Monthly Archives: December 2016

U.S. Supreme Court Rules for Prosecutors in Insider Trading Case

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Karp, Dan Kramer, Lorin Reisner, Rich Tarlowe, Audra Soloway, and Andrew Ehrlich.

The Supreme Court yesterday [Dec. 6, 2016] issued its first opinion addressing the scope of insider trading liability in nearly twenty years. In a much anticipated decision, the Court in Salman v. United States addressed whether insider trading liability can arise where a tipper makes a “gift” of confidential information to a trading friend or relative but receives no financial or other tangible benefit in return. Relying on the 1983 seminal insider trading case, Dirks v. SEC, the Supreme Court answered that question in the affirmative.

In Dirks, the Court articulated the so-called personal benefit test. In particular, the Court held that trading on inside information is unlawful only if there has been a breach of a duty of trust and confidence, and that the test for determining whether such a breach has occurred is whether the insider personally benefits from the disclosure. The precise contours of the personal benefit requirement have been subject to debate and uncertainty following the Second Circuit’s landmark decision in 2014 in United States v. Newman.

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The Dark Side of Blockholder Philanthropy

Thomas Shohfi is an assistant professor of finance and accounting at the Lally School of Management and Technology at Rensselaer Polytechnic Institute; and Roger M. White is an assistant professor of accounting at the W.P. Carey School of Business at Arizona State University. This post is based on a recent paper by Professor Shohfi and Professor White.

Who would you rather own a business with, Mahatma Ghandi or Ebenezer Scrooge? Behavioral economics research points to considerable benefits of co-ownership with Ghandi, as counterparties (like suppliers, customers, and potential employees) work harder and offer better contracting terms when dealing with philanthropic principals. [1] Understandably, these contracting parties feel better about not driving the hardest possible bargain, as the proceeds to a firm co-owned by Ghandi go at least partially towards noble causes.

Corporate governance research based in agency theory, however, points to Scrooge being a major shareholder also having benefits. That is, small shareholders typically rely on the self-interest of large shareholders to monitor their shared investment. [2] For those small shareholders, having Scrooge as a blockholder may be comforting, as he would likely be a very close monitor of managers (for his own benefit). Research in this mold has found that self-interested blockholder monitoring is particularly effective at discouraging wasteful investments in R&D, M&A, and PP&E. [3] In this line of thinking, where the self-interest of large investors (and their associated monitoring of managers and the firm) comforts small investors, the market could view large investors’ philanthropy as troubling. If this philanthropy signals weakening self-interest on behalf of the newly charitable blockholder in question, smaller investors could worry that, as the monitor they rely on is less interested in wealth, this monitor will subsequently provide less monitoring of their shared investment. Sticking with our original analogy, this is akin to Scrooge taking a big step towards being Ghandi (i.e. Scrooge on Christmas morning). If you relied on Christmas Eve Scrooge’s preferences for wealth to keep an eye on an investment you two shared, this display of Scrooge’s new wealth preferences (giving wealth away à la Christmas morning Scrooge) could certainly have you worried!

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The Future of Sustainability Disclosure: What Remains Unchanged in an Environment of Regulatory Uncertainty?

Elisse B. Walter is a former Chair of the U.S. Securities and Exchange Commission. This post is based on Ms. Walter’s Keynote Remarks at the 2016 SASB Symposium.

This afternoon [December 1, 2016], I would like to talk with you about the history of sustainability disclosure, and about the fundamental principles that have long been central to the efficient functioning of our markets—concepts such as transparency, materiality, and, above all, the needs of investors. I believe it’s important for all of us to understand where those ideas came from, how they gained currency and what lies ahead. But before we talk about the past, and about the future, let’s consider where we are today.

This has been quite a day. We have heard about the Securities and Exchange Commission’s disclosure effectiveness initiative. We have learned about a variety of emerging approaches to integrate sustainability information into financial analysis. We have been informed about the corporate perspective on sustainability-related risks, and we took a peek into the future of accounting. My thanks, and those of everyone at SASB, to all who took the time to participate in this inaugural conference.
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Ten Key Implications of Donald Trump’s Electoral Victory for Financial and Securities Regulation

Dan Ryan is Leader of the Financial Services Advisory Practice at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Mr. Ryan, Mike Alix, Adam Gilbert, and Armen Meyer. Additional posts addressing legal and financial implications of the incoming Trump administration are available here.

