Monthly Archives: January 2016

U.S. Uncleared Swap Margin, Capital, and Segregation Rules

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk visual memorandum; the complete publication, including charts, is available here.

U.S. prudential regulators (the OCC, Federal Reserve, FDIC, FCA and FHFA) and the CFTC have finalized uncleared swap margin, capital and segregation requirements (the “PR rules,” and “CFTC rules,” respectively, and the “final rules,” collectively).* The PR rules apply to swap entities that are prudentially regulated by a U.S. prudential regulator (“PR CSEs”). The CFTC rules apply to swap entities that are regulated by the CFTC and that are not prudentially regulated (“CFTC CSEs”). In this memorandum, “covered swap entities” refers to PR CSEs and CFTC CSEs, together.

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Alternatives to Equity Shares in a Low Stock Price Environment

Steve Pakela is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Pakela, Brian Scheiring, and Mike Grasso.

Compensation Committees face the challenge of balancing the tension in motivating their executives to create shareholder value in the current Say on Pay and economic environment. The current pullback in stock prices and the uncertain financial outlook for 2016 at many companies will make this year’s compensation decisions even more challenging. Stock prices at many companies and in many sectors are down 50% or more over the past year and, in particular, since equity awards were last granted to executives. The table below illustrates the effect of a significantly low stock price on the number of shares granted. For companies whose stock price is down 50%, the number of shares required to deliver equivalent value will be double that granted last year. For those companies whose share price is down 67% or 75%, share grants will need to be three or four times greater than the shares granted last year, respectively. This can pose a number of problems ranging from creating potential windfalls when share prices recover to previous levels to exceeding maximum share grant levels contained in a shareholder approved equity incentive plan.

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M&A at a Glance: 2015 Year-End Roundup

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. The complete publication, including figures, is available here.

Continuing the upward trend started in 2013, 2015 was a record-breaking year for M&A activity. Almost every measure tracked in our Year-End Roundup increased sharply both globally and in the U.S.

Globally, overall deal volume as measured by total deal value was $4,741 billion, which is 63.7% greater than in 2014 ($3,506 billion), and 83% greater than in 2013 ($2,591 billion). In the U.S., overall deal volume was $2,285 billion, which is 56% greater than in 2014 ($1,465 billion), and 133.4% greater than in 2013 ($979 billion). Strategic deal volume in 2015 increased from 2014 by 41.8% globally (from $2,620 billion to $3,715 billion), and by 63.9% in the U.S (from $1,040 billion to $1,705 billion). As a result of this growth, the ratio of strategic to sponsor-related deal volume in the U.S. increased from approximately 2:1 in both 2013 and 2014 to approximately 3:1 in 2015. (Figure 1 of the complete publication, available here). Average deal value in the U.S. was 12.1% higher in 2015 than in 2014. The average value of the ten largest “megadeals” in 2015 was approximately $44 billion, which is consistent with 2014, but more than 160% greater than the average value in 2013. (Figure 2.)
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Weekly Roundup: January 21–January 28


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This roundup contains a collection of the posts published on the Forum during the week of January 21, 2016 to January 28, 2016.



Weekly Roundup: January 14–January 21












 

White Collar and Regulatory Enforcement: What to Expect In 2016

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum.

One way in which we expect the white-collar/regulatory enforcement regime in 2016 to continue last year’s pattern is that the government’s appetite for extracting enormous fines and penalties from settling companies will likely continue unabated. However, as we discuss below, the manner in which well-advised companies facing criminal or serious regulatory investigations will seek to mitigate such fines and sanctions will likely change in some important respects in 2016. The reason for this expected change is that U.S. Deputy Attorney General Sally Yates announced late in 2015 that DOJ was formalizing a requirement that, in order to get “any” cooperation credit, companies must come forward with all available evidence identifying individuals responsible for the underlying misconduct subject to investigation.

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Inversions: Recent Developments

Peter J. Connors is a tax partner at Orrick, Herrington & Sutcliffe LLP. Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group. This post is based on an article authored by Mr. Connors and Mr. Halper, that was previously published in Law360.

