Monthly Archives: March 2016

Federal Guidance on the Cybersecurity Information Sharing Act of 2015

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum.

The Cybersecurity Information Sharing Act of 2015 (“CISA”) was signed into law on December 18, 2015. The law has two main components. First, it authorizes companies to monitor and implement defensive measures on their own information systems to counter cyber threats. Second, CISA provides certain protections to encourage companies voluntarily to share information—specifically, information about “cyber threat indicators” and “defensive measures”—with the federal government, state and local governments, and other companies and private entities. These protections include protections from liability, non-waiver of privilege, and protections from FOIA disclosure, although, importantly, some of these protections apply only when sharing with certain entities. To qualify for these protections, the information sharing must comply with CISA’s requirements, including regarding the removal of personal information.

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Accountability and the Pursuit of SEC Clawback Actions

Joseph A. Hall is a partner and head of the corporate governance practice at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Related research from the Program on Corporate Governance includes Excess-Pay Clawbacks by Jesse Fried and Nitzan Shilon (discussed on the Forum here).

In two recent cases, the SEC affirmatively decided not to bring clawback actions under Section 304 of the Sarbanes-Oxley Act (“SOX”) against executives who reimbursed their respective companies for compensation they received following the filing of misstated financial statements.

The first case involved an investigation into the accounting practices of Monsanto Company, a St. Louis-based agribusiness company. The SEC found that Monsanto had failed to fully recognize the costs of a rebate program it offered, resulting in “materially misstated” earnings over a three-year period. On February 9, 2016, the SEC announced that Monsanto had agreed to pay an $80 million penalty and hire an independent compliance consultant to settle the charges against it and that three accounting and sales executives also agreed to settle charges in connection with the case. However, the SEC indicated that it would not bring a clawback action against the company’s CEO and former CFO. According to the SEC’s press release, “[t]he SEC’s investigation found no personal misconduct by Monsanto CEO … and former CFO …, who reimbursed the company $3,165,852 and $728,843, respectively, for cash bonuses and certain stock awards they received during the period when the company committed accounting violations.” Because Monsanto’s CEO and former CFO reimbursed the company, the SEC found that “it wasn’t necessary … to pursue a clawback action under Section 304 of [SOX].”

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Demise of the Small IPO and the Investing Preferences of Mutual Funds

Robert Bartlett and Steven Davidoff Solomon are Professors of Law at UC Berkeley School of Law, and Paul Rose is Professor of Business Law at Ohio State University College of Law. This post is based on an article authored by Professors Bartlett, Davidoff Solomon, and Rose.

The decline of the small initial public offering (IPO) has been well-documented. It has been less noted that this decline happened in the space of a few years. In 1997 there were 464 non-financial IPOs and 46% were small IPOs. By 1998, this percentage declined to 30%, which would decline further to just 10% in 1999. Small IPOs—once a mainstay of U.S. corporate finance—were quickly relegated to the margins. We explore the reasons for this sudden decline in our paper recently posted to SSRN: What Happened in 1998? The Demise of the Small IPO and the Investing Preferences of Mutual Funds.

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Developments in Corporate Governance and M&A Law in 2015

Jason M. Halper is a partner in the Securities Litigation & Regulatory Enforcement Practice Group at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Halper, Peter J. Rooney, and Brian Blood. This post is part of the Delaware law series; links to other posts in the series are available here.

There were important developments in 2015 in Delaware law concerning issues of corporate governance and/or arising in the context of M&A transactions. These developments arose from a number of sources, including statutory amendments to the Delaware General Corporation Law (DGCL), decisions issued by the Delaware Supreme and Chancery Courts, and SEC interpretive guidance.

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Optimal Inside Debt Compensation and the Value of Equity and Debt

Shane Johnson, Professor of Finance at Texas A&M University. This post is based on an article authored by Professor Johnson; Timothy Campbell, Assistant Professor of Finance at Miami University of Ohio; and Neal Galpin, Associate Professor of Finance at the University of Melbourne. Related research from the Program on Corporate Governance includes Executive Pensions by Lucian Bebchuk and Robert J. Jackson Jr.

Four decades ago, Jensen and Meckling (1976) provided the first analysis of a hypothetical compensation contract that included both equity and debt for a CEO. But until Bebchuk and Jackson (2005) and Sundaram and Yermack (2007) provided early analyses based on then newly available data on CEO pensions, the dominant view was that debt-like claims held by CEOs were theoretically interesting but not empirically relevant. With the new data and evidence, a natural question arose: What is the optimal mix of CEO debt and equity?

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