Monthly Archives: May 2015

“Exclusive Forum” Bylaws Fast Becoming an Item in M&A Deals

Robert B. Little is partner in the Mergers and Acquisitions group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Little and Chris Babcock. 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.

The Delaware Court of Chancery’s endorsement of exclusive forum bylaws—bylaw provisions establishing that certain types of lawsuits relating to internal corporate governance matters may only be pursued in a designated forum—has led to the extensive use of these bylaws as a way to manage the litigation that commonly accompanies public mergers and similar transactions. In particular, following the decision in City of Providence v. First Citizens BancShares, [1] where the Court determined that it was not a per se violation of a board’s fiduciary duties to adopt exclusive forum bylaws in the context of an upcoming acquisition, it appears that public company targets have more often than not adopted these provisions. Examining a sample of public M&A deals taking place after City of Providence, we found that the target adopted exclusive forum bylaws prior to or at the time of the acquisition in over two-thirds of the deals reviewed. This finding suggests that adoption of such bylaw provisions is becoming a routine part of public M&A practice.


Corporations and the 99%: Team Production Revisited

Shlomit Azgad-Tromer is a researcher at Tel Aviv University—Buchmann Faculty of Law. This post is based on the article Corporations and the 99%: Team Production Revisited. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein, and The CEO Pay Slice by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

“We Are the 99%” is a political slogan used by the Occupy Wall Street movement, referring to the prevailing wealth and income inequality, and claiming a divergence of corporate America from the public. The article explores the interaction between the general public and the public corporation, and its legal manifestation.

Stakeholder theory portrays the corporation as a sphere of cooperation between all stakeholder constituencies, including the general public. Revisiting team production analysis, the article argues that while several constituencies indeed form part of the corporate team, others are exogenous to the corporate enterprise. Employees, suppliers and financiers contribute together to the common corporate enterprise, enjoying a long-term relational contract with the corporation, while retail consumers contract with the corporation at arm’s length, and other people living alongside the corporation do not contract with it at all. Under this organizational model, the general public may participate in the team forming the corporate enterprise by providing public financing. Indeed, corporate law was developed to protect public investors.


Gold or Fool’s Gold?

Douglas P. Bartner is partner in the Financial Restructuring & Insolvency Group, Shearman & Sterling LLP. This post is based on an article by Mr. Bartner, Fredric Sosnick, and Cynthia Urda Kassis that first appeared in the Mining Journal.

By mid-2014 the consequences of several years of significant liquidity constraints in the traditional sources of funding for the mining sector, combined with depressed commodity prices, became increasingly evident.

Official corporate announcements and market rumours appeared sporadically at first and then with disturbing regularity as major and mid-tier companies began selling “non-core” assets and juniors tried to sell themselves or entered into insolvency proceedings when that was not an option. This increased level of distressed transaction activity in the mining sector which began in 2014 looks set to continue through 2015.


Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act

Dirk Hackbarth is Associate Professor of Finance at Boston University. This post is based on an article authored by Professor Hackbarth; Rainer Haselmann, Professor of Finance, Accounting, and Taxation at Goethe University, Frankfurt; and David Schoenherr of the Department of Finance at London Business School.

In our article, Financial Distress, Stock Returns, and the 1978 Bankruptcy Reform Act, forthcoming in The Review of Financial Studies, we examine how bargaining power in distress affects the pricing of corporate securities. The nature of Chapter 11 makes bargaining an important factor in distressed reorganizations. Reorganization outcomes depend on the relative bargaining power of the parties involved. A number of papers document that shareholders receive concessions in distressed reorganization even when creditors are not paid in full despite of their contractual (junior) status as residual claimants (Franks and Torous 1989; Eberhart, Moore and Roenfeldt 1990; Weiss 1990). To this end, our research exploits an exogenous variation in the allocation of bargaining power between shareholders and debtholders due to the 1978 Bankruptcy Reform Act to examine how the ex post allocation of cash flows in distress affects the ex ante pricing (return and risk) of corporate securities, such as risky debt and levered equity.


Shareholder Activism: Are You Prepared to Respond?

Mary Ann Cloyd is leader of the Center for Board Governance at PricewaterhouseCoopers LLP. The following post is based on a PricewaterhouseCoopers publication. Related research from the Program on Corporate Governance about hedge fund activism includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

Activist investors are increasing in number and becoming more assertive in exercising their influence over companies in which they have a stake. Shareholder activism comes in different forms, ranging from say-on-pay votes, to shareholder proposals, to “vote no” campaigns (where some investors will urge other shareholders to withhold votes from one or more directors), to hedge fund activism.

Activism can build or progress. If a company is the target of a less aggressive form of activism one year, such as say-on-pay or shareholder proposals, and the activists’ issues are not resolved, it could lead to more aggressive activism in the following years. (For more background information, see a previous PwC publication, discussed on the Forum here.)


