Monthly Archives: December 2015

Reply

Posted by Martin Cremers, Erasmo Giambona, Simone M. Sepe, and Ye Wang, on
Saturday, December 19, 2015
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Martijn Cremers is Professor of Finance at the University of Notre Dame; Erasmo Giambona is the Michael Falcone Chair in Real Estate at the Whitman School of Management at Syracuse University; Simone M. Sepe is Professor of Law and Finance at the College of Law at the University of Arizona; and Ye Wang is a PhD Candidate in the Department of Finance at Bocconi University. This post responds to a post, titled The Long-term Effects of Hedge Fund Activism: A Reply to Cremers, Giambona, Sepe, and Wang, by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (available on the Forum here). The post by Professors Bebchuk, Brav, Jiang and Keusch replied to the criticism of the study on The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here) that was put forward in a paper by Cremers, Giambona, Sepe and Wang discussed in this post.

In a December 10, 2015 post to the Harvard Corporate Governance Blog, Professors Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (“BBJK”) suggest that a study the four of us have recently coauthored, Hedge Fund Activism and Long-Term Firm Value (the “CGSW study”), “overlooks prior opposing evidence on the subject, offers a flawed empirical analysis, and makes [contradictory] claims.” For these reasons—BBJK unequivocally conclude—the CGSW study’s claims “should be given no weight in the ongoing examination of hedge fund activism.” We are thankful to BBJK for the time spent analyzing our work and the occasion they have provided us to offer a few clarifications. Hopefully, those clarifications will add clarity to our attempt at better understanding the effects of hedge fund activism, which is what, ultimately, we should all care about.
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The Long-Term Value of the Poison Pill

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Friday, December 18, 2015
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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, Daniel A. Neff, David A. Katz, Mark Gordon, and William Savitt. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance about poison pills includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here), and  The Case Against Board Veto in Corporate Takeovers>by Lucian Bebchuk.

Nearly six years ago, Air Products made an unsolicited all-cash bid to acquire Airgas for $60 per share (later increased to $70), to which the board of directors of Airgas said “no.” Based on the Airgas directors’ unanimous judgment—informed by months of thoughtful review and analysis—that Airgas was worth more than Air Products was offering, whether on a standalone basis or in the hands of another industry player, this “no” was made possible by bedrock principles of Delaware law. These principles recognize that it is the role of the board, and not raiders or short-term speculators, to determine whether and when a company should be sold, and authorize the use of appropriate measures—most notably, the poison pill—to ensure the board has the opportunity to perform this essential function.

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Lessons Learned from a Highly Successful Proxy Contest Defense

Posted by M. Ridgway Barker, Withers Bergman LLP, on
Friday, December 18, 2015
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M. Ridgway Barker is a partner focusing on corporate finance and securities law at Withers Bergman LLP. This post is based on a Withers memorandum by Mr. Barker, Clyde Tinnen, and Michael Rueda.

Recently, our client, a NYSE-listed publicly traded firm, successfully defended against a proxy contest brought by an activist fund that in the first part of this year acquired 5.5% stake in the company. Following on earlier indications that it would do so, the fund notified the company in September that it intended to nominate six individuals for election to the seven member board of directors at the 2015 annual meeting of stockholders to be held in November. At the meeting, stockholders elected all seven incumbent director nominees and flatly rejected all of the fund’s six nominees, despite ISS’s recommendation in favor of three of the fund’s nominees and Proxy Mosaic’s recommendation in favor of all six of the fund’s nominees. These results offer key lessons to companies under attack by dissidents, notwithstanding strong activist pressure with backing from ISS or other proxy advisors.

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Oversight of the Financial Stability Oversight Council

Posted by Mary Jo White, U.S. Securities and Exchange Commission, on
Thursday, December 17, 2015
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent testimony before the United States House Committee on Financial Services, 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.

Thank you for inviting me to testify regarding the Financial Stability Oversight Council (Council). Below I highlight my perspective on the Council and my role on it.

The Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act) established the Council to provide comprehensive monitoring of the stability of our nation’s financial system. Specifically, the Council is responsible for:

  • Identifying risks to the financial stability of the United States that could arise from the material financial distress or failure—or ongoing activities—of large, interconnected bank holding companies or nonbank financial companies, or that could arise outside the financial services marketplace;
  • Promoting market discipline by eliminating expectations on the part of shareholders, creditors, and counterparties of such companies that the government will shield them from losses in the event of failure; and
  • Responding to emerging threats to the stability of the United States financial system. [1]

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U.S. Antitrust Agencies and Challenges to Mergers

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on
Thursday, December 17, 2015
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David A. Katz is a partner specializing in the areas of mergers and acquisitions, corporate governance and activism, and crisis management at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Katz, Joseph D. Larson, and Nelson O. Fitts.

