Monthly Archives: August 2015

Foreign Antitakeover Regimes

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. Related research from the Program on Corporate Governance includes The Case Against Board Veto in Corporate Takeovers by Lucian Bebchuk.

The confluence of a number of overlapping factors—including an uptick in global and cross-border M&A activity, a resurgence in unsolicited takeover offers, the continued flow of tax inversion transactions, and the growth of activism in non-U.S. markets—means that U.S. companies and investors are more often facing unfamiliar takeover (and antitakeover) regimes as they evaluate and pursue offers for foreign targets. While experienced dealmakers are often well-versed in the nuances of friendly transactions with a foreign seller, the defenses available, and sometimes unavailable, to foreign companies facing unsolicited or hostile offers occasionally come as a surprise and complicate the pursuit or defense of these bids.

While a comprehensive survey of antitakeover regimes in various foreign jurisdictions is well beyond the scope of this post, it is instructive to highlight a number of examples where the regime—mandatory or permissive—departs significantly from U.S. practices, even in countries with well-developed legal systems and capital markets.

In a number of jurisdictions, the applicable takeover rules can be seen to facilitate, or even encourage, offerors in taking rejected overtures to the public shareholders:

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A Reassessment of the Clearing Mandate

Ilya Beylin is a Postdoctoral Research Scholar at Columbia Law School and the Editor-at-Large of the CLS Blue Sky Blog. This post is based on an article authored by Mr. Beylin.

Following the financial crisis, the G-20 nations committed to a raft of reforms for swap markets. These reforms are intended to mitigate systemic risk, and with it, the damage that failing financial institutions inflict on the financial sector and the broader economy. A core component of the reforms is the introduction of the “clearing mandate” for standardized swaps.

Clearing refers to the interposition of a clearinghouse, or central counterparty, between the two parties to a financial transaction. When a swap is cleared, the initial swap is extinguished and two new swaps are created in its place. The first is an identical swap between the first counterparty and the clearinghouse, and the second is another identical swap between the clearinghouse and the second counterparty. In this manner, absent default, parties make payments as they would if they had transacted bilaterally and the clearinghouse simply passes the payments between counterparties. However, when one of the counterparties to a transaction defaults, the presence of the clearinghouse as an intermediate counterparty shields the non-defaulting party from losses; that is because although the defaulting party may not pay the clearinghouse, the clearinghouse is still liable for, and makes, the payment to the remaining counterparty.

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Proxy Access: Best Practices

This post is based on a report from the Council of Institutional Investors. The complete publication, including charts, is available here. Related research from the Program on Corporate Governance about proxy access include Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and The Myth of the Shareholder Franchise (discussed on the Forum here), and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

 

The Council of Institutional Investors (CII) believes that proxy access is a fundamental right of longterm shareowners. Proxy access—a mechanism that enables shareowners to place their nominees for director on a company’s proxy card—gives shareowners a meaningful voice in board elections.

CII’s members-approved policy on proxy access states, in part:

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CII on Proxy Access

Elizabeth Ising is a partner and Co-Chair of the Securities Regulation and Corporate Governance practice group at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn client alert by Ms. Ising, Lori Zyskowski, and Ronald O. Mueller.

[On August 5, 2015] the Council of Institutional Investors (“CII”), a nonprofit association of corporate, public and union employee benefit funds and endowments that seeks to promote effective corporate governance practices for U.S. companies and strong shareholder rights and protections, published a report titled “Proxy Access: Best Practices” that describes CII’s views on seven provisions that companies typically address when implementing proxy access. The CII report is available here, and was discussed on the Forum here.

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Securities Class Action Filings—2015 Midyear Assessment

John Gould is senior vice president at Cornerstone Research. This post is based on a report from the Stanford Law School Securities Class Action Clearinghouse and Cornerstone Research; the full publication is available here.

Plaintiffs brought 85 new federal class action securities cases in the first half of 2015, according to Securities Class Action Filings—2015 Midyear Assessment, a report compiled by Cornerstone Research and the Stanford Law School Securities Class Action Clearinghouse. This represents a decrease from the second half of 2014, when plaintiffs filed 92 securities class actions. The number of filings in the first six months of 2015 remains 10 percent below the semiannual average of 94 observed between 1997 and 2014—the seventh consecutive semiannual period below the historical average.

Despite this period of little overall change in filing activity, securities class actions against companies headquartered outside the United States increased in the first half of 2015. Twenty filings, or 24 percent of the total, targeted foreign firms. Asian firms were named in more than half of these cases.

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D.C. Circuit Upholds Privilege For Internal Investigation Documents

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Peter C. Hein, and David B. Anders.

