Monthly Archives: November 2015

Merion Capital: Merger Price as a Factor in Appraisal Action

William P. Mills is a partner in the New York Office of Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader publication by Mr. Mills, Martin L. Seidel,  Gregory A. MarkelJoshua Apfelroth, and Brittany Schulman. 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 a recent decision in an appraisal action, the Delaware Chancery Court reaffirmed the Court’s reluctance to substitute its own calculation of the “fair value” of a target company’s stock for the purchase price derived through arms-length negotiations, provided it resulted from a thorough, effective and disinterested sales process. The October 21, 2015 decision, Merion Capital LP and Merion Capital II LP v. BMC Software, Inc., not only provides a comprehensive review of the fundamentals of appraisal actions, but also serves as a cautionary tale for merger arbitrageurs and other stockholders looking to seek appraisal remedies.

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Corporate Governance Responses to Director Rule Changes

Cindy Vojtech is an Economist at the Federal Reserve Board. This post is based on an article authored by Dr. Vojtech and Benjamin Kay, Economist at the U.S. Treasury’s Office of Financial Research.

Much of the corporate governance literature has been plagued by endogeneity problems. In our paper, Corporate Governance Responses to Director Rule Changes, which was recently made publicly available on SSRN, we use a law change as a natural experiment to test how firms adjust the choice and magnitude of governance tools given a floor level of monitoring from independent directors. Through this analysis, we can recover the structural relationship between inputs in the governance production function. We study these relationships with a new board of director dataset with a much larger range of firm size.

In 2002, U.S. stock exchanges and the Sarbanes-Oxley Act established minimum standards for director independence. These director rules altered firm choice of other tools for mitigating agency problems. On average, treated firms do not increase the size of their board, instead inside directors are replaced with outside directors.

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SEC Disclosures by Foreign Firms

Audra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone, Kathryn Schumann, Assistant Professor of Finance at James Madison University, and Joshua White, Assistant Professor of Finance at the University of Georgia. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

The U.S. Securities and Exchange Commission (SEC) established the ongoing reporting regime for U.S.-listed foreign firms when most of these filers were large, well-known companies that had a primary trading venue on a major foreign exchange. Accordingly, prior work argues that the SEC exempted these firms from producing quarterly and event-driven filings beyond those mandated by their home country or exchange. [1] Specifically, the SEC stipulates that foreign firms must supply ongoing disclosures on a Form 6-K only when they publicly release information outside the U.S. (e.g., updates on earnings, acquisitions, raising capital, or payout structure). [2]

The composition of foreign firms listing in the U.S. has evolved over the years towards one with more firms stemming from less transparent countries and those lacking a primary listing outside the U.S. Notably, foreign firms with these characteristics likely have fewer ongoing reporting mandates, and thus considerable discretion regarding the information they supply to the SEC. Yet, there is little evidence on how the deference to home country requirements affects ongoing reporting and information flows in more recent periods. Studying these issues helps understand the relative trade-offs of creating a competitive landscape for attracting foreign firm listings and ensuring meaningful information flows to investors, thus balancing capital formation and investor protection.
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On Secondary Buyouts

François Degeorge is Professor of Finance at the University of Lugano This post is based on an article authored by Professor Degeorge; Jens Martin, Assistant Professor of Finance at the University of Amsterdam; and Ludovic Phalippou, Associate Professor of Finance at Saïd Business School, Oxford University.

Twenty years ago, private equity (PE) firms seeking to exit sold their portfolio companies to another company in the same industry or organized an IPO. Nowadays, 40 percent of PE exits occur through secondary buyouts (SBOs), transactions in which a PE firm sells a portfolio company to another PE firm. The rise of SBOs has elicited concerns among PE investors (the limited partners with stakes in private equity funds): Does the rise of SBOs mean that PE firms have run out of investment ideas? Do SBOs create or destroy value for investors? Our paper, On Secondary Buyouts, forthcoming in the Journal of Financial Economics, provides answers to these questions.

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Director Independence and Risks for M&A Financial Advisors

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper and Gregory Beaman. 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.

On September 28 and October 1, 2015, the Delaware Court of Chancery issued decisions in Caspian Select Credit Master Fund Limited v. Gohl, C.A. No. 10244-VCN and In re Zale Corporation Stockholders Litigation, C.A. No. 9388-VCP. On October 2, 2015, the Delaware Supreme Court decided Delaware County Employees Retirement Fund v. Sanchez, No. 702. The outcome for the director defendants in each case differed: the claims against the Zale directors were dismissed, the claims against directors in Caspian largely survived at the pleading stage, and the claims against the directors in Sanchez, where the Chancery Court had granted the defendants’ motion to dismiss, were reinstated when the Supreme Court reversed. These contrasting results largely are attributable to the existence in Zale of an independent board of directors, whereas the pleadings in Caspian and Sanchez sufficiently alleged that a majority of the boards of the companies at issue lacked independence. In addition, the Zale decision underscores again the risks confronting financial advisors to sellers in merger transactions, since the aiding and abetting fiduciary breach claim against the board’s financial advisor survived even though the fiduciary duty claims against the directors themselves were dismissed.

