Monthly Archives: December 2014

Corporate Governance Survey—2014 Proxy Season Results

The following post comes to us from David A. Bell, partner in the corporate and securities group at Fenwick & West LLP. This post is based on portions of a Fenwick publication titled Corporate Governance Practices and Trends: A Comparison of Large Public Companies and Silicon Valley Companies (2014 Proxy Season); the complete survey is available here.

Since 2003, Fenwick has collected a unique body of information on the corporate governance practices of publicly traded companies that is useful for Silicon Valley companies and publicly-traded technology and life science companies across the U.S. as well as public companies and their advisors generally. Fenwick’s annual survey covers a variety of corporate governance practices and data for the companies included in the Standard & Poor’s 100 Index (S&P 100) and the high technology and life science companies included in the Silicon Valley 150 Index (SV 150). [1]

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Minority Shareholders and Board Domination

The following post comes to us from Daniel J. Dunne, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Dunne and Peter J. Rooney. 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.

Emphasizing the demanding pleading standards a shareholder must meet to show that a minority shareholder controls a board of directors, on November 25, Vice Chancellor Glasscock dismissed claims for breach of fiduciary duties against the directors of Sanchez Energy Corporation in connection with a corporate acquisition of assets. The decision in In Re Sanchez Energy Derivative Litigation, C.A. No. 9132 VEG, reinforces the Chancery Court’s insistence that shareholder plaintiffs plead specific facts to raise reasonable doubts whether directors lack independence, especially when it comes to longstanding personal and business relationships. To sustain a claim that minority shareholders exercised domination and control over a board of directors, plaintiffs must plead specific facts demonstrating actual control of the board in the transaction at issue in the lawsuit.

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Liquidity and Shareholder Activism

The following post comes to us from Øyvind Norli and Charlotte Østergaard, both of the Department of Finance at the Norwegian Business School, and Ibolya Schindele of the Department of Economics at the Norwegian Business School.

In our paper, Liquidity and Shareholder Activism, forthcoming in the Review of Financial Studies, we provide new insights on how stock liquidity influences shareholder activism. Blockholders’ incentives to intervene in corporate governance are weakened by free-rider problems and high costs of activism. Theory suggests activists may recoup expenses through informed trading of target firms’ stock when stocks are liquid. We show that stock liquidity increases the probability of activism—but, does less so for potentially overvalued firms for which privately informed blockholders may have greater incentives to sell their stake than to intervene. We also document that activists accumulate more stocks in targets when stock is more liquid. We conclude that liquidity helps overcome the free-rider problem and induces activism via pre activism accumulation of target firms’ shares.

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“Need to Know” White Collar Enforcement Trends for Directors

The following post comes to us from Michael W. Peregrine, partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; the views expressed therein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

The ability of corporate directors to exercise effective judgment and oversight will be aided by an awareness of emerging white collar enforcement trends of the federal government.

These trends are primarily reflected in a notable series of significant speeches and other public comments made this fall by representatives of the Department of Justice. These include speeches made by senior officials of DOJ’s Criminal and Antitrust Divisions, as well as Attorney General Holder. Collectively, these trends may help to inform boards with respect to transactional planning, risk evaluation and compliance oversight, among other critical matters.

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New Approaches to International Financial Regulation

The following post comes to us from Annelise Riles, Jack G. Clarke Professor of Far East Legal Studies and Professor of Anthropology at Cornell Law School.

International financial law scholarship is undergoing a revolution. The financial crisis of 2008 has led to a dramatic rethinking of the “givens,” and has attracted a new community of scholars to the field. Until 2008, international legal theory played only a minor role in international financial law. The implicit and taken for granted neoclassical economic theory that undergirded debates about global financial regulation was presumed to be all the theory that could or should apply, and the analysis focused rather simply and uniformly on questions of efficiency and social welfare. Since the financial crisis, however, the mainstream debate has shifted its focus to so-called “macro-prudential issues” and to an awareness of a need for some sort of global, or at least a transnationally coordinated response to systemic risk.

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Basel III Framework: The Net Stable Funding Ratio

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds and Azad Ali. The complete publication, including annex, is available here.

A key element of the Basel III framework aims to ensure the maintenance and stability of funding and liquidity profiles of banks’ balance sheets. Two liquidity standards, the “net stable funding ratio” and a “liquidity coverage ratio”, were introduced in the Basel III framework to achieve this aim. Final standards on the net stable funding ratio have recently been released. Despite the implementation date of January 2018, banking institutions are considering the full impact of these measures on all aspects of their businesses now.

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A Reply to Professors Macey and Grundfest

The following post comes to us from Harvey L. Pitt, Chief Executive Officer and Managing Director at Kalorama Partners, LLC and former Chairman of the U. S. Securities and Exchange Commission. This post comments on posts by Professor Joseph A. Grundfest (available on the Forum here and here) and Professor Jonathan R. Macey (available on the Forum here and here), which discuss a paper by SEC Commissioner Daniel M. Gallagher and Stanford Law School Professor Joseph A. Grundfest, described in a post by Professor Grundfest (available on the Forum here).

