Yearly Archives: 2015

The Forum’s New Look

Posted by The Harvard Law School Forum on Corporate Governance and Financial Regulation, on
Monday, April 6, 2015
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The Harvard Law School Forum on Corporate Governance and Financial Regulation is pleased to present a newly redesigned website. The Forum will continue to be available at its old address, http://blogs.law.harvard.edu/corpgov, which will automatically redirect to its new address, https://corpgov.law.harvard.edu.

Since the Forum was created in 2006, its audience has grown to hundreds of thousands of monthly visits and thousands of Twitter followers and subscribers to our newsletter, many of whom now access the Forum on mobile devices. The Forum has been completely redesigned with these trends in mind, and the new design will enhance readability, navigation, search, and mobile accessibility. Comments or feedback on the redesigned site can be sent to: [email protected].

The SEC Opens a New Front in Whistleblower Protection

Posted by Wayne M. Carlin, Wachtell, Lipton, Rosen & Katz, on
Monday, April 6, 2015
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Wayne Carlin is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Carlin, John F. Savarese, and David B. Anders.

For some time, SEC officials have expressed concern about confidentiality agreements that may deter corporate employees from submitting whistleblower reports. The SEC has now brought its first enforcement action in this area, a settled case in which the respondent agreed to pay a $130,000 civil penalty without admitting or denying the SEC’s findings. According to the SEC’s order, the company required its employees to sign confidentiality agreements at the outset of interviews in internal investigations. The agreements prohibited witnesses from communicating with anyone else any of “the subject matter discussed during the interview.” Such communication was permissible only if the employee first obtained authorization from the company’s legal department. The SEC found that this practice violated Rule 21F-17, which prohibits taking “any action to impede an individual from communicating directly with the Commission staff about a possible securities law violation, including enforcing, or threatening to enforce, a confidentiality agreement … with respect to such communications.”

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Reasonable Investor(s)

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 6, 2015
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The following post comes to us from Tom C. W. Lin at Temple University Beasley School of Law.

Much of financial regulation for investor protection is built on a convenient fiction. In regulation, all investors are identically reasonable investors. In reality, they are distinctly diverse investors. This fundamental discord has resulted in a modern financial marketplace of mismatched regulations and misplaced expectations—a precarious marketplace that has frustrated investors, regulators, and policymakers.

In a new article, Reasonable Investor(s), published in the Boston University Law Review, I examine this fundamental discord in financial regulation, and seek to make a general positive claim and a specific normative claim. First, the general positive claim contends that a fundamental dissonance between investor heterogeneity in reality and investor homogeneity in regulation has created significant discontent in financial markets for both regulators and investors. Second, the specific normative claim argues that policymakers should formally recognize a new typology of algorithmic investors as an early step towards better acknowledging contemporary investor diversity, so as to forge more effective rules and regulations in a fundamentally changed marketplace. Together, both claims aim to highlight the harms caused by not better recognizing contemporary investor diversity and explain how we can begin to address those harms. Ultimately, the article aspires to create a new and better framework for thinking about investors and investor protection.

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SEC Enforcement Actions for Failure to Update 13D Disclosures

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Sunday, April 5, 2015
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The following post comes to us from James Moloney, partner and co-chair of the Securities Regulation and Corporate Governance Practice Group at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn publication by Mr. Moloney and Andrew Fabens, with assistance from Lauren Traina.

On Friday, March 13, 2015, the SEC announced that it had settled a string of 21C administrative proceedings brought against eight officers, directors, and shareholders of public companies for their failure to report plans and actions leading up to planned going private transactions. The SEC press release can be found here. In doing so, the SEC sent another strong reminder to those that beneficially own more than 5% of the equity securities of a public company to keep their 13D disclosures current.

The respondents included a lottery equipment holding company, the owners of a living trust, and the CEO of a Chinese technical services firm. According to the SEC, the respondents in each of these cases failed to report various plans and activities with respect to the anticipated going private transactions, including when the parties: (i) determined the form of the going private transaction; (ii) obtained waivers from preferred shareholders; (iii) assisted in arriving at shareholder vote projections; (iv) informed management of their plans to take the company private; and (v) recruited shareholders to execute on the proposals. In one case the respondents were charged for failure to report owning securities in the company that was going private. In another case, the respondents reported their transactions months or years later. The proceedings resulted in cease-and-desist orders as well as the imposition of civil monetary penalties ranging from $15,000 to $75,000 per respondent.

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Implications of the SEC’s Plans to Amend Rule 15b9-1

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on
Saturday, April 4, 2015
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Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on an article by Ms. Nazareth and Jeffrey T. Dinwoodie that first appeared in Traders Magazine.

