO Ownership, Stock Market Performance, and Managerial Discretion, forthcoming in the Journal of Finance, we examine the relationship between CEO ownership and stock market performance. We show that investing in firms in which the CEO owns a substantial fraction of shares (for example more than 10% of outstanding shares) leads to large abnormal returns. A strategy based on public information about managerial ownership delivers annual abnormal returns (annual alphas in a Fama-French portfolio setting) of 4 to 10%. These results are stronger for firms in which the impact of the CEO can expected to be large, that is, in firms in which the CEO has a lot of discretion.

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Enhancing the Effectiveness of the UK Listing Regime—Implementation

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, June 1, 2014
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The following post comes to us from Simon Witty, partner in the corporate department at Davis Polk & Wardwell LLP, and is based on a Davis Polk client memorandum by Mr. Witty, Will Pearce, Dan Hirschovits, and Victoria Kershaw.

Significant new rules to strengthen the UK premium listing regime have come into force today (The Listing Rules (Listing Regime Enhancements) Instrument 2014). The rules have been the subject of two rounds of consultation by the UK Financial Conduct Authority (“FCA”) and are designed in particular to improve the governance of premium listed companies with a controlling shareholder. Feedback on the responses received has also been published today by the FCA (PS14/8: Response to CP13/15—Enhancing the effectiveness of the Listing Regime).

We summarise the main elements of the new regime below, which are largely as proposed by the FCA in its previous consultation document (see our Client Memorandum dated November 7, 2013). Companies contemplating a premium listing will need to consider the new rules as part of their IPO process and, over the coming months, existing premium listed companies with controlling shareholders will need to implement a number of new measures to comply with the new rules.

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