Monthly Archives: June 2016

How Economic Attention Deficit Disorder Infected the Corporate Boardroom

Jon Lukomnik is the Executive Director of the Investor Responsibility Research Center Institute. The ideas in this post related to his new book, What They Do With Your Money: How the Financial System Fails Us and How to Fix It (Yale University Press), co-authored with Stephen Davis and David Pitt-Watson.

According to one widely reported study, three quarters of senior American corporate officials would not make an investment that would benefit a company over the long run if it would derail even one quarterly earnings report. [1] Combine that with the fact that corporate officials and institutional investors commonly over-discount the future, meaning that they don’t fully appreciate returns on investments that are more than a few months away. For instance, the Bank of England has found that cash flows five years away are actually valued in the marketplace as if they were eight years away and cash flows 30 years in the future are not valued at all. [2] “This is a market failure. It would tend to result in … long-duration projects suffering disproportionately… including infrastructure and high-tech investments… often felt to yield the highest long-term (private and social) returns and hence offer the biggest bang to future growth,” explained Andrew Haldane, the Bank’s Chief Economist. [3]

Simply put, we are suffering from an epidemic of Economic Attention Deficit Hyperactivity Disorder. But if short-term thinking at today’s companies is commonplace, the implications are profound. Economic ADHD silently robs us of wealth and decreases our standard of living.


Implications of the Recent Dell Appraisal Decision

Lewis R. Clayton and Stephen Lamb are partners in the Litigation Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Clayton, Mr. Lamb, Frances Mi and Daniel Mason. This post is part of the Delaware law series; links to other posts in the series are available here.

On May 31, Vice Chancellor Laster of the Delaware Court of Chancery held that, for purposes of Delaware’s appraisal statute, the fair value of the common stock of Dell Inc. at the time of its sale to a group including the Company’s founder Michael Dell was $17.62 per share, almost a third higher than the $13.75 deal price. [1] The decision has received a good deal of attention from the press and commentators, largely because the Court rejected the use of the transaction price as compelling evidence of fair value, despite several recent Delaware appraisal decisions that have relied heavily or exclusively on the transaction price. While the ruling may encourage some stockholders of Delaware companies to seek appraisal—particularly in management buyouts—there are powerful reasons why the decision should be limited to its particular facts.


Financing Corporate Elections

Andrew A. Schwartz is an Associate Professor at University of Colorado Law School. This post is based on Professor Schwartz’s recent article published in The Journal of Corporation Law, 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 Servants of Two Masters? The Feigned Hysteria Over Activist-Paid Directors, by Yaron Nili (discussed on the Forum here).

There is a battle in progress between activist hedge funds and public companies over so-called “golden leash” payments. This is where an activist shareholder running a proxy contest promises to pay her slate of director-candidates a supplemental compensation, over and above the ordinary director fees paid by the company to all directors. The purpose of the golden leash, according to the hedge funds that invented it, is to help activists recruit highly qualified people to challenge incumbent board members and, once on the board, to push for business decisions that will benefit all shareholders. Because the golden leash serves to enhance corporate democracy by helping activists mount effective proxy contests to challenge the incumbent board, the advisory services ISS and Glass Lewis have voiced support for the practice, as have some other commentators.


Venture-Backed IPOs in 2015

Richard C. Blake is a partner at Gunderson Dettmer Stough Villeneuve Franklin & Hachigian, LLP. This post is based on a Gunderson Dettmer report, available here.

2015 proved to be a tough year for venture-backed IPOs with the total number of IPOs completed decreasing by 37% from 2014. Life sciences companies represented over a majority of the IPOs completed in 2015, almost all of which relied in some part on insider participation.

The outlook for IPOs in 2016 is still uncertain following a dramatic decrease in IPO activity in the first quarter of 2016 compared to IPO activity in the comparable periods over the last five years. Despite the decrease in activity, there is still optimism by the pipeline of outstanding pre-IPO companies ready to access the public markets.


CEO Pay at Valeant: Does Extreme Compensation Create Extreme Risk?

David Larcker is Professor of Accounting at Stanford University. This post is based on a paper authored by Professor Larcker and Brian Tayan, Researcher with the Corporate Governance Research Initiative at Stanford University. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

In our paper, CEO Pay at Valeant: Does Extreme Compensation Create Extreme Risk?, which was recently made publicly available on SSRN, we examine the relation between pay for performance and organizational risk.

