Monthly Archives: May 2016

Redacting Proprietary Information and IPOs

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.


Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed

Kevin S. Haeberle is Assistant Professor of Law at University of South Carolina School of Law and M. Todd Henderson is Professor of Law and Aaron Director Teaching Scholar at the University of Chicago Law School. This post is based on an article authored by Professor Haeberle and Professor Henderson.

Over the past few years, regulators have repeatedly decreed that they would end what was quickly becoming a routine practice: the release of market-moving information to high-speed traders just prior to the time at which it was being made available to the entire public. The most prominent examples of regulatory efforts in the area during this period involved New York State Attorney General Eric Schneiderman. He termed these types of practices “Insider Trading 2.0” and vowed to end them.

The question of how to regulate how and when market-moving information is disseminated to the investing public is not just political fodder. In 2000, the SEC promulgated Regulation Fair Disclosure (Reg FD), which requires public companies to make material information available to all investors at the same exact time when first disseminating it beyond the firm. Indeed, the agency’s parity-of-information approach in this context has been explicit since at least as early as the seminal Dirks insider-trading case in the early 1980s.


DOL Final “Investment Advice” Regulation

Jeffrey D. Hochberg is a partner in the Tax and Alternative Investment Management practices at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Hochberg, David J. Passey, and Dana E. Brodsky.

On April 6, 2016, the Department of Labor (the “DOL”) promulgated final regulations (the “Final Regulations”) defining the circumstances in which a person will be treated as a fiduciary under both the Employee Retirement Income Security Act of 1974 (“ERISA”) and Section 4975 of the Internal Revenue Code (the “Code”) by reason of providing investment advice to retirement plans and individual retirement accounts (“IRAs”). As part of the regulatory package, the DOL also released final versions of prohibited transaction class exemptions (“PTEs”) intended to minimize the industry disruptions that might otherwise result from the Final Regulations, most notably, the so-called “Best Interest Contract Exemption” (the “BIC Exemption”) and the “Principal Transaction Exemption.”


In re Kenneth Cole: Business Judgment Review of Controlling Stockholder Mergers

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt and Ryan A. McLeod.

[On May 5, 2016,] the New York Court of Appeals held that business judgment review is available in the context of going-private mergers of controlled companies. In re Kenneth Cole Prods., Inc. S’holder Litig. , No. 54 (N.Y. May 5, 2016). The decision adopts the same standards set forth by the Delaware Supreme Court in its MFW opinion and affirms dismissal of a stockholder suit.

The case concerned a merger transaction between Kenneth Cole Productions, Inc. and its controlling stockholder, Kenneth Cole. In February 2012, Cole informed the board of directors that he wished to take the company private. The board appointed a special committee of independent directors. Cole thereafter made an offer conditioned on the approval of both that independent committee and the vote of the majority of the minority stockholders. Following months of negotiation, the special committee approved the merger and some 99% of the minority stockholders voted in favor of it. Multiple stockholder class action lawsuits challenging the transaction were nevertheless filed. The trial court dismissed these actions, reasoning that the complaints failed to impugn the independence of the special committee, and the appellate division affirmed. On appeal to New York’s highest court, plaintiffs argued that all controlled company go-private mergers should be subject to “entire fairness” review.


Takeovers and Takings in the Next Economic Crisis

Nestor M. Davidson is Professor of Law at Fordham Urban Law Center. This post is based on Professor Davidson’s recent article, available here.

Economic crises can reverberate in the legal system long after they end. One potential echo from the last recession involves Takings Clause challenges to the federal government’s rescue of several failing companies. As I explain in a recent essay, Resetting the Baseline of Ownership: Takings and Investor Expectations After the Bailouts, perhaps the most significant aspect of these cases is what they signal for investors going forward: the federal government has tremendous latitude to respond to economic crises, a power it may well deploy in the next economic crisis. As I explain in the essay and summarize below, the iterative nature of “regulatory” takings law means that a court’s assessment of an investor’s reasonable expectations will reflect government actions; when the government responds as it did, this may well serve as notice to investors about the potential for a similar response the next time around.


Weekly Roundup: April 29–May 5, 2016

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This roundup contains a collection of the posts published on the Forum during the week of April 29, 2016 to May 5, 2016.

