Monthly Archives: October 2016

Second Circuit Clarifications on Key Investor Protections

Blair A. Nicholas is a Managing Partner at Bernstein Litowitz Berger & Grossmann LLP. This post is based on a Bernstein Litowitz publication by Mr. Nicholas, Jonathan Uslaner, and Jai K. Chandrasekhar.

The Second Circuit Court of Appeals this week handed down two decisions important to investor rights: In re Vivendi, S.A. Securities Litigation (“Vivendi“) and GAMCO Investors, Inc. v. Vivendi Universal, S.A. (“GAMCO“).

In Vivendi, the Second Circuit (i) clarified the requirements for proving “loss causation” in securities fraud cases and (ii) endorsed the “inflation-maintenance” theory of liability, under which defendants may be liable for false statements that maintain (but do not increase) the price of a company’s stock. Meanwhile, in GAMCO, the Second Circuit made clear that the fraud-on-the-market theory may be rebutted in efficient-market cases where a security’s price is inflated by fraud only in the extraordinary instance where plaintiff would have bought the security even if it had actual knowledge of the alleged fraud.


Optimal Fee-Shifting Bylaws

Albert H. Choi is Albert C. BeVier Research Professor and Professor of Law at the University of Virginia Law School and Visiting Professor of Law at Columbia Law School. This post is based on a recent paper by Professor Choi. This post is part of the Delaware law series; links to other posts in the series are available here.

After the financial crisis of 2008, there was an explosion of lawsuits by shareholders against their corporations, particularly in mergers and acquisitions transactions. Partly in response to this “flood” of litigation, a number of corporations began devising strategies to deter shareholder lawsuits. One strategy was the fee-shifting bylaw, which would obligate the plaintiff-shareholder to reimburse the corporation’s expenses (including attorneys’ fees and other costs) when the plaintiff is unsuccessful in litigation. Initially, whether the bylaw—adopted unilaterally by the directors and without express shareholder consent—would be honored by the court was uncertain. But that uncertainty was resolved, at least in Delaware, through the case of ATP Tour, Inc. v. Deutscher Tennis Bund (“ATP Tour”). [1] In the case, the Delaware Supreme Court upheld the fee-shifting bylaw adopted by the directors of ATP Tour, Inc., largely by applying the contractarian principle. According to the Court, charters and bylaws constitute a contract between a corporation and its shareholders, and the directors can amend the bylaws by adopting a fee-shifting provision when the amendment right is granted to them in the corporation’s charter. The case generated a substantial amount of controversy, but a number of corporations promptly took advantage of this newly validated right. Only a year later, however, the Delaware legislature took away that right by amending the Delaware General Corporation Law to prohibit altogether fee-shifting provisions, either in the charter or the bylaws.


It’s Commonsense to Have a U.S. Corporate Governance Code

Gary Larkin is a Research Associate at The Conference Board Governance Center. This post is based on a Conference Board publication. Additional posts on the Commonsense Governance Principles are available here.

Over the summer, one of the most interesting pieces of corporate governance literature was the Commonsense Corporate Governance Principles.

The publication was the result of meetings between a group of leading executives of public companies, asset managers, a public pension fund, and a shareholder activist. The principles themselves may not have broken new ground—they addressed such basic issues as director independence, board refreshment and diversity, the need for earnings guidance, and shareholder engagement.  But the fact that such a publication was released at a time when some in Congress to roll back Dodd-Frank corporate-governance-related regulations is impressive.


One Year Later: The Yates Memo, False Claims Act and Director & Executive Liability

Tony Maida and Rebecca C. Martin are partners at McDermott Will & Emery LLP. This post is based on a McDermott Will & Emery publication.

On September 19 and 27, 2016, the US Department of Justice announced two False Claims Act settlements that required corporate executives to make substantial monetary payments to resolve their liability. In the first, announced on September 19, North American Health Care Inc. (NAHC) and two individuals—its chairman of the board and a senior vice president of reimbursement—agreed to settle potential False Claims Act liability for a total of $30 million. The second settlement involves the former CEO of Tuomey Healthcare, who, a year after the $72.4 million corporate FCA resolution and two years after his departure from Tuomey as CEO, is now settling his own liability for $1 million, has been required to release any indemnification claims he may have had against the company, and has agreed to a four-year period of exclusion from participating in federal health care programs. Coinciding with the Tuomey CEO settlement announcement, Bill Baer, Principal Deputy Associate Attorney General of the US Department of Justice (DOJ), gave a speech in Chicago discussing company cooperation and “individual accountability” in the context of federal civil enforcement. This new guidance, as well as the two settlements, come a little over a year after DOJ Deputy Attorney General, Sally Yates, issued what is now known as the “Yates Memo,” which sets forth guidance to be used by DOJ civil and criminal attorneys “in any investigation of corporate misconduct” in order to “hold to account the individuals responsible for illegal corporate conduct.” Since then, corporate resolutions like these have been watched for telltale signs of whether the Yates Memo is really changing the way federal enforcement does business. Given the timing of the speech and the settlements, and the high level of the officers involved, that change may be here


Inside Safe Assets

Anna Gelpern is a Professor at Georgetown University Law Center, and Erik F. Gerding is a Professor at the University of Colorado Law School. This post is based on their forthcoming article.

