Monthly Archives: November 2016

SEC’s “Substantial Implementation” Approach to Proxy Access

Yafit Cohn is an associate at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher publication. 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).

In July of 2016, the staff of the Securities and Exchange Commission (“SEC”) determined that H&R Block, Inc. did not, by virtue of its previous adoption of proxy access at the 3-percent/3-year thresholds, substantially implement a shareholder proposal requesting four specific revisions to the company’s proxy access bylaw. [1] After granting no-action relief earlier this year to dozens of companies that had received proxy access shareholder proposals and thereafter adopted proxy access at the 3-percent/3-year thresholds, the Staff’s no-action denial to H&R Block suggested that, when it comes to applying the “substantial implementation” exclusion under Rule 14a-8(i)(10), there is a crucial distinction between a shareholder proposal that seeks the adoption of proxy access with specified provisions and one that requests enumerated revisions to the company’s existing proxy access bylaw. [2] On September 27, 2016, the Staff issued three no-action responses that confirm and refine its view with regard to the application of the “substantial implementation” exclusion to proxy access proposals.


Law and Ownership Reexamined

Clifford G. Holderness is Professor of Finance at the Carroll School of Management at Boston College. This post is based on a forthcoming article by Professor Holderness. Related research from the Program on Corporate Governance includes The “Antidirector Rights Index” Revisited by Holger Spamann.

One of the most influential findings from the law and finance literature is that large-percentage shareholders in public corporations are a response to weak legal protections for public market investors. This theory was initially proposed in La Porta, Lopez-de-Silanes, Shleifer, and Vishny (1998) and has been confirmed and refined by the same researchers and others. The theory serves as a cornerstone for many analyses and recommendations in corporate governance. The belief is that when legal protections for public market investors are weak, stock ownership will be concentrated.

In Law and Ownership Reexamined I reexamine the relation between investors’ legal protections and ownership concentration and find no evidence of any relationship, either negative or positive. Although ownership concentration varies widely both within and across countries, there is no evidence that these differences reflect legal differences.


SEC Guidance on CEO Pay Ratio Disclosure

Elizabeth Ising and Ronald Mueller are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Ms. Ising, Mr. Mueller, and Sarah Fortt. Related research from the Program on Corporate Governance includes The Growth of Executive Pay by Lucian Bebchuk and Yaniv Grinstein.

On October 18, the Division of Corporation Finance (the “Staff”) of the Securities and Exchange Commission (the “Commission”) released five Compliance and Disclosure Interpretations (“C&DIs”) addressing new Item 402(u) of Regulation S-K regarding CEO pay ratio disclosure.

C&DIs 128C.01 through 128C.05 address five topics: (1) the identification of a “consistently applied compensation measure” to identify the median employee; (2) the use of hourly or annual rates of pay as a “consistently applied compensation measure;” (3) the time period(s) that may be used in applying a “consistently applied compensation measure;” (4) the treatment of furloughed employees; and (5) the circumstances under which a worker’s compensation will be deemed determined by an unaffiliated third party. In summary, the takeaways from the Staff’s new C&DIs are as follows:


Privacy in M&A Transactions: Pre Closing Liabilities

One aspect of mergers and acquisitions that is receiving growing attention is the relevance of privacy issues [1] under U.S. and European Union (“EU”) laws as well as the laws of a growing number of other jurisdictions. [2] This two-part blog post discusses the principal M&A-related privacy risks and highlights certain “traps” that are often overlooked. In this Part 1 of the post, we discuss risks associated with a target’s pre-closing privacy-related liabilities and consider ways to mitigate these risks through adequate diligence and representations in M&A agreements. In Part 2, we discuss the risks associated with transferring or disclosing personally-identifiable information (“personal data”) of an M&A target (or a seller) to a purchaser (or prospective purchaser) and those associated with the purchaser’s post-acquisition use of such personal data.


Golden Hellos: Signing Bonuses for New Top Executives

Jin Xu is Assistant Professor of Finance at Virginia Tech Pamplin College of Business; and Jun Yang is Associate Professor of Finance at Indiana University Kelley School of Business. This post is based on a recent article by Professors Xu and Yang. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.

