Monthly Archives: December 2015

2016 Proxy Advisor Policy Changes

Posted by Shirley Westcott, Alliance Advisors, LLC, on

Monday, December 7, 2015

Boards of Directors, Charter & bylaws, Classified boards, Glass Lewis, Institutional Investors, IPOs, ISS, Overboarding, Proxy advisors, Proxy voting, Shareholder proposals, Shareholder rights, Shareholder voting
More from: Shirley Westcott, Alliance Advisors

Shirley Westcott is a Senior Vice President at Alliance Advisors, LLC. This post is based on an Alliance Advisors whitepaper. The complete publication, including footnotes, is available here.

In preparation for the 2016 proxy season, proxy advisors Institutional Shareholder Services (ISS) and Glass Lewis & Co. have issued updates to their proxy voting guidelines, which take effect for annual meetings held on or after Feb. 1, 2016 (ISS) and Jan. 1, 2016 (Glass Lewis). [1] The policy changes and their expected impact on issuers are discussed in more detail in Alliance Advisors’ November newsletter.

The key revisions deal with various situations where the proxy advisors recommend against directors. These include the following:

Disclosure Standards and the Sensitivity of Returns to Mood

Posted by Henry Friedman, University of California, Los Angeles, on

Monday, December 7, 2015

Accounting standards, Behavioral finance, Compliance and disclosure interpretation, Disclosure, Information environment, International governance, Market efficiency, Signaling, Stock returns
More from: Brian Bushee, Henry Friedman

Henry Friedman is an Assistant Professor of Accounting at UCLA. This post is based on an article authored by Professor Friedman and Brian Bushee, Professor of Accounting at the University of Pennsylvania

In our paper, Disclosure Standards and the Sensitivity of Returns to Mood, forthcoming in the Review of Financial Studies, we provide evidence that high-quality disclosure standards are negatively associated with return-mood sensitivity (RMS). Using daily data, we estimate RMS for each country-year as the association between market returns and deseasonalized cloudiness in the city that hosts a country’s stock exchange. We interpret RMS as reflecting noise in returns because short-term moods are unlikely to convey fundamental information.

SEC’s “Unbundling Rule” Interpretation

Posted by Philip E. Richter & Gail Weinstein, Fried, Frank, Harris, Shriver & Jacobson LLP, on

Sunday, December 6, 2015

Acquisition agreements, Charter & bylaws, Compliance and disclosure interpretation, Exchange Act, Inversions, Mergers & acquisitions, Rule 14a-4, SEC, SEC rulemaking, Securities regulation, Shareholder meetings, Shareholder rights, Shareholder voting, Target firms
More from: Gail Weinstein, Philip Richter, Fried Frank

Philip E. Richter is partner and co-head of the Mergers and Acquisitions Practice and Gail Weinstein is of counsel at Fried, Frank, Harris, Shriver & Jacobson LLP. The following post is based on a Fried Frank publication. Related research from the Program on Corporate Governance includes Bundling and Entrenchment by Lucian Bebchuk and Ehud Kamar (discussed on the Forum here).

The SEC has issued two new compliance and disclosure interpretations on the so-called “Unbundling Rule.” The SEC appears to have been motivated to issue the CDIs as part of the political reaction against, and desire to deter, inversion transactions.

The CDIs relate to proposed M&A transactions in which an acquiror would be issuing its equity securities to the target stockholders and the transaction agreement requires the acquiror to make material changes to its organizational documents (such as corporate governance changes). The SEC staff has established a new requirement for separate, precatory (i.e., non-binding) target stockholder votes on material changes to the acquiror’s organizational documents (“unbundled” from the target vote on the transaction itself)—which is designed to heighten the visibility to target stockholders of proposed acquiror corporate governance changes.

