Monthly Archives: April 2016

Agencies’ Resolution Plan Feedback

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

[On April 13, 2016], the Federal Reserve and the FDIC (collectively, “Agencies”) released their feedback on the resolution plans submitted July 1, 2015 by the eight largest US banking institutions. [1] Five were deemed “not credible,” while all eight were found to have “deficiencies” or “shortcomings” (or both). The expected July 1, 2016 plan filing date has been pushed back one year; instead, all eight banks must submit by October 1, 2016 an explanation of how deficiencies have been remedied, a status report on remediation of the shortcomings, and a public section that explains these submissions at a high level. The timeline for remediating some of the cited deficiencies will be very challenging, even considering the relief from the July 1, 2016 filing. [2]

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Executive Compensation Incentives Contingent on Long-Term Accounting Performance

Lingling Wang is Assistant Professor of Finance at Tulane University. This post is based on an article authored by Professor Wang and Zhi Li, Visiting Assistant Professor of Finance at Ohio State University. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

U.S. public firms increasingly tie CEO compensation to long-term accounting performance. The percentage of S&P 500 firms that adopt multiyear accounting-based performance (MAP) incentives has more than doubled from 16.5% in 1996 to 43.3% in 2008. In our paper, Executive Compensation Incentives Contingent on Long-Term Accounting Performance, forthcoming in the Review of Financial Studies, we offer the first large sample study that documents the use and design of MAP plans, investigates the determinants of plan adoption and structure, and analyzes the growing trend of MAP incentives.

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Weekly Roundup: April 22–April 28, 2016


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This roundup contains a collection of the posts published on the Forum during the week of April 22, 2016 to April 28, 2016.








Articles by Bebchuk, Coates and Fried Voted to be Among the Top Ten Corporate and Securities Articles of 2015







Proxy Access: Developments in Market Practice

This post is based on a Sullivan & Cromwell LLP publication authored by Glen T. Schleyer. The complete publication, including Annex, is available here. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot and The Myth of the Shareholder Franchise (discussed on the Forum here), and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

Looking back at the proxy access provisions adopted by U.S. companies over the past year, it is clear that there is convergence around most key terms and conditions, including exceptions and details that are not contemplated by most shareholder proposals. While this convergence does not mean that market practice will stop developing or that governance advocates will cease fighting terms that they find objectionable, companies considering whether to adopt a proxy access provision now have the benefit of significant precedents.
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Reporting “Up” Obligations

Michael W. Peregrine and William P. Schuman are partners at McDermott Will & Emery LLP. This post is based on a McDermott Will & Emery publication authored by Mr. Peregrine, Mr. Schuman, Eugene I. Goldman, and Kelsey J. Leingang. The views expressed herein do not necessarily reflect the views of McDermott Will & Emery LLP or its clients.

A recent decision of a state bar disciplinary commission has important implications for the risk oversight obligations of the governing board. According to various media reports, the Michigan Attorney Grievance Commission declined to pursue six former General Motors Co. in-house counsel for failing to disclose to consumers the safety risks of an alleged defective automotive product. [1] The reporting practices (or lack thereof) by members of the GM in-house counsel department were a major part of that company’s broader ignition switch controversy. As such, the circumstances surrounding the Commission’s action are a useful reminder on how in-house counsel can support the flow of material information to the board, and enable the board to discharge its oversight responsibilities more effectively.

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Preferential Treatment and the Rise of Individualized Investing in Private Equity

William Clayton is an Associate Research Scholar in Law and John R. Raben/Sullivan & Cromwell Executive Director of the Yale Law School Center for the Study of Corporate Law. This post is based on his recent article Preferential Treatment and the Rise of Individualized Investing in Private Equity.

Preferential treatment of investors is more common than ever in today’s private equity industry, thanks in part to new structures that make it easier to grant different terms to different investors. Traditionally, private equity managers raised almost all of their capital through “pooled” funds whereby the capital of many investors was aggregated into a single vehicle, but recent years have seen a dramatic increase in what I refer to in my paper as “individualized investing”—private equity investing by individual investors through separate accounts and co-investments. Separate accounts and co-investment vehicles are entities that exist outside of pooled funds, enabling managers to provide highly customized treatment to the investors in them. Estimates are that upwards of 20% of all investment in private equity went through these channels in 2015. Some anecdotal accounts suggest even higher levels.

