Monthly Archives: August 2015

ISS 2016 Proxy Voting Policy

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update by Ms. Gregory, John P. Kelsh, Thomas J. Kim, Rebecca Grapsas, and Claire H. Holland.

Institutional Shareholder Services (ISS) is seeking feedback on policy questions as part of its process for updating its policies for the 2016 proxy season. Corporate issuers should consider communicating company views on proxy voting issues by participating in the survey, which can be accessed here. [1] Feedback is due by September 4, 2015 at 5:00 p.m. ET. Survey results are scheduled to be released in September and draft policy revisions are scheduled to be released for comment in late September or early October.

Survey topics provide an early indicator of potential areas for policy revision. This year’s questions signal that ISS may refine its position on:

  • Proxy access bylaw features
  • Director overboarding
  • Defensive governance provisions adopted pre-IPO or by a board without shareholder approval
  • Sunset provisions for net operating loss poison pills
  • Equity compensation of non-employee directors
  • Use of adjusted metrics in incentive programs
  • Say-on-pay in relation to disclosure by externally-managed issuers
  • Use of financial metrics and financial ratios to assess capital allocation decisions, share buybacks and board stewardship

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Do Takeover Defenses Deter Takeovers?

Jonathan Karpoff is Professor of Finance at the University of Washington. This post is based on an article authored by Professor Karpoff; Robert Schonlau, Assistant Professor of Finance at Brigham Young University; and Eric Wehrly, Finance Instructor at Seattle University. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen and Allen Ferrell (discussed on the Forum here), The Costs of Entrenched Boards by Lucian Bebchuk and Alma Cohen, and The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

The G-index and E-index are workhorses of empirical corporate finance research. Each counts the number of takeover defenses a firm has and is often used as a summary measure of the firm’s protection from unsolicited takeover bids. But do these indices actually measure takeover deterrence?

This is an important question because a substantial number of empirical findings and their interpretations are based on the assumption that takeover defense indices do indeed measure takeover deterrence. For example, researchers have used the G-index and E-index to examine whether takeover defenses are associated with various firm outcomes including low stock returns, low firm value, acquisition returns, takeover premiums, increased risk taking, internal capital markets, credit risk and pricing, operating performance, the value and use of cash holdings, and corporate innovation. Researchers also have used takeover indices to examine whether takeover defenses serve primarily to entrench managers at shareholders’ expense, or to increase firm value through bargaining or contractual bonding.

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Federal Court Injunction Against SEC Prosecution

John J. Falvey, Jr. and Daniel J. Tyukody are partners in the Securities Litigation & White Collar Defense Group at Goodwin Procter LLP. This post is based on a Goodwin Procter Financial Services Alert.

A federal judge in Manhattan recently granted a preliminary injunction against the Securities and Exchange Commission in the latest of a series of rulings raising issues with the SEC’s use of in-house proceedings before its administrative law judges (“ALJs”) rather than proceed with its charges in federal court. The SEC has prevailed more frequently in its administrative proceedings than it has in federal court, where defendants have more robust procedural rights. This ruling by a judge in the Southern District of New York indicates the federal courts’ ongoing concerns with the SEC’s increased preference for administrative proceedings before its own ALJs. But the SEC has the ability to correct the constitutional flaw that the court found to exist with its appointments of ALJs, suggesting that this and similar rulings will likely only raise a short-term disruption of the SEC’s use of its in-house courts.

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Fiduciary Duty Proposal

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Adam Gilbert, Genevieve Gimbert, and Armen Meyer.

With fewer than 18 months left in office, President Obama has asserted that the Department of Labor’s (“DOL”) proposed fiduciary standard for retirement account advisors is a major priority. The DOL completed public hearings last week on this proposal, and we believe that the rule will be finalized early next year with the proposal’s core framework intact.

The DOL’s final rule is set to transform the competitive landscape and disrupt current business models, particularly for financial institutions that are reliant on traditional broker-dealer activities which are currently not covered by the existing Employee Retirement Income Security Act (“ERISA”) fiduciary standard.

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Dodd-Frank Turns Five, What’s Next?

Daniel F.C. Crowley is a partner at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Crowley, Bruce J. HeimanSean P. Donovan-Smith, and Giovanni Campi.

The 2008 credit crisis was the beginning of an era of unprecedented government management of the capital markets. July 21, 2015 marked the fifth anniversary of the hallmark congressional response, the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank”). Dodd-Frank resulted in an extraordinary revamp of the regulatory regime that governs the U.S. financial system and, consequently, has significant implications for the U.S. economy and the international financial system.

Members of Congress recognized the fifth anniversary of Dodd-Frank in markedly different ways. House Financial Services Committee Chairman Jeb Hensarling (R-TX) has held two of a series of three hearings to examine whether the United States is more prosperous, free, and stable five years after enactment of the law. In contrast, Senator Elizabeth Warren (D-MA)—one of the leading proponents of the law—and other members of Congress have criticized the slow pace of implementation by the regulatory agencies. Meanwhile, Senate Banking Committee Chairman Richard Shelby (R-AL) is advancing the “Financial Regulatory Improvement Act of 2015,” which seeks to amend a number of provisions of Dodd-Frank.

