Monthly Archives: February 2016

EGC Corporate Governance Practices Survey

Anna T. Pinedo is a partner in the New York office of Morrison & Foerster LLP. This post is based on a Morrison & Foerster publication by Ms. Pinedo, Ze’-ev Eiger, Brian Hirshberg, and David Lynn; the complete publication is available here.

Corporate governance has changed dramatically since passage of the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010. The level of shareholder engagement and institutional investor expectations regarding governance practices have also changed significantly. The passage of the Jumpstart Our Business Startups Act in April 2012, which helped spur the initial public offering market, raised concerns among certain groups that new initial public offering (“IPO”) candidates would view certain of the accommodations available under the Act as a rationale to relax their governance practices and to rely on phase-in periods. [1] However, emerging growth companies, or EGCs, availing themselves of the JOBS Act’s Title I “IPO on-ramp” provisions generally have adopted rigorous governance policies and procedures.

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Servants of Two Masters? The Feigned Hysteria Over Activist-Paid Directors

Yaron Nili is a fellow at the Harvard Law School Program on Corporate Governance. This post is based on Mr. Nili’s recent article, Servants of Two Masters? The Feigned Hysteria over Activist-Paid Directors, forthcoming in the Penn Journal of Business Law. 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).

Director compensation in the U.S. has garnered much less attention than the compensation of executives. Directors are most often elected without challenge, based on the company’s recommendation. They serve, at least in theory, all shareholders and owe their duties to the corporation. In each company, directors are compensated equally regardless of their affiliation, credentials or tenure. This parity has been lauded as a crucial element in promoting board “cohesiveness,” to the benefit of all shareholders.

Recently, however, activist investors have asked shareholders to elect director-candidates who receive a lucrative compensation package from the activist in addition to their compensation arrangement with the company. Incumbent managers and their defenders, such as Wachtell Lipton, have sharply condemned this practice, terming it a “Golden Leash” that subjects the nominated director to the activist’s control. They argue that the payment of incentive compensation by a sponsoring shareholder establishes a two-tiered compensation structure for the board, creates dissension and lack of cohesion in the boardroom, and fosters continuing allegiances between the director and the activist shareholder following the election therefore calling into question the independence of the director. Further, they argue that these arrangements could cause the firm to be too “short-term” oriented. Activists, however, claim that these arrangements help recruit talent that would otherwise not serve on a board for regular director pay, particularly in the case of a contested election and that structuring it as performance-based pay serves a number of useful functions that may not be achieved by fixed compensation.

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Remarks of SEC Chair on Small and Emerging Companies

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent remarks before the SEC Advisory Committee on Small and Emerging Companies; the complete text 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.

Good morning. Thank you very much, Sara and Steve. I want to extend a warm welcome to our new Committee members as well as those members who are returning.

This Committee has been a continuing source of valuable expertise and advice to the Commission on a variety of important issues, as reflected in the Commission’s renewal of its charter last year. Small businesses play a crucial role in our nation’s economy, and this Committee helps to ensure that the views of small business owners, investors, and other stakeholders in this community are clearly heard here at the Commission.
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Down-Round Financings and Outstanding Equity Compensation

Kyoko Lin is a partner in the Corporate Department at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Ms. Lin, Byron Rooney, and Brian Sieben.

The recent market turmoil has forced VC firms and other private company investors to examine closely the real possibility of seeking financing at a lower valuation—what is often referred to as a “down round.” More recently, the New York Times observed in January, “The unicorn [1] wars are coming, as the downturn in the market will force these onetime highfliers to seek money at valuations below their earlier billion-dollar-plus levels[.]”

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Osborne Should Think Again On His Bank Surcharge

Mark Roe is the David Berg Professor of Law at Harvard Law School. This post is based on an op-ed by Professor Roe and Michael Tröge that was published today in The Financial Times, which can be found here.