The overwhelming majority of SEC-registered broker-dealers must also be members of FINRA. Through a commonly overlooked exemption in SEC Rule 15b9-1, some broker-dealers that operate proprietary-only businesses are able to avoid FINRA regulation. The SEC recently voted to on a proposal to amend this rule on March 25.

While it is not clear whether the SEC will seek to eliminate the exemption or narrow its availability, the rulemaking could have important implications for firms currently relying on the exemption and, more broadly, for the ongoing market structure debate.

Let’s explore the history of this exemption and some of the possible implications of an SEC rulemaking.

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A Say on “Say-on-Pay”: Assessing Impact After Four Years

Posted by Joseph E. Bachelder III, McCarter & English, LLP, on
Friday, April 3, 2015
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Joseph Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on an article by Mr. Bachelder, with assistance from Andy Tsang, which first appeared in the New York Law Journal.

The 2015 proxy season is the fifth one in which shareholders of thousands of publicly traded corporations have cast non-binding votes on the executive pay programs of the companies in which they are invested. The holding of such a vote, commonly known as Say-on-Pay, is required under Section 951 of the Dodd-Frank law. [1] That requirement applies to most publicly traded companies. Following are some observations on Say-on-Pay.

Results of Votes

In each of the four years of Say-on-Pay—2011-2014 proxy seasons—at the Russell 3000 companies holding Say-on-Pay votes (i) the executive pay program received favorable votes from over 90 percent of the shareholders voting at 75 percent of those companies and (ii) 60 or fewer companies had a majority of votes cast disapproving the executive pay program. [2]

Evaluating the Impact

Following are two propositions on how well Say-on-Pay is working.

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2015 IPO Study

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, April 2, 2015
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The following post comes to us from Proskauer Rose LLP and is based on the Executive Summary of a Proskauer publication; the complete publication, including extensive analysis of multiple industry sectors and foreign private issuers, is available here.

We examined 119 U.S.-listed IPOs with a minimum deal size of $50 million in 2014, representing about half of the overall market for deals meeting those criteria. Our study covered a range of industries and included foreign private issuers and master limited partnerships, but excluded certain uncommon deal structures.

This edition expands on last year’s study (discussed on the Forum here) in several important ways. Collectively, these enhancements widen our perspective and, in the process, deepen our analysis.

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CEO Contractual Protection and Managerial Short-Termism

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Thursday, April 2, 2015
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The following post comes to us from Xia Chen and Qiang Cheng, both of the School of Accountancy at Singapore Management University; Alvis Lo of the Department of Accounting at Boston College; and Xin Wang of the Accounting Area at the University of Hong Kong.

In our paper, CEO Contractual Protection and Managerial Short-Termism, which was recently made publicly available on SSRN, we investigate whether CEO contractual protection, can address managerial short-termism by reducing managers’ incentives to engage in myopic behavior. Managers generally have incentives to boost short-term performance to increase their welfare, potentially at the expense of long-term firm value. However, CEOs with contractual protection are protected from short-term performance swings and downside risk, and consequently are likely to have weaker incentives to engage in myopic behavior.

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Keeping It Private—Tough Disclosure Issues in Take-Private Transactions

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on
Wednesday, April 1, 2015
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Daniel Wolf is a partner at Kirkland & Ellis focusing on mergers and acquisitions. The following post is based on a Kirkland memorandum by Mr. Wolf and Norbert B. Knapke II.

One of the tougher issues buyers face when engaging in preliminary discussions regarding a potential going-private transaction is whether and when an amendment to required SEC stock ownership disclosures needs to be filed as steps are taken to advance the transaction. Recent settlements between the SEC and officers, directors and major shareholders for failure to update their stock ownership disclosures to reflect material changes—including steps to take a company private—illustrate the importance of careful consideration of these issues when pursuing a going-private transaction.

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More Corporate Actions, More Insider Trading?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, April 1, 2015
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The following post comes to us from Patrick Augustin of the Finance Area at McGill University; Jianfeng Hu of the Finance Area at Singapore Management University; and Menachem Brenner and Marti Subrahmanyam, both of the Finance Department at New York University.

According to Preet Bharara, the U.S. Attorney of the Southern District of New York, insider trading is “rampant” in U.S. securities markets, and his actions in the past few years indicate concrete action by his office to combat such activity. In a similar vein, the Securities and Exchange Commission (SEC) has stepped up efforts to chase down high profile insider traders, and has made it its key priority in pursuing errant behavior. Academic studies, including our own, have previously documented empirical evidence of informed trading ahead of major corporate events such as earnings announcements, mergers and acquisitions (M&A) and corporate bankruptcies.

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