The litmus test for an effective executive compensation program is whether it provides incentive to attract, retain, and motivate qualified executives to pursue corporate objectives that build shareholder wealth. This concept, known as “pay for performance,” reflects the degree to which executive rewards are correlated with financial outcomes that benefit shareholders.


SEC Amendment to Form 10-K

This post is based on a Sullivan & Cromwell LLP publication authored by Robert E. BuckholzCatherine M. Clarkin, David B. Harms, and Kevin Y. Toh.

The Securities and Exchange Commission (“SEC”) announced on June 1, 2016 that it has approved an interim final amendment to Form 10-K, implementing Section 72001 of the Fixing America’s Surface Transportation (“FAST”) Act, [1] to expressly permit issuers to provide a summary of business and financial information contained in the annual report, provided that each item in the summary includes a cross-reference by hyperlink to the material in the report to which the item relates. This amendment will take effect immediately upon publication in the Federal Register. The SEC also requests comments on the amendment within 30 days after publication, including on whether it should be revised to include specific requirements as to the form of the summary and whether other annual reporting forms should be similarly amended.


SEC Enforcement: Private Equity Broker Registration

Rajib Chanda is partner at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Mr. Chanda.

On June 1, 2016, the Securities and Exchange Commission (SEC) announced the settlement of an enforcement action against a private equity firm and its owner, alleging that the firm acted as an unregistered broker-dealer in connection with activities commonly conducted by sponsors of private equity funds. [1] Although several improprieties under the Investment Advisers Act of 1940, as amended, were also alleged and detailed in the Order, the title of the SEC’s press release, “SEC: Private Equity Fund Adviser Acted As Unregistered Broker,” is indicative of the relative importance of the broker-dealer registration issue, at least with respect to its implications for the private equity industry. [2]


What are the Consequences of Regulating Executive Compensation?

Anya Kleymenova is Assistant Professor of Accounting the University of Chicago. This post is based on a paper authored by Professor Kleymenova and İrem Tuna, Professor of Accounting at London Business School. 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); and How to Fix Bankers’ Pay by Lucian Bebchuk (discussed on the Forum here).

The level and structure of executive compensation has been a frequently debated topic among politicians, CEOs, and academics since the financial crisis of 2007-2009. Critiques of compensation practices at financial services companies often attribute the crisis at least in part to incentive pay that purportedly encourages excessive risk taking. Regulators in Europe and the US have proposed, and in some cases even implemented, regulation that monitors or modifies the level and the structure of executive compensation in the financial services industry. In the UK, the Remuneration Code came into effect in 2010 as a response to the allegation that misalignment of shareholders’ and executives’ incentives was at least partly the cause of excessive risk-taking leading up to the financial crisis. READ MORE »

The New EU Market Abuse Regulation

Simon Witty is a partner in the Corporate Department at Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum by Mr. Witty, Will Pearce, Michael Sholem, and John Taylor. The complete publication, including Annexes, is available here.

• A new Market Abuse Regulation will apply across the European Union (EU) from July 3, 2016, replacing the previous market abuse regimes that existed in EU Member States and applied only to instruments traded on EU regulated markets.

• For the first time, issuers of securities on previously unregulated exchanges across the EU will be subject to onerous obligations on information disclosure, insider lists and dealings by senior managers in respect of their securities traded on EU trading venues.

• Where a U.S. issuer has not consented or approved trading in its securities on an EU trading venue (e.g. where a third party has arranged admission to trading on a German trading venue without notifying the issuer), the issuer obligations above should not apply.

• The new regime will also prohibit insider dealing, unlawful disclosure of inside information and market manipulation in respect of a much wider range of securities in the EU.

• U.S. issuers may wish to consider de-listing from EU trading where the new issuer obligations are considered to be too onerous and they wish to be removed from the scope of MAR. U.S. issuers should carefully check the provisions of the securities themselves in order to establish whether noteholders have to be consulted about de-listing, as well as obtain local advice on the procedures for de-listing from the relevant exchange.


Weekly Roundup: June 10–June 16, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 10–June 16, 2016.

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