Monthly Archives: August 2016

Private Equity Portfolio Company IPOs and SEC Review: What to Expect

Paul M. Rodel is a partner and Benjamin R. Pedersen is an associate in the New York office of Debevoise & Plimpton LLP. This post is based on a Debevoise & Plimpton publication by Mr. Rodel and Mr. Pedersen.

Private-equity (“PE”) sponsored issuers are estimated to have represented nearly a quarter of all US-issuer IPOs in 2015, with that proportion being even higher in prior years. The relationship of PE sponsor to IPO issuer presents a core group of issues and a short list of recurring themes in the SEC review and comment process. [1] For certain of these issues, the SEC staff has issued substantially identical comments to multiple PE-backed issuers, suggesting that they have developed models for reviewing PE-backed IPOs. In advance of an initial IPO registration statement filing, and when structuring pre- and post-IPO relationships, PE sponsors and their counsel should consider these trending comments and likely areas of SEC scrutiny in order to avoid potential IPO disclosure difficulties and to guide the drafting of IPO registration statement disclosure.

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The Law and Brexit IV

Thomas J. Reid is Managing Partner of Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Additional posts on the legal and financial impact of Brexit are available here.

[As of] the second half of August, no substantial progress has been made towards finalising Britain’s objectives in the upcoming Brexit negotiations. The EU and the UK seem to have accepted that there will be no quick triggering of Article 50 before the end of the year. Nevertheless, it is to be hoped that once the corridors of power in Westminster and Brussels fill again after the summer break, some picture of a plausible UK negotiating position might begin to emerge.

In this post, we consider Brexit’s implications for fiscal policy in the UK. Specifically, we examine how Brexit might impact the UK’s existing tax regime and the proposed changes to the UK’s tax regime arising out of various international and EU initiatives. We also discuss what Brexit might mean for the UK’s continued attractiveness as a corporate tax jurisdiction—and whether this may, in fact, be bolstered by Brexit. We conclude that Brexit presents an opportunity for the UK to enhance its credentials as a flexible and well-balanced corporate tax jurisdiction, but that the UK will need to balance healthy tax competition against preserving its reputation as a “good citizen” in the international tax world. It remains to be seen what approach the UK Government will take.

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Measuring Institutional Investors’ Skill from Their Investments in Private Equity

Michael S. Weisbach is the Ralph W. Kurtz Chair in Finance at Ohio State University. This post is based on a recent paper by Professor Weisbach; Daniel R. Cavagnaro, California State University, Fullerton; Berk A. Sensoy, Ohio State University Fisher College of Business, and Yingdi Wang, California State University, Fullerton.

Institutional investors have become the most important investors in the U.S. economy, controlling more than 70% of the publicly traded equity, much of the debt, and virtually all of the private equity. Their investment decisions have far reaching consequences for their beneficiaries: universities’ spending decisions, pension plan funding levels and consequent funding decisions by states and corporations, as well as the ability of foundations to support charitable endeavors all depend crucially on the returns they receive on their investments. For this reason, the highest paid individuals in these organizations are often their investment officers. This high level of pay is often controversial, and it is not clear from existing evidence whether these compensation decisions are optimal. If investment performance is random, then it is hard to justify this high level of pay; however, if higher quality investment officers lead to better returns, then it potentially makes sense to pay high salaries to attract them.

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Glass Lewis Thoughts on the “Commonsense Principles of Corporate Governance”

Greg Waters is Director of North American Research at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Mr. Waters. Additional posts on the Commonsense Governance Principles are available here.

On July 21, 2016 a group of 13 high profile investors and corporate executives released a set of “Commonsense Corporate Governance Principles” which opined on the roles and responsibilities of boards and investors. The Principles—which largely center on the themes of independent, experienced and diverse boards, transparency, sound board and executive compensation and long-term value creation—generally recommend practices either generally already in place at most (particularly large-cap) companies or required by regulations or stock exchange listing rules. Further, the Principles’ rejection of obligatory earnings guidance is also indicative of their focus on the long-term, an unsurprising viewpoint given that the signatories include BlackRock CEO Larry Fink and famed investor Warren Buffett, both of whom have been particularly vocal on this subject in recent years.

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Corporate Litigation: Advancement of Legal Expenses

Joseph M. McLaughlin is a partner and Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher publication by Mr. McLaughlin and Ms. Cohn which appeared in the New York Law Journal. This post is part of the Delaware law series; links to other posts in the series are available here.

Corporate indemnification and advancement of legal expenses are distinct rights, with advancement being a narrower and more provisional contractual benefit. By relieving corporate officials from the personal financial burden of paying ongoing expenses arising from lawsuits and investigations, advancement is widely recognized as an important corollary to indemnification as an inducement to secure able individuals to corporate service. The decision by a corporation to grant advancement of expenses incurred by an officer or director (and sometimes other employees and agents) in defending civil, criminal, administrative or investigative actions is essentially a decision to advance credit to corporate officials, because amounts advanced to them must be repaid if it is subsequently determined that they are not entitled to be indemnified.

