Yearly Archives: 2015

Is Institutional Investor Stewardship Still Elusive?

Posted by Simon C. Y. Wong, Northwestern University School of Law, on

Thursday, September 24, 2015

Agency costs, Asset management, Conflicts of interest, Incentives, Institutional Investors, Long-Term value, Ownership, Pension funds, Short-termism, Stewardship, Stewardship Code, UK
More from: Simon Wong

Simon C.Y. Wong is an adjunct professor of law at the Northwestern University School of Law, and a visiting fellow at the London School of Economics and Political Science. This post is based on an article that recently appeared in the Butterworths Journal of International Banking and Financial Law.

The idea that institutional investors should behave as active, long-term oriented “stewards” has caught on globally. Five years after the launch of the landmark UK Stewardship Code, counterparts can be found on four continents (see Figure 1).

When the UK code was promulgated, I argued that institutional investor stewardship was an elusive quest due to, inter alia:

Inappropriate performance metrics and financial arrangements that promote trading and a short-term focus;
Excessive portfolio diversification that makes monitoring of investee companies challenging;
Lengthening chain of ownership that weakens an ownership mindset;
Passive/index funds that pay scant attention to corporate governance; and
Pervasive conflicts of interest among asset managers.

The fifth anniversary of the UK code provides an opportune moment to examine the notable achievements and continuing challenges in the drive to encourage institutional investors to be informed and engaged owners.

In re Dole Food Company, Inc. and the Cost of Going Private

Posted by James Jian Hu, Kirkland & Ellis LLP, on

Wednesday, September 23, 2015

Controlling shareholders, Delaware cases, Delaware law, Disclosure, Fair values, Fiduciary duties, Going private, Management, Merger litigation, Mergers & acquisitions, Minority shareholders, Misconduct, Shareholder suits
More from: James Jian Hu, Kirkland & Ellis

James Jian Hu is an associate in the corporate and mergers & acquisitions practice at Kirkland & Ellis LLP. The views expressed in this post represent solely those of the author. 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 August 27, 2015, Vice Chancellor Laster authored a widely anticipated opinion providing valuable guidance on steering clear of a flawed process in a going-private transaction. David H. Murdock, the CEO and Chairman of Dole and a 40% shareholder, and C. Michael Carter, the General Counsel, President and COO of Dole and characterized as Murdock’s right-hand man, were found personally liable for $148 million to Dole shareholders. A number of considerations detailed in the court’s opinion serve as valuable reminders for practitioners guiding a controlling stockholder in a going-private process in the interest of minimizing post-closing litigation risk and liability exposure.

A New Paradigm for Corporate Governance

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on

Tuesday, September 22, 2015

Antitakeover, Hedge funds, Institutional Investors, Shareholder activism, Shareholder value, Short-termism
More from: Martin Lipton, Wachtell Lipton

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. The study putting forward the empirical evidence on hedge fund activism that the post seeks to question is The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here). Additional posts discussing the Bebchuk-Brav-Jiang study, including additional critiques by Wachtell Lipton and responses to them by Professors Bebchuk, Brav, and Jiang, are available on the Forum here.

Recently, there have been three important studies by prominent economists and law professors, each of which points out serious flaws in the so-called empirical evidence being put forth to justify short-termism, attacks by activist hedge funds and shareholder-centric corporate governance. These new studies show that the so-called empirical evidence omit important control variables, use improper specifications, contain errors and methodological flaws, suffer from selection bias and lack real evidence of causality. In addition, these new studies show that the so-called empirical evidence ignore real-world practical experience and other significant empirical studies that reach contrary conclusions. These new studies are:

Opportunism as a Managerial Trait

Posted by David Hirshleifer, University of California, Irvine, on

Tuesday, September 22, 2015

Backdating, Behavioral finance, Corporate culture, Disclosure, Earnings announcements, Information environment, Inside information, Insider trading, Management, Manager characteristics, Misconduct, Option timing, Profitability, Securities regulation
More from: David Hirshleifer, Usman Ali

David Hirshleifer is Professor of Finance at the University of California, Irvine. This post is based on an article authored by Professor Hirshleifer and Usman Ali, Portfolio Manager at MIG Capital. Related research from the Program on Corporate Governance includes Insider Trading via the Corporation by Jesse Fried (discussed on the Forum here.)