Incentive Compensation for Financial Institutions: Reproposal

Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission; Margaret E. Tahyar is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP. The following post is based on the introduction to a Davis Polk visual memorandum; the full publication, including visuals, tables, and timelines, is available here. Related research from the Program on Corporate Governance includes Regulating Bankers’ Pay by Lucian Bebchuk and Holger Spamann (discussed on the Forum here); The Wages of Failure: Executive Compensation at Bear Stearns and Lehman 2000-2008 by Lucian Bebchuk, Alma Cohen, and Holger Spamann (discussed on the Forum here); How to Fix Bankers’ Pay by Lucian Bebchuk (discussed on the Forum here); and Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried.

  • Four of the six Agencies have jointly issued a proposed rule implementing Dodd-Frank Act Section 956 regarding incentive compensation paid by covered financial institutions. An earlier version of the rule was proposed in 2011.


Mergers and Heightened Regulatory Risk

Steven Epstein is a partner and Co-Head of the Mergers & Acquisitions practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Epstein, Gail Weinstein, Philip Richter, and Bernard A. Nigro Jr.

As U.S. corporations face the later stages of a prolonged economic recovery, with the prospect of slow growth, a number of strategies have been considered to meet the challenge of producing meaningful profit improvement in a short timeframe—with corporations increasingly turning to tax inversion transactions (for the dramatic and immediate reduction of tax expense) and mergers (for the significant expected synergies). At the same time, the U.S. government has evidenced rising skepticism toward inversions and mega-mergers.


Corporate Resilience to Banking Crises

Ross Levine is Professor of Finance at the University of California, Berkeley. This post is based on an article authored by Professor Levine; Chen Lin, Professor of Finance at the University of Hong Kong; and Wensi Xie, Assistant Professor of Finance at the Chinese University of Hong Kong.

Although banking crises are costly, common, and heavily researched, there is surprisingly little research on corporate resilience to systemic banking crises. In an earlier paper, [1] we showed that strong shareholder protection laws mitigate the adverse effects of banking crises by easing the ability of firms to issue equity when crises curtail the flow of bank credit to firms. But, other factors might also shape the ability of corporations to obtain financing during systemic banking crises.

In our new paper, Corporate Resilience to Banking Crises: The Roles of Trust and Trade Credit, which was recently made publicly available on SSRN, we examine whether social trust affects (a) the ability of firms to obtain financing through informal channels when crises reduce the flow of bank loans to firms and (b) the resilience of corporate profits and employment to systemic banking crises. Social trust refers to the expectations within a community that people will behave in honest and cooperative ways and the extent to which human interactions are governed by the norms of reciprocity and trustworthiness. Informal finance refers to short-term credit provision that occurs beyond the scope of a country’s formal financial and regulatory institutions. For example, firms often receive trade credit that does not involve collateral or promissory notes subject to formal judicial enforcement mechanisms. In communities where individuals are more confident that others will repay them—even when there are no formal enforcement mechanisms underpinning the extension of credit, trade credit is likely to flourish. Thus, when a systemic banking crisis impedes the normal bank-lending channel, social trust might facilitate corporate access to trade credit and partially offset the adverse effects of the crisis on corporate profits and employment. This could be the first-order effect since trade credit is large. It accounts for 25% of the average firm’s total debt liabilities in our sample of over 3500 firms across 34 countries from 1990 to 2011.


SEC Enforcement and Internal Control Failures

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 and William J. Foley Jr.

We have previously written about how, over the past few years, the SEC and other regulatory agencies have devoted substantial resources to investigations regarding allegations that public companies have inadequate internal controls and/or a system for reporting those controls. See here, here and here. That effort shows no signs of waning. As recently as March 23, 2016, the SEC announced a settlement with a multi-national company due in part to the internal controls failures at two foreign subsidiaries. On March 10, 2016, the SEC announced a settlement of claims against Magnum Hunter Resources Corporation in connection with alleged internal control failures. And, on February 17, 2016, the SEC announced a settlement of claims against a biopesticide company, Marrone Bio Innovations, based on the company having reported misstated financial results caused in part by internal control failures. [1]


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