The First Insider Trader in Commodities

Posted by Andrew Verstein, Wake Forest University, on

Friday, December 4, 2015

CFTC, Commodities, Disclosure, Duty to inform, Front-running transactions, Futures, Information asymmetries, Inside information, Insider trading, LIBOR, Misconduct, Securities enforcement, Securities regulation, Swaps, U.S. federal courts
More from: Andrew Verstein

Andrew Verstein is Assistant Professor of Law at Wake Forest University. This post draws upon an article forthcoming in the Virginia Law Review

The Second Circuit’s decision in United States v. Newman has led many commentators to predict fewer insider trading enforcement actions, a prediction quickly validated by Preet Bharara, United States Attorney for Manhattan, who has both unwound guilty pleas and dropped active prosecutions. For Newman’s critics and defenders alike, it is obvious that insider trading prosecution in the stock market is now in a period of stumbling retreat.

Yet the stock market is not the only financial market, and the trajectory of insider trading law looks very different if other asset classes are considered. Commodities markets are the world’s largest and oldest markets, and Wednesday marked the very first time an individual was sanctioned for insider trading in commodities.

Rural/Metro Decision: Aiding and Abetting Liability

Posted by Ariel J. Deckelbaum, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on

Friday, December 4, 2015

Ariel J. Deckelbaum is a partner and deputy chair of the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Deckelbaum, Ross A. Fieldston, Justin G. Hamill, Stephen P. Lamb, and Jeffrey D. Marell. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court has issued its much anticipated opinion in RBC Capital Markets v. Joanna Jervis, affirming all of the principal holdings of the Court of Chancery’s series of decisions in In re Rural/Metro Corp. S’holder Litig. The opinion speaks to a multitude of issues, but we focus on the breach of fiduciary duty and aiding and abetting liability claims in this post.

Does the Presence of Short Sellers Affect Insider Selling?

Posted by Massimo Massa, INSEAD, on

Thursday, December 3, 2015

Boards of Directors, Incentives, Information asymmetries, Information environment, Inside information, Insider trading, Management, Market efficiency, Market reaction, Short sales, Stock analysts
More from: Hong Zhang, Massimo Massa, Weibiao Xu, Wenlan Qian

Massimo Massa is Professor of Finance at INSEAD. This post is based on an article authored by Professor Massa; Wenlan Qian, Assistant Profess of Finance at National University of Singapore; Weibiao Xu of the Department of Finance at National University of Singapore; and Hong Zhang, Associate Professor of Finance at Tsingua University.

A large body of literature shows that insiders trade on private information. Less attention, however, has been devoted to how the trading activity of other types of “informed” investors affects insiders’ trading activity. In our study, we address this issue by exploring how the presence of a particular type of informed investors—i.e., the short sellers—could alter insiders’ incentives to trade on their private (negative) information.

We know that short sellers are able to identify overvalued stocks. In addition, short sellers intermediate a considerable amount of trade. Collectively, these characteristics make short sellers an important class of “informed” investors whose trading activity may directly and significantly affect insiders.

Bankruptcy Versus Bailout of Socially Important Non-Financial Institutions

Posted by Shlomit Azgad-Tromer, Berkeley Law School, on

Thursday, December 3, 2015

Bailouts, Bankruptcy, Corporate governance, Distressed companies, Financial crisis, Financial policies, Financial regulation, Liquidity, Moral hazard, SIFIs, Social capital, Systemic risk, Too big to fail
More from: Shlomit Azgad-Tromer

Shlomit Azgad-Tromer is a visiting scholar at Berkeley Law School. This post is based on the article Too Important to Fail: Bankruptcy Versus Bailout of Socially Important Non-Financial Institutions.

Systemically important financial institutions are broadly considered to pose a risk to the entire economy upon failure. Thus governments act upon their failure, providing them with an implied insurance policy for ongoing liquidity. Yet governments frequently provide de facto liquidity insurance for non-financial institutions as well. For example, recently in the U.K., 35 hospital trusts were sharing £536 million in non-repayable bailouts in order to keep services running smoothly during 2013-2014. A decade earlier, a federal bankruptcy judge approved California’s multibillion-dollar bailout of Pacific Gas & Electric Corporation. In an effort to stabilize and sustain air transportation after 9/11, the U.S. Congress passed the Air Transportation Safety and System Stabilization Act, which provided the airline industry with financial aid valued at as much as $10 billion. In all of these cases, taxpayer money was used to rescue non-financial institutions.

