Monthly Archives: June 2016

Light at the End of the (Channel) Tunnel

Christopher Leonard is a partner in the London office of Akin Gump Strauss Hauer & Feld LLP. This post is based on an Akin Gump memorandum by Mr. Leonard, Ian Patrick Meade, and Tim Pearce. Related posts on the legal and financial impact of Brexit include Brexit: Possible Options and Impact, from Shearman & Sterling; Brexit: Legal Implications, from Sullivan & Cromwell LLP; The Day After Brexit, from Cadwalader, Wickersham & Taft LLP; The Legal Consequences of Brexit, from Davis Polk & Wardwell LLP; and Brexit: What Does the Vote Mean for Business?, from Shearman & Sterling LLP.

The decision to hold a referendum as to whether the United Kingdom (UK) should remain a member of the European Union (EU) introduced the term “Brexit” into the global political lexicon. Now that the UK has voted to leave the EU, the term has spawned new variations: will the UK’s departure be a “soft-Brexit” or a “hard-Brexit”?

Those advocating a soft-Brexit assume that the UK will be able to negotiate continued access to the EU’s single market in financial services, perhaps by agreeing to join the European Economic Area (EEA) (members of which accept certain laws of the EU, including in relation to financial services, in return for access to the single market).

If this turns out not to be possible, perhaps because EEA membership is simply not on offer or because the cost of becoming a member of the EEA is politically unacceptable (EEA membership entails the free movement of labour between EU and EEA member states, making a contribution to the EU budget and accepting laws over which the EEA member state has little say), the UK will have to contemplate the possibility of a “hard-Brexit,” in which it no longer has automatic access to the single market. Press coverage has assumed that UK financial institutions that currently rely on their EU “passports” to provide financial services to clients in the remaining EU Member States on a cross-border basis would have to relocate to a remaining member state.


Engagement: New Imperatives

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop and Catherine Bromilow.

Investors expect a new approach to engagement—one that covers important topics, meets their needs, and often involves directors. Companies with effective engagement programs are seizing the opportunity to build important relationships with long-term shareholders before crises hit. And they’re taking credit for them publicly, setting the bar higher for other companies. So how does your company measure up?

The Role of Mutual Funds in Corporate Governance

Yawen Jiao is Assistant Professor of Finance at the University of California, Riverside. This post is based on an article authored by Professor Jiao and Ying Duan, Assistant Professor of Finance at the University of Alberta.

Mutual funds hold about a quarter to a third of outstanding shares of U.S. companies in the past decade and therefore have the potential to play a pivotal role in corporate governance. In our article, The Role of Mutual Funds in Corporate Governance: Evidence from Mutual Funds’ Proxy Voting and Trading Behavior, forthcoming in the Journal of Financial and Quantitative Analysis, we simultaneously consider two governance approaches of mutual funds in the proxy voting setting: First, they can follow the “Wall Street rule” when dissatisfied with firm management, that is, sell their shares and “exit” the firm. This approach is modeled by Admati and Pfleiderer (2009), Edmans (2009), and Edmans and Manso (2011). Second, they can attempt to directly intervene (“voice”) by voting against firm management, as suggested by theories of Shleifer and Vishny (1986), Maug (1998), and Kahn and Winton (1998).


Seven Deadly Fallacies of Activist Investing’s Critics

Charles Nathan is a senior advisor at Finsbury LLC, and an adjunct professor at Yale Law School and Columbia Law School. This post is based on a commentary by Mr. Nathan. 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.

Attacks on activist investing often tread a familiar and well-worn road, long on inflammatory rhetoric and specious arguments and short on reason and respect for the facts. A recent example is a commentary by two Wachtell Lipton lawyers entitled “Corporate Governance Update: Holding Activists and Proxy Advisory Firms Accountable,” published in the New York Law Journal on May 26, 2016 (and discussed on the Forum here).

The article’s message, like so many criticisms of activist investing, is built on seven fatal fallacies.


Does the Market Value CEO Styles?

Luo Zuo is Assistant Professor of Accounting at Cornell University. This post is based on an article authored by Professor Zuo and Antoinette Schoar, Professor of Entrepreneurship at MIT.

In our article, Does the Market Value CEO Styles?, recently published in the American Economic Review, we study how investors perceive the skill set that different types of CEOs bring into their companies. A growing body of research offers evidence that CEOs and other top executives show large and persistent person-specific heterogeneity in their management styles. Bertrand and Schoar (2003) document that such person-specific styles explain a substantial fraction of the variation in firms’ capital structures, investment decisions and organizational structures. The idea that CEOs greatly differ in their styles is also supported by a number of papers that show substantial changes in a firm’s stock price and accounting performance when its top management changes. For example, Perez-Gonzalez (2006) and Bennedsen, Nielsen, Perez-Gonzalez and Wolfenzon (2007) focus on transitions to family CEOs, and Parrino (1997) focuses on internal versus external successors. Similarly, a large literature suggests that CEOs’ specific traits play a role in their management approach. See, for example, Malmendier and Tate (2008) on CEO overconfidence; Kaplan, Klebanov and Sorensen (2012) on general ability and execution skills; Graham, Harvey and Puri (2013) on optimism and risk aversion; and Benmelech and Frydman (2015) on prior military experience.