In trading their firms’ stocks, insiders must balance the profits of informed trading before news, the scrutiny by regulators that such trading can engender, formal policy restrictions by firms of insider trading activities, and diversification and liquidity motivations for selling shares after vesting of equity-based compensation. This mixture of motivations and constraints makes it is hard to decipher the information content of insider trades, especially because different trades may be intended to exploit news arriving at short or long horizons. This noise makes it feasible, up to a point, to conceal deliberate opportunism from regulators such as the SEC.

Empirically, there are some indications that insiders do exploit private information. Past research finds that insider purchases positively predict subsequent abnormal returns. On the other hand, effects are much harder to identify for insider sales, presumably because such sales are often performed for non-informational reasons, such as to reduce risk or to consume.

Individual Accountability for Corporate Wrongdoing

Posted by Daniel P. Chung, Gibson, Dunn & Crutcher LLP, on

Monday, September 21, 2015

Accountability, Compliance & ethics, Corporate fraud, Deferred prosecution agreements, DOJ, Incentives, Misconduct, Non-prosecution agreement, Securities enforcement, Securities fraud, Securities regulation
More from: Charles Stevens, Daniel Chung, Debra Yang, Joseph Warin, Gibson Dunn

Daniel P. Chung is of counsel in the Washington, D.C. office of Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication authored by Mr. Chung, F. Joseph Warin, Charles J. Stevens, and Debra Wong Yang.

On September 9, 2015, the Department of Justice (“DOJ”) issued a new policy memorandum, signed by Deputy Attorney General Sally Yates, regarding the prosecution of individuals in corporate fraud cases—”Individual Accountability for Corporate Wrongdoing” (“the Yates Memorandum”).

The Yates Memorandum has been heralded as a sign of a new resolve at DOJ, and follows a series of public statements made by DOJ officials indicating that they intend to adopt a more severe posture towards “flesh-and-blood” corporate criminals, not just corporate entities. Furthermore, the Yates Memorandum formalizes six guidelines that are intended “to strengthen [DOJ’s] pursuit of corporate wrongdoing.”

Though much of the Yates Memorandum is not entirely novel, corporations and their executives should take close note of DOJ’s increasing and public focus on individual prosecutions. Additionally, both corporations and DOJ should take note of how the Yates Memorandum may carry a number of consequences—intended and unintended—with respect to cooperation with DOJ investigations.

Peer Effects of Corporate Social Responsibility

Posted by Hao Liang, Singapore Management University, on

Monday, September 21, 2015

Corporate Social Responsibility, Firm performance, Information environment, Peer effects, Peer groups, Product markets, Public perception, Regression discontinuity, Shareholder proposals, Shareholder value, Shareholder voting, Transparency
More from: Hao Liang, Jie Cao, Xintong Zhan

Hao Liang is Assistant Professor of Finance at Singapore Management University. This post is based on an article authored by Professor Liang, and Jie Cao and Xintong Zhan, both of the Department of Finance at the Chinese University of Hong Kong.

Corporate social responsibility (CSR) has increasingly become a mainstream business activity—ranging from voluntarily engaging in environmental protection to increasing workforce diversity and employee welfare—although standard economic theories predict that it should be rather uncommon (Benabou and Tirole, 2010; Kitzmueller and Shimshack, 2012). The neoclassical economic paradigm usually considers CSR as unnecessary and inconsistent with profit maximization (e.g., Friedman, 1970). This discrepancy between theory and real-world observations has attracted much scholarly attention in recent years. One popular view on why CSR prevails is that it creates a competitive advantage for the firm and thus contributes to firm value. Following this line, numerous studies have investigated the causes and consequences of CSR by focusing on its strategic value implications.

Title VII and Security-Based Swaps

Posted by Robert W. Reeder III and Dennis C. Sullivan, Sullivan & Cromwell LLP, on

Sunday, September 20, 2015

Clearing houses, Compliance & ethics, Cross-border transactions, Disclosure, Dodd-Frank Act, Exchange Act, Financial institutions, Financial regulation, Regulation SBSR, SEC, SEC rulemaking, Securities regulation, Swaps, Swaps entities
More from: Dennis Sullivan, Robert Reeder, Sullivan & Cromwell

Robert W. Reeder III and Dennis C. Sullivan are partners at Sullivan & Cromwell LLP. This post is based on a Sullivan and Cromwell publication. The complete publication is available for download here.

