Yearly Archives: 2015

Over-Reaction to Use of Merger Price to Determine Fair Value

Posted by Philip Richter, Fried, Frank, Harris, Shriver & Jacobson LLP, on
Friday, May 1, 2015
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Philip Richter is co-head of the Mergers and Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication authored by Mr. Richter, Steven Epstein, John E. Sorkin, 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.

The Delaware Chancery Court has used the merger price in the underlying transaction as the primary or sole factor in determining the “fair value” of dissenting shares in two recent appraisal cases. The Delaware Supreme Court recently upheld one of those decisions. However, the court’s use of the merger price in both cases was based on the same limited fact situation, suggesting that—contrary to much of the recent commentary—the merger price will not frequently be used as a key factor in determining fair value in appraisal cases.

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Improving Transparency for Executive Pay Practices

Posted by Luis A. Aguilar, Commissioner, U.S. Securities and Exchange Commission, on
Thursday, April 30, 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 remarks at a recent 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. Related research from the Program on Corporate Governance about CEO pay includes: Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here); Golden Parachutes and the Wealth of Shareholders by Lucian Bebchuk, Alma Cohen, and Charles C.Y. Wang (discussed on the Forum here); and The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

Today, as part of a series of Congressionally-mandated rules to promote corporate accountability, we consider proposed rules to put a spotlight on the relationship between executive compensation and a company’s financial performance. It is well known that the compensation of corporate executives has grown exponentially over the last several decades, and continues to do so today. It is also commonly accepted that much of that growth reflects the trend towards equity-based and other incentive compensation, which is thought to align the interests of corporate management with the company’s shareholders. Specifically, the idea is that stock options, restricted stock, and other incentive-based compensation encourages management to work hard to improve their company’s performance, because managers will share in the wealth along with shareholders when stock prices rise.

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Some Lessons from DuPont-Trian

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Thursday, April 30, 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. 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) and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

The ISS Report on the DuPont-Trian proxy contest calls attention to a number of important insights into ISS policies and practices and those of many of its institutional investor clients. Concomitantly, these policies illustrate the realities of the sharp increase in activist activity and the steps corporations can, and should, take to deal with the activist phenomena.

ISS and major institutional investors will be responsive to and support well-presented attacks on business strategy and operations by activist hedge funds on generally well managed major corporations, even those with an outstanding CEO and board of directors.

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Implications of the Supreme Court Omnicare Decision

Posted by Boris Feldman, Wilson Sonsini Goodrich & Rosati, on
Wednesday, April 29, 2015
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Boris Feldman is a member of Wilson Sonsini Goodrich & Rosati, P.C. This post is based on a WSGR alert authored by Mr. Feldman, Robert G. Day, Catherine Moreno, and Michael Nordtvedt.

On March 24, 2015, the U.S. Supreme Court issued its decision in Omnicare, Inc., et al. v. Laborers District Council Construction Industry Pension Fund et al., addressing when an issuer may be held liable for material misstatements or omissions under Section 11 of the Securities Act of 1933 for statements of opinion in a registration statement.

Among other things, the Supreme Court held that an issuer may be held liable under Section 11 for a statement of opinion, even one that is sincerely held, if its registration statement omits facts about the issuer’s inquiry into, or knowledge concerning, a statement of opinion and if those facts conflict with what a reasonable investor, reading the statement fairly and in context, would take from the statement itself.

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CEO Stock Ownership Policies—Rhetoric and Reality

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Wednesday, April 29, 2015
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The following post comes to us from Nitzan Shilon at Peking University School of Transnational Law. This post is based on his recent study, CEO Stock Ownership Policies—Rhetoric and Reality. He conducted this study while being a Fellow in Law and Economics and an S.J.D. (Doctor of Laws) candidate at Harvard Law School.

I recently published a study titled CEO Stock Ownership Policies—Rhetoric and Reality. This study is the first academic endeavor to analyze the efficacy and transparency of stock ownership policies (SOPs) in U.S. public firms. SOPs generally require managers to hold some of their firms’ stock for the long term. Although firms universally adopted these policies and promoted them as a key element in their mitigation of risk, no one has shown that such policies actually achieve the important goals that they have been established to achieve. My study shows that while SOPs are important in theory, they are paper tigers in practice. It also shows that firms camouflage the weakness of these policies in their public filings. Therefore I put forward a proposal to make SOPs transparent as a first step in improving their content. My findings have important implications for the ongoing policy debates on corporate governance and executive compensation.

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Shareholder Proposal Landscape

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, April 28, 2015
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The following post comes to us from Ernst & Young LLP, and is based on a publication by the EY Center for Board Matters.

Institutional investors are increasingly communicating their expectations around governance through direct engagement and letter writing campaigns. Still, some continue to rely on shareholder proposals to trigger dialogue and help ensure a topic is raised at the board level.

