Monthly Archives: November 2015

Investor-Advisor Relationships and Mutual Fund Flows

Leonard Kostovetsky is Assistant Professor of Finance at Boston College. This post is based on Professor Kostovetsky’s recent article, available here.

In my paper, Whom Do You Trust? Investor-Advisor Relationships and Mutual Fund Flows, forthcoming in the Review of Financial Studies, I investigate the role of trust in the asset management industry. While there is plenty of anecdotal and survey evidence which underlines the general importance of trust in finance, academic research has been scarce due to the difficulty of quantifying and measuring trust. In this paper, I use an exogenous shock to the relationships between investors and mutual fund advisory companies (e.g. Fidelity, Wells Fargo, Vanguard, etc.) to try to tease out the effect of trust.

READ MORE »

Role of Long-Term Shareholders in Hostile Takeovers

Andrew R. Brownstein is a partner in the corporate group at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Brownstein, Igor Kirman, and Victor Goldfeld.

On Friday November 13, 2015, shareholders of Perrigo Company plc convincingly rejected Mylan N.V.’s hostile takeover attempt, with holders of over 60% of Perrigo’s shares refusing to tender into what was the largest hostile offer in history to go to the very end. The outcome demonstrates that a well-articulated strategy and proven record of performance, and concerns about the corporate governance of a bidder offering stock, resonate with long-term shareholders as against a premium bid of questionable merit, even in the absence of transaction alternatives.

READ MORE »

The Product Market Effects of Hedge Fund Activism

Praveen Kumar is Professor of Finance at the University of Houston. This post is based on an article authored by Professor Kumar and Hadiye Aslan, Assistant Professor of Finance at Georgia State University, available here. 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), 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.

Whether intervention by activist investors, such as hedge funds, is beneficial or detrimental to the shareholders of target firms remains controversial. Proponents marshal considerable empirical evidence that hedge fund activism (HFA) is associated with significant medium-to-long-run improvements in targets’ cost and investment efficiency, profitability, productivity, and shareholder returns. Opponents, however, insist that HFA forces management to take myopic decisions that weaken firms in the longer run. The debate rages in academia, media, and has already featured in the 2016 presidential campaign.

Despite this intense interest, however, the research on the effects HFA has typically focused only on its impact on the performance of target firms. But targets of HFA do not exist in vacuum; they have industry competitors, suppliers, and customers. It is by now well known that HFA has a broad scope that often—simultaneously or sequentially—touches on virtually every major aspect of company management, including changes in product market strategy, negotiation tactics with suppliers and customers, and knowledge-based technical advice of production organization. In particular, HFA that improves target’s cost efficiency and product differentiation, and generally redesigns its competitive strategy, should have a significant impact on the target’s competitors (or rival firms). This prediction follows from basic principles of strategic interaction among firms in oligopolistic interaction. Indeed, the received theory of industrial organization provides the effects of cost improvements and product differentiation on rivals’ equilibrium profits and market shares.

READ MORE »

SEC Adopts Final Rules for Crowdfunding

Andrew J. Foley is a partner in the Corporate Department of Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum.

On October 30, 2015, the Securities and Exchange Commission (the “SEC”) adopted final rules under Title III of the Jumpstart Our Business Startups (“JOBS”) Act. These rules relate to a new exemption under the Securities Act of 1933 (the “Securities Act”) that will permit securities-based crowdfunding by private companies without registering the offering with the SEC. The crowdfunding proposal (“Regulation Crowdfunding”) follows the 2013 crowdfunding rule proposal in most significant respects and represents a major shift in how small U.S. companies can raise money in the private securities market.

READ MORE »

Shadow Resolutions as a “No-No” in a Sound Banking Union

Luca Enriques is Allen & Overy Professor of Corporate Law at Oxford University. The following post is based on a paper co-authored by Professor Enriques and Gerard Hertig.

Credit crisis related bank bailouts and resolutions have been actively debated over the past few years. By contrast, little attention has been paid to resolution procedures being generally circumvented when banks are getting insolvent in normal times.

In fact, supervisory leniency and political considerations often result in public officials incentivizing viable banks to acquire failing banks. In our book chapter Shadow resolutions as a no-no in a sound Banking Union, published in Financial Regulation: A Transatlantic Perspective 150-166 (Ester Faia et al. eds.), Cambridge University Press, 2015, we consider this a very unfortunate approach. It weakens supervision, distorts competition and, most importantly, gives resolution a bad name.

READ MORE »

The Pay Ratio Rule: Preparing for Compliance

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/FW Cook co-publication authored by Mr. Kess, Yafit Cohn, Bindu M. Culas, and Michael R. Marino, available here.