HSBC’s decision last week to keep its headquarters in London, after reports that it would leave the UK if the levy on bank liabilities were not lifted, will have been greeted with relief at the Treasury. However, there is good reason to think the Treasury got a bad deal, jeopardising financial safety for not very much in return.

In his Autumn Statement last year, Chancellor George Osborne promised to phase out the levy, offsetting this with an 8 per cent surcharge tax on bank profits. Taxing bank profits is popular with voters, even though it makes the financial system weaker. Because it makes bank equity more expensive and ending the levy makes debt cheaper, the surcharge will push British banks to use less safe equity and more risky debt.
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2015 CPA-Zicklin Index of Corporate Political Disclosure

Bruce F. Freed is president and a founder of the Center for Political Accountability. This post is based on the 2015 CPA-Zicklin Index of Corporate Political Disclosure and Accountability by Mr. Freed and Marian Currinder, CPA’s associate director. The full report is available here. Related research on corporate political spending from the Program on Corporate Governance includes Originalist or Original: The Difficulties of Reconciling Citizens United with Corporate Law History, by Leo Strine and Nicholas Walter (discussed on the Forum here), and Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here).

On the eve of a blockbuster election year for political spending, more of America’s largest publicly traded companies are disclosing their corporate expenditures on politics and are starting to place restrictions on their political spending. These are key findings of the fifth annual CPA-Zicklin Index of Political Disclosure and Accountability that, for the first time, measures the transparency and accountability policies and practices of the entire S&P 500.

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Weekly Roundup: February 19–February 25


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This roundup contains a collection of the posts published on the Forum during the week of February 19, 2016 to February 25, 2016.











Delaware Forum Selection Bylaws After Trulia

Warren S. de Wied is partner and member of the mergers & acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. de Wied, Steven Epstein, Philip Richter, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware courts have been engaged over the past couple of years in trying to counter the “sue first, ask questions later” approach to M&A litigation that has become so prevalent. In re Trulia (Jan. 26, 2016) represents the procedural prong of the Delaware courts’ general effort to reduce the volume of unnecessary M&A litigation.

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The Ownership and Trading of Debt Claims in Chapter 11 Restructurings

David Smith is Professor of Commerce at the University of Virginia. This post is based on an article authored by Professor Smith; Victoria Ivashina, Professor of Finance at Harvard Business School; and Ben Iverson, Assistant Professor of Finance at Northwestern University.

The ownership structure of corporate debt is potentially a key factor affecting the cost of financial distress. However, past studies have been hampered by the fact that observing the ownership of debt claims is difficult. In our paper, The Ownership and Trading of Debt Claims in Chapter 11 Restructurings, which was recently featured in the Journal of Financial Economics, we overcome this obstacle by using claim-level holdings and trading data on bankrupt firms collected electronically by claims administration companies. [1] For 136 large US bankruptcy cases filed between July 1998 and March 2009, these data identify the holder of each claim or the name of a custodian, the amount of the claim, information on the claim type, and, for a subset of claims, ownership transfers that occur during the bankruptcy process. We use these data to study the ownership structure of firms that have filed for bankruptcy, how ownership changes during bankruptcy, and ultimately, how ownership structure influences Chapter 11 outcomes (our data set does not include private workouts).

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What Lies Ahead? The SEC in 2016

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent remarks at SEC Speaks, available here. The views expressed in this post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Good morning. It is a pleasure to be part of SEC Speaks. This conference provides an important forum for the Commission staff, the securities bar, and financial market participants to discuss cutting-edge issues. As our securities markets continue to undergo change at an incredible pace, this conference helps us to look back and to look ahead.

Before I begin, I would like to acknowledge the phenomenal and dedicated staff of the SEC, many of whom are present or are participating via video-conference today. Our staff is over 4,000 strong, across twelve offices and dedicated each and every day to protecting investors, maintaining fair, orderly, and efficient markets, and helping to facilitate capital formation.

Of course, I would be remiss if I did not remind you that the views I am expressing today are my own and do not necessarily reflect those of the Commission, my fellow Commissioners, or the staff of the Commission.

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