President-elect Trump and his supporters have publicly called for the overhaul of Dodd-Frank and related regulations enacted since the financial crisis, while Democrats have been steadfast in maintaining one of the major accomplishments of the Obama presidency. We have watched the incoming administration’s statements and actions with interest, along with the hardened views of congressional leaders in the context of the complex myriad of financial regulations that are in place or still to come. As a result, we have been cautious to publish our specific views or predictions—the safest prediction is obviously to say things are unpredictable.

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Price and Probability: Decomposing the Takeover Effects of Anti-Takeover Provisions

Vicente Cuñat is Associate Professor of Finance at the London School of Economics & Political Science (LSE). This posts is based on a paper by Professor Cuñat; Mireia Gine, Assistant Professor of Financial Management is the IESE Business School at the University of Navarra; and Maria Guadalupe, Associate Professor of Economics and Political Science at INSEAD. 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).

Anti-takeover provisions are major governance mechanisms that affect firm value. It is often argued that they allow managers to bargain for a higher price in the event of a hostile takeover at the expense of reducing or delay the possibility of a takeover. However, there is little causal evidence on this trade-off.

Our paper, Price and Probability: Decomposing the Takeover Effects of Anti-Takeover Provisions, is the first to provide estimates of this trade-off that can be interpreted as causal, and not simple correlations. First, we show by how much takeovers are deterred when firms are protected. Second, we provide evidence that takeover premiums are lower when firms are more protected—which reverses the commonly held view that anti-takeover provisions increase takeover premiums by giving managers more bargaining power.

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The HLS Forum Celebrates Its Tenth Anniversary


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Today, the Harvard Law School Forum on Corporate Governance and Financial Regulation is pleased to mark its tenth anniversary. Established in 2006 by Professor Lucian Bebchuk and the Harvard Law School Program on Corporate Governance, the Forum has become the leading online resource, and the central outlet for the exchange of ideas and debate, in the fields of corporate governance and financial regulation.

Each month, the Forum features over 60 posts authored by scholars and practitioners on a wide range of topics. To date, the Forum has published more than 5,000 posts by close to 4,000 contributors, including prominent academics, public officials, executives, legal and financial advisors, institutional investors, and other market participants. While most posts are solicited by the editors, the Forum welcomes submissions of unsolicited posts for consideration by the editors.

The Forum now attracts more than 85,000 unique visits a month, and its posts have been cited in more than 350 academic articles and regulatory documents. It has established itself as the go-to outlet for readers seeking to follow the full range of new research and thought leadership, legal developments, and debate in corporate governance and financial regulation. In a recent article about the Forum that appeared in the Fall 2016 issue of the Harvard Law Bulletin, Chief Justice Leo Strine observed that “[i]t is amazing to see the [Forum] become required reading among the intelligentsia … of corporate governance.”

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Building the Strategic-Asset Board

Robyn Bew is director of strategic content development for the National Association of Corporate Directors (NACD). This post is based on a NACD publication, available here.

In 1996, the Report of the NACD Blue Ribbon Commission on Director Professionalism made recommendations on issues including establishing mechanisms for appropriate director turnover/tenure limitations, evaluation of the full board and of individual directors, and ongoing director education. [1] It stated, “the primary goal of director selection is to nominate individuals who, as a group, offer a range of specialized knowledge, skills, and expertise that can contribute to the successful operation of the company,” and advocated that boards must “[expand] the pool of potential nominees considered to include a more diverse range of qualified candidates who meet established criteria.” [2]

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Competition and Stability in Banking: The Role of Regulation and Competition Policy

Xavier Vives is professor of Economics and Finance, Abertis Chair of Regulation, Competition and Public Policy, and academic director of the Public-Private Research Center at IESE Business School. This post is based on his recent book, available here.

