Monthly Archives: April 2016

Weekly Roundup: April 1–April 7, 2016


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This roundup contains a collection of the posts published on the Forum during the week of April 1, 2016 to April 7, 2016.

SEC Enforcement of Internal Control Over Financial Reporting












ValueAct: Activist Use of HSR Act’s “Passive Investor” Exemption

Daniel A. Neff is co-chairman of the Executive Committee and partner at Wachtell, Lipton, Rosen & Katz; David A. Katz is a partner specializing in the areas of mergers and acquisitions, corporate governance and activism, and crisis management at Wachtell Lipton; and Nelson O. Fitts is a partner in the Antitrust Department at Wachtell Lipton. This post is based on a Wachtell Lipton memorandum by Messrs. Neff, Katz, and Fitts. Related research from the Program on Corporate Governance includes The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here), and Pre-Disclosure Accumulations by Activist Investors: Evidence and Policy by Lucian Bebchuk, Alon Brav, Robert J. Jackson Jr., and Wei Jiang.

[On April 4, 2016,] the U.S. Department of Justice filed a complaint in federal district court alleging that two ValueAct Capital funds repeatedly violated the Hart-Scott-Rodino Act in amassing large equity positions in two oilfield services companies which have agreed to merge. The DOJ’s complaint alleges that ValueAct’s actions and statements of intention—including repeatedly meeting with both management teams, lobbying other shareholders to vote in favor of the proposed merger, promoting specific integration plans and executive compensation strategies, and proposing operational and strategic changes at the company to be acquired—were inconsistent with investment-only intent. The DOJ’s complaint also took the extraordinary step of naming the ValueAct funds’ general partner as a defendant.

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Does ValueAct Have Implications for Institutional Shareholders?

Arthur F. Golden is the senior partner at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Golden, Arthur J. Burke, Joel M. Cohen, Ronan P. Harty, and Thomas J. Reid.

[On April 4, 2016,] the U.S. Department of Justice brought a civil action against ValueAct for failing to comply with the waiting period requirements under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (the “HSR Act”) with respect to its purchases of shares of Halliburton Company and Baker Hughes Incorporated. The DOJ’s suit seeks a civil penalty of at least $19 million from ValueAct. (In November 2014, Halliburton entered into an agreement to purchase Baker Hughes; the transaction is pending.)

The DOJ claims that ValueAct’s purchases of Halliburton and Baker Hughes shares “did not qualify for the narrow exemption from the requirements of the HSR Act for acquisitions made solely for the purpose of investment” because ValueAct “planned from the outset to take steps to influence the business decisions of both companies, and met frequently with executives of both companies to execute those plans.”

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The Source of Information in Prices and Investment-Price Sensitivity

Alex Edmans is Professor of Finance at London Business School. This post is based on an article authored by Professor Edmans and Sudarshan Jayaraman, Associate Professor of Accounting at the University of Rochester.

In our paper, The Source of Information in Prices and Investment-Price Sensitivity, which was recently made publicly available on SSRN, we show that real decisions depend not only on the total amount of information in prices, but the source of this information—a manager learns from prices when they contain information not possessed by him.

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Protecting Investors in an Innovative Financial Marketplace

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent Keynote Address at the SEC and Stanford Rock Center’s Silicon Valley Initiative; the complete text, including footnotes, 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.

Thank you Jina [Choi] for that kind introduction and for your leadership of the San Francisco Regional Office. It is always good to be back at Stanford, and it is an honor to speak at the SEC’s and Rock Center’s Silicon Valley Initiative. This is an important event that brings together regulators, academics, lawyers and entrepreneurs to discuss the issues impacting the start-up, venture capital and private equity worlds rooted here in this cutting edge center of technological innovation. It is essential that the Commission fully engage with Silicon Valley, and participants in this important market across the country, so that we can better understand the unique features of its investors and financings. This Valley-SEC dialogue, which I hope becomes a permanent fixture, can only make the Commission a more effective regulator and better able to protect all investors.

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Securities Class Action Settlements: 2015 Review

Laura E. Simmons is a senior advisor in the Washington, D.C. office of Cornerstone Research. This post is based on a Cornerstone publication by Ms. Simmons, Laarni T. Bulan, and Ellen M. Ryan. The complete publication is available here.

