Monthly Archives: July 2016

Hot Topics for Boards from the 2016 Proxy Season

Posted by Holly J. Gregory, Sidley Austin LLP, on
Tuesday, July 19, 2016
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Holly J. Gregory is a partner and co-global coordinator of the Corporate Governance and Executive Compensation group at Sidley Austin LLP. This post is based on an article originally featured in Practical Law.

With the 2016 proxy season winding down, it is time for boards, corporate governance and compensation committees, and their advisors to take stock of voting results and consider their implications for board and committee agendas and shareholder engagement efforts in the year ahead. This article provides an overview of key mid-season voting results on:

  • „„Shareholder proposals.
  • „„Director elections.
  • „„Management say on pay proposals.
  • „„Equity compensation plans.

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ValueAct Settlement: A Record Fine for HSR Violation

Posted by Barry A. Nigro, Jr., Fried, Frank, Harris, Shriver & Jacobson LLP, on
Tuesday, July 19, 2016
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Barry A. Nigro Jr., is a partner in the Antitrust and Competition and Corporate Practices and chair of the Antitrust Department at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Nigro, Nathaniel L. Asker, and Aleksandr B. Livshits. 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 Antitrust Division of the Department of Justice announced that activist investor ValueAct Capital has agreed to pay a record $11 million fine to settle allegations that it violated the notification requirements of the Hart-Scott-Rodino Act. The settlement highlights two important trends in HSR enforcement: continued scrutiny of activist investors that seek to rely on the “investment-only” exemption to HSR filing requirements; and increased fines for violations of the HSR Act. In addition, the settlement deprives the broader investment community and issuers of potential judicial guidance on the scope of the investment-only exemption, which could have provided welcome clarity, particularly in the area of investor communications with management.

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Equity is Cheap for Large Financial Institutions: The International Evidence

Posted by Priyank Gandhi, Mendoza College of Business, University of Notre Dame, on
Tuesday, July 19, 2016
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Priyank Gandhi is Assistant Professor at the University of Notre Dame’s Mendoza College of Business. This post is based on a recent paper authored by Professor Gandhi; Hanno N. Lustig, Professor of Finance at Stanford Graduate School of Business; and Alberto Plazzi, Assistant Professor of Finance at USI Lugano.

In countries around the world, governments and regulators are commonly perceived by market participants to offer special protections to the depositors, bondholders, and other creditors of large financial institutions in times of financial distress. A key question is whether these implicit and explicit government guarantees—collectively referred to as “Too Big to Fail (TBTF)”—also protect the shareholders of large financial institutions. In our paper, Equity is Cheap for Large Financial Institutions: The International Evidence, we set out to measure the effect of these implicit shareholder guarantees by closely examining the returns on stocks of large financial institutions.

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The JOBS Act: Did It Accomplish Its Goals?

Posted by Michael J. Zeidel, Skadden, Arps, Slate, Meagher & Flom LLP, on
Monday, July 18, 2016
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Michael J. Zeidel is a partner in the Corporate Finance practice at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Zeidel, Kathleen A. Negri, and Brittany L. Turner.

In the wake of the 2008 financial crisis, Congress created the Jumpstart Our Business Startups Act (JOBS Act) to encourage capital formation in order to grow businesses, create jobs and spur economic activity. Congress and the Securities and Exchange Commission (SEC) continue to monitor and update the JOBS Act rules to further achieve this goal. Since its enactment in 2012, the JOBS Act has succeeded in increasing market activity by easing regulatory requirements for smaller companies going public as well as companies raising capital in the private markets.

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Does Fiduciary Duty to Creditors Reduce Debt-Covenant Avoidance Behavior?

Posted by Dan Segal, Interdisciplinary Center Herzliya, on
Monday, July 18, 2016
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Shai Levi is Assistant Professor at Tel Aviv University; Benjamin Segal is Associate Professor at Fordham University; and Dan Segal is Associate Professor of Accounting at the Interdisciplinary Center Herzliya. This post is based on a recent paper by Professors Levi, Segal, and Segal.

Financial reports should provide useful information to both shareholders and creditors, according to U.S. accounting principles. However, directors of corporations have fiduciary duties toward equity holders only. In our paper, Does Fiduciary Duty to Creditors Reduce Debt-Covenant Avoidance Behavior?, we examine whether this slant in corporate governance biases financial reports in favor of equity investors. In particular, we examine whether the likelihood that firms manipulate their reporting to circumvent debt covenants is higher when directors owe fiduciary duties only to equity holders, rather than when they owe fiduciary duties also to creditors. Debt covenants set limits on leverage and performance, and act as a tripwire allowing creditors to take timely actions to reduce bankruptcy risk and costs. When managers manipulate financial reports to circumvent these debt covenants, they transfer wealth from creditors to shareholders.

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Empire of the Fund: The Way We Save Now

Posted by William Birdthistle, Chicago-Kent College of Law, on
Monday, July 18, 2016
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William Birdthistle is professor of law at Chicago-Kent College of Law. This post relates to a new book authored by Professor Birdthistle.