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FTC Charges Activist Hedge Fund

Sabastian V. Niles focuses on rapid response shareholder activism and preparedness, takeover defense, corporate governance, and M&A at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Niles, Nelson O. Fitts, and Franco Castelli.

Yesterday [August 24, 2015], the Federal Trade Commission announced that Dan Loeb’s Third Point had settled a complaint charging violations of the notification and waiting period requirements of the Hart-Scott-Rodino Act in connection with purchases of Yahoo! stock in 2011.

The HSR Act requires that acquirors notify the federal antitrust agencies of transactions that meet applicable thresholds and observe a pre-acquisition waiting period. Acquisitions of up to 10% of a company’s voting stock are exempt if made solely for the purpose of investment, and the acquirer “has no intention of participating in the formulation, determination, or direction of the basic business decisions of the issuer.” Buyers who intend to be involved in the management of the target company or to seek representation on its board of directors are not eligible for the exemption. HSR requirements have historically been enforced strictly and narrowly against public companies, officers, directors, and investors, without deference or favor to any particular class of violator.

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Unfinished Reform in the Global Financial System

Lewis B. Kaden is John Harvey Gregory Lecturer on World Organizations, Harvard Law School, and Senior Fellow of the Mossavar-Rahmani Center on Business and Government, Harvard Kennedy School of Government. This post is based on Mr. Kaden’s paper, which was adapted from remarks delivered at Cambridge University on February 27, 2015 and at the Kennedy School of Government, Harvard University on April 9, 2015. The full paper is available for download here.

This paper offers a perspective on the challenges that the global financial system will face in the course of the next decade. While there has been significant progress since the financial crisis of 2007-2009 and the slow and uneven pressure of recovery and reform, a great deal of important work lies ahead. Part I briefly reviews, for the purpose of general background, the context and causes of the financial crisis. Part II identifies the key lessons to be learned from the crisis, and Part III outlines the major reforms adopted to date in the United States, Europe and the G-20. Finally, Part IV highlights what I regard as the principal ongoing issues affecting the financial system and suggests some approaches for dealing with them.

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Court Strikes NYC’s “Responsible Banking Act”

Robert J. Giuffra, Jr. is a partner in the Litigation Group at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Giuffra, H. Rodgin Cohen, Matthew A. Schwartz, and Marc Trevino.

On August 7, 2015, in a 71-page opinion, Judge Katherine Polk Failla of the United States District Court for the Southern District of New York struck down New York City Local Law 38 of 2012, entitled the “Responsible Banking Act” (“RBA”), as preempted by federal and state banking law. The RBA—enacted by the City Council on June 28, 2012, over Mayor Bloomberg’s veto—established an eight-member Community Investment Advisory Board (“CIAB”), charged with collecting data at the census-tract level from the 21 banks eligible to receive some of the City’s $150 billion in annual deposits. This data, which went beyond data required by federal and state banking regulators and would be disclosed publicly, covered a variety of categories ranging from the maintenance of foreclosed properties, to investment in affordable housing, to product and service offerings. Based on the data collected and feedback from public hearings, the CIAB was to develop “benchmarks and best practices” against which the deposit banks were to be evaluated, including against each other, in a publicly filed annual report. The report was to identify deposit banks that refused to provide the requested data. Finally, the RBA provided that the City’s Banking Commission—responsible for designating eligible deposit banks—“may” consider the CIAB’s annual report in making its designation decisions.

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Understanding the US Listing Gap

René Stulz is Professor of Finance at Ohio State University. This post is based on an article authored by Professor Stulz; Craig Doidge, Associate Professor of Finance at the University of Toronto; and Andrew Karolyi, Professor of Finance at Cornell University.

The number of publicly-listed firms in the U.S. peaked in 1996 at 8,025. In that year, the U.S. had 30 listings per million inhabitants. By 2012, it had only 13, or 56% less. Importantly, the decrease in listings occurred in all industries and across both the NYSE and Nasdaq. In our new working paper, entitled The U.S. Listing Gap, which was recently made publicly available on SSRN, we show that this evolution is specific to the U.S. Listings in the rest of the world, in fact, increased over the same period. The U.S. has developed a “listing gap” relative to other countries with similar investor protection, economic growth, and overall wealth. The listing gap arises in the late 1990s and widens over time. It is statistically significant, economically large, and robust to different measurement approaches. We also find that the U.S. has a listing gap when compared to its own recent history and after controlling for changing capital market conditions.

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SEC and PCAOB on Audit Committees

Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. The following post is based on a Sidley update by Ms. Gregory, Jack B. Jacobs and Thomas J. Kim.

Public company counsel and audit committee members should be aware of recent activity at the U.S. Securities and Exchange Commission (SEC) and the Public Company Accounting Oversight Board (PCAOB) that could lead to additional regulation of audit committee disclosure and to federal normative expectations for how audit committees and their members behave.

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