Monthly Archives: June 2016

Limiting Government’s Attempts to Expand the Scope of FIRREA

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Dan Kramer, Jane O’Brien, Walter Rieman, and Richard A. Rosen.

On May 23, 2016, the United States Court of Appeals for the Second Circuit reversed a jury’s finding of liability and the district court’s imposition of a $1.27 billion civil penalty on Countrywide and related defendants (collectively, “Countrywide”) under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”) for mail or wire fraud affecting a federally insured financial institution. [1] The Second Circuit held that the trial evidence was insufficient to establish fraudulent intent. But in ruling on that basis, the court avoided the controversial legal question of whether FIRREA, which authorizes civil penalties for fraud “affecting” a federally insured financial institution, applies to fraud by such an institution.


SEC Guidance and Non-GAAP Measures

Meredith B. Cross is a partner in the Transactional and Securities Departments at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication by Ms. Cross, Knute J. Salhus, Thomas W. White, Jonathan Wolfman, and Jennifer A. Zepralka.

On May 17, 2016, the SEC’s Division of Corporation Finance escalated the SEC’s efforts to curb perceived misuse of non-GAAP financial measures with the issuance of a revised set of Compliance and Disclosure Interpretations (CDIs). This action follows a series of speeches by SEC Chair Mary Jo White and SEC senior staff members, and an uptick in comment letter activity, all focused on what a member of the SEC staff described in one speech as a “troubling increase over the past few years in the use of, and nature of adjustments within, non-GAAP measures by companies.”

All public companies should consider and address the SEC staff’s new guidance, as well as other recent developments regarding the use of non-GAAP measures, as they prepare for their next earnings announcement. To help you work through the implications of the new guidance, we discuss below the new and revised CDIs, and offer our analysis of key takeaways and action items.


Chelsea Therapeutics: Management Projections & Fiduciary Duties

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, Scott LuftglassPhilip Richter, Peter L. Simmons, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery’s decision in Chelsea Therapeutics Stockholder Litigation (May 20, 2016) underscores the benefits of disclosure to stockholders with respect to a board’s decision—in valuing the company in connection with a sales process—to not take into account (or to modify or revise) projections prepared by management. It should be noted that the court’s discussion highlights that, as reflected in the trend of Delaware decisions over the past couple of years, there is only a narrow path to success for plaintiffs in establishing liability of independent and disinterested directors in a post-closing damages action.


Accounting for Rising Corporate Profits: Intangibles or Regulatory Rents?

Jim Bessen is Lecturer at the Boston University School of Law. This post is based on a discussion paper authored by Professor Bessen.

Profits are up. Operating margins for firms publicly listed in the US show a substantial and sustained rise (see Figure below). Corporate valuations are up as well. That is good news for managers and investors. But is it good news for society?

Economists, such as Joseph Stiglitz and Luigi Zingales, find the rise potentially troubling for two reasons. First, higher profits create greater economic inequality. Rising aggregate profits correspond to a decline in labor’s share of output, contributing to stagnant wages. Also, greater profits for some corporations but not others may create greater wage inequality (see “Corporate Inequality Is the Defining Fact of Business Today”).


Weekly Roundup: June 3–June 9, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of June 3–June 9, 2016.

The Value-Decreasing Effect of Staggered Boards

Governance Practices for IPO Companies

Richard J. Sandler is a partner at Davis Polk & Wardwell LLP and co-head of the firm’s global corporate governance group. This post is based on a Davis Polk client memorandum.

With ongoing pressure on companies that are past the IPO stage to update or modify their corporate governance practices to align with the views of some shareholders and proxy advisory firms, we thought this would be a good time to review corporate governance practices of newly public companies to see if they have also shifted in recent years. Our 2016 survey is an update of our 2009, 2011 and 2014 surveys and focuses on corporate governance structures at the time of the IPO for the 50 largest U.S.-listed IPOs of “controlled companies” (as defined under NYSE and NASDAQ listing standards) and the 50 largest U.S.-listed IPOs of non-controlled companies from November 2013 through March 2016. Results are presented separately for controlled companies and non-controlled companies in recognition of their different governance profiles.


Corporate Privacy Failures Start at the Top

Victoria Schwartz is Associate Professor of Law at Pepperdine University School of Law. This post is based on a recent article by Professor Schwartz.

In my article, Corporate Privacy Failures Start at the Top, forthcoming in the Boston College Law Review, I offer a new theory to explain why corporations are so bad at privacy. We have all heard numerous stories of corporations neglecting to protect, failing to consider, or in some cases even intentionally violating the privacy of their consumers, employees, and even occasionally their shareholders. In recent years, consumer backlash has repeatedly caused corporations to issue apologies regarding their treatment of privacy, prompting the question of why the corporation failed to anticipate the privacy problem in the first case.


An Empirical Analysis of Public Enforcement of Directors’ Duties in Australia

Jasper Hedges is Research Fellow, George Gilligan is Senior Research Fellow, and Ian Ramsay is Harold Ford Professor of Commercial Law at Melbourne Law School, The University of Melbourne. This post is based on a recent paper authored by Mr. Hedges, Mr. Gilligan, Mr. Ramsay, Helen Bird, and Andrew Godwin.

There is significant international interest in enforcement of directors’ duties. Our paper presents the findings of an empirical study of judicial proceedings brought by the Australian Securities and Investments Commission (ASIC) and the Commonwealth Director of Public Prosecutions (CDPP) for breaches of the directors’ duties provisions of the Corporations Act 2001 (Cth) in the ten year period from 2005 to 2014. The paper examines the directors’ duties to: (a) act with reasonable care and diligence, in the best interests of the company, and for a proper purpose; (b) avoid conflicts of interest; (c) not engage in related party transactions; and (d) prevent the company trading while it is insolvent.


Women Directors and Participation on Key Committees

Carol Bowie is Head of Americas Research at Institutional Shareholder Services (ISS). This post is based on a recent publication authored by ISS U.S. Research analyst Rob Yates.

Women corporate directors globally are showing greater proportional gains on occupying key board committees than on boards overall, according to a new analysis by leading governance and ESG data and analytics provider Institutional Shareholder Services.

Between Jan. 1, 2014, and Jan. 1, 2016, the proportion of women directorships at companies across major markets and indices in Europe, the U.S., Australia, and Canada grew by 5.5 percentage points compared with 6.9 points for those on audit committees. Growth evidenced in the proportion of women on audit committees during that period included double digit gains at companies in Italy and France, 7.2 percentage points at U.K. companies, and 6 percentage points at Swiss companies. Meanwhile, the proportion of women on other key committees, including those addressing remuneration and nomination, similarly outpaced gains at the overall board levels, albeit less prominently, at 6.5 and 5.9 points, respectively.


How Does Hedge Fund Activism Reshape Corporate Innovation?

Wei Jiang is the Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School. This post is based on a discussion paper authored by Professor Jiang; Alon Brav, Professor of Finance at Duke University; Xuan Tian, Associate Professor of Finance at Indiana University; and Song Ma. 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 idea that stock market pressure leads to “managerial myopia” has been a recurring concern and has evolved into a heated debate in recent years as activist hedge funds have come to epitomize shareholder empowerment. Our study, How Does Hedge Fund Activism Reshape Corporate Innovation?, aims to inform the debate by analyzing how hedge fund activism reshapes corporate innovation—arguably the most important long-term investment that firms make but also the most susceptible to short-termism.

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