In the first half of 2015, the Securities and Exchange Commission (the “SEC”) finalized or proposed a number of rules relating to security-based swaps (“SBSs”). These include final and proposed rules on the reporting and public dissemination of security-based swaps, proposed rules on security-based swap transactions arranged, negotiated or executed by U.S.-based personnel of a non-U.S. person and final rules on the registration of security-based swap data repositories (“SDRs”). This post provides an overview of these regulatory developments.

Federal Court Dismisses Madoff Investors’ Claim

Posted by John F. Savarese, Wachtell, Lipton, Rosen & Katz, on

Saturday, September 19, 2015

Banks, Bernard Madoff, Financial institutions, JPMorgan, Secondary liability, Securities enforcement, Securities fraud, U.S. federal courts
More from: Emil Kleinhaus, John Savarese, Noah Yavitz, Stephen DiPrima, Wachtell Lipton

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Stephen R. DiPrima, Emil A. Kleinhaus, and Noah B. Yavitz

In a significant decision addressing claims arising out of Bernard Madoff’s Ponzi scheme, the U.S. District Court for the Middle District of Florida has dismissed federal securities and other claims asserted by Madoff investors. Dusek v. JPMorgan Chase & Co., No. 2:14-cv-184 (M.D. Fla. Sept. 17, 2015). The decision applies and enforces key principles of federal securities law that, taken together, limit the scope of liability for financial institutions sued in connection with frauds perpetrated by their customers, especially Ponzi schemes.

Remuneration in the Financial Services Industry 2015

Posted by Will Pearce and Michael Sholem, Davis Polk LLP, on

Friday, September 18, 2015

Will Pearce is partner and Michael Sholem is European Counsel at Davis Polk LLP. This post is based on a Davis Polk client memorandum by Mr. Pearce, Mr. Sholem, Simon Witty, and Anne Cathrine Ingerslev. The complete publication, including footnotes, is available here. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here), The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann, and How to Fix Bankers’ Pay by Lucian Bebchuk.

The past year has seen the issue of financial sector pay continue to generate headlines. With the EU having put in place a complex web of overlapping law, regulation and guidance during 2013 and 2014, national regulators are faced with the task of interpreting these requirements and imposing them on a sometimes skeptical (if not openly hostile) financial services industry. This post aims to assist in navigating the European labyrinth by providing a snapshot of the four main European Directives that regulate remuneration:

Capital Requirements Directive IV (CRD IV);
Alternative Investment Fund Managers Directive (AIFMD);
Fifth instalment of the Undertakings for Collective Investment in Transferable Securities Directive (UCITS V); and
Markets in Financial Instruments Directive (MiFID).

Treasury Seeks to Curb “Cash-Rich” and
REIT Spin-Offs

Posted by Jodi J. Schwartz and Joshua M. Holmes, Wachtell Lipton Rosen & Katz, on

Thursday, September 17, 2015

Internal Revenue Code, IRS, Public firms, REITs, Securities regulation, Spinoffs, Tax avoidance, Taxation, Treasury Department
More from: David Sturgeon, James Holmes, Jodi Schwartz, Wachtell Lipton

Jodi J. Schwartz and Joshua M. Holmes are partners at Wachtell Lipton Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Ms. Schwartz, Mr. Holmes, and David B. Sturgeon.

The Treasury Department and the Internal Revenue Service have announced (in Notice 2015-59) that they are studying issues related to the qualification of certain corporate distributions as tax-free under Section 355 of the Internal Revenue Code in situations involving substantial investment assets, reliance on relatively small active businesses, and REIT conversions. The IRS concurrently issued related guidance (Rev. Proc. 2015-43), adding such transactions to its ever-expanding list of areas on which it will not issue private letter rulings. While this expansion of the IRS’s “no-rule” areas is not a statement of substantive law, these announcements may have a chilling effect on certain pending and proposed transactions.

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