Monthly Archives: June 2016

Dictation and Delegation in Securities Regulation

Usha R. Rodrigues is M.E. Kilpatrick Professor of Law at University of Georgia School of Law. This post is based on a recent article by Professor Rodrigues.

Prominent scholars have descried a pattern of boom and bust in securities laws: after financial crisis comes “bubble law,” “quack” regulation that is a misguided populist reaction with little empirical support. [1] In other words, crisis leads to reactionary legislation. But what about when Congress legislates in the absence of a precipitating crisis—most recently, in the JOBS Act? In Dictation and Delegation in Securities Regulation, forthcoming in the Indiana Law Journal, I articulate a more nuanced theory of congressional action in the securities field, one that accounts for differences not only in when Congress intervenes in securities law, but also how it does so.


The Value-Decreasing Effect of Staggered Boards

Alma Cohen is a Professor of Empirical Practice at Harvard Law School and Charles Wang is an Assistant Professor of Business Administration at Harvard Business School. This post is a reply to a recent post by Yakov Amihud that is based on a paper on staggered boards with Stoyan Stoyanov, available here, which contests the conclusions of an article on the subject by Professors Cohen and Wang, available here. The post by Professors Cohen and Wang draws on their reply paper, available here.

In an article published in the Journal of Financial Economics in 2013, How Do Staggered Boards Affect Shareholder Value? Evidence from a Natural Experiment, we provided evidence that market participants perceive staggered boards to be, on average, value-decreasing. In an April 2016 paper, summarized in a recent post on the Forum (available here), Amihud and Stoyanov attempt to contest our findings. The Amihud-Stoyanov paper (hereinafter AS2016) puts forward several specifications that render our results not statistically significant (though the results largely retain their sign). In response to their work, we have carried out further empirical analysis and found that the non-significant “results” of AS2016 do not hold up when carefully examined. Indeed, the tests that we have conducted to address the issues raised by AS2016 provide a wide array of statistically significant results that are consistent with and reinforce the findings and conclusions of our 2013 JFE article.

In November 2015 Amihud and Stoyanov issued an earlier version of their paper (AS2015, available here) attempting to show that the significance of our results weakens when some observations are excluded. In December 2015 we issued a detailed response (Staggered Boards and Shareholder Value: A Reply to Amihud and Stoyanov, hereinafter the CW Reply), showing that the claims of AS2015 are unwarranted. In their current paper, AS2016, Amihud and Stoyanov drop some of their claims, but they retain other arguments that were already shown to be unwarranted in the CW Reply and add new claims.

Notably, with the exception of its replication of our 2013 specifications, none of the results presented in AS2016 are statistically significant, and the results based on our sample largely have a sign consistent with the conclusions of our 2013 JFE article. Thus, even assuming that the results reported by AS2016 hold up to scrutiny, the lack of statistical significance implies that they would equally be consistent with both the view that staggered boards are value-decreasing and the view that they are value-increasing.

In any case, this point is moot because the non-significant “results” of AS2016 do not hold up. As is true of any event study without a large number of observations, the statistical significance of our 2013 results could be sensitive to the removal of a small number of observations, especially if such removal is designed in a strategic way. However, in the case of our study, the results retain their statistical significance under a wide range of tests conducted to address the concerns raised by AS2016.

The “Gimlet Eye” and Shareholder Voting

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 Gregory Beaman. This post is part of the Delaware law series; links to other posts in the series are available here.

On May 19, 2016, the Delaware Chancery Court preliminarily enjoined the directors of Cogentix Medical from reducing the size of the company’s board because, under the facts presented, there was a reasonable probability that the board reduction plan was implemented to defeat insurgent candidates in a contested director election. Pell v. Kill, C.A. No. 12251-VCL (Del. Ch. May 19, 2016). The decision is a reminder that board actions that affect the shareholder vote—particularly decisions that make it more difficult for stockholders to elect directors not supported by management—will be subject to enhanced judicial scrutiny by Delaware courts on the lookout with a “gimlet eye” for conduct having a preclusive or coercive effect on the stockholder vote.


Managerial Performance Incentives and Firm Risk During Economic Expansions and Recessions

Tanseli Savaser is Assistant Professor of Finance at Bilkent University and Elif Şişli-Ciamarra is Assistant Professor of Finance in the Brandeis International Business School. The following post is based on an article by Ms. Savaser and Ms. Şişli-Ciamarra.

In our article, Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions, which is forthcoming in the Review of Finance, we show that the relationship between managerial pay-for-performance incentives and risk taking is pro-cyclical.

A significant portion of executive pay packages are in the form of equity-based compensation, which create pay-for-performance sensitivity and is expected to incentivize managers to exert effort and take actions that increase stock values. However, the relationship between pay-for-performance incentives and firm risk is less clear. Pay-for-performance could induce more risk taking because risky projects generally create more value and therefore increase the expected value of incentive compensation. However, it could also induce less risk taking because of a desire to limit portfolio risk. This is mainly because managers are inherently more risk averse than diversified shareholders due to their organization-specific human capital and/or undiversified wealth portfolios (Smith and Stulz, 1985; Amihud and Lev, 1981; Tufano, 1996).


