Monthly Archives: July 2014

Does Mandatory Shareholder Voting Prevent Bad Corporate Acquisitions?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, July 14, 2014
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The following post comes to us from Marco Becht, Professor of Corporate Governance at the Université libre de Bruxelles; Andrea Polo of the Department of Economics and Business at the Universitat Pompeu Fabra and Barcelona GSE; and Stefano Rossi of the Department of Finance at Purdue University.

In our paper, Does Mandatory Shareholder Voting Prevent Bad Corporate Acquisitions?, which was recently made publicly available as an ECGI and Rock Center Working Paper on SSRN, we examine how much power shareholders should delegate to the board of directors. In practice, there is broad consensus that fundamental changes to the basic corporate contract or decisions that might have large material consequences for shareholder wealth must be taken via an extraordinary shareholder resolution (Rock, Davies, Kanda and Kraakman 2009). Large corporate acquisitions are a notable exception. In the United Kingdom, deals larger than 25% in relative size are subject to a mandatory shareholder vote; in most of continental Europe there is no vote, while in Delaware voting is largely discretionary.

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Two New Cases Cast a Shadow Over Credit Bidding

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, July 13, 2014
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The following post comes to us from Marshall S. Huebner, partner and co-head of the Insolvency and Restructuring Group at Davis Polk & Wardwell LLP, and is based on an article by Damian S. Schaible and Darren S. Klein that first appeared the New York Law Journal; the full article, including footnotes, is available here.

Two recent bankruptcy court decisions have increased uncertainty over the right of secured creditors to credit bid in sales of debtors’ assets. Relying on and expanding a rarely used “for cause” limitation on a secured creditor’s right to credit bid under §363(k) of the Bankruptcy Code, these decisions may ultimately affect credit bidding rights in a broad swath of cases.

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Delaware Court Declines to Dismiss Class Action Challenging Going-Private Transaction

Posted by Allen M. Terrell, Jr., Richards, Layton & Finger, on
Saturday, July 12, 2014
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Allen M. Terrell, Jr. is a director at Richards, Layton & Finger. This post is based on a Richards, Layton & Finger publication, and 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 Hamilton Partners, L.P. v. Highland Capital Management, L.P., C.A. No. 6547-VCN, 2014 WL 1813340 (Del. Ch. May 7, 2014), the Court of Chancery, by Vice Chancellor Noble, in connection with a challenge to a going-private transaction whereby American HomePatient, Inc. (“AHP”) was acquired by an affiliate of one of its stockholders, Highland Capital Management, L.P. (“Highland”), refused to dismiss breach of fiduciary duty claims against Highland. The Court held that, for purposes of defendants’ motion to dismiss, plaintiff alleged facts sufficient to support an inference that Highland, which owned 48% of AHP’s stock and 82% of AHP’s debt, was the controlling stockholder of AHP and that the merger was not entirely fair.

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Volcker Rule and Covered Bonds

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, July 11, 2014
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he following post comes to us from Jerry Marlatt, Senior Of Counsel at Morrison & Foerster LLP, and is based on a Morrison & Foerster publication by Mr. Marlatt.

The subtler aspects of the Volcker Rule [1] continue to emerge. One of the subtleties is the extraterritorial reach of the Rule in connection with underwriting, investments in, and market making for covered bonds by foreign banks.

Foreign banks that underwrite, invest in, or conduct market making for covered bonds need to review their activity under the Volcker Rule.

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Executive Remuneration and the Payout Decision

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Friday, July 11, 2014
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The following post comes to us from Philipp Geiler of the Department of Economics, Finances, and Control at EMLYON Business School and Luc Renneboog, Professor of Finance at Tilburg University.

Corporations rely on dividends, share repurchases, or a combination of both payout methods to return earnings to their shareholders. Over the last decade, the importance of the dominating payout method—dividends—seems to be somewhat eroded at UK firms, with an increasing number of firms combining share repurchases with dividends. What explains the surge in the use of combined share repurchases and dividends in the UK? Is there a link between firm’s payout decision and executive remuneration?

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2014 Proxy Season Review

Posted by H. Rodgin Cohen, Sullivan & Cromwell LLP, on
Thursday, July 10, 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. The following post is based on a Sullivan & Cromwell publication by Mr. Cohen, Glen T. Schleyer, Melissa Sawyer, and Janet T. Geldzahler; the complete publication, including footnotes, is available here.