Yesterday [December 7, 2015] was a busy day for antitrust enforcement, as the United States Federal Trade Commission sued to block the proposed merger of Staples, Inc. with Office Depot, Inc., and the Department of Justice announced that AB Electrolux and General Electric Company have abandoned their proposed transaction after five months of litigation with the DOJ. These events highlight aggressive positions the FTC and DOJ are taking with respect to market definition and competitive effects at the end of President Obama’s second term, leading to a number of court challenges seeking to block proposed deals.

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Chair White Statement on Use of Derivatives

Posted by Mary Jo White, U.S. Securities & Exchange Commission, on
Wednesday, December 16, 2015
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, 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.

The Commission will consider two separate recommendations from the staff today [December 11, 2015]. First, we will consider and vote on a recommendation from the staff of the Division of Investment Management to propose an updated and more comprehensive approach to the use of derivatives by mutual funds and exchange-traded funds, closed-end funds, and business development companies.

Second, we will consider and vote on a recommendation from the staff of the Division of Corporation Finance to propose rules to require disclosure of certain payments made to governments by resource extraction issuers, as mandated by the Dodd-Frank Act.

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Protecting Investors through Proactive Regulation of Derivatives

Posted by Luis A. Aguilar, U.S. Securities & Exchange Commission, on
Wednesday, December 16, 2015
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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 at an open meeting of the SEC; 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.

Today [December 11, 2015], the Commission considers new rules that are designed to protect investors by addressing the use of derivatives by registered investment companies. As demonstrated by the 2008 financial crisis, and the economic turmoil that followed, years of regulatory complacency and deregulation enabled an unregulated derivatives marketplace to cause significant losses to investors. In response to that crisis, in 2010, Congress passed the Dodd-Frank Act to address the causes of the financial crisis, and specifically included provisions in Title VII of the Act mandating the establishment of a regulatory framework for addressing broad categories of derivatives. This process is still ongoing.

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Dissenting Statement on Use of Derivatives

Posted by Michael S. Piwowar. U.S. Securities & Exchange Commission, on
Wednesday, December 16, 2015
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Michael S. Piwowar is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Piwowar’s recent remarks at a recent open meeting of the SEC. The complete publication, including footnotes, is available here. The views expressed in the post are those of Commissioner Piwowar and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Today [December 11, 2015], we are considering a proposed new exemptive rule that addresses the use of derivatives and financial commitment transactions by registered investment companies and business development companies (collectively, “funds”). This proposal is the third in a series of initiatives aimed at ensuring that the Commission’s regulatory program fully addresses the increasingly complex portfolio composition and operations of the asset management industry.

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Maintaining High-Quality, Reliable Financial Reporting

Posted by Mary Jo White, U.S. Securities and Exchange Commission, on
Tuesday, December 15, 2015
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. This post is based on Chair White’s recent Keynote Address at the 2015 AICPA National Conference; 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.

It is a pleasure to be here to speak to you about our shared and weighty responsibility to maintain high-quality, reliable financial reporting. This audience—preparers, auditors, audit committee members, and their advisors—is a very important one for the SEC. Investors, issuers, and the markets all depend on the work you do and the judgments you make—and how well you do both. You, together with the standard setters and the regulators, have a vital stake in ensuring that our capital markets remain the safest and strongest in the world—and we all share the responsibility.

Key to our mutual success is maintaining high-quality reporting of reliable and relevant financial information that investors can use to make informed investment decisions. If there is even one weak link in the financial reporting chain, investors and the integrity of our markets suffer. We must all work together in order to fulfill the high expectations investors rightly set for financial reporting.

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Putting RBC Capital In Context

Posted by John C. Coates, Harvard Law School, on
Tuesday, December 15, 2015
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John C. Coates is the John F. Cogan, Jr. Professor of Law and Economics at Harvard Law School. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision, the Delaware Supreme Court upheld Chancery Court decisions requiring RBC Capital—a unit of the Royal Bank of Canada—to pay $76 million to Rural/Metro shareholders based on RBC Capital’s advisory work for Rural/Metro in its 2011 sale to Warburg Pincus. RBC Capital sought a buy-side financing role for Warburg Pincus, a private equity firm, while giving Rural/Metro sell-side advice, and sought to leverage its role in the Rural/Metro deal for work in an unrelated deal without disclosing that fact to Rural/Metro’s board. As a result, under the Revlon standard the Court applied to the case, RBC Capital “aided and abetted breaches of fiduciary duty by former directors of Rural/Metro Corporation,” said the Court, even as it sought to limit the holding by stating that “a board is not required to perform searching and ongoing due diligence on its retained advisors … to ensure that the advisors are not acting in contravention of the company’s interests….”

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