Competition has been perceived with suspicion, and even suppressed for extended periods, in banking. After banking was liberalized, a process which started in the 1970s in the United States, it has become much more unstable, culminating with the 2007–2009 crisis which resembles the systemic banking problems of the 1930s.

Is competition in banking good for society? What policies can best protect and stabilize banking and the financial system without stifling it? Has excessive competition helped the overexpansion of credit in the real state sector? Competition has a bearing on all the major perceived failures associated with banking: excessive risk taking by financial intermediaries, credit overexpansion, and bank misconduct (e.g., the Libor manipulation). However, we have to ascertain whether competition is responsible for instability, or instead we have to blame inadequate regulation and supervision.

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End of the First Proxy Access Campaign

David C. Karp is a corporate partner and Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Karp, Mr. Niles, and Eitan S. Hoenig. 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).

America’s first proxy access campaign ended this week. In early November, funds controlled by Mario Gabelli nominated a candidate for election to the board of directors of National Fuel Gas Company (“NFG”) using the company’s proxy access bylaw. NFG then challenged the Gabelli funds’ eligibility under the proxy access bylaw. This Monday, the Gabelli funds’ nominee withdrew and the funds announced that they would not pursue proxy access.

NFG rejected the nomination after concluding that the Gabelli funds did not satisfy NFG’s proxy access bylaw’s customary “passive investment” requirement, which required the nominating stockholder to have acquired its shares in NFG “in the ordinary course of business and not with the intent to change or influence control of [NFG],” and that the stockholder could “not presently have such intent.” The Gabelli funds’ practice of reporting their share ownership on a Schedule 13D instead of Schedule 13G caused NFG to doubt the Gabelli funds’ claim that they lacked an intent to change or influence control of NFG, as did the funds’ public advocacy in 2014 and 2015 for a spin-off of NFG’s regulated natural gas utility business and presentation of a Rule 14a-8 shareholder proposal to that effect at NFG’s 2015 annual meeting (which proposal lost by 82% of votes cast thanks to NFG’s strong shareholder engagement and shareholder-focused practices). The Gabelli funds’ head utilities analyst had recently informed NFG that Gabelli continued to believe the company should be split up. Moreover, the Gabelli funds’ statement in support of their nominee was revised to delete references to the 2015 proposal, despite the originally submitted statement referring positively to the 2015 proposal. In its letter to the Gabelli funds rejecting the nomination, NFG referenced public statements by Mr. Gabelli favoring “financial engineering” at NFG as well as statements by the funds’ representatives that proxy access was an appealing way to reduce the costs of traditional activism.

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CEO Duality, Agency Costs, and Internal Capital Allocations

Dennis Philip is Reader in Finance at Durham University Business School. This post is based on a recent paper authored by Dr. Philip; Nihat Aktas, Professor of Finance at WHU Otto Beisheim School of Management; Panayiotis C. Andreou, Assistant Professor of Finance at Cyprus University of Technology; and Isabella Karasamani, Lecturer in Accounting and Finance at the University of Central Lancashire, Cyprus.

When a sole individual acts as both CEO and chair of the board of a firm, the resulting CEO duality creates one of the most contentious issues in the field of strategic leadership (Dalton et al., 2007; Finkelstein et al., 2009). While the global financial crisis triggered a wave of proposals to eliminate CEO duality and achieve independent board leadership, corporate leaders and associations appear reluctant to adopt such an obligatory separation that suggests a “one size fits all” approach (Krause et al., 2014). Companies such as Bank of America, Citigroup and a number of other largest US banks chose to separate the two roles after a series of shareholder proposals demanding that they split the top jobs. Contrarily, Exxon Mobil refused to separate the two roles after the eleventh consecutive year of shareholder proposals, emphasising the cohesive leadership deriving from the combination of the roles. The Walt Disney Company recombined the two roles after splitting them for a period of time. Even as recent years have witnessed a tendency by firms to separate their CEO and chair positions, the majority of firms included in the S&P 1500 index continue to be governed by dual CEOs. In particular, the percentage of firms with dual CEO-chair roles at times reached as high as 65% in the early 2000s and has rarely dropped below 50% in more recent years. [1] These trends show that there are still questions about which leadership structure is the most effective.

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