Monthly Archives: May 2016

Holding Activists and Proxy Advisory Firms Accountable?

David A. Katz is a partner and Laura A. McIntosh is a consulting attorney at Wachtell, Lipton, Rosen & Katz. The following post is based on an article by Mr. Katz and Ms. McIntosh that first appeared in the New York Law Journal. 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); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); 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.

The nation’s capital is center stage for the latest round of debates as to the impact of shareholder activism on American business. With the introduction of the Brokaw Act by four Democratic senators in March, followed by the announcement in May of a new D.C.-based lobbying organization formed by a bipartisan group of prominent activists, the long-running controversy over the unprecedented influence of shareholder activism has officially reached Washington. The activist agenda now includes public policy, and it appears that the influence of these powerful investors is to be wielded on K Street as it has been on Wall Street. By raising their own profile via a Washington-based lobbying entity, activists will place themselves and their business practices squarely in the spotlight. Perhaps a more significant public presence will engender a more favorable reputation for activists, or perhaps it will increase activist accountability to lawmakers and public shareholders; or, perhaps, it will do both.
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Merrill Lynch v. Manning

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. DavidowRichard A. Rosen, Walter Rieman, and Audra J. Soloway.

In Merrill Lynch, Pierce, Fenner & Smith Inc. v. Manning, No. 14-1132 (May 16, 2016), the Supreme Court held that the provision of exclusive federal jurisdiction in the Securities Exchange Act of 1934 (“Exchange Act”) does not generally extend to claims brought under state law even if the complaint refers to purported Exchange Act violations. This ruling gives greater latitude to plaintiffs seeking to keep their cases in state court while invoking the language of federal securities laws or regulations in their complaints—so long as they do not actually assert federal causes of action.

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An Examination of Changes in Earnings Management after Receiving SEC Comment Letters

Scott Johnson is Assistant Professor of Accounting at Virginia Tech. This post is based on an discussion paper authored by Professor Johnson; Lauren Cunningham, Assistant Professor of Accounting at the University of Tennessee; Bret Johnson, Assistant Professor of Accounting at George Mason University; and Ling Lei Lisic, Associate Professor of Accounting at George Mason University.

The Securities and Exchange Commission (SEC) has long been concerned that earnings management practices result in adverse consequences for investors, including masking the true nature of economic transactions, and has often called for increased regulatory oversight of the financial reporting process. In our paper, The Switch Up: An Examination of Changes in Earnings Management after Receiving SEC Comment Letters, which was recently made publicly available on SSRN, we examine the influence of firm-specific regulatory oversight, in the form of SEC comment letters, on firms’ earnings management practices.

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SEC Enforcement Actions against Public Companies and Subsidiaries

David Marcus is Senior Vice President at Cornerstone Research; and Stephen Choi is Murray and Kathleen Bring Professor of Law at the New York University School of Law, and Director of the Pollack Center for Law & Business at New York University. This post relates to a report co-authored by the NYU Pollack Center for Law & Business and Cornerstone Research, available here.

A report released [May 17, 2016] by the NYU Pollack Center for Law & Business and Cornerstone Research finds that U.S. Securities and Exchange Commission enforcements against public companies and their subsidiaries increased more than 50 percent in fiscal year 2015 and are on a pace to equal or exceed that high-water mark in FY 2016.

The SEC brought 84 actions against public companies and their subsidiaries in FY 2015, compared to 55 actions in the previous fiscal year. In the first half of FY 2016, the SEC filed 43 new enforcement actions against public companies and their related subsidiaries.

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Influencing Control: Jawboning in Risk Arbitrage

Wei Jiang is the Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School. This post is based on a discussion paper authored by Professor Jiang; Tao Li, Assistant Professor of Finance at Warwick Business School; and Danqing Mei, Ph.D. candidate in Finance at Columbia 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).

Our paper, Influencing Control: Jawboning in Risk Arbitrage, publicly available on SSRN, provides the first study on a relatively new phenomenon of “activist risk arbitrage,” in which activist shareholders wield their influence over corporate control changes by blending shareholder activism into an M&A arbitrage strategy. More specifically, the activist arbitrageurs attempt to block an announced M&A deal through public campaigns in order to extract better deal terms. Such activities have been on the rise since the early 2000s: they were observed in fewer than 1% of all M&A deals in early 2000s, rising to around 10% during the past few years. However, the academic literature has not formally analyzed the full process, characteristics, or the impact of the new risk arbitrage strategy on the market for corporate control. As shareholder activism launched by institutional investors becomes increasingly commonplace in corporate governance, its marriage with a popular, traditionally non-activist, arbitrage strategy is instructive. A signature of institutional investor activism has been that it strives to influence corporate policies and governance, but does not aim for control. The activist arbitrage strategy, by inserting shareholder activism into corporate control events, thus bridges the two by “influencing control.”

