Monthly Archives: August 2016

SEC Denial of No-Action Relief with Regard to 3/3 Proxy Access Proposal

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher memorandum by Ms. Cohn. Related research from the Program on Corporate Governance includes The Case for Shareholder Access to the Ballot by Lucian Bebchuk; and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

During the 2016 proxy season, the Staff of the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (“SEC”) granted no-action relief to 36 issuers with regard to proxy access shareholder proposals on the ground that they had substantially implemented the proposal under Rule 14a-8(i)(10). [1] In each of these instances, the proxy access bylaw adopted by the company granted proxy access for holders of three percent of the company’s outstanding stock for at least three years, as requested by the shareholder proposal. The Staff granted no-action relief despite the fact that in most of these cases, the company’s bylaws differed from the shareholder proposal with regard to the number of shareholders who could be aggregated to form a group, the cap on the number of candidates who may be nominated pursuant to proxy access, and/or the specific disclosures and certifications required from nominating shareholders. On July 21, 2016, for the first time, the Staff denied no-action relief under Rule 14a-8(i)(10) to a company that had adopted proxy access at the 3%/3-year thresholds. [2]

Mergers and Acquisitions, Technological Change, and Inequality

Elena Simintzi is Assistant Professor of Finance at University of British Columbia Sauder School of Business. This post is based on a recent paper by Professor Simintzi; Paige Ouimet, Associate Professor of Finance at the Finance Department at the University of North Carolina at Chapel Hill; and Wenting Ma.

A substantial rise in wage inequality in the United States and other developed countries has garnered significant attention in the media and among policy circles. Economists have argued that rising inequality is a consequence of technology adoption. Technology may be skill-biased enhancing the productivity of high-skill labor (Katz and Autor, 1999) or routine-biased enabling firms to automate routine tasks replacing middle-skill workers (Autor, Levy, and Murnane, 2003; Acemoglu and Autor, 2011; Autor and Dorn, 2013). But what drives technology adoption? In recent research, we argue firm reorganization, in the form of M&As, acts as a catalyst for the adoption of both skill-biased and routine-biased technology. Considering the large scale of M&A activity, with over 4 $trillion in activity in 2015 alone, it is plausible to expect M&A activity may have economically important effects on increased income inequality and other changes in labor demand.


Corporate Governance by the Numbers

Ann Yerger is an executive director at the EY Center for Board Matters at Ernst & Young LLP. The following post is based on a report from the EY Center for Board Matters.

The EY Center for Board Matters collects and analyzes governance data for more than 3,000 US public companies through its proprietary corporate governance database. We invite you to explore Corporate Governance by the Numbers.

Board Composition

Board composition* S&P 500 S&P MidCap 400  S&P SmallCap 600  S&P 1500 Russell 3000
Age 62 years 63 years 62 years 62 years 61 years
Gender diversity 2 (21%) 2 (16%) 1 (14%) 2 (17%) 1 (14%)
Independence 85% 82% 81% 83% 79%
Tenure 9 years 9 years 9 years 9 years 8 years
* Numbers based on all directorships in each index; gender diversity data represents average number of women directors on a board (and the percentage this represents)


Do Banks Have A Fiduciary Duty to Shed Their BHC Status?

V. Gerard Comizio is a partner and chair of the Global Banking and Payment Systems Group at Paul Hastings LLP. This post is largely based on a recent article by Mr. Comizio, Laura E. Bain and Kristin S. Teager which was previously published in the American University Business Law Review.

The last thirty years have witnessed a dramatic rise in bank adoption of the bank holding company (“BHC”) structure. Inherent in this trend is an apparent accepted orthodoxy about the need of such structures from both a business and regulatory perspective. The percentage of U.S. banks owned by BHCs has more than doubled since 1980, from 34.3% to approximately 84% today. [1]


Federal banking agencies (“FBAs”), however, do not require banks to form a BHC. [2] Thus, the uptick in BHC-owned banks has largely been driven by perceived legal, regulatory, and business advantages. Since 1980, the majority of banks presumably (1) identified significant advantages to forming a BHC that outweighed the increased costs of corporate governance and regulatory compliance and/or (2) saw their peers forming BHCs and generally accepted this industry trend as the orthodoxy of modern banking organization structure.


CEO Equity-Based Incentives and Shareholder Say-on-Pay in the U.S.

Denton Collins is a Jerry S. Rawls Professor of Accounting at Texas Tech University Rawls College of Business. This post is based on a paper authored by Professor Collins, Blair B. Marquardt, and Xu Niu. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

Equity-based compensation has interested business leaders, regulators, and researchers for decades, and remains a significant but controversial form of executive compensation. On the one hand, stock options and stock awards align the interests of managers and shareholders at a fundamental level—directly associating compensation to changes in shareholder wealth. Thus, equity-based compensation serves as a governance mechanism and provides strong incentives for management to create value to shareholders. This has generally been supported by research. On the other hand, equity-based compensation has been linked to many unintended consequences that can negatively affect shareholder value (e.g., earnings management, excessive risk taking). Further, equity-based compensation is generally complex and opaque relative to other forms of compensation.