Getting the Most from the Evaluation Process

John Olson is a founding partner of the Washington, D.C. office at Gibson, Dunn & Crutcher LLP and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert.

More than ten years have passed since the New York Stock Exchange (NYSE) began requiring annual evaluations for boards of directors and “key” committees (audit, compensation, nominating/governance), and many NASDAQ companies also conduct these evaluations annually as a matter of good governance. [1] With boards now firmly in the routine of doing annual evaluations, one challenge (as with any recurring activity) is to keep the process fresh and productive so that it continues to provide the board with valuable insights. In addition, companies are increasingly providing, and institutional shareholders are increasingly seeking, more information about the board’s evaluation process. Boards that have implemented a substantive, effective evaluation process will want information about their work in this area to be communicated to shareholders and potential investors. This can be done in a variety of ways, including in the annual proxy statement, in the governance or investor information section on the corporate website, and/or as part of shareholder engagement outreach.

Shareholder Proposal Settlements, the SEC, and Campaign Finance Disclosure

Sarah Haan is an Associate Professor at the University of Idaho College of Law. This post is based on a recent article by Professor Haan. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here).

Reform of campaign finance disclosure has stalled in Congress and at various federal agencies, but it is steadily unfolding in a firm-by-firm program of private ordering. Today, much of what is publicly known about how individual public companies spend money to influence federal, state, and local elections—and particularly what is known about corporate “dark money”—comes from disclosures that conform to privately-negotiated contracts.


Shareholder Proposals Contested by Firm Management

Suraj Srinivasan is Professor of Business Administration at Harvard Business School. This post is based on a recent paper by Professor Srinivasan; Eugene F. Soltes, Jakurski Family Associate Professor of Business Administration at Harvard Business School; and Rajesh Vijayaraghavan.

In our new paper, What Else Do Shareholders Want? Shareholder Proposals Contested by Firm Management, we explore proposals that managers seek to exclude from their firms’ proxy statements. We find that managers often seek to exclude shareholder proposals from the proxy. Over four thousand proposals, or nearly 40%, of all proposals received during 2003-2013 were contested by management. These proposals covered a wide range of issues including executive compensation, antitakeover measures, voting procedures, environmental issues, and social policy. The SEC allows firms to exclude many of the proposals that managers contest. Specifically, 72% of all proposals that managers seek to exclude from the proxy are allowed by the SEC (i.e. SEC provides firm a “no action” opinion letter).

We find that some firms are more inclined than others to seek exclusion of shareholder proposals. Firms that are larger, have worse performance, and have less institutional shareholders are more likely to contest proposals they receive. There is also the tendency for management to behave similarly over time. If a firm contests a proposal in the prior year, they are more inclined to contest a proposal in the subsequent year.


American Pipe: Tolling and Statutes of Repose

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, Walter RiemanAudra J. SolowayAndrew J. Ehrlich, and Susanna M. Buergel.

On Friday, in Stein v. Regions Morgan Keegan Select High Income Fund, Inc., Nos. 15-5903, 15-905, 2016 WL 2909333 (6th Cir. May 19, 2016), the Sixth Circuit ruled that the tolling doctrine established by American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), does not apply to the three-year statute of repose governing claims under Sections 11 and 12 of the Securities Act of 1933 [1] or to the five-year statute of repose governing claims under Section 10(b) of the Securities Exchange Act of 1934. [2]


The Effect of Staggered Boards on Stock Value: New Evidence

Yakov Amihud is Ira Leon Rennert Professor of Entrepreneurial Finance at NYU Stern School of Business. This post is based on a recent paper authored by Professor Amihud and Stoyan Stoyanov of Berkeley Research Group, that responds to an article by Professors Alma Cohen and Charles C.Y. Wang.

Against the lively debate on whether a staggered board (SB) of directors hurts or benefits stockholders I present new evidence suggesting that in general, an SB has no significant effect on stock value. The evidence is based on the effects of two Delaware court rulings in 2010 in the case of Airgas on stock prices of Delaware companies that could be affected by these rulings. The October 8 ruling weakened the potency of the SB for companies that have their annual meeting late in the year and the November 23 decision restored its potency. (A detailed description of these rulings appears in a post on the Forum here.)


Delaware Court of Chancery Appraises Fully-Shopped Company at Nearly 30% Over Merger Price

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Mirvis, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series; links to other posts in the series are available here.

In an appraisal decision issued this week, the Delaware Court of Chancery held that the fair value of Dell Inc. was $17.62 per share—almost four dollars over and nearly 30% more than the price paid in the 2013 go-private merger. In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016). The result reflects the remarkable view that “fair value” in Delaware represents a price far higher than any buyer would have been willing to pay and that the merger price derived from an admirable sales process should be accorded no weight.


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