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Stock Repurchases and Persistent Asymmetric Information

Philip Bond is Professor of Finance and Business Economics at the University of Washington. This post is based on an article authored by Professor Bond and Hongda Zhong, Assistant Professor of Finance at London School of Economics.

A widely documented empirical finding is that share prices fall in response to a firm’s announcement of a seasoned equity offering (SEO). The standard explanation for this empirical regularity is that a firm has information that investors lack, and a SEO reveals to investors that the firm’s information is negative (see, in particular, Myers and Majluf 1984). In equilibrium, firms with negative information issue equity and accept the negative share price response because the SEO provides funding for a profitable investment. In contrast, firms with positive information prefer to pass up the investment rather than issue equity at a low price.

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Fed, FDIC, and “Not Credible” Resolution Plans

Seth GrosshandlerMichael H. Krimminger, and Sean A. O’Neal are Partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Grosshandler, Mr. Krimminger, Mr. O’Neal, Knox L. McIlwain, and Melissa M. Ruth.

[On April 13, 2016], the Federal Reserve and the FDIC provided feedback on the 2015 resolution plans filed by the eight “first-wave” domestic filers, and issued Guidance to govern their 2017 resolution plans. Most significantly, the Federal Reserve and the FDIC jointly determined that the resolution plans of five financial companies were “not credible” as required by the joint resolution planning rule, 12 C.F.R. Parts 243 and 381. Those five companies were Bank of America, Bank of New York Mellon, JPMorgan Chase, State Street and Wells Fargo. The agencies were unable to agree on a joint determination for the 2015 resolution plans of Goldman Sachs and Morgan Stanley. The Federal Reserve, but not the FDIC, found Morgan Stanley’s plan to be “not credible”, while the agencies reached the reverse judgment on Goldman Sachs’ resolution plan. Finally, the Federal Reserve and the FDIC identified “shortcomings”, but not “deficiencies”, in the Citigroup resolution plan and so did not find that plan to be “not credible.”

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CFPB and Class Action Arbitration

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, Roberto GonzalezElizabeth Sacksteder, Jay Cohen, and Jane O’Brien. The complete publication, including footnotes, is available here.

On May 5, 2016, the Consumer Financial Protection Bureau (CFPB) released a 377-page notice of proposed rulemaking that would prohibit, going forward, banks and a variety of other companies from including in contracts arbitration clauses that would prevent consumers from filing or participating in class-action litigation. According to the press release: “With this contract gotcha, companies can sidestep the legal system, avoid accountability, and continue to pursue profitable practices that may violate the law and harm countless consumers.” The proposed regulation would continue to allow companies to insist on arbitration instead of individual litigation, but would require companies to submit records related to arbitrations to CFPB for monitoring and for potential posting in some form on its website. The public will have 90 days to comment on the proposal once it is published in the Federal Register.

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SEC Guidance on Non-GAAP Financial Measures

Howard B. Dicker is a partner in the Public Company Advisory Group of Weil, Gotshal & Manges LLP. This post is based on a Weil publication.

On May 17, 2016, the U.S. Securities and Exchange Commission staff issued important updates to its Compliance and Disclosure Interpretations regarding the use of non-GAAP financial measures. Last significantly modified in January 2010, these interpretations provide new guidance to help companies avoid presenting financial information in an improper or potentially misleading manner.

Below we look at just one significant interpretation, which applies to the frequent issue of how prominently non-GAAP financial measures in filings and earnings releases are presented in relation to GAAP measures.

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Weekly Roundup: May 20–May 26, 2016


More from:

This roundup contains a collection of the posts published on the Forum during the week of May 20–May 26, 2016.



Resource Accumulation through Economic Ties


Equity in LLC Law?


Italian Boards and The Strange Case of the Minority Becoming Majority








Dual Ownership, Returns, and Voting in Mergers





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