Monthly Archives: October 2015

“Is Short-Term Behavior Jeopardizing the Future Prosperity of Business?”

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton and Sabastian V. Niles. Mr. Niles is counsel at Wachtell Lipton specializing in rapid response shareholder activism and preparedness, takeover defense, corporate governance, and M&A. Related research from the Program on Corporate Governance 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), and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law, by Leo E. Strine (discussed on the Forum here).

In a must-read report highlighting the pressures public companies face to meet quarterly guidance, maximize immediate profits and extract value today instead of investing for the future, the Conference Board examines what is driving short-term behavior and outlines what can be done to restore balance. The following specially selected highlights from the report and associated release (omitting tax policy matters discussed in detail in the actual report) support the need for action to curb short-termism and the excesses of shareholder activism that are detrimental to the American economy and society:

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The Delaware Courts and the Investment Banks

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Theodore N. Mirvis, and William Savitt. 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.

A doctrinal innovation in Delaware law that first appeared a year ago is threatening to mature into a full-on trend: through the tort of “aiding-and-abetting” fiduciary breach, the Delaware courts, accepting the invitation of the stockholder-plaintiffs’ bar, have begun to take on the task of regulating the M&A advisory function of investment banks. In October 2014, the Court of Chancery awarded stockholder plaintiffs $76 million in damages against an investment bank for aiding and abetting breaches of the duty of care by the directors of Rural Metro, an ambulance company that was sold for a 37% premium in 2011 and was bankrupt by the time of trial. The novel theory of the decision was that conflicted bankers dispensed self-interested advice, which left Rural Metro’s directors uninformed and hence induced them to breach their duty of care in approving the sale. Although the directors were not liable for the breach (because they had settled and were exculpated at any rate), the court found that the bankers were.

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Fund Advisers and Fee Disclosure in SEC Enforcement Action

Veronica Rendón Callahan is a partner at Arnold & Porter LLP and co-chair of the firm’s Securities Enforcement and Litigation practice. This post is a based on an Arnold & Porter memorandum by Ms. Callahan, Ellen Kaye Fleishhacker, Daniel M. Hawke, Robert E. Holton, and Kevin J. Lavin.

October 7, 2015, the US Securities and Exchange Commission (the Commission or SEC) entered into a settlement agreement with Blackstone Management Partners L.L.C., Blackstone Management Partners III L.L.C., and Blackstone Management Partners IV L.L.C. (collectively, Blackstone) regarding certain Blackstone fee and expense disclosure practices. Without admitting or denying the Commission’s findings, Blackstone consented to a cease-and-desist order and agreed to pay nearly $40 million to settle the charges consisting of $26,225,203 of disgorgement, $2,686,553 of prejudgment interest, and $10,000,000 of civil money penalties. This action represents a continuing focus by the SEC on fee and expense allocation and disclosure practices of private fund advisers. [1] It serves as a reminder of the need for advisers to private investment funds to review and revise as necessary their compliance and disclosure policies and procedures related to the allocation of fees and expenses.

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Building a Dynamic Framework for Offering Reform

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent Keynote Address at the 47th Annual Securities Regulation Institute. The full text, including footnotes, is available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I am very pleased to be here to help kick off the 47th Annual Securities Regulation Institute. As some of you know, I am no stranger to this program, nor is the SEC staff. I have participated since my early days as U.S. Attorney, and its tremendous success is largely due to its tireless organizers. For many years, that work was led by Anita Shapiro, who is now the President of PLI, along with Laura Shields. Laura has now taken over from Anita, and she will surely continue the program’s record of excellence. Thank you both for all that you do to make this program such a great one year after year.

I have selected a topic that I think is well-suited for a conference of such endurance and importance: how the Commission is building a more proactive and responsive regulatory framework to better assess the impact of regulatory changes on investors and issuers over time in the context of securities offerings. As your opening panelists will no doubt discuss, this important area has seen tremendous regulatory change over the last ten years, including significant new rules in the past year.