Directors’ Fiduciary Duties in Approving Mergers

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 July 28, 2016, the Delaware Court of Chancery held that stockholders of Riverstone National, Inc. had adequately stated a breach of fiduciary duty claim against the company’s directors who approved a merger that extinguished threatened derivative claims against them. See In re Riverstone Nat’l, Inc. S’holder Litig., C.A. No. 9796-VCG (Del. Ch. July 28, 2016). The court concluded that the plaintiffs had sufficiently rebutted the business judgment rule and stated claims under “entire fairness” review because they alleged that a majority of Riverstone’s directors had usurped a corporate opportunity by personally investing $4.65 million in other companies operating in Riverstone’s general line of business, knew that Riverstone’s shareholders were investigating potential derivative claims against them in connection with those investments, and nonetheless proceeded to negotiate a sale of the company for $94 million to an acquirer that agreed not to pursue any litigation against them, including, by implication, the threatened usurpation claims. In re Riverstone is a cautionary reminder to directors that self-interested motives for negotiating mergers and other transactions will be subject to enhanced scrutiny, and may even lead to personal liability in the event directors are found to have acted disloyally to their shareholders.


Interest in Appraisal

Charles Korsmo is Assistant Professor of Law at Case Western Reserve University School of Law and Minor Myers is Professor of Law at Brooklyn Law School. This post is based on a recent article by Professors Korsmo and Myers and is part of the Delaware law series; links to other posts in the series are available here.

In a forthcoming article, we critique Delaware’s system for awarding prejudgment interest in stockholder appraisal actions and propose a set of reforms designed to improve upon the existing regime.

The recent rise in appraisal litigation is largely a positive development, as we have argued before and as mounting evidence confirms. Nonetheless, it has sparked a backlash among an influential group of deal advisers and defendants. Citing danger to the deal market, these critics have sought drastic changes in Delaware to curtail the ability of minority shareholders to pursue appraisal.


Form 13f (Mis) Filings

Anne M. Anderson is Associate Professor of Finance and Paul Brockman is Professor of Finance at Lehigh University. This post is based on a recent paper by Professors Anderson and Brockman.

We examine the reliability of Form 13F filings and document the widespread presence of significant reporting errors. Even among a select group of high-profile bank holding companies, we find that filing firms frequently (1) report their holdings of securities that do not appear on the SEC’s Official List, (2) report inaccurate market prices for securities that do appear on the SEC’s Official List, and (3) file amended 13F reports that can be less accurate than the original filings. Overall, our evidence shows that the widespread reliance on 13F filings for institutional ownership figures is unwarranted.


The Importance of Trust for Investment

Thomas Hellmann is Professor of Entrepreneurship and Innovation at the University of Oxford. This post is based on an article authored by Professor Hellmann; Laura Bottazzi, Professor of Economics at the University of Bologna; and Marco Da Rin, Associate Professor of Finance at Tilburg University.

In our article, The Importance of Trust for Investment: Evidence from Venture Capital, forthcoming in the Review of Financial Studies, we ask whether trust among nations affects the decision to make an investment across different countries, how trust is related to investment success, and how trust affects deal structures. Following the social capital literature, we define trust as a subjective belief about the likelihood that a potential trading partner will act honestly. Distinguishing between two different types of trust is essential: Generalized trust pertains to the preconceptions that people of one identifiable group have for people from another identifiable group. Personalized trust, on the other hand, concerns an evolving relationship between two specific agents. In this article we focus solely on generalized trust, so that we are concerned with what might be considered cursory beliefs, generalizations about others, or even stereotypes. Moreover, generalized trust does not necessarily pertain to the specific company that an investor deals with, but it may pertain to the company’s countrymen and country’s institutions, which can influence the investment outcome.


Regulating Conduct & Culture in the Financial Industry

Pedro Machado is a Partner at PwC Portugal, co-leading FS Risk & Regulation and leading the EMEA FS workstream on governance & conduct. This post is based on his contribution to the Roundtable on “Conduct and culture: what priorities in the financial services industry?”, held at the Eurofi High Level Seminar 2016.

The Eurofi High Level Seminar 2016, which took place in Amsterdam from 20-22 April during the Dutch EU Council Presidency, examined new trends and objectives in the financial sector, amongst which the improvement of conduct and culture. The full report of the event was made available this month, [1] containing an account of the discussions held during the roundtable on conduct & culture. [2] The choice of this theme denotes both a new trend in the financial sector and growing regulatory concern with conduct & culture in the financial services industry.

Although amorphous as a concept, culture is very much in the regulator’s sights, responding to the widely held belief that poor conduct was at the root of both the 2008 financial crisis and more recent market scandals. Whilst the initial regulatory priority was to promote a more risk-aware culture to support prudential regulation, the examples of Libor and FX manipulation and collusion behaviors helped build the case for the conduct element of culture to rank high in the regulator’s agenda. The growing focus on conduct and customer protection extends the cultural lens into the murkier areas of ethics and integrity: what does “good” look like?


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