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US Regulators’ Bonus Compensation Proposal

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann; The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann; How to Fix Bankers’ Pay by Lucian Bebchuk; and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried.

[On April 21, 2016], the National Credit Union Administration (NCUA) became the first of six federal regulatory agencies to repropose the long-awaited bonus compensation rule that will apply to banks, asset managers, broker-dealers, and other financial institutions. [1] The issuance follows an earlier joint proposal released in April 2011 to establish limitations on the timing—but not the size—of bonus payouts. [2] Compared to the 2011 proposal, the reproposal establishes generally stricter bonus requirements (e.g., longer deferral periods and clawbacks) [3] and applies these requirements to a larger subset of the institutions’ employees. The reproposal also differentiates many of the requirements for institutions with total consolidated assets of over $250 billion, and with between $50 and $250 billion (i.e., “Level 1” and “Level 2” institutions, respectively). [4]

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Omnicare, Legal Risk Disclosure and Corporate Governance

Donald Langevoort is a Professor of Law at the Georgetown University Law Center and Hillary A. Sale is the Walter D. Coles Professor of Law at Washington University School of Law. This post is based on an article authored by Professor Langevoort and Professor Sale.

The Supreme Court’s 2015 decision in Omnicare Inc. v. Laborers District Council Construction Industry Pension Fund is an extended exercise in corporate discourse theory. Omnicare’s registration statement for a public offering under the Securities Act of 1933 stated the company’s belief that its marketing practices to certain kinds of pharmacies were lawful. Later the government decided that they were not, and took legal action against the company, imposing sizable sanctions.

The question before the Court was whether and when that statement of belief could be found false or misleading other than by proof that the issuer’s genuine opinion at the time was different from what it stated. The Court said it might, because words in context can generate inferences for the reasonable investor that go beyond narrow linguistic confines. The statement of opinion could imply something about how the belief was formed that might be untrue, or that certain facts do not exist when in fact they do. Thus the case was remanded for further proceedings, in particular to consider evidence that a lawyer had described one of Omnicare’s contracts as high-risk. Did that or anything similar uncovered by plaintiffs render the unqualified compliance opinion misleading even if genuinely believed?
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The Economics and Finance of Hedge Funds

Vikas Agarwal is Professor of Finance at Georgia State University. This post is based on an article authored by Professor Agarwal; Kevin Mullally, Doctoral Candidate at Georgia State University; and Narayan Naik, Professor of Finance at London Business School. 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).

Critics of hedge funds often label hedge funds as greedy, corrupt, and highly compensated villains who disrupt and pose a threat to financial markets and force corporations to change to policies that destroy firm value. Proponents of hedge funds view them as informed traders who improve market quality and corporate governance. Despite these opposing views, the hedge fund industry has continued to grow at an astounding pace. According to an estimate by Hedge Fund Research, Inc. (HFR) assets in the industry increased from $39 billion in 1990 to about $3 trillion in 2015. Moreover, hedge funds now own a larger fraction of the US stock market with percentage ownership increasing from 3% in 2000‒2003 to 9% during 2008‒2012.

In our paper, The Economics and Finance of Hedge Funds: A Review of the Academic Literature, which was recently published in Foundations and Trends in Finance, we provide a comprehensive survey of the academic literature focused on the hedge fund industry. Although data on hedge funds is still relatively limited when compared to other investment vehicles such as mutual funds, researchers have managed to study a number of topics related to this industry.

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Articles by Bebchuk, Coates and Fried Voted to be Among the Top Ten Corporate and Securities Articles of 2015

The Corporate Practice Commentator announced last week the list of the Ten Best Corporate and Securities Articles selected by an annual poll of corporate and securities law academics. The list includes three articles from Harvard Law faculty associated with the Program on Corporate Governance, Professors Lucian Bebchuk, John Coates, and Jesse Fried.

The top ten articles were selected from a field of more than 540 pieces. Professor Robert Thompson of Georgetown Law School conducted the annual poll.

The selected Bebchuk, Coates, and Fried articles are:

Additional information about the best corporate and securities law articles of 2015 and the selection process is available here.

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    Lucian Bebchuk
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    Ben W. Heineman, Jr.
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