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ISS Preliminary 2016 Voting Policy Updates

Andrew R. Brownstein is partner and co-chair of the Corporate practice group at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Brownstein, David M. SilkDavid A. KatzSabastian V. Niles, and S. Iliana Ongun.

Today [October 26, 2015], ISS announced it is considering changing its U.S. voting policies in three areas heading into the 2016 proxy season: (i) when a sitting CEO or a non-CEO director will be viewed as “overboarded “on account of service on multiple boards, (ii) unilateral board actions that reduce shareholder rights (with a focus on newly classified boards and supermajority voting provisions) and (iii) compensation disclosure at externally managed issuers. Notably, the areas highlighted for change in the U.S. market do not address proxy access, “responsiveness” to majority-supported shareholder proposals or other current topics. ISS is also proposing changes to non-U.S. policies, including with respect to Brazil, Canada, France, Hong Kong & Singapore, India, Japan, the Middle East & Africa and the U.K. & Ireland.

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The SEC Proposed Clawback Rule

Joseph E. 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 which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this column. The complete publication, including footnotes, is available here. Related research from the Program on Corporate Governance includes Excess-Pay Clawbacks by Jesse Fried and Nitzan Shilon (discussed on the Forum here).

On July 1, 2015, the Securities and Exchange Commission (SEC) issued Proposed Rule 10D-1 relating to so-called “clawbacks” pursuant to Section 10D of the Securities and Exchange Act of 1934 (the Exchange Act). Section 10D of the Exchange Act was added by Section 954 of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank).

(On Aug. 5, 2015 the SEC issued its final rule requiring the disclosure of the ratio of the annual pay of the CEO to the median annual pay of all employees (excluding the CEO). Issuers subject to the rule must comply with it for the first fiscal year beginning on or after Jan. 1, 2017. The pay ratio rule will be the subject of a future post.)

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Deal Activism

Adam O. Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz focusing primarily on mergers and acquisitions and securities law matters. This post is based on a Wachtell Lipton publication authored by Mr. Emmerich, William SavittRonald C. ChenEdward J. LeeSabastian V. Niles, and Remi KorenblitRelated 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), and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

In today’s robust M&A environment, parties to a potential merger or acquisition must anticipate and manage “deal activism.” Just as all companies and boards should prepare for shareholder activism generally, deal participants should plan for the possibility that, after a deal is announced, activists may seek a higher price, encourage a topping bid for all or part of the company, dissent and seek appraisal, try to influence the combined company and its integration, or even try to scuttle a deal entirely, leveraging traditional disruptive activist campaign tactics in their efforts.

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Harvard Convenes the 2015 Executive Compensation & Corporate Governance Roundtable

The Harvard Law School Program on Corporate Governance and the Harvard Law School Program on Institutional Investors convened the Harvard Roundtable on Executive Compensation & Corporate Governance last Wednesday, October 21, 2015. The event brought together for a roundtable discussion 62 prominent experts with a wide range of perspectives on the subject, including senior officers from leading institutional investors (both mutual funds and public pension funds) with aggregate assets under management exceeding $13 trillion, and from significant issuers, prominent advisors, and academics. Participants in the event, and the topics of discussion, are set out below.

The Roundtable discussion on issues relating to the process of determining executive compensation included discussion of the work of proxy advisors and their interaction with investors and issuers, engagement between issuers and investors themselves and compensation disclosure issues, such as pay-for-performance disclosure and pay-ratio disclosure. The Roundtable then moved to a discussion of the substantive terms of compensation arrangements, including compensation levels, composition, and structures. Issues that were considered included the composition of long-term and short-term incentive pay and contractual provisions such as claw-backs and hedging policies. The Roundtable ended with a discussion of current issues in corporate governance, including lessons from the 2015 proxy season, current thinking on engagement with investors, and proxy access.

The Roundtable was co-organized by Lucian Bebchuk, Stephen Davis, and Scott Hirst, and was supported by a number of co-sponsors (listed here), the supporting organizations of the Program on Corporate Governance (listed on the program site here), and the institutional members of the Harvard Institutional Investor Forum (listed here).

The participants in the Harvard Roundtable on Executive Compensation & Corporate Governance included:

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Are Institutions Informed About News?