Entering the ongoing debate in this venue between Professors Macey and Grundfest—two individuals of profound intellect I greatly admire and respect—is doubtlessly foolish on my part. Nonetheless, I have been known to abandon caution frequently, and see no reason to change at this stage of my professional existence. The focal point of the debate is an important and thoughtful Paper co-authored by SEC Commissioner Dan Gallagher and Stanford Law Professor (and former SEC Commissioner) Joe Grundfest (a summary of the Paper is available here). The Paper discusses the obligation of proponents of shareholder proposals to avoid misleading shareholders when explaining the reasons those shareholders should support their proposals.

In commenting upon the Gallagher/Grundfest Paper, Professor Macey seemingly assumes the mantle of “Harvard Protector” (his original post criticizing the Paper is available here) an unusual role—to say the least—for a Yale Law Professor (and former Administrator) of distinction. Perhaps, he also disputes Professor Grundfest’s response to his initial criticism of the Paper, which exposits legal principles (the response is available here) that contest some of Professor Macey’s initial commentary. In his latest reply (available here), Professor Macey, on occasion, appears to be looking a gift horse in the mouth.

If, as Professor Macey contends, Professor Grundfest’s response to Professor Macey’s original posting contains concessions—a characterization I’m not certain Professor Grundfest would accept—or if Professor Macey is correct that Professor Grundfest has retreated from certain positions previously espoused in the Gallagher/Grundfest Paper—something I am certain Professor Grundfest would not concede—Professor Macey’s comments pointing out these concessions and retreats are superfluous. Surely those of us interested (and, dare I say, sophisticated) enough to read the Harvard Law School Forum’s postings on Corporate Governance and Financial Regulation don’t require Professor Macey (or anyone else) to tell us what concessions or retreats Professor Grundfest has embraced! Professor Macey also seems reluctant to acknowledge that there are considerable points of commonality between the two professors on many substantive issues raised and discussed in the Gallagher/Grundfest Paper.

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The Board’s “Seven Year Itch”

The following post comes to us from Allan Grafman, president of All Media Ventures, and is based on an article by Mr. Grafman and Idalene Kesner that originally appeared in the Fourth Quarter 2014 edition of Directors & Boards.

The famous Marilyn Monroe comedy “The Seven Year Itch” examines the natural tendency of people to get bored and complacent after seven years of a relationship. Is it possible that companies and directors need to act after seven years to remove complacency and stay fresh and engaged? Let’s consider why companies and boards need to address the issue in a way that benefits all concerned.

In the beginning

The Bible requires a seventh year sabbatical to give people and the land a respite and to refresh. This concept is considered so important that it is mentioned many times, including in Exodus, Leviticus, Deuteronomy and elsewhere. From the beginning of time a sabbatical is advocated as a good practice, leading to greater long-term vitality and sustainability.

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Top 10 Topics for Directors in 2015

The following post comes to us from Kerry E. Berchem, partner and co-head of the corporate practice group at Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump corporate alert; the full publication, including footnotes, is available here.

U.S. public companies face a host of challenges as they enter 2015. Here is our list of hot topics for the boardroom in the coming year:

  • 1. Oversee strategic planning in the face of uneven economic growth and rising geopolitical tensions
  • 2. Oversee cybersecurity as hackers seek to infiltrate even the most sophisticated information security systems
  • 3. Assess the impact of advances in technology and big data on the company’s business plans
  • 4. Cultivate shareholder relations and assess company vulnerabilities as activist investors target more companies
  • 5. Consider the impact of M&A opportunities
  • 6. Oversee risk management as newer and more complex risks emerge
  • 7. Ensure appropriate board composition in light of increasing focus on diversity, director tenure and board size
  • 8. Explore new trends in reducing corporate health care costs
  • 9. Set appropriate executive compensation
  • 10. Ensure the company has a robust compliance program as the SEC steps up its enforcement efforts and whistleblowers earn huge bounties.

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2014 SEC and FINRA Enforcement Actions Against Broker-Dealers and Investment Advisers

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.

It’s been a busy year for securities regulators. The SEC recently reported that in FY 2014 new investigative approaches and innovative use of data and analytical tools contributed to a record 755 enforcement actions with orders totaling $4.16 billion in disgorgement and penalties. By comparison, in FY 2013 it brought 686 enforcement actions with orders totaling $3.4 billion in disgorgement and penalties. We do not yet have FINRA’s fiscal year 2014 enforcement action totals, but we know that FINRA too has taken a more aggressive approach to enforcement—in 2013 FINRA barred 135 more individuals and suspended 221 more individuals than it did in 2012. Moreover, like the SEC, FINRA increasingly is relying on data and analytical tools to make its enforcement program more effective. FINRA’s proposed Comprehensive Automated Risk Data System (CARDS) is a further step in that direction. CARDS will help FINRA more quickly identify patterns of transactions and monitor for excessive concentration, lack of suitability, churning, mutual fund switching, and other potentially problematic misconduct. Both broker-dealers and investment advisers now find themselves in a position in which, from an enforcement perspective, regulators often have far better data and analytical tools than the firms have.

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