On August 5, 2015, the Securities and Exchange Commission (SEC) adopted its much-anticipated final rule implementing the pay ratio disclosure requirement of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (Dodd-Frank Act). Section 953(b) of the Dodd-Frank Act instructed the SEC to adopt rules requiring reporting companies to disclose the median of the annual total compensation of all company employees other than the company’s chief executive officer (CEO), the CEO’s annual total compensation and the ratio between these two numbers.

READ MORE »

New Records in SEC Enforcement Actions

John C. Wander is a partner in the Shareholder Litigation & Enforcement practice at Vinson & Elkins LLP. This post is based on a Vinson & Elkins publication authored by Mr. Wander, Jeffrey S. JohnstonClifford Thau, and Olivia D. Howe.

In late October, the Securities and Exchange Commission announced that under the leadership of chair Mary Jo White and enforcement director Andrew Ceresney, the SEC has continued to ramp up enforcement activity. In its 2015 fiscal year, the SEC reported filing a total of 807 actions for the year—including 507 independent enforcement actions, 168 follow-on actions, and 132 actions for delinquent filings—resulting in $4.19 billion in monetary penalties and disgorgements.
READ MORE »

Delaware Courts and the Law Of Demand Excusal

Justin T. Kelton is an attorney specializing in complex commercial litigation at Dunnington, Bartholow & Miller, LLP. 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. 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.

Delaware courts have recently issued critical guidance regarding the contours of the demand excusal doctrine. The following cases outline the Delaware courts’ recent analyses on the issue.

Delaware Supreme Court Clarifies Analysis For Determining Director Independence

In Del. Cty. Emps. Ret. Fund v. Sanchez, Del. No. 702, 10/2/15, the Delaware Supreme Court clarified that, in considering whether a complaint has sufficiently pleaded a lack of independence, the Court of Chancery should not parse facts pled regarding personal relationships and those pled regarding business relationships as categorically distinct issues. Rather, the Court of Chancery must “consider in fully context” all of the “pled facts regarding a director’s relationship to the interested party.” Taking all of the facts together, the Delaware Supreme Court found that the plaintiff’s allegations that “a director has been close friends with an interested party for a half century” was sufficient to raise a pleading stage inference of interestedness because “close friendships of that duration are likely considered precious by many people, and are rare.”

READ MORE »

Quadrant v. Vertin: Determining Rights of Creditors

Steven Epstein is a partner and Co-Head of the Mergers & Acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Epstein, J. Christian Nahr, Brad Eric Scheler, 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.

In Quadrant Structured Products Company, Ltd. v. Vertin (Oct. 20, 2015), the Delaware Court of Chancery, in a post-trial decision, rejected Quadrant’s challenges to transactions by Athilon Capital Corp., with Athilon’s sole stockholder (private equity firm Merced), after Athilon had returned to solvency following a long period of insolvency. Merced held all of Athilon’s equity and all of its junior notes; and both Quadrant and Merced held the company’s publicly traded senior notes. Quadrant challenged Athilon’s (i) repurchases of senior notes held by Merced (the “Note Repurchases”) and (ii) purchases of certain relatively illiquid securities owned by Merced (the “Securities Purchases”). A majority of the Athilon board that approved the challenged transactions was viewed by the court as non-independent (with two directors affiliated with Merced; the Athilon CEO; and two independent directors). Vice Chancellor Laster, applying New York law, rejected (i) Quadrant’s claims that the Note Repurchases (a) were prohibited by the indenture and (b) were fraudulent conveyances; and (ii) Quadrant’s derivative claim that the Note Repurchases and the Securities Purchases constituted a breach of the directors’ fiduciary duties.

READ MORE »

Employee Rights and Acquisitions

Anzhela Knyazeva is a Financial Economist at the U.S. Securities and Exchange Commission. This post is based on an article authored by Dr. Knyazeva, Diana Knyazeva, Financial Economist at the Securities and Exchange Commission; and Kose John, Professor in Banking and Finance at New York University. The views expressed in this post are those of Dr. Knyazeva and do not necessarily reflect those of the Securities and Exchange Commission or its Staff.

 

In our paper, Employee Rights and Acquisitions, which was recently featured in the Journal of Financial Economics, we consider incentive conflicts involving employees, and how they may affect firms in the context of acquisitions. More specifically, we look at the effects of variation in employee protections on shareholder value, the choice of targets, and deal characteristics.  We focus on acquisitions since they are major firm investment decisions with the potential to substantially affect firm value.

READ MORE »

Page 3 of 5
1 2 3 4 5
  • Subscribe or Follow

  • Supported By:

  • Program on Corporate Governance Advisory Board

  • Programs Faculty & Senior Fellows