Monthly Archives: May 2016

Investors and Board Composition

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop and Paul DeNicola. The complete publication, including footnotes and appendix, is available here.

In today’s business environment, companies face numerous challenges that can impact success—from emerging technologies to changing regulatory requirements and cybersecurity concerns. As a result, the expertise, experience, and diversity of perspective in the boardroom play a more critical role than ever in ensuring effective oversight. At the same time, many investors and other stakeholders are seeking influence on board composition. They want more information about a company’s director nominees. They also want to know that boards and their nominating and governance committees are appropriately considering director tenure, board diversity and the results of board self-evaluations when making director nominations. All of this is occurring within an environment of aggressive shareholder activism, in which board composition often becomes a central focus.

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Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay

Fabrizio Ferri is Associate Professor of Accounting at Columbia Business School. This post is based on an article authored by Professor Ferri and David Oesch, Associate Professor of Financial Accounting at the University of Zurich.

In our paper, Management Influence on Investors: Evidence from Shareholder Votes on the Frequency of Say on Pay, forthcoming in the Contemporary Accounting Research, we try to quantify the influence of management recommendations on shareholder votes. In the post-Enron world, firms have become increasingly responsive to shareholder votes, even when non-binding. A key driver of voting outcomes is the recommendations issued by proxy advisors. For example, various studies estimate that ISS recommendations “move” about 25% of the votes, raising legitimate concerns about the quality of these recommendations, the degree of transparency and competition in the proxy advisory industry, potential conflicts of interest, etc. In contrast, we know very little about the influence of management recommendations on shareholder votes. The challenge in empirically evaluating this influence is that management recommendations are typically the same across firms and over time (i.e., in favor of management proposal and against shareholder), making it impossible to estimate their association with shareholder votes.

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The Value of Offshore Secrets: Evidence from the Panama Papers

Hannes Wagner is Associate Professor of Finance at Bocconi University. This post is based on paper authored by Professor Wagner; James O’Donovan of INSEAD; and Stefan Zeume, Assistant Professor of Finance at the University of Michigan.

On April 3, 2016, news sources around the world started reporting about a data leak of 11.5 million confidential documents concerning the business activities of Mossack Fonseca, a Panama-based law firm. The leaked documents implicate a wide range of firms, politicians, and other individuals to have used 214,000 secret shell companies to evade taxes, finance corruption, launder money, violate sanctions, and hide other activities. In our paper entitled The Value of Offshore Secrets—Evidence from the Panama Papers, which was recently made available on SSRN, we use this data leak to study whether and how the use of offshore vehicles creates firm value.

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Recent Criticism of the SEC: Fair or Unfair?

Jonathan N. Eisenberg is partner in the Government Enforcement practice at K&L Gates LLP. This post is based on a K&L Gates publication by Mr. Eisenberg and Shanda Hastings. The complete publication, including footnotes, is available here.

Over the last few years, the SEC has been criticized for (1) failing to “consistently and aggressively enforce the securities laws and protect investors and the public,” (2) obtaining sanctions that amount to only a slap on the wrist against major financial institutions, (3) settling rather than taking big banks to trial, 4) failing to name individuals in enforcement actions, (5) failing to require that companies admit guilt, (6) granting waivers from the collateral consequences of enforcement actions,6 and, most recently, (7) failing to prevent a prominent hedge-fund manager from getting back into the hedge-fund business.

We evaluate below whether the facts support those criticisms. We find that they support the opposite conclusions.

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Dual Ownership, Returns, and Voting in Mergers

Andriy Bodnaruk is Assistant Professor of Finance at University of Notre Dame; Marco Rossi is Visiting Assistant Professor of Finance at Texas A&M University. This post is based on a recent paper authored by Mr. Bodnaruk and Mr. Rossi.

In our paper, Dual Ownership, Returns, and Voting in Mergers, recently published in the Journal of Financial Economics, we study how the joint ownership of target’s equity and debt affects investors’ behavior and outcomes of M&A transactions.

Prior research in this area implicitly assumes that each investor holds either stocks or bonds, but not both types of securities simultaneously. We document, however, that a significant (and steadily rising) percentage of the equity of many U.S.-listed corporations is owned by financial conglomerates whose affiliates are also major company bondholders. If affiliated fund managers coordinate their actions around M&A deals, financial conglomerates with dual ownership of target equity and debt—“dual holders”—have different incentives than pure shareholders. Our results could be broken down in the following three groups.