In October 2015, press reports began appearing suggesting that Pfizer Inc., one of the world’s largest pharmaceutical companies, and Allergan, an Irish publicly traded pharmaceutical company, were considering entering into the largest inversion in history. Within weeks, the IRS launched its latest missive against inversion transactions. It also put the tax community on notice that more regulatory activity was yet to come.

Companies invert primarily because of perceived disadvantages associated with the U.S. corporate tax system, which has one of the world’s highest tax rates and levies taxes on worldwide income, including income earned by foreign subsidiaries (generally referred to as “controlled foreign corporations”) when repatriated and, at times, prior to repatriation. In its broadest terms, an inversion is the acquisition of substantially all the assets of a U.S. corporation or partnership by a foreign corporation. If a transaction triggers Internal Revenue Code Section 7874, the post-transaction foreign corporation will be treated as a U.S. corporation, and gain that is otherwise recognized on the transaction will not be offset by tax attributes of the U.S. entity, such as net operating losses (NOLs).

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Negotiation in Good Faith—SIGA v. PharmAthene

Philip Richter is a partner and Co-Head of the Mergers & Acquisitions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Richter, Peter Simmons, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court’s decision in SIGA Technologies Inc. v. PharmAthene Inc. (Dec. 23, 2015) has increased the risk associated with entering into a “preliminary agreement”—i.e., an agreement to negotiate in good faith a definitive agreement based on, for example, a term sheet or letter of intent, where some material terms have been set forth and others remain to be negotiated.

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Delaware Court Guidance on Merger Litigation Settlements

Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Mirvis, William Savitt, and Ryan A. McLeod. 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 an opinion last week, the Delaware Court of Chancery rejected a disclosure-only settlement of a putative stockholder class-action lawsuit challenging a merger. In re Trulia, Inc. Stockholder Litig., C.A. No. 10020-CB (Del. Ch. Jan. 22, 2016). Continuing and perhaps completing its recent reevaluation of merger litigation settlement practice, the Court made clear that it “will be increasingly vigilant in scrutinizing” such settlements in the future and that disclosure claims should be litigated (if at all) outside the settlement context.

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Executive Pay, Share Buybacks, and Managerial Short-Termism

Ira Kay is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance memorandum by Mr. Kay, Blaine Martin, and Chris Brindisi. 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 Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

The past year has seen extensive criticism of share buybacks as an example of “corporate short-termism” within the business press, academic literature, and political community. The critics of share buybacks claim that corporate managers, motivated by flawed executive incentive plans (stock options, bonus plans based on EPS, etc.) and supported by complacent boards, behave myopically and undertake value-destroying buybacks to mechanically increase their own reward. In turn, so the criticism goes, the cash used for share buybacks directly cannibalizes long-term value-enhancing strategies such as capital investment, research and development, and employment growth, thereby damaging long-term stock price performance and the value of US markets. [1]

Pay Governance has conducted unique research using a sample of S&P 500 companies over the 2008-2014 period that brings additional perspective to this debate.

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The Biases of an “Unbiased” Optional Takeover Regime

Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law and Bocconi University. This post is based on a recent article authored by Prof. Ventoruzzo and Johannes Fedderke, Professor of International Affairs at Pennsylvania State University School of International Affairs.

The conundrum of the perfect balance between mandatory and enabling rules and the role of private ordering in takeover regulation is one of the most relevant and interesting issues regarding the optimal regime for acquisitions of listed corporations. The issue is rife with complex questions and implications, both from a more technical legal perspective and in terms of public choice.

In a recent and compelling article (available here and published in the Harvard Business Law Review in 2014, and discussed on the Forum here), Luca Enriques, Ron Gilson and Alessio Pacces have argued the desirability of an optional, default regime to regulate takeovers particularly in the European Union. According to this approach, which the proponents call “unbiased,” listed corporations should be allowed to opt out of the default regime and use private ordering to tailor more desirable rules on the “pillars” of the European approach: mandatory bid, board neutrality, and breakthrough. More precisely, they suggest a dichotomy, distinguishing already listed corporations and new IPOs: for the former, the default regime should be the one currently in place; for the latter, a regime crafted against the interests of the existing incumbents should be introduced. With adequate protections and procedural rules, the theory goes, it would be easier to achieve a more efficient regulatory structure.

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