Monthly Archives: October 2016

Weekly Roundup: September 30–October 6, 2016

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This roundup contains a collection of the posts published on the Forum during the week of September 30–October 6, 2016.

Earnings and the Value of Voting Rights

The Investors’ Exchange

When Do Merger Benefits to Directors Constitute Disabling Conflicts?

Ethan A. Klingsberg is a partner in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg. This post is part of the Delaware law series; links to other posts in the series are available here.

As the Delaware Supreme Court narrows the avenues for post-closing challenges to mergers (see our discussions of the implications of the Corwin and Cornerstone decisions here, here, here, and here), we expect that plaintiffs’ lawyers will increasingly seek to base their merger suits on specific allegations of conflicts that may have tainted the oversight of processes to sell companies in hopes of supporting claims for breaches of the duty of loyalty and the applicability of the enhanced scrutiny of the entire fairness doctrine. Given that virtually every merger includes some special merger benefits for directors that may be susceptible to an attempt at such a claim, it is timely that the Delaware Court of Chancery issued a decision over the summer of 2016 that provides useful guidance on how to evaluate the most common of special merger benefits to insiders: protection against exposure to pre-merger claims.


The Role of Financial Reporting and Transparency in Corporate Governance

Wayne R. Guay is the Yageo Professor of Accounting at The Wharton School of the University of Pennsylvania. This post is based on a recent article authored by Professor Guay; Chris Armstrong, Associate Professor of Accounting at Wharton; Hamid Mehran, Assistant Vice President at the Federal Reserve Bank of New York; and Joseph Weber, George Maverick Bunker Professor of Management and a Professor of Accounting at MIT Sloan School of Management.

In our article, The Role of Financial Reporting and Transparency in Corporate Governance (Economic Policy Review, 2016), we review the recent corporate governance literature that examines the role of financial reporting in resolving agency conflicts among a firm’s managers, directors, and capital providers. We view governance as the set of contracts that help align managers’ interests with those of shareholders, and we focus on the central role of information asymmetry in agency conflicts between these parties. The general conclusion in this literature is that financial reporting is valuable because contracts can be more efficient when the parties commit themselves to a more transparent information environment.


Supreme Court’s Anticipated Ruling on Insider Trading

Amy S. Park is a partner in the Commercial and Securities Litigation practice at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication.

In its 2016 fall term, the U.S. Supreme Court will have the opportunity to consider two cases involving securities laws, one of which is already on the calendar for oral argument. The cases concern the “personal benefit” required to establish liability for insider trading and the jurisdictional requirements for class actions under the Securities Act of 1933. Depending on how the Court rules, the implications for companies, their constituents and practitioners could be profound.


2016-2017 Annual Benchmark Voting Policy Survey

Marc Goldstein is Head of the Policy Steering Committee at Institutional Shareholder Services, Inc. This post is based on an ISS publication.

ISS received 439 responses to this year’s policy survey, from 417 organizations. One hundred and twenty of the respondents were institutional investors, representing 115 organizations, including 73 asset managers or investment managers, 16 mutual funds, 15 government or state-sponsored pension funds, three foundations/endowments, three insurance companies (investment side), two alternative asset managers, and two labor union pension funds.


A Review of the STADA Arzneimittel Proxy Contest and the Activism Landscape in Germany

Steve Wolosky is partner and chair of the Activist & Equity Investment Practice at Olshan Frome Wolosky LLP. This post is based on an Olshan publication by Mr. Wolosky, Andrew Freedman and Ron Berenblat. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here), and The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here).

Active Ownership Capital (“AOC”), an activist investment company that takes minority positions in undervalued small to mid-size publicly traded companies in Western Europe and the Nordics, recently won a small, but significant, victory in a proxy battle it waged against STADA Arzneimittel AG (“STADA” or the “Company”), a publicly listed pharmaceutical company based in Germany. AOC, the owner of between 5% and 10% of the capital stock of STADA, sought to replace multiple members of the Company’s Supervisory Board at its 2016 Annual General Meeting (“AGM”). While AOC was only successful replacing the Chairman of the Supervisory Board at the AGM, this event garnered significant media attention given how rare proxy contests are in Germany. A review of the STADA situation reveals that there may be various avenues available to a shareholder holding a relatively small ownership interest in a German listed corporation to influence management and, if necessary, to run a proxy contest.


The Insignificance of Clear-Day Poison Pills

Emiliano M. Catan is Assistant Professor of Law at New York University School of Law. This post is based on his recent paper. Related research from the Program on Corporate Governance includes Toward a Constitutional Review of the Poison Pill by Lucian Bebchuk and Robert J. Jackson, Jr. (discussed on the Forum here).

Does the presence of a poison pill really matter for firm value? There are good reasons to believe that when it comes to pills, what really matters is their availability, and not whether they have been adopted. After all, even a firm that has not adopted a poison pill can quickly adopt one if a hostile bid arises. (Coates, 2000). However, empirical studies over the past few years (Bebchuk et al., 2009; Cremers & Ferrell, 2014; Cremers et al., 2016) have documented that the actual presence of pills is negatively associated with firm value (Tobin’s Q).

Although those studies suggest that the association may reflect a causal effect of the presence of pills, their methodologies are not airtight: They are still incapable of ruling out stories whereby firms adopt (or drop) pills in response to changing conditions correlated with firm value.


The Investors’ Exchange

Kevin J. Campion and James Brigagliano are partners at Sidley Austin LLP. This post is based on a Sidley publication by Messrs. Campion, Brigagliano, and Charles A. Sommers.

On September 2, 2016, the Investors’ Exchange, LLC (IEX) commenced full operations as a registered national securities exchange. After receiving over 400 comment letters during the U.S. Securities and Exchange Commission’s (SEC) review and a spirited debate on equity market structure, the SEC approved IEX’s application to become a national securities exchange on June 17, 2016. [1] As highlighted in the widely read book Flash Boys, by Michael Lewis, IEX employs a speed bump or delay on market participants accessing liquidity on IEX (IEX access delay).


The Financial Crisis and Credit Unavailability: Cause or Effect?

Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at the Duke University School of Law. This post is based a recent keynote address by Professor Schwarcz at a University of Durham/Newcastle University symposium, “The Untold Stories of the Financial Crisis: the Challenge of Credit Availability.”

Was the global financial crisis the cause of credit unavailability, or was it the effect? The standard story is that the financial crisis resulted in the loss of credit availability. In a keynote address for a University of Durham/Newcastle University symposium (linked here as a more complete and footnoted article), I argue that story is reversed and examine what lessons that can teach us.

To assess cause and effect, consider the timeline of events leading to the financial crisis. As home prices steadily increased, it became common for lenders to make mortgage loans to even risky, or “subprime,” borrowers. Lenders expected that home appreciation would cause collateral values to increase and enable borrowers to repay through refinancing.


California’s New Alternative Investment Fee Disclosure Bill

Catherine Skulan is counsel in the Private Investment Funds practice, and Raj Marphatia is a partner in the Private Investment Funds practice at Ropes & Gray LLP. This post is based on a Ropes & Gray publication.

On September 14, 2016, California Governor Jerry Brown signed into law a bill intended to provide transparency with respect to fees and expenses paid by California public pension or retirement systems (“PPPs”) to private equity funds, venture funds, hedge funds and absolute return funds (each, a “Fund”) in which they invest. This post seeks to answer some of the key questions regarding the new law (the “Fee Disclosure Law”) that we believe will be of particular interest.


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