In a rare bipartisan moment of the 2016 election season, a group of U.S. Senators introduced a bill late last month that would let municipal debt count among “High Quality Liquid Assets” (HQLA), the buffers banks must hold against liquidity shocks since the last financial crisis. The key argument for the bill cited in the news media was not about bank liquidity, but rather about the need to preserve market access for states, cities, and counties. Anointed as HQLA, municipal debt would gain preferred access to a special group of buyers, the country’s biggest financial institutions. Foreign governments made a similar argument just a few years earlier, when they lobbied U.S. regulators for exemptions from the proprietary trading ban of the Volcker Rule, so as to preserve liquidity in their debt markets. [1] In the late 1990s and early 2000s, the desire to preserve liquidity in yet another vital market—overnight repurchase agreements (repos)—animated the push for bankruptcy safe harbors, which put repos backed by an ever-widening range of collateral ahead of other claims, and effectively beyond the reach of bankruptcy law. The repo market boomed, until it collapsed in 2007-2008.


The EU’s New Reporting Rules—Creating An Informational Vacuum

Robert C. Pozen is a Senior Lecturer at MIT Sloan School of Management and a Senior Fellow at the Brookings Institution. This post is based on an article by Mr. Pozen that originally appeared in the Financial Times.

Executives, fund managers and even politicians have criticised publicly traded companies’ undue focus on generating profits in the next quarter instead of making investments with good five-year prospects.

To encourage these companies to take a longer-term perspective, several regulators have shifted corporate reporting requirements from quarterly to semi-annually.

Most prominently, in 2013 the European Commission amended its Transparency Directive to abolish the requirement for quarterly reports by publicly traded companies in favour of semi-annual reports.

After an impact assessment, the commission concluded that “quarterly financial information is not necessary for investor protection”.

But a recent study severely undermines the commission’s conclusions.


Audit Committee Reporting to Shareholders in 2016

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.

Audit committees have a key role in overseeing the integrity of financial reporting. Nevertheless, relatively little information is required to be disclosed by US public companies about the audit committee’s important work. Since our first publication in this series in 2012, we have described efforts by investors, regulators and other stakeholders to seek increased audit­-related disclosures, as well as the resulting voluntary disclosures to respond to this interest.

Over 2015–2016, US regulators have placed a spotlight on audit-related disclosures and financial reporting more generally. The US Securities and Exchange Commission (SEC) and the US Public Company Accounting Oversight Board (PCAOB) have both taken action to consider the possibility of requiring new disclosures relating to the audit.


Does Corporate Governance Matter? Evidence from the AGR Governance Rating

Alberto Plazzi is Associate Professor of Finance at USI Lugano and a Faculty member of the Swiss Finance Institute. Walter Torous is a Senior Lecturer at the Massachusetts Institute of Technology holding a joint appointment in the Center for Real Estate and the Sloan School of Management. This post is based on a recent paper by Professor Plazzi and Dr. Torous. Related research from the Program on Corporate Governance includes What Matters in Corporate Governance? by Lucian Bebchuk, Alma Cohen and Allen Ferrell (discussed on the Forum here), and Learning and the Disappearing Association between Governance and Returns by Lucian Bebchuk, Alma Cohen, and Charles C. Y. Wang (discussed on the Forum here).

Do better governed firms perform better than their peers? In the academic literature, numerous studies have tackled this question with mixed success. On the one hand, there appears to be a robust statistical association between governance indices based on anti-takeover provisions and future operating performance, see e.g. Bebchuk, Cohen, and Wang (2013). On the other hand, these indices are characterized by limited time variation for a given firm, and their effects are harder to identify when focusing on finer industry definitions (Johnson, Moorman, and Sorescu (2009)). Altogether, it appears that the evidence that better governance is indeed a driving force behind a firm’s success is still far from conclusive.


Disclosure of Beneficial Ownership After the Panama Papers

Joseph McCahery is Professor in the Department of Business Law at Tilburg University. This post is based on a foreword authored by Professor McCahery for a recent International Finance Corporation report. 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).

The disclosure of the “Panama Papers” [1] focused public interest on how elaborate corporate structures and offshore tax havens can be used by politicians, celebrities and other elites to obscure their assets, including concealing their beneficial ownership of companies.

Conventional thinking suggests that trust in corporations and markets depend, in large part, on the existence of an accurate disclosure regime that provides transparency in the beneficial ownership and control structures of companies. In particular, investor confidence in financial markets is regarded as contingent on the accurate disclosure of the ultimate beneficial owner (either an individual, group of individuals or the state) of publicly listed companies.


The Law and Brexit VII

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.

Despite the protestations of some, the direction of travel in UK Government thinking seems to be towards the negotiation of a “hard” Brexit, meaning limited market access for services and goods to the EU single market. Attitudes also appear to be hardening in other EU member states: the Italian Prime Minister warned during the past week that it would be impossible for the UK to get special treatment post Brexit as compared with other non-EU states. Some of this may be seen as positioning in advance of the substantive negotiations likely to begin next year, but the hardening of public positions does little to reassure the financial services industry and market participants that a sensible bespoke solution for the UK can be found quickly.


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