Focusing the Lens of Disclosure on Board Diversity, Non-GAAP, and Sustainability

Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s recent keynote address to the International Corporate Governance Network Annual Conference. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Investors and regulators everywhere share a common interest in effective disclosures, robust corporate governance practices and strong corporate cultures, which are fundamental for fair and efficient markets and to achieve sustainable value. But, as the preamble to ICGN’s Global Governance Principles acknowledges, there are differences from jurisdiction to jurisdiction as to what precisely we are trying to achieve and the tools available to us. So, I thought I would begin by discussing the regulatory framework in the United States with respect to corporate governance matters and how the SEC, long known as “the disclosure agency,” fits into the framework. Then, reflecting on the extent of the SEC’s disclosure authority, I will discuss my perspective on the work we are doing on three important subjects on your agenda—board diversity; non-GAAP financial measures; and sustainability reporting.


Brexit: What Does the Vote Mean for Business?

Barnabas Reynolds is head of the global Financial Institutions Advisory & Financial Regulatory Group at Shearman & Sterling LLP. This post is based on a Shearman & Sterling client publication by Mr. Reynolds, Thomas Donegan, and James Webber. Related posts on the legal and financial impact of Brexit include Brexit: Possible Options and Impact, also from Shearman & Sterling; Brexit: Legal Implications, from Sullivan & Cromwell LLP; and The Day After Brexit, from Cadwalader, Wickersham & Taft LLP.

[On June 24, 2016], it was announced that the UK public has voted to leave the European Union. There will now be a negotiation of a new relationship between the UK and Europe. The fact of the vote itself has no legal effect on the laws of the UK or EU. The UK will remain a member of the EU until there is either an agreement to exit or expiry of a two-year period after issuance of a formal notice of exit by the UK government. That notice, when served, triggers a negotiation period of up to two years during which time the current EU laws continue to apply in the UK. The UK will lose some of its rights to participate in EU political processes during this period.

This post discusses potential legal models for any post-Brexit negotiated solution in the context of financial business in particular.


Pushbacks and Delaware Appraisal Arbitrage

Jack B. Jacobs is a senior counsel at Sidley Austin LLP, and served on the Delaware Supreme Court from 2003 to 2014 and, prior to that, on the Delaware Court of Chancery since 1985. The views expressed in this post are those of the author and do not necessarily reflect the views of the firm. This post is part of the Delaware law series; links to other posts in the series are available here.

For over a decade hedge funds have utilized Delaware’s appraisal statute as a strategy to arbitrage either the statutory interest rate, or the possibility of a litigated capital gain, or both. Typically, hedge funds will buy into the stock of the target company after a merger is announced, and then litigate or settle the case at a premium above the deal price. Despite the protests of the corporate defense bar, the Delaware courts have held that this practice, whether or not desirable as a policy matter, is not legally prohibited.


Do Courts Matter for Firm Value? Evidence from the U.S. Court System

Stefano Colonnello is Assistant Professor at the Halle Institute for Economic Research (IWH) and Junior Professor at Otto von Guericke University Magdeburg. Christoph Herpfer is a PhD Candidate at the Swiss Finance Institute at École Polytechnique Fédérale de Lausanne. This post is based on a recent paper authored by Professor Colonnello and Mr. Herpfer.

Courts provide an important link between the legal system and economic development. Our paper, Do Courts Matter for Firm Value? Evidence from the U.S. Court System, which is publicly available on SSRN, studies if and how courts affect firm value. We distinguish between two main channels through which courts can impact firm value. First, courts may benefit firms by providing efficient and competent resolution of cases thus reducing legal uncertainty and litigation costs, a hypothesis we refer to as the efficiency channel. Alternatively, courts can affect firm value by transferring resources from plaintiffs such as customers or employees to shareholders (or vice versa), a business attitude channel.

The key challenge in measuring the impact of courts on firms is to isolate the impact of laws from that of courts, the institutions that enforce those laws. Any study comparing measures of court characteristics across states or countries is invariably comparing not just different courts, but different laws, firms, or political and social environments.

The Legal Consequences of Brexit

Simon Witty is a partner in the Corporate Department at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Related posts on the legal and financial impact of Brexit include Brexit: Legal Implications, from Sullivan & Cromwell LLP, and The Day After Brexit, from Cadwalader, Wickersham & Taft LLP.

On June 23, 2016, the UK electorate voted to leave the European Union. The referendum was advisory rather than mandatory and does not have any immediate legal consequences. It will, however, have a profound effect. With any next steps being driven by UK and EU politics, it is difficult to predict the future of the UK’s relationship with the EU. This post discusses the process for Brexit, the alternative models of relationship that the UK may seek to adopt, and certain implications for the capital markets, mergers and acquisitions, contractual disputes and enforcement, anti-trust, financial services and tax.


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