Norman Schürhoff is Professor of Finance at the Swiss Finance Institute. This post is based on an article authored by Professor Schürhoff; Terrence Hendershott, Professor of Finance at the University of California, Berkeley; and Dmitry Livdan, Associate Professor of Finance at the University of California, Berkeley.

Who is informed on the stock market? There are plenty of reasons to believe that institutional investors possess value-relevant information. Unlike retail investors, institutions often directly communicate with publicly traded firms as well as brokerage firms through their investment banking, lending, and asset management divisions. Most mutual funds and hedge funds employ buy-side analysts and enjoy better relationships with sell-side analysts. Their economies of scale allow institutions to monitor many sources of information. Last but not least, institutions employ professionals and technologies with superior information processing skills. Yet, the academic literature has struggled to identify the information channel in institutional trading. There is some evidence that institutional investors are informed, but studies examining institutional order flow around specific events provide mixed evidence.

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Fifty-Eight Members of the US House of Representatives Support the Rulemaking Petition for Transparency in Corporate Political Spending

Lucian Bebchuk is Professor of Law, Economics, and Finance at Harvard Law School. Robert J. Jackson, Jr. is Professor of Law at Columbia Law School. Bebchuk and Jackson served as co-chairs of the Committee on Disclosure of Corporate Political Spending, which filed a rulemaking petition requesting that the SEC require all public companies to disclose their political spending. Bebchuk and Jackson are also co-authors of Shining Light on Corporate Political Spending, published in the Georgetown Law Journal. A series of posts in which Bebchuk and Jackson respond to objections to an SEC rule requiring disclosure of corporate political spending is available here. All posts related to the SEC rulemaking petition on disclosure of political spending are available here.

We are pleased to report that a group of fifty-eight members of the House of Representatives last week sent a letter to SEC Chair Mary Jo White expressing support for the rulemaking petition on corporate political spending submitted by the committee of corporate and securities law experts that we co-chaired. We are delighted that these fifty-eight members of the House of Representatives have added their voices to the unprecedented support that our petition has already received.

In July 2011, we co-chaired a committee on the disclosure of corporate political spending and served as the principal draftsmen of the rulemaking petition that the committee submitted. The petition urged the SEC to develop rules requiring public companies to disclose their spending on politics. To date, the SEC has received more than 1.2 million comments on the proposal—more than any rulemaking petition in the Commission’s history.

Taking notice of the overwhelming support that the petition had received, the SEC placed consideration of the petition on its regulatory agenda in 2013. Unfortunately, Chair Mary Jo White encountered significant political pressure to remove the petition from the Commission’s agenda, and the Commission chose to delay consideration of rules in this area.

In their letter, the fifty-eight Representatives stated that they are writing to “express [their] support for” the rulemaking petition. They urged the SEC chair “to reconsider the frustrating decision to remove corporate political disclosure from the regulatory agenda and make corporate political disclosure a top priority for protecting investors.”

The Representatives’ letter that forty-four Senators sent Chair White in August. The Senators’ letter stated that the Chair should make the petition “a top priority for the SEC in the near term, and inform [the Senators] of the basis for [the SEC Chair’s] decision should [the SEC Chair] not plan to include it on the Commission’s agenda for the upcoming year.” Earlier this year, a bipartisan group of former SEC officials (including former Chairmen Arthur Levitt and William Donaldson) sent a letter to SEC Chair White stating that the petition is a “slam dunk” and that the SEC’s failure to act “flies in the face of the primary mission of the Commission, which since 1934 has been the protection of investors.”

As we have discussed in previous posts on the Forum, the case for rules requiring disclosure of corporate political spending is compelling. Moreover, as we showed in our article Shining Light on Corporate Political Spending, a close examination of the objections that opponents of such rules have raised indicates that these objections, both individually and in combination, fail to provide an adequate basis for opposing rules that would mandate the disclosure of corporate political spending to investors. The SEC should proceed with rulemaking in this area without further delay.

The fifty-eight members of the House of Representatives who signed the letter (available here) supporting the rulemaking petition are:

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