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2015 Corporate Governance & Executive Compensation Survey

Creighton Condon is Senior Partner at Shearman & Sterling LLP. This post is based on the introduction to a Shearman & Sterling Corporate Governance Survey by Bradley SabelDanielle Carbone, David Connolly, Stephen Giove, Doreen Lilienfeld, and Rory O’Halloran. The complete publication is available here.

We are pleased to share Shearman & Sterling’s 2015 Corporate Governance & Executive Compensation Survey of the 100 largest US public companies. This year’s Survey, the 13th in our series, examines some of the most important governance and executive compensation practices facing boards today and identifies best practices and merging trends. Our analysis will provide you with insights into how companies approach governance issues and will allow you to benchmark your company’s corporate governance practices against the best practices we have identified.

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ISS Proposed 2016 Policy Changes

Howard B. Dicker is a partner in the Public Company Advisory Group of Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Mr. Dicker, Lyuba Goltser, and Megan Pendleton. The complete publication is available here.

Yesterday [October 27, 2015], Institutional Shareholder Services released its key draft proposed proxy voting policy changes for the 2016 proxy season. ISS is seeking comments by 6:00 p.m. EDT on November 9, 2015. ISS expects to release its final 2016 policies on November 18, 2015. [1] The policies as updated will apply to meetings held on or after February 1, 2016.

Proposed Amendments to ISS Proxy Voting Policies for 2016

ISS’s proposed voting policy changes for U.S. companies would:

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SEC Enforcement Actions Against Investment Advisers

Jon N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg. The complete publication, including footnotes, is available here.

According to the SEC’s most recent financial report, as of August 2014, SEC-registered investment advisers managed $62.3 trillion in assets. Not surprisingly, investment advisers attract a great deal of attention from the SEC’s Enforcement Division. The Division of Enforcement’s Asset Management Unit has 75 professionals spread across all 12 SEC offices. The group has developed strong industry expertise: it includes more than a half-dozen former industry professionals and works closely with the examination teams of the Office of Compliance Inspections and Examinations, as well as with the Divisions of Investment Management and Economic and Risk Analysis. In the first 10 months of 2015, it brought over two dozen cases, resulting in over $190 million in settlements; nearly a dozen cases are being litigated.

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Fair Price and Process in Delaware Appraisals

Jason M. Halper is partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper, Gregory Beaman, and Carrie H. Lebigre. 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.

On October 21, 2015, the Delaware Court of Chancery issued a post-trial opinion in an appraisal action in which it yet again found that the merger price was the most reliable indicator of fair value. Vice Chancellor Glasscock’s opinion in Merion Capital LP v. BMC Software, Inc., No. 8900-VCG (Del. Ch. Oct. 21, 2015), underscores, yet again, the critical importance of merger price and process in Delaware appraisal actions. In fact, as we have previously discussed, Merion is just the latest of several decisions by the Delaware Chancery Court over the past six months finding that merger price (following an arm’s length, thorough and informed sales process) represented the most reliable indicator of fair value in the context of an appraisal proceeding. See also LongPath Capital, LLC v. Ramtron Int’l Corp., No. 8094-VCP (Del. Ch. June 30, 2015); Merlin Partners LP v. AutoInfo, Inc., No. 8509-VCN (Del. Ch. Apr. 30, 2015).

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Securing Our Nation’s Economic Future

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent keynote address to the Fellows Colloquium of the American College of Governance Counsel, 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), 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).

These days it has become fashionable to talk about a subject some of us have been addressing for some time: [1] whether the incentive system for the governance of American corporations optimally encourages long-term investment, sustainable policies, and therefore creates the most long-term economic and social benefit for American workers and investors. Many commentators have come to the conclusion that the answer to that question is no. They bemoan the pressures that can lead corporate managers to quick fixes like offshoring, which might give a balance sheet a short-term benefit, but cut our nation’s long-term prospects. They lament the relative tilt in corporate spending toward stock buybacks and away from spending on capital expenditures. They look at situations where corporations took environmental or other regulatory short-cuts, which ended up in disaster, and ask whether anyone is thinking about sustainable approaches. They rightly point to the accounting gimmickry involved in several high-profile debacles and ask what it has to do with the creation of long-term wealth for human investors.

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