During the 2014 proxy season, governance-related shareholder proposals continued to be common at U.S. public companies, including proposals calling for declassified boards, majority voting in director elections, elimination of supermajority requirements, separation of the roles of the CEO and chair, the right to call special meetings and the right to act by written consent. While the number of these proposals was down from 2012 and 2013 levels, this decline related entirely to fewer proposals being received by large-cap companies, likely due to the diminishing number of large companies that have not already adopted these practices. Smaller companies, at which these practices are less common, have not seen a similar decline and, if anything, are increasingly being targeted with these types of proposals.

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Economic Crisis and Share Price Unpredictability: Reasons and Implications

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, July 10, 2014
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The following post comes to us from Edward G. Fox of University of Michigan at Ann Arbor, Department of Economics, Merritt B. Fox, the Michael E. Patterson Professor of Law at Columbia Law School, and Ronald J. Gilson, Charles J. Meyers Professor of Law and Business at Stanford Law School.

During the recent financial crisis, there was a dramatic spike in “idiosyncratic volatility”—the volatility of individual firm share prices after adjustment for movements in the market as a whole. The average firm’s increase was a remarkable five-fold as measured by variance. This dramatic spike is not peculiar to the most recent crisis. Rather, it has occurred with each major downturn in the economy since the 1920s, as our paper shows for the first time. These spikes present a puzzle in terms of existing economic theory. They also have important implications for several areas of corporate and securities law where the capacity of securities prices to reflect available information is particularly important. Examples include the presumption of reliance, loss causation and materiality in fraud-on-the-market suits, materiality in insider trading cases, and the corporate law regulation of defenses undertaken by targets of hostile takeover attempts. The continuing centrality of these issues is underscored by this week’s decision in Halliburton Co v. Erica P. John Fund, where the Supreme Court ruled that a defendant can defeat a fraud-on-the-market case class certification by showing that the alleged misstatement had no impact on price.

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SEC Chair White Sets Equity Market Structure Agenda

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, July 9, 2014
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The following post comes to us from Byungkwon Lim, partner in the Corporate Department at Debevoise & Plimpton LLP and leader of the firm’s Hedge Funds and Derivatives & Structured Finance Groups. This post is based on a Debevoise & Plimpton Client Update by Mr. Lim, Lee A. Schneider, and Ryan M. Kusmin; the complete publication, including footnotes, is available here.

Mary Jo White, the Chair of the Securities and Exchange Commission (the “SEC”), recently delivered two speeches with important implications for the future structure of U.S. equity markets. The first (discussed on the Forum here), delivered on June 5, 2014, discussed various initiatives to improve equity market structure. The second (discussed on the Forum here), delivered on June 20, 2014, addressed the importance of intermediation in the securities markets and the roles that technology and competition play with respect to various types of market intermediaries such as exchanges, dark pools, brokers and dealers. In both speeches, Chair White expressed her belief that the equity markets are not rigged or fundamentally unfair, but nevertheless could—with updated or different regulations—function more efficiently and with even greater fairness than they currently do.

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A New Tool to Detect Financial Reporting Irregularities

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, July 9, 2014
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The following post comes to us from Dan Amiram and Ethan Rouen, both of the Accounting Division at Columbia University, and Zahn Bozanic of the Department of Accounting and MIS at Ohio State University.

Irregularities in financial statements lead to inefficiencies in capital allocation and can become costly to investors, regulators, and potentially taxpayers if left unchecked. Finding an effective way to detect accounting irregularities has been challenging for academics and regulators. Responding to this challenge, we rely on a peculiar mathematical property known as Benford’s Law to create a summary red-flag measure to capture the likelihood that a company may be manipulating its financial statement numbers.

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Navigating Today’s Shareholder Activism Landscape

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, July 8, 2014
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The following post comes to us from Richard J. Grossman, partner concentrating in corporate governance matters and mergers and acquisitions, at Skadden, Arps, Slate, Meagher & Flom LLP, and is based on a Skadden alert by Mr. Grossman and Stephen F. Arcano.

Shareholder activism is the corporate topic du jour, be it in boardrooms, the media or Washington, D.C. While corporate boards and management need to understand the current environment and how we got here, their top priority is to develop comprehensive strategies for navigating the activism landscape. As activists have become more sophisticated, and activism more mainstream, approaches to dealing with activists are, by necessity, evolving.

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