Earlier this week, the D.C. Circuit Court of Appeals for the second time granted a writ of mandamus and vacated district court orders that would have provided for the disclosure of privileged documents created in the course of a company’s internal investigation. In Re Kellogg Brown & Root, Inc., No. 14-5319 (Aug. 11, 2015).

As noted in our prior memo, in a 2014 decision in this same case the D.C. Circuit granted a writ of mandamus and made clear that a proper application of privilege principles would protect documents created in the course of a company’s internal investigation—even if the investigation was conducted by in-house counsel without outside lawyers, even if non-attorneys (serving as agents of attorneys) conducted many of the interviews, and even if the internal investigation was conducted pursuant to a company compliance program required by a statute or government regulation (and thus arguably had in part a business purpose in addition to the purpose of obtaining or providing legal advice).

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SEC Adopts CEO Pay Ratio Disclosure Rule

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, Corey Perry, and Rebecca Grapsas. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

On August 5, 2015, the Securities and Exchange Commission (SEC), by a 3-2 vote, adopted rule amendments [1] to implement Section 953(b) of the Dodd-Frank Act, which requires public companies to disclose the “pay ratio” between its CEO’s annual total compensation and the median annual total compensation of all other employees of the company. [2]

The pay ratio disclosures that will result from this much-anticipated new rule will further heighten scrutiny on corporate executive compensation practices—with specific focus on how CEO compensation compares to the “median” employee. Companies should be aware that, depending on the magnitude of pay ratios, these new disclosures may exacerbate existing concerns among investors, labor groups and others around executive compensation.

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An Interview with Chief Justice Strine

Judy Warner is editor-in-chief of NACD Directorship. This post is based on an interview between Ms. Warner and Delaware Supreme Court Chief Justice Leo E. Strine Jr. The full interview is available here. Research by Chief Justice Strine recently issued by the Program on Corporate Governance includes A Job is Not a Hobby: The Judicial Revival of Corporate Paternalism, discussed on the Forum here; and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, discussed on the Forum here. 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.

As your predecessor Chief Justice Myron Steele was stepping down in 2013, Directorship asked him if he had any words of advice for his successor. Chief Justice Steele suggested that his successor be prepared for crisis management because you never know what’s going to happen. So, I’m curious: have you had a crisis so far?

We’ve had a crisis. For example, we’re dealing very much this week with an emerging development that’s affecting our entire state government around the cost of health insurance for our employees. There are very tough choices that have to be made, that regardless of which choice is going to be made, it’s going to have an influence on the ability of our government to fund other priorities.

What you have to do in all these things is understand that life is sort of a series of planned emergencies. What we have tried to do is identify a set of priorities for future action that builds on existing achievements. I’m very fortunate I had a wonderful predecessor and friend in Myron Steele, who cares very much about our judiciary and worked very hard. I had a very high-quality predecessor, and I can build off that platform of making a very good organization.

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Special Meeting Proposals

Avrohom J. Kess is partner and head of the Public Company Advisory Practice at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Kess, Karen Hsu Kelley, and Yafit Cohn. The complete publication, including footnotes, is available here.

Shareholders petitioning the board for the special meeting right propose either to create the right or, in circumstances where the right already exists, to lower the minimum share ownership threshold required to exercise the right. As of June 30, 2015, 339 companies in the S&P 500 and Fortune 500 already provided their shareholders with the right to call a special meeting outside of the usual annual meeting. During the 2015 proxy season, 20 special meeting shareholder proposals went to a vote at Russell 3000 companies. Of these, six proposed to create the right, and 14 proposed to lower the ownership threshold with respect to an existing right. Only four special meeting shareholder proposals received majority support: three created the right for the first time and one lowered the threshold for an existing right to 25%. Overall, shareholder proposals relating to special meetings received average shareholder support of 43.6% this proxy season.
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A Registration Framework for 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 recent public statement; 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, and the ensuing turmoil, shook the global economy to its core and exposed the weaknesses of our regulatory regime. Years of lax attitudes, deregulation, and complacency allowed an unregulated derivatives marketplace to cause serious damage to the U.S. economy, resulting in significant losses to investors. As a result, Title VII of the Dodd-Frank Act tasked the SEC and the CFTC with establishing 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 the much larger swaps market, covering products such as energy and agricultural swaps.

Today [August 5, 2015], the global derivatives market is estimated to exceed $630 trillion worldwide—with approximately $14 trillion representing transactions in SBS regulated by the SEC. The regulatory regime for the SBS market, however, cannot go into effect until the SEC has put in place the necessary rules to implement Title VII.

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