Monthly Archives: May 2016

Genuine Parts Co. v. Cepec: Business Registration and Personal Jurisdiction

John D. Donovan, Jr. is partner in the litigation department, and Gregg L. Weiner is co-head of the business & commercial litigation practice, at Ropes & Gray LLP. This post is based on a Ropes & Gray memorandum by Mr. Donovan and Mr. Weiner. This post is part of the Delaware law series; links to other posts in the series are available here.

On April 18, 2016, the Delaware Supreme Court held that corporations not incorporated in Delaware that register to do business in that state are not subject to the “general” jurisdiction of the Delaware courts. In Genuine Parts Co. v. Cepec, the Court held that under the U.S. Constitution, Delaware’s business registration statute cannot be read to constitute a “consent” to general jurisdiction by out-of-state corporations. Business conduct in Delaware leading to a claim—and not just registration to do business—is now the key to the Delaware courthouse door for plaintiffs seeking to sue in that forum. As one of the most important jurisdictions addressing claims against business entities, Delaware now joins the growing list of states that will refuse to adjudicate cases arising out of business activity conducted elsewhere, and that has nothing to do with the forum state.


Corporate Litigation and Non-Reliance Provisions

Joseph M. McLaughlin is a partner and Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. McLaughlin and Ms. Cohn. This article appeared in the April 14, 2016 edition of the New York Law Journal. This post is part of the Delaware law series; links to other posts in the series are available here.

This month we continue our discussion of contractual non-reliance provisions. Under Delaware law, a prima facie claim for fraudulent misrepresentation requires the plaintiff to plead facts supporting an inference that, among other things, the plaintiff acted in justifiable reliance on the misrepresentation. In the context of private mergers and acquisitions, a buyer bringing a post-transaction fraud claim against the seller may be precluded from claiming reasonable reliance on any representations made by the seller outside the four corners of the contract if the agreement contained a clear “non-reliance provision.”

Such a provision, which is often included in acquisition agreements in private transactions, amounts to a representation by the buyer that it has made its investment decisions based on its own knowledge and independent investigation—without regard to anything the seller has said or not said—and/or that the buyer only relied on the specific representations contained in the parties’ definitive agreement.


Do Compensation Consultants Have Distinct Styles?

Omesh Kini is Professor of Finance at Georgia State University. This post is based on an article authored by Professor Kini; Chen Cai of the Department of Finance at Georgia State University; and Ryan Williams, Assistant Professor of Finance at the University of Arizona.

In our paper, Do Compensation Consultants have Distinct Styles?, which was recently made public on SSRN, we investigate whether the choice of a specific compensation consultant affects the compensation level and structure of top managers. This question is crucially important because existing studies that examine the compensation of CEOs show that compensation schemes influence their behavior and, consequently, impact firm economic outcomes. Compensation consultants are typically hired by the board of directors’ compensation committee to help craft compensation policies for the top managers of the corporation. Although they serve at the behest of the board, consultants can imprint their own distinct styles in fashioning compensation policies for a firm. We examine whether individual compensation consultants influence compensation policies in unique ways, i.e., exhibit distinct “styles,” after controlling for the known economic determinants of these policies.


Weekly Roundup: May 6–May 12, 2016

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This roundup contains a collection of the posts published on the Forum during the week of May 6–May 12, 2016.

Collaborative Gatekeepers

Stavros Gadinis is an Assistant Professor of Law at the University of California, Berkeley Law School. This post is based on a recent article by Professor Gadinis and Colby Mangels.

In his annual letter to shareholders for 2014, Jamie Dimon, J.P. Morgan’s CEO, made an astonishing revelation. That year alone, his firm hired 8,000 new employees just to improve its compliance with anti-money laundering laws. J.P. Morgan’s recruitment zeal stemmed from a $2.6 billion penalty for anti-money laundering violations, due to its failure to spot Madoff’s ponzi scheme. This was hardly an isolated case: anti-money laundering laws have played a central part in four out of the eight biggest fines in the wake of the financial crisis, becoming a key legal basis in the quest to hold banks accountable. The newfound prominence of the anti-money laundering framework is striking. These laws target drug cartels and terrorists, the criminal periphery of the financial system rather than its core weaknesses. But since 2007, the anti-money laundering framework has evolved into a critical detection and enforcement mechanism for regulators, and a key priority for private industry compliance. So far, there is little in the legal literature that could explain this puzzling shift towards the anti-money laundering toolkit.