In my book, Empire of the Fund: The Way We Save Now, just published by Oxford University Press, I examine the challenges to our new system of individual investing. More pointedly, the book is an attempt to consider the possible consequences of a failure of our large national experiment with personal finances.

Over the past thirty years, the decline of defined benefit pensions and the rise of defined contribution plans has directed trillions of dollars into the hands of investing amateurs. The implicit hypothesis of our experiment has been that ordinary citizens can successfully manage 401(k) plans and IRAs to provide for their future needs and retirements—but the evidence we have so far suggests otherwise. In the book, I worry about the inadequacies of our new system of investing and suggest possible ways to improve our individual and collective prospects.

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Does Dodd-Frank Affect OTC Transaction Costs and Liquidity?

Posted by Y.C. Loon, U.S. Securities and Exchange Commission and Zhaodong (Ken) Zhong, Rutgers Business School, on
Sunday, July 17, 2016
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Y.C. Loon is a Financial Economist at the U.S. Securities and Exchange Commission and Zhaodong (Ken) Zhong is Associate Professor of Finance at Rutgers Business School. This post is based on an article authored by Mr. Loon and Professor Zhong. The Securities and Exchange Commission, as a matter of policy, disclaims responsibility for any private publication or statement by any of its employees. The views expressed herein are those of the author and do not necessarily reflect the views of the Commission or the author’s colleagues on the staff of the Commission.

In our article, Does Dodd-Frank Affect OTC Transaction Costs and Liquidity? Evidence from Real-Time CDS Trade Reports, recently published in the Journal of Financial Economics, we use real-time trade reports made available by post-financial crisis reforms to examine the trading costs and liquidity of index credit default swaps (CDSs), an important class of OTC derivatives. More importantly, the richness of the disseminated trade reports allows us to analyze how different aspects of the Dodd-Frank Act’s regulatory reforms are changing the landscape and thus, the liquidity of the once opaque OTC derivatives market.

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Consolidated Audit Trail: The CAT’s Out of the Bag

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on
Saturday, July 16, 2016
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Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer.

The SEC recently released a plan to establish a Consolidated Audit Trail (CAT), one of the world’s largest data repositories that will contain a complete record of all equities and options traded in the US. [1] The plan will require national securities exchanges and FINRA (SROs), alternative trading systems (ATSs), and broker-dealers (collectively, CAT Reporters) to submit information on trade events, [2] including customers and prices, to the CAT on a daily basis. It is estimated that the CAT will aggregate between 30 billion and 120 billion trade events per day from over 2,000 sources.

The SEC first proposed the CAT after the May 2010 “flash crash” when it became clear that the data available to the SEC is fragmented with no single source that covers all SEC regulated markets. [3] As a result, the SEC mandated the SROs to develop a plan to create the CAT, which will enable the SEC to conduct cross-market surveillance and reconstruct market events more efficiently. The plan is currently in the midst of a 60-day comment period, [4] after which the SEC will have 120 days to approve it. Once approved, SROs will have two months to select a vendor who will build and maintain the CAT (Plan Processor). [5]

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The Investor-Savvy Board

Posted by Anthony Goodman, Russell Reynolds Associates, on
Friday, July 15, 2016
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Anthony Goodman is a member of the Board Effectiveness Practice at Russell Reynolds Associates. This post is based on an Russell Reynolds publication authored by Mr. Goodman, Jack “Rusty” O’Kelley, III, and Constantine Alexandrakis.

With mounting activist pressure and the increasing “activation” of large institutional investors continuing to transform corporate governance in the United States and many markets around the world, boards have had no choice but to become more investor savvy.

We have seen this trend firsthand in our work with boards, as well as in conversations with institutional investors. The most forward-thinking boards are doing what it takes to thrive in the new environment.

What can a board do to become more investor savvy? There are seven steps to consider, which we’ve ordered from basic to most challenging. Many boards are already making significant progress along this continuum. How does your board measure up?

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The Impact of Merger Legislation on Bank Mergers

Posted by Jan-Peter Siedlarek, Federal Reserve Bank of Cleveland, on
Friday, July 15, 2016
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Jan-Peter Siedlarek is a Research Economist at the Federal Reserve Bank of Cleveland. This post is based on a recent paper by Mr. Siedlarek; Elena Carletti, Professor of Economics at the European University Institute; Steven Ongena, Professor of Banking at the University of Zurich; and Giancarlo Spagnolo, Professor of Economics at the University of Rome.

How do changes in merger control legislation affect merger activity in the banking sector? This is the question we investigate in our new research paper, The Impact of Changes in Merger Control Legislation on Bank Mergers. Using data on bank mergers and acquisitions in Europe, we find evidence that stricter merger control laws lead to an increase in the merger premium that target banks experience when an acquisition is announced. We interpret this as suggestive of merger legislation being effective in bringing about more efficient and pro-competitive transactions.

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