Investors that submit proposals generally view them as an invitation to a discussion, preferring to reach agreement with the targeted company without the proposal going to a vote. If agreement cannot be reached, they generally believe that votes on shareholder proposals provide management with valuable insights into investor views.

The EY Center for Board Matters recently had conversations with 50 institutional investors, investor associations and advisors on their corporate governance views and priorities for the 2015 proxy season.

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A Century of Capital Structure: The Leveraging of Corporate America

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Tuesday, April 28, 2015
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The following post comes to us from John Graham, Professor of Finance at Duke University; Mark Leary of the Finance Area at Washington University in St. Louis; and Michael Roberts, Professor of Finance at the University of Pennsylvania.

In our paper, A Century of Capital Structure: The Leveraging of Corporate America, forthcoming in the Journal of Financial Economics, we shed light on the evolution and determination of corporate financial policy by analyzing a unique panel data set containing accounting and financial market information for US nonfinancial publicly traded firms over the last century. Our analysis is organized around three questions. First, how have corporate capital structures changed over the past one hundred years? Second, do existing empirical models of capital structure account for these changes? And, third, if not explained by existing empirical models, what forces are behind variation in financial policy over the last century?

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Delaware Court’s El Paso Pipeline Opinion Provides Lessons for Related-Party Transactions

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 27, 2015
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The following post comes to us from Jason M. Halper, partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP, and is based on an Orrick publication by Mr. Halper, Peter J. Rooney, and William J. Foley. 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 April 20, 2015, the Delaware Court of Chancery issued a decision awarding $171 million in damages to the common unitholders of a limited partnership against its general partner in connection with a “dropdown” transaction. The decision is the latest in a series of decisions by the Chancery Court concerning the conduct of directors and advisers in conflict of interest and/or sale of the company transactions. See also In re Rural/Metro Corp. S’holders Litig., No. 6350-VCL (Del. Ch. Oct. 10, 2014); Chen v. Howard-Anderson, No. 5878-VCL (Del Ch. April 8, 2014); In re Orchard Enter., Inc. S’holder Litig., No. 7840-VCL (Del. Ch. Feb. 28, 2014). The decision yet again highlights areas that should be of concern to boards and their advisers in such transactions.

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Multiple Voting Shares and Private Ordering: Should Old Taboos Be Abolished? The Recent Italian Reform

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on
Monday, April 27, 2015
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The following post comes to us from Marco Ventoruzzo of Pennsylvania State University, Dickinson School of Law, and Bocconi University.

Italian Law No. 116 of 2014 introduced several rules designed to make corporate law more flexible, create incentives to corporations to go public, and might also allow controlling shareholders and directors to entrench themselves more effectively, limiting the risk of hostile acquisitions. The new rules, which became effective a few weeks ago, are both interesting and controversial. They can be seen as a response to the increase of regulatory competition in Europe, epitomized by the reincorporation of Chrysler-Fiat, which last year moved its registered seat from Italy to The Netherlands, thus becoming subject to Dutch law.

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Balancing Division of Board Labor with Overall Director Responsibilities

Posted by Eric Geringswald, Corporation Service Company, on
Sunday, April 26, 2015
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Eric Geringswald is Director of CSC® Publishing at Corporation Service Company. This post is an excerpt from the 2015 Edition of The Directors’ Handbook, by Thomas J. Dougherty of Skadden, Arps.

In this year’s Foreword, Dougherty argues that an increasing complexity of corporate governance and the growing list of action items assigned to directors has led to a division of labor that leaves some directors uninvolved or unaware of important board activities and responsibilities.

The Culture-Structure Interplay

We tend to think of board structure in relation to its stock exchange-mandated board committees, or other standing committees, including Audit, Compensation, Nominating, Governance, Finance and M&A. Much of the Handbook is taken up with discussion of those committees and related director duties. Deservedly so.

But there is a predicate question and, I submit, a related concern that should be addressed, at least annually, regarding board structure. That is the interplay between board structure and board culture, which manifests itself, for good or bad, in many ways. The board’s division of labor across its standing committees facilitates decision-making in our world of audit, compensation and governance complexity. But in the process, there are manifold opportunities for some directors, who are not on one committee or the other, to get “left behind” other directors in their exposure to, and grasp of, key risks, opportunities and even basic operational desiderata. Much of the responsibility to avoid that eventuality rests mutually with the respective committee chairs (whose regular reports to the full board and committee minutes must be robust) and with those directors not on a given committee. The latter should from time to time attend committee meetings or otherwise become sufficiently informed of each committee’s work that they are both comfortable that its work is being well-handled and also educated enough about its process that they can intelligently assess the reporting-out by the committee chair.

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