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Buyout Activity: The Impact of Aggregate Discount Rates

Matthew C. Plosser is an Economist in the Financial Intermediation Function at the Federal Reserve Bank of New York. This post is based on a forthcoming article by Mr. Plosser, Valentin Haddad, Assistant Professor of Economics at Princeton University, and Erik Loualiche, Assistant Professor of Finance at the MIT Sloan School of Management.

Leveraged buyouts are a powerful tool to alter incentives in firms and improve their corporate governance. Despite these benefits, the use of the buyout transaction varies wildly over time. In the U.S., peak buyout years exhibit close to one hundred public-to-private transactions and trough years as few as ten. What explains this dramatic time-variation in activity? Prior literature and the popular press largely focus on how the cost of debt impacts buyout activity, as debt is a key input to the buyout transaction. Another popular explanation is a periodical form of irrational exuberance for buyouts.

In Buyout Activity: The Impact of Aggregate Discount Rates (forthcoming, Journal of Finance), we argue that these approaches miss the forest for the trees: the overall cost of capital, rather than debt alone, is the primary driver of buyout activity. We document that common changes in the cost of debt and the cost of equity—also known as the aggregate risk premium—best explain booms and busts in buyout activity. We also outline the economic mechanisms by which the risk premium influence the buyout decision.

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Advance Notice Bylaws in Light of Corvex/Williams: Displacing the Placeholder Nomination

Daniel Wolf and Sarkis Jebejian are partners at Kirkland & Ellis LLP who specialize in mergers and acquisitions. The following post is based on a Kirkland publication by Mr. Wolf and Mr. Jebejian.

Advance notice bylaws are a near universal feature of the organizational documents of public companies. In their simplest form, they set a deadline, usually between 60 and 120 days before an upcoming stockholder meeting, by which a stockholder must give notice to the company of its intention to nominate director candidates and identify those nominees. Delaware courts have repeatedly upheld the validity of these provisions holding that they are “useful in permitting orderly shareholder meetings.”

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We Have a Consensus on Fraud on the Market—And It’s Wrong

James C. Spindler is Sylvan Lang Professor of Law at University of Texas Law School; and Professor, University of Texas McCombs School of Business. This post is based on a forthcoming article by Professor Spindler. Related research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell, discussed on the Forum here.

Fraud on the market litigation has faced existential challenges in recent years, fueled by a broad academic policy consensus that it “just doesn’t work.” This consensus has, in large part, focused on two theoretical critiques of private securities litigation, the “diversification critique” and the “circularity critique.” The diversification critique holds that potential fraud losses to investors may be eliminated through diversification: an investor will lose from fraud on some trades, but gain on others, and this ought to even out in the end. [1] The circularity critique argues that, since plaintiffs are typically shareholders of the defendant firm, the fraud on the market remedy amounts to shareholders suing themselves, achieving no meaningful compensation, and merely shifting money from one pocket to the other. [2]

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Blockholders: a Survey of Theory and Evidence

Alex Edmans is Professor of Finance at London Business School and Clifford G. Holderness is Professor of Finance at the Boston College Carroll School of Management. This post is based on a recent paper by Professors Edmans and Holderness. 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.

Our new paper, Blockholders: a Survey of Theory and Evidence, surveys the role of large shareholders in corporate governance. We start by analyzing the underlying property rights of public corporations and blockholders. How are public corporations similar to other forms of private property and how are they different? We then define a blockholder by discussing what distinguishes it from an ordinary shareholder. Next, we present new evidence on the frequency, size, and board representation of blockholders in United States corporations and the resulting association with firm characteristics. We then develop a simple unifying model to present theories of blockholder governance through two channels. The first, traditional channel is direct intervention in a firm’s operations, otherwise known as “voice.” These theories have motivated empirical research on the determinants and consequences of activism. The second, more recent channel is selling one’s shares if the manager underperforms, otherwise known as “exit.” These theories give rise to new empirical studies on the two-way relationship between blockholders and financial markets, linking corporate finance with asset pricing. We survey the empirical evidence on blockholder governance and close with suggestions for future research.

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Do CEOs Affect Employee Political Choices?

Ilona Babenko is Associate Professor at W.P. Carey School of Business at Arizona State University. This post is based on a recent paper by Professor Babenko, Viktar Fedaseyeu, Assistant Professor in the Department of Finance at Bocconi University, and Song Zhang, University of Lugano and Swiss Finance Institute.

Do CEOs affect political choices of their employees? Using a large sample of U.S. firms, we find evidence that they do. First, we document that employees donate significantly more money to CEO-supported political candidates than to otherwise similar candidates not supported by the CEO. In 2012, for example, Barack Obama raised three times more money from employees of firms whose CEOs donated to him than from employees of firms whose CEOs donated to Mitt Romney (see Figure). We find similar effects for all federal elections (House, Senate, and President). Second, we find that employees located in congressional districts where CEOs support political candidates are more likely to vote in elections, suggesting that CEOs can affect not only their employees’ campaign contributions but also voter turnout.

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