ISS and Glass Lewis Updated 2016 Voting Policies

Posted by Ellen Odoner & Lyuba Goltser, Weil, Gotshal & Manges LLP, on

Wednesday, December 2, 2015

Ellen Odoner and Lyuba Goltser are partners in the Public Company Advisory Group of Weil, Gotshal & Manges LLP. This post is based on a Weil publication by Ms. Odoner, Ms. Goltser, and Reid Powell. The complete publication, including appendices, is available here.

ISS and Glass Lewis have released updates to their proxy voting policies for the 2016 proxy season. [1] ISS has also modified its QuickScore 3.0 Technical Document and Equity Plan Scorecard. [2] In this post we provide guidance for U.S. public companies on addressing these developments.

Information, Analysts, and Stock Return Comovement

Posted by Allaudeen Hameed, National University of Singapore, on

Wednesday, December 2, 2015

Earnings announcements, Forecasting, Information asymmetries, Information environment, Market reaction, Peer effects, Public perception, Stock analysts, Stock mispricing, Stock performance, Stock returns
More from: Allaudeen Hameed, Bernard Yeung, Jianfeng Shen, Randall Morck

Allaudeen Hameed is a Professor of Finance at National University of Singapore. This post is based on an article authored by Professor Hameed; Randall Morck, Professor of Finance at the University of Alberta; Jianfeng Shen, Senior Lecturer in Finance at the University of New South Wales; and Bernard Yeung, Professor of Finance at National University of Singapore.

Stocks followed by more analysts should be priced more accurately, yet their returns are unusually prone to co-move with market and industry indexes. Stocks that co-move more are often thought to be related to herding. This is because more informed trading ought to make a firm’s stock price move with the changing fortunes of that specific firm, as well as with market and industry trends. More firm-specific price variation in less-followed stocks seems counterintuitive, yet this is what we observe.

In our paper, Information, Analysts, and Stock Return Comovement, forthcoming in The Review of Financial Studies, we resolve this seeming paradox. Stocks covered by more analysts co-move more precisely because they are priced more accurately and their price movements help investors update the prices of less-followed stocks. This “information spillover” makes most price movement in highly-followed stocks look like comovement with industry or market trends, but in fact investors are using information about highly-followed stocks to deduce how other stocks ought to move.

The Dutch Poison Pill: How is it Different from an American Rights Plan?

Posted by Leonard Chazen, Covington & Burling LLP, and Peter Werdmuller, Werdmuller & Co. B.V., on

Tuesday, December 1, 2015

Boards of Directors, International governance, Merger litigation, Mergers & acquisitions, Netherlands, Poison pills, SEC rulemaking, Securities regulation, Shareholder activism, Shareholder rights, Shareholder suits, Shareholder voting, Takeover defenses, Takeovers
More from: Leonard Chazen, Peter Werdmuller, Covington & Burling, Werdmuller & Co.

Leonard Chazen is a Senior Counsel of Covington & Burling LLP, and a member of the New York Bar. Peter Werdmuller is the founding partner of Werdmuller & Co. B.V., and a member of the New York and Rotterdam (the Netherlands) Bar. This post is based on an article authored by Mr. Chazen and Mr. Werdmuller.

During the spring and summer of this year, the so-called “Dutch Poison Pill” made it to the front pages of the business sections of The New York Times [1] and The Wall Street Journal. [2] The Dutch Poison Pill received this extraordinary attention because of its use by Mylan N.V. (“Mylan”), a NASDAQ-quoted Dutch public limited liability company (or, “Dutch N.V.”) to ward off an unsolicited takeover bid by the Israeli pharmaceutical company Teva Pharmaceutical Industries Ltd. (“Teva”). Mylan, which had previously been a Pennsylvania corporation, became a Dutch N.V. in early 2015 through an inversion, which involved merging Mylan into a newly created Dutch acquisition vehicle that also acquired certain non-U.S. businesses of Abbott Laboratories.

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