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Redacting Proprietary Information at the Initial Public Offering

Audra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone; Ioannis Floros, Assistant Professor of Finance at Iowa State University; and Shane Johnson, Professor of Finance at Texas A&M University. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

The U.S. Securities and Exchange Commission (SEC) mandates that publicly-traded firms disclose a large array of information to investors. Because certain disclosures could cause competitive harm, the SEC allows firms to request confidential treatment of competitively sensitive information contained in material agreements that it would otherwise be required to disclose to the public. If the SEC grants the request, the firm receives a Confidential Treatment Order (CTO), enabling them to redact specific content from their material, such as pricing terms, specifications, deadlines, and milestone payments. For the duration of time that the confidential treatment is awarded, which coincides with the length of the agreement, the redacted details are not subject to Freedom of Information Act (FOIA) requests. While a CTO shields proprietary information from competitors, it also prevents investors from obtaining potentially value-relevant information from SEC disclosures, which can be even more critical at the initial public offering (IPO) stage when it is often the first opportunity for the public to learn details about the firm.

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Antitrust Executive Order and Common Ownership

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, Aidan Synnott, Andrew Finch, William Michael, and Joseph Simons. The complete publication, including footnotes, is available here.

On April 15, 2016, President Obama issued an Executive Order entitled “Steps to Increase Competition and Better Inform Consumers and Workers to Support Continued Growth of the American Economy.”

The Order called on federal agencies to identify potentially anticompetitive practices and to furnish to the Director of the White House National Economic Council a list of actions each agency can take, including rulemaking, to promote competition. The same week, the White House Council of Economic Advisers released an antitrust-themed issue brief, which stated that “many industries may be becoming more concentrated” and enumerated a number of “potential areas for future consideration” for additional regulation. Included among those areas was “common ownership of stock by large institutional investors.”

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Inside Lawyers: Friends or Gatekeepers?

Sung Hui Kim is Professor of Law and Faculty Director of the Program on In-House Counsel at the UCLA School of Law. This post is based on a recent article by Professor Kim.

What should the role of inside (in-house) lawyers be within the corporation? What, if any, obligations to the corporate entity should inside lawyers have to disrupt the material misconduct of their client representatives (to wit: senior managers, including the CEO)? Should inside lawyers conduct themselves as if they are “close friends” of senior managers or is there another, more appropriate model that would facilitate good corporate governance? To what extent should an inside lawyer think of herself as a “gatekeeper”—defined as a “private intermediary who can prevent harm to the securities markets by disrupting the misconduct of his/her client representatives? Would the imposition of some gatekeeping obligations ultimately backfire by foreclosing access to critical information about corporate misconduct? These controversial questions are, at least partially, addressed in my article, Inside Lawyers: Friends or Gatekeepers? 84 Fordham L. Rev. 1867 (2016), the fifth article of mine on the subject of gatekeeping.

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SEC Monitoring of Foreign Firms’ Disclosures

James Naughton is Assistant Professor of Accounting Information and Management at Northwestern University. This post is based on a discussion paper authored by Professor Naughton; Rafael Rogo, Assistant Professor of Accounting at the University of British Columbia; Jayanthi Sunder, Associate Professor of Accounting at the University of Arizona; and Ray Zhang of the Accounting Division at the University of British Columbia.

Foreign firms represent a significant proportion of firms trading in US markets. These firms, like listed US firms, are subject to monitoring by the Securities Exchange Commission (SEC). However, because of SEC’s tripartite mission to protect investors, maintain fair, orderly, and efficient markets, and facilitate capital formation, it is not obvious how SEC monitoring of foreign firms compares with US firms. In particular, SEC may balance the need for rigorous monitoring of foreign firms to protect US investors with an approach that facilitates capital formation by attracting foreign firms to list in the US. In addition, due to the heterogeneity of foreign firms and their home institutions, it is not obvious how the intensity of SEC monitoring is distributed across different countries. In our paper SEC Monitoring of Foreign Firms’ Disclosures, which was recently made publicly available on SSRN, we examine whether SEC’s monitoring activities differ for US versus foreign firms and whether it varies based on attributes of the home country’s institutions.

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Challenges to Going-Private Mergers in New York

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, Richard V. Smith, and Gregory Beaman.

In a landmark decision on May 5, 2016, the New York Court of Appeals held that challenges to going-private mergers where there is a controlling stockholder must be reviewed under the deferential business judgment rule rather than the more exacting “entire fairness” standard of review, as long as certain protections for minority stockholders are in place from the time the transaction is proposed. See In the Matter of Kenneth Cole Productions, Inc., S’holder Litig.,—N.E.3d—, 2016 WL 2350133 (N.Y. 2016). In so holding, New York’s highest court adopted the same standard of review announced by the Delaware Supreme Court in Kahn v. M&F Worldwide Corp., 88 A.3d 635, 648-49 (Del. 2014).

New York now joins Delaware in its view that going-private mergers with a controlling stockholder will be insulated from “entire fairness” review as long as the transaction is, at the time an offer is first made, conditioned on approval by (1) a truly independent and empowered special committee, and (2) an informed majority of the minority stockholders.

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