Starting with Lewellen (1968), scholars have examined many facets of the executive compensation plan: salary, annual bonuses, stock and options, pensions, and, more recently, severance pay. A unique component that has largely been overlooked, however, is the signing bonus. Labeled by the media as “golden hellos”, the signing bonus is typically awarded to an executive who is identified by the board of directors as having special skills that are critical for the firm’s success. It is a one-time, upfront award granted when an executive assumes a new post and is arranged separately from the executive’s annual compensation plan.


The New EU Market Abuse Regulation: Impact on US Issuers

Michael E. Hatchard is partner and head of the English law practice at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication by Mr. Hatchard, Pranav TrivediDanny TricotJames A. McDonaldScott C. Hopkins, and Patrick Brandt.

The EU Market Abuse Regulation, which replaced the previous Market Abuse Directive regime, has been in effect since 3 July 2016. Although there is much in the new regime that is familiar, U.S. issuers that have applied to have securities admitted to trading on European Union Regulated Markets will still need to address a number of detailed differences. U.S. issuers that fell outside the scope of the previous Market Abuse Directive regime because they had applied to have their securities admitted to trading on certain EU multilateral trading facilities face a greater compliance burden. This post outlines the new regime’s implications for affected U.S. issuers, some issues that have emerged since the implementation and methods of dealing with them.


Brexit on Ice? Court Ruling That Only UK Parliament Can Trigger Article 50

This post is based on an Akin Gump Strauss Hauer & Feld LLP memorandum by Ian Patrick MeadeTim PearceChristopher Leonard, and Davina Garrod. Additional posts on the legal and financial impact of Brexit are available here.

Earlier today, the High Court of Justice ruled that the U.K. government does not have the constitutional capacity to trigger the U.K.’s withdrawal from the European Union without further primary legislation being passed. This decision is likely to delay, potentially significantly, the filing of the U.K.’s Article 50 notice with the European Council, further extending the uncertainty over the timing and the terms of the U.K.’s exit from the European Union (“EU”).


During the course of October 2016, a number of separate claims were commenced in the High Court concerning the U.K. government’s constitutional capacity to give notice under Article 50 TFEU of the U.K.’s intention to withdraw from the EU. These various proceedings were joined and heard together as Santos & Miller v. Secretary of State for Exiting the European Union.


“Ostrich” Theory Enforces Ill-Defined Duty to Investigate Clients’ Conduct

Lawrence S. Spiegel is Partner and General Counsel in the Government Enforcement and White Collar Crime division of Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden publication authored by Mr. Spiegel and Katherine L. Caldwell.

In recent years, the application of a “conscious avoidance” or “willful blindness” theory as the basis of attorneys’ liability for clients’ criminal conduct has been on the rise. In principle, this standard—commonly referred to as the “ostrich” theory—allows an attorney with no actual knowledge of a client’s wrongdoing to be held liable for providing legal services if the attorney suspected criminality on the client’s part and took deliberate steps to avoid learning the truth. In practice, however, the standard may be enforcing an ill-defined duty to investigate red flags in situations where the ethical rules governing attorneys would find misconduct only if an attorney had actual knowledge of a client’s criminality.


Dissenting Directors

Marco Ventoruzzo is a comparative business law scholar with a joint appointment with the Pennsylvania State University, Dickinson School of Law and Bocconi University. This post is based on a recent paper authored by Professor Ventoruzzo; Gianfranco Siciliano, ‎Assistant Professor of Accounting at Bocconi University; and Piergaetano Marchetti, Senior Professor in the Department of Law at Bocconi University.

At a time when a group of leading U.S. corporate executives promotes “Commonsense Principles of Corporate Governance,” it is apt to remark that one of the most commonsense governance ideas is that blind conformism and acquiescence are as bad for board members as ill-motivated divisiveness and litigiousness. Policy makers, scholars and practitioners around the world seem to agree that a diverse board, able to express different perspectives and challenge stereotypes, is desirable. This insight has prompted discussions around rules ranging from proxy access in the U.S., to co-determination in Germany and other European jurisdictions, and to list voting in Italy.


Weekly Roundup: October 28, 2016–November 3, 2016

More from:

This roundup contains a collection of the posts published on the Forum during the week of October 28, 2016–November 3, 2016.

Sharing Ideas for Shareholders—and Others

Crowdfunding Without the Crowd

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