Monthly Archives: April 2016

FinTech: New Regulatory Developments

This post is based on a Sullivan & Cromwell LLP publication authored by Mitchell S. Eitel, C. Andrew Gerlach, Rebecca J. Simmons, Stephen H. Lam. The complete publication, including footnotes, is available here.

On March 31, 2016, the Office of the Comptroller of the Currency (the “OCC”), the regulator of federally chartered national banks and savings associations, released a white paper that sets forth the OCC’s perspective on supporting responsible innovation in the federal banking system (the “White Paper”). The release of the White Paper represents the most significant effort by a U.S. federal financial regulator to provide guidance for financial institutions and companies regarding the development of products and services in the financial technology (“FinTech”) sector and identifies the principles that the OCC plans to use as it continues to develop its comprehensive framework for understanding and evaluating innovative products, services and processes.


Halliburton II: Presumption of Reliance

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Charles E. DavidowAudra J. SolowayAndrew J. Ehrlich, and Geoffrey R. Chepiga. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

On April 12, 2016, in IBEW Local 98 Pension Fund v. Best Buy Co., Inc., [1] the Eighth Circuit interpreted and applied the Supreme Court’s decision in Halliburton Co. v. Erica P. John Fund, Inc. (“Halliburton II”), [2] which held that defendants have the right to rebut the fraud-on-the-market presumption of reliance created by Basic, Inc. v. Levinson, [3] prior to the certification of a class, by showing a lack of “price impact.” The Eighth Circuit held that the Best Buy defendants successfully rebutted the presumption with a “front-end” showing of a lack of price impact—i.e., that the alleged misstatements did not cause a statistically significant stock-price increase when made.


U.S. Executive Compensation: 2015 Recap, Developments & Trends

Avrohom J. Kess is partner and head of the Public Company Advisory Practice and Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on the Executive Summary of a co-published memorandum from Simpson Thacher and Frederic W. Cook & Co., authored by Mr. Kess, Ms. Cohn, and Jamin R. Koslowe of Simpson Thacher; and Bindu Culas and Metin Aksoy of FW Cook. The complete publication is available here.

For public companies, boards of directors, and practitioners, 2015 was an eventful year in executive compensation. This post presents the key developments and trends we observed during 2015 and their implications for 2016 and beyond.

In 2015, consistent with prior years, an overwhelming percentage of Russell 3000 companies obtained majority “Say-on-Pay” support. In 2015, Say-on-Pay voting entered its fifth year.

  • 2,121 companies (97%) passed Say-on-Pay, and 56 companies (3%) failed.
  • On average, passing companies had a 92% approval rate, while those that failed had a 39% approval rate.
  • On a related note, approximately 80% of Russell 3000 companies hold annual Say-on-Pay votes.


Supercharged IPOs: Rent Extraction or Signal of Future Firm Performance?

Sonja Olhoft Rego is Professor of Accounting at Indiana University. This post is based on an article authored by Professor Rego, Alexander Edwards, Assistant Professor of Accounting at the University of Toronto; and Michelle Hutchens of the Department of Accounting at Indiana University.

A new structure for initial public offerings (IPOs), colloquially referred to as “supercharged IPOs,” has become increasingly popular in recent years. In our paper, Supercharged IPOs: Rent Extraction or Signal of Future Performance, which was recently made publicly available on SSRN, we examine the motivations and implications of this new IPO structure. In a traditional IPO, a private corporation “goes public” by issuing new shares of capital stock in exchange for cash from new investors on the open market. In a supercharged IPO, a series of transactions are typically performed as part of the IPO process, which generates new tax assets (e.g., larger future tax deductions) for the corporation but also creates a tax liability for the pre-IPO owners. The future tax benefits generated by the new tax assets are then split between the new IPO investors and the pre-IPO owners based on a contract, typically referred to as a “tax receivable agreement” (TRA). These arrangements allow pre-IPO owners to retain some portion of difficult-to-value assets (i.e., future tax benefits), which were created under their ownership and may otherwise be discounted by potential IPO investors.


Weekly Roundup: April 8–April 14, 2016

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This roundup contains a collection of the posts published on the Forum during the week of April 8, 2016 to April 14, 2016.

Statement from Chair White on Regulation S-K Concept Release

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks at a recent open meeting of the SEC, 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.

