Monthly Archives: May 2016

What Do Insiders Know?

Peter Cziraki is Assistant Professor of Economics at the University of Toronto. This post is based on an article authored by Professor Cziraki; Evgeny Lyandres, Associate Professor of Finance at Boston University; and Roni Michaely, Professor of Finance at Cornell University.

The evidence that share repurchases and seasoned equity offers (SEOs) contain value-relevant information is extensive in the corporate finance literature. In addition, we also know that insider trading is informative about future firm value. What is less clear is how trading by firms’ insiders prior to corporate events interacts with firms’ actions and whether this interaction contains additional value-relevant information. In our paper, What Do Insiders Know? Evidence from Insider Trading Around Share Repurchases and SEOs, which was recently made publicly available on SSRN, we examine the information contained in insider trades prior to open market share repurchases and seasoned equity offerings using a comprehensive sample of over 4,300 repurchase and nearly 1,800 SEO announcements.

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NASDAQ and Disclosure of Third-Party Compensation for Directors

Lori Zyskowski is a Partner and member of the Securities Regulation and Corporate Governance, and Financial Institutions Practice Groups at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Ms. Zyskowski and Gillian McPhee.

NASDAQ has proposed changes to its listing standards to require disclosure of third-party compensation arrangements for directors and nominees. After withdrawing an initial proposal on this subject, NASDAQ has revised the proposal, and it has been published in the Federal Register for public comment. Comments are due on or before April 26, 2016. The proposal is available here, and a redline showing proposed changes to the rule text begins on page 21 of the document.

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How Management Risk Affects Corporate Debt

Michael Weisbach is Professor of Finance at Ohio State University. This post is based on an article authored by Professor Weisbach; Yihui Pan, Assistant Professor of Finance at the University of Utah; and Tracy Yue Wang, Associate Professor of Finance at the University of Minnesota.

A firm’s default risk reflects not only the likelihood that it will have bad luck, but also the risk that the firm’s managerial decisions will lead the firm to default. Management risk occurs when the impact of management on firm value is uncertain, and, in principle, could meaningfully affect the firm’s overall risk. Practitioners have long understood the importance of management risk, and regularly characterize it as an important factor affecting a firm’s risk. However, the academic literature on corporate default risk and the pricing of corporate debt has largely ignored management risk. In our paper, How Management Risk Affects Corporate Debt, which was recently made publicly available on SSRN, we evaluate the extent to which uncertainty about management is a factor that affects a firm’s default risk and the pricing of its debt.

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Indentures and the Brokaw Act

Laurent Alpert is a partner focusing on mergers and acquisitions and Robert Gruszecki is a knowledge management attorney focusing on mergers and acquisitions at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Alpert and Mr. Gruszecki. 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.

The recently introduced “Brokaw Act” that proposes changes to the rules governing the reporting of ownership in U.S. public companies would expand the definition of “beneficial owner” to include any person with a “pecuniary or indirect pecuniary interest,” including through derivatives, in a particular security (borrowing the concept from the SEC’s insider reporting regime, which captures the “opportunity to profit” from transactions related to the relevant security). If passed and ultimately adopted, these changes would have a significant impact on the reporting obligations of investors by expanding the types of interests that would be counted toward the 5% threshold requiring the filing of a Schedule 13D. Because indentures often incorporate by direct reference the 13(d) concept of beneficial ownership, expansion of the definition could have ripple effects beyond increased public ownership filings.

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Metlife: FSOC “Too-Big-to-Fail” Designation

Lee A. Meyerson is a Partner and head of the M&A Group and Financial Institutions Practice at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Meyerson, Mark Chorazak, and Spencer A. Sloan.

On March 30, Judge Rosemary Collyer of the U.S. District Court for the District of Columbia invalidated the Financial Stability Oversight Council’s (“FSOC”) designation of MetLife as a systemically important financial institution (“SIFI”). [1] Although the court found that MetLife may be deemed “predominantly engaged” in “financial” activities and therefore eligible for designation as a SIFI, the court found “fundamental violations of administrative law” and a designation process that was “fatally flawed.” In particular, the court determined that FSOC did not follow its own published standards for SIFI-designation: it did not assess MetLife’s likelihood of failure, but simply assumed that a failure would occur, and never attempted to quantify or estimate the actual consequences of a failure to the financial system. In addition, FSOC failed to consider the costs associated with designating MetLife as a SIFI. Accordingly, the court determined that FSOC’s decision was “arbitrary and capricious,” and granted MetLife’s motion for summary judgment to rescind its SIFI designation.

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The Effect of Passive Investors on Activism

Todd Gormley is Assistant Professor of Finance at the University of Pennsylvania. This post is based on an article authored by Professor Gormley; Ian Appel, Assistant Professor of Finance at Boston College; and Donald Keim, Professor of Finance at the University of Pennsylvania. 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).

The willingness of investors to engage in activism has grown rapidly in recent years. About 400 U.S. activist campaigns are launched per year, and as noted by The Economist, the current “scale of their insurrection in America is unprecedented… one in seven [companies in the S&P 500 index] has been on the receiving end of an activist attack” over the past five years. [1] The goals of activists have also become more ambitious and the success rate of activist campaigns has improved. Activists increasingly wage proxy fights to obtain board representation, and more than 70% of these campaigns were successful in 2014. [2] The determinants of this shift in activist tactics and success rates, however, are not well understood. For example, why do activists seem more willing in recent years to engage in hostile and costly tactics, like initiating a proxy fight? And, what factors affect their likelihood of success?

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Grading Global Boards of Directors on Cybersecurity

Paul A. Ferrillo is counsel at Weil, Gotshal & Manges LLP specializing in complex securities and business litigation. This post is based on a Weil publication by Mr. Ferrillo and Christophe Veltsos.

On April 1, 2016 NASDAQ, along with Tanium (a leading-edge cybersecurity consultant), released a detailed survey of nonexecutive (independent) directors and C-suite executives in multiple countries (e.g., the US, UK, Japan, Germany, Denmark, and the Nordic countries) concerning cybersecurity accountability. [1] NASDAQ and Tanium wished to obtain answers to three basic questions: (1) how these executives assessed their company’s vulnerabilities to cybersecurity threat vectors; (2) how they evaluated their company’s readiness to address these vulnerabilities; and (3) who within the company was held “accountable” for addressing these cybersecurity vulnerabilities.

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