Increased Risk for Preferred Stockholders in Ensuring Mandatory Redemptions

Philip Richter is co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Richter, Abigail Pickering BombaJohn E. Sorkin, and Gail Weinstein. 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.

The Delaware Chancery Court’s holding in TCV v. TradingScreen (Feb. 26, 2015; redacted March 27, 2015) has increased the risk for preferred stockholders in their being able to exit their investments under mandatory redemption provisions. The decision is on interlocutory appeal to the Delaware Supreme Court.

The Chancery Court held that a corporation’s ability to redeem preferred stock upon the occurrence of an event triggering mandatory redemption is implicitly restricted by the common law limitation that a corporation may not take action that would result in its not having the ability to continue as a going concern or to pay its debts as they come due. Thus, based on TradingScreen, a company cannot legally redeem preferred stock if, in the board’s judgment, doing so would render it unable to continue as a going concern and to pay its debts as they come due—even if:


SEC Responds to FAQs on 2014 Money Market Reform Release

John M. Loder is partner and co-head of the Investment Management practice group at Ropes & Gray LLP. This post is based on a Ropes & Gray Alert.

On April 22, 2015, the Securities and Exchange Commission (“SEC”) staff released guidance (available here), titled “2014 Money Market Fund Reform Frequently Asked Questions,” that discusses various interpretive issues arising from the SEC’s 2014 Money Market Fund Reform release (the “2014 Reform Release”). On April 23, 2015, the SEC staff released additional guidance (available here), titled “Valuation Guidance Frequently Asked Questions,” that discusses the valuation guidance applicable to all mutual funds that was included within the 2014 Reform Release. Both the April 22 release and the April 23 release (together, the “Guidance”) were in a question-and-answer format and represent the views of the SEC’s Division of Investment Management’s staff (the “IM Staff”). This post discusses the highlights of the Guidance.

For a detailed discussion of the 2014 Reform Release’s effects on money market funds, please refer to our August 2014 Alert, which can be accessed here.


Latest CD&A Template Offers Best Practices, Is Win-Win for Issuers, Investors

Matt Orsagh is a director at CFA Institute.

To help companies produce a more clear and concise executive compensation report that attends to the needs of both companies and investors, CFA Institute has released an updated Compensation Discussion & Analysis (CD&A) Template. It is an update of the 2011 template of the same name and aims to help companies draft CD&As that serve as better communications tools, not simply as compliance documents.

CFA Institute worked with issuers, investors, proxy advisers, compensation consultants, legal experts and other associations to update the manual so it would best serve the needs of investors and issuers. One of the main enhancements in the latest version of the template is a graphic executive summary that presents the main information investors are looking for in a concise format that takes up only one or two pages.


Focusing on Dealer Conduct in the Derivatives Market

Luis A. Aguilar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Aguilar’s remarks at a recent open meeting of the SEC; the full text, including footnotes, is available here. The views expressed in the post are those of Commissioner Aguilar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

The financial crisis of 2008 demonstrated the devastating effects of a derivatives marketplace that, left unchecked, seriously damaged the world economy and caused significant losses to investors. As a result, Title VII of the Dodd-Frank Act tasked the SEC and the CFTC to establish a regulatory framework for the over-the-counter swaps market. In particular, the SEC was tasked with regulating the security-based swap (SBS) market and the CFTC was given regulatory authority over all other swaps, such as energy and agricultural swaps.

The Commission has already proposed and/or adopted various rules governing the SBS market— such as rules that establish standards for registered clearing agencies; rules to move transactions onto regulated platforms; rules to bring transparency and fair dealing to the market for SBS; rules for the registration of dealers and major participants; rules to impose capital, margin, and segregation requirements for dealers and major participants; and rules for cross-border SBS activities.


SEC Proposes “Pay Versus Performance” Rule

Edmond T. FitzGerald is partner and head of the Executive Compensation Group at Davis Polk & Wardwell LLP. This post is based on a Davis Polk client memorandum; the complete publication, including Appendix, is available here. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

On April 29, 2015, a divided Securities and Exchange Commission proposed requiring U.S. public companies to disclose the relationship between executive compensation and the company’s financial performance. [1] The proposed “pay versus performance” rule, one of the last Dodd-Frank Act rulemaking responsibilities for the SEC, mandates that a company provide, in any proxy or information statement:

  • A new table, covering up to five years, that shows:
    • compensation “actually paid” to the CEO, and total compensation paid to the CEO as reported in the Summary Compensation Table;
    • average compensation “actually paid” to other named executive officers, and average compensation paid to such officers as reported in the Summary Compensation Table; and
    • cumulative total shareholder return (TSR) of the company and its peer group; and
  • Disclosure of the relationship between:
    • executive compensation “actually paid” and company TSR; and
    • company TSR and peer group TSR.


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