Today [April 13, 2016], the Commission will consider two separate recommendations from the staff. First, we will consider and vote on a recommendation from the Division of Corporation Finance to issue, as another important step in its disclosure effectiveness review, a concept release on modernizing certain business and financial disclosures required by Regulation S-K. Second, we will consider and vote on a recommendation from the Division of Trading and Markets to adopt final rules for the business conduct standards of security-based swap dealers and major security-based swap participants, rules essential to completing our regulatory regime under Title VII of the Dodd-Frank Act. I will discuss the recommendations in the order they will be presented, turning first to the recommendation from the Division of Corporation Finance.


Statement from Commissioner Stein on
Regulation S-K

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 an open meeting of the SEC, 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.

Justice Brandeis once wrote, “[s]unlight is said to be the best of disinfectants; electric light the most efficient policeman.” But he warned, “[t]o be effective, knowledge of the facts must be actually brought home to the investors…” [1]

Today [April 13, 2016], the Commission considers issuing a Concept Release on how to improve our disclosure framework and how to better bring “knowledge of the facts…home to… investors.” At the moment, we are focusing on the rules that cover non-financial statement corporate disclosures, otherwise known as Regulation S-K.


Statement from Commissioner Piwowar on Regulation S-K

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

Thank you, Chair White. I also wish to express my appreciation to the Division of Corporation Finance, the Division of Economic and Risk Analysis, the Office of the General Counsel, and the many others at the Commission for their efforts in helping to bring this concept release to fruition. Our action today [April 13, 2016] represents another step forward in fulfilling the mission given to the Commission by Congress, on a bipartisan basis, to review and modernize our disclosure regime.

On April 5, 2012, the President signed the JOBS Act into law. [1] Section 108 of that Act required the Commission to conduct a review of the disclosure requirements contained in Regulation S-K to determine how such rules could be modernized and simplified and to examine whether we could reduce the costs and burdens associated with these requirements for emerging growth companies. [2] We released our staff’s report studying Regulation S-K in December 2013. [3] However, we have not implemented any reforms based on this effort to date. [4]


Treasury Guidance on Corporate Inversions

David H. Schnabel is a partner at Davis Polk & Wardwell and a member of the firm’s tax department. This post is based on a Davis Polk memorandum by Mr. Schnabel, Neil Barr, Mary Conway, Michael Farber, Lucy W. Farr, Kathleen L. Ferrell, Rachel D. Kleinberg, Michael Mollerus, Avishai Shachar, and Po Sit.

On April 4, 2016, the Internal Revenue Service (the “IRS”) and the Treasury Department (“Treasury”) issued (i) final and temporary regulations addressing inversion transactions (the “New Inversion Regulations”) under Section 7874 (and certain other provisions of the Internal Revenue Code) and (ii) proposed regulations under Section 385 that would treat intercompany debt as stock in many situations.

While most of the New Inversion Regulations merely implement the rules announced in certain notices previously issued by the IRS and Treasury, (the “Notices”), they include new rules that expand (even further) when a transaction may run afoul of the inversion rules. In addition, the proposed Section 385 regulations would (if finalized in their current form) generally eliminate the incremental U.S. interest deductions on intercompany debt typically available after an inversion. [1]


In re Ebix: Corporate Defenses and Activist Engagement

Kai Haakon E. Liekefett is a partner and head of the Shareholder Activism Response Team at Vinson & Elkins LLP. This post is based on a Vinson & Elkins publication by Mr. Liekefett and Leonard Wood. This post is part of the Delaware law series; links to other posts in the series are available here. 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 surge in shareholder activist campaigns directed at corporate America in recent years makes clear that few public companies are immune from shareholder activism. However, companies are not powerless in preparing for potential activist campaigns. Strengthening structural defenses in corporate bylaws before an activist appears is the best way to prepare for activism while minimizing the risk of shareholder litigation. [1] Courts are typically reluctant to second guess bylaw amendments adopted by a board on a “clear day,” where no activist is present, and review these actions under the deferential business judgment rule. By contrast, defensive bylaw amendments implemented in the middle of an activist engagement, or a “rainy day,” will likely be subject to greater judicial scrutiny out of a concern that a board may be changing the rules of the game after the game has begun. But in corporate law, as in the weather, grey area exists, commonly referred to as “cloudy days.” Open questions about the legal viability of implementing defensive measures will arise whenever engagement by an activist is looming or possible, but has not yet commenced or resumed in earnest. A recent Delaware decision now indicates that even a firm settlement agreement with an activist will not necessarily end the activist threat from the Court’s perspective.


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