Reforming the Delaware Law to Address Appraisal Arbitrage

Wei Jiang is Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School. This post is based on an article authored by Professor Jiang; Tao Li, Assistant Professor of Finance at Warwick Business School; Danqing Mei, Ph.D. candidate in Finance at Columbia Business School; and Randall S. Thomas, John S. Beasley II Professor of Law and Business at Vanderbilt Law School and Owen Graduate School of Management. This post is part of the Delaware law series; links to other posts in the series are available here.

The number of appraisal petitions has increased from a trickle of cases in early 2000s to over 20 a year in recent years, or close to one-quarter of all transactions where appraisal is possible, or appraisal eligible deals. After years of being infrequently deployed and largely overshadowed by shareholder class actions in Delaware and other states, the contours of the appraisal remedy are suddenly front page news as some Wall Street law firms seek to cut back on appraisal arbitrage filings. These firms are petitioning the Council of the Corporate Law Section of the Delaware State Bar Association (the “Council”) and the Delaware legislature to raise the bar for shareholders eligibility to file appraisal petitions and to make its terms less attractive in an effort to curb what they perceive to be a new form of strike suit. Echoing this view, Delaware Vice Chancellor Sam Glasscock III commented in Merion Capital v. BMC Software, Inc. (2015) that dissenters of valuation were “arbitrageurs who bought, not into an ongoing concern, but instead into this lawsuit.” Shareholder advocates, on the other hand, are arguing in favor of expanding the appraisal remedy in order to fill perceived gaps in investor protection that are alleged to have surfaced as Delaware and other states have cut back on judicial protections for minority shareholders in change-of-control transactions.


Disclosure in the Digital Age

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 the 48th Annual Rocky Mountain Securities Conference; the complete publication, including footnotes, is available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I want to thank you for the opportunity to speak with you today [May 6, 2016], and I’m going to return the favor by providing you with an invitation as well. I want your input on perhaps one of the most significant undertakings the Commission has faced in decades.

I’m talking about how we can breathe new life into the critical matchmaking process between companies and investors; I’m talking about a new way of communicating; I’m talking about Disclosure in the Digital Age.


Defenses Available to Directors and Financial Advisors

Ethan A. Klingsberg and Meredith E. Kotler are partners in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg, Ms. Kotler, and Darryl G. Stein. This post is part of the Delaware law series; links to other posts in the series are available here.

On May 6, the Delaware Supreme Court issued an Order that sets forth concisely the contours of the defendant-favorable standards for determining liability of directors and their advisors following the closing of sales of control of companies. These standards are available, however, only following an uncoerced and informed approval of the sale by the target stockholders, including a majority of the disinterested holders. Thus, while the Order clarifies a roadmap (set forth recently in Corwin v. KKR and discussed here) for obtaining easy dismissal of post-merger damages claims against directors and advisors, the need for directors and their advisors to avoid, or at least ferret out and disclose, any deficiencies in sales processes remains as strong as ever. Only if these deficiencies are avoided or uncovered and disclosed in advance of the shareholder approval will the lower courts be able to rely on these defendant-favorable standards to dismiss claims.


Responding to Shareholder Directives to Directors

Donald C. Ross is of counsel at Covington & Burling LLP. This post is based on a Covington publication authored by Mr. Ross. 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), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law and Securing Our Nation’s Economic Future: A Sensible, Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in the United States, both by Chief Justice Leo E. Strine (discussed on the Forum here and here).

Shareholder activism, that seeks short-term gain for corporate shareholders, and the response to it by some long term investors, that seek long-term growth in corporate profitability, is creating inconsistent shareholder directives to directors of public companies. At the same time under Delaware corporate law the selection of a time frame for the achievement of corporate goals is a decision of the directors which may not be delegated to the shareholders. This post addresses how directors may seek to resolve these conflicting considerations.


Corporate Governance in an Era of Compliance

Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on a recent article by Professor Griffith.

Compliance is the new corporate governance.

Much of what scholars and practitioners think of as core corporate governance—the oversight and control of internal corporate affairs— is now being subsumed by “compliance.” Although compliance with law and regulation is not a new idea, the establishment of an autonomous department within firms to detect and deter violations of law and policy is. American corporations are at the dawn of a new era: the era of compliance.

Over the past decade, compliance has blossomed into a thriving industry, and the compliance department has emerged, in many firms, as the co-equal of the legal department. Compliance is commonly headed by a Chief Compliance Officer (CCO) with a staff, in large firms, of hundreds or thousands. Moreover, although the CCO reports to the board, compliance is not wholly subordinate to the board. Boards cannot neglect the compliance function or choose not to install and maintain the function on par with industry peers. Furthermore, once compliance officers generate information through monitoring and surveillance, it is beyond a reasonable board’s authority to stop them. Compliance is thus under the board, but its authority comes from somewhere else.


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