There were 80 securities class action settlements approved in 2015, the highest number since 2010, according to a new report from Cornerstone Research. The report, Securities Class Action Settlements—2015 Review and Analysis, shows that total settlement dollars rose to more than $3 billion, an increase of 184 percent over the historic low in 2014.

The surge in securities class action settlements in 2015 can be attributed in part to three consecutive year-over-year increases in the number of case filings. The increases in case filings may suggest that higher numbers of settlements will persist in the near future. While settlement volume fluctuates from year to year, the size of the typical settlement tends to remain fairly consistent. READ MORE »

The Fund Director in 2016

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent Keynote Address at the Mutual Fund Directors Forum 2016 Policy Conference; the complete text, including footnotes, 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.

From the perspective of the SEC’s mission to protect investors, there could hardly be anything more important than strong mutual fund boards when more than 53 million households—approximately 43 percent of all U.S. households—owned mutual funds in 2015. Mutual fund investors are like anyone else—they find their time consumed by jobs, family obligations, and the myriad of other priorities we face in today’s world. They are lucky if they can make it to the gym in their spare time. So, to expect most investors to closely follow the performance of their fund investments, let alone their fee structure, management changes and investment risks, would be unrealistic. And, of course, it is fund directors, not fund investors, who have access to the information and critical participants, like the fund adviser, that makes strong and meaningful oversight possible.

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Sun Capital Redux: Private Equity and Pension Liability

Michael J. Segal is senior partner in the Executive Compensation and Benefits Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Segal and Alicia C. McCarthy.

In the latest chapter of a case that has been closely followed by the private equity community for over four years, a Federal District Court in Massachusetts held on remand from the First Circuit in Sun Capital Partners III, et al v. New England Teamsters & Trucking Industry Pension Fund, 10-10921-DPW (D. Mass. March 28, 2016), that non-parallel private equity funds with the same sponsor are jointly and severally liable for the multiemployer pension plan withdrawal liability of a portfolio company in which they both invest under the Employee Retirement Income Security Act of 1974 (“ERISA”), where the funds together indirectly owned 100% of the portfolio company. The First Circuit decision is discussed in our memorandum of July 29, 2013.

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Social Covenants in Mergers: Legal Promises or Moral Commitments?

Daniel E. Wolf is a partner focusing on mergers and acquisitions at Kirkland & Ellis LLP. The following post is based on a Kirkland memorandum by Mr. Wolf.

With the return of acquirer stock as a featured form of consideration in many recent deals, dealmakers are once again focusing on “social” issues in striking a merger agreement. As compared to most straight cash takeovers where price garners the overwhelming share of, if not exclusive, attention, an acquisition featuring stock consideration, and especially a so-called merger-of-equals, often involves significant discussion between the parties of softer issues, including governance, board composition, management, people, and corporate identity (e.g., corporate and brand names, headquarters and facility locations, and charitable and community commitments). A number of deal developments over the last few years highlight some of the risks and considerations unique to these social terms.

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The Trust Indenture Act and the Courts: Bringing the SEC to the Table

Mark J. Roe is the David Berg Professor of Law at Harvard Law School. This post is based on a recent article by Professor Roe, available here.

Distressed firms with publicly-issued bonds often seek to restructure the bonds’ payment terms to better reflect the weakened firm’s repayment capabilities. The Depression-era Trust Indenture Act, however, bars the bondholders from voting on whether or not to accept new payment terms, requiring individualized consent to the new payment terms. Yet, such votes that bind all bondholders are commonplace now in bankruptcy. Recent application of this securities law rule to bond recapitalizations has been more consistent than it had previously been, with courts striking down restructuring deals that twisted bondholders’ arms into consenting to apparently unwanted deals. These court decisions faithfully apply the securities law rules, reducing such coercive exchanges. But the bond market, and distressed firms, would be better served by adding an exemption to the securities rules, allowing binding bondholder votes to restructure payment terms. The Securities and Exchange Commission now has authority to exempt fair restructuring votes from this now out-of-date securities law. I analyze these issues in The Trust Indenture Act of 1939 in Congress and the Courts in 2016: Bringing the SEC to the Table, a short article recently posted on SSRN.

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