Yearly Archives: 2016

The “Gimlet Eye” and Shareholder Voting

Posted by Jason M. Halper, Orrick, Herrington & Sutcliffe LLP, on
Tuesday, June 7, 2016
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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 May 19, 2016, the Delaware Chancery Court preliminarily enjoined the directors of Cogentix Medical from reducing the size of the company’s board because, under the facts presented, there was a reasonable probability that the board reduction plan was implemented to defeat insurgent candidates in a contested director election. Pell v. Kill, C.A. No. 12251-VCL (Del. Ch. May 19, 2016). The decision is a reminder that board actions that affect the shareholder vote—particularly decisions that make it more difficult for stockholders to elect directors not supported by management—will be subject to enhanced judicial scrutiny by Delaware courts on the lookout with a “gimlet eye” for conduct having a preclusive or coercive effect on the stockholder vote.

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Managerial Performance Incentives and Firm Risk During Economic Expansions and Recessions

Posted by Tanseli Savaser, Bilkent University and Elif Şişli-Ciamarra, Brandeis University, on
Tuesday, June 7, 2016
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Tanseli Savaser is Assistant Professor of Finance at Bilkent University and Elif Şişli-Ciamarra is Assistant Professor of Finance in the Brandeis International Business School. The following post is based on an article by Ms. Savaser and Ms. Şişli-Ciamarra.

In our article, Managerial Performance Incentives and Firm Risk during Economic Expansions and Recessions, which is forthcoming in the Review of Finance, we show that the relationship between managerial pay-for-performance incentives and risk taking is pro-cyclical.

A significant portion of executive pay packages are in the form of equity-based compensation, which create pay-for-performance sensitivity and is expected to incentivize managers to exert effort and take actions that increase stock values. However, the relationship between pay-for-performance incentives and firm risk is less clear. Pay-for-performance could induce more risk taking because risky projects generally create more value and therefore increase the expected value of incentive compensation. However, it could also induce less risk taking because of a desire to limit portfolio risk. This is mainly because managers are inherently more risk averse than diversified shareholders due to their organization-specific human capital and/or undiversified wealth portfolios (Smith and Stulz, 1985; Amihud and Lev, 1981; Tufano, 1996).

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Getting the Most from the Evaluation Process

Posted by John F. Olson, Gibson, Dunn & Crutcher LLP, on
Monday, June 6, 2016
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John Olson is a founding partner of the Washington, D.C. office at Gibson, Dunn & Crutcher LLP and a visiting professor at the Georgetown Law Center. This post is based on a Gibson Dunn alert.

More than ten years have passed since the New York Stock Exchange (NYSE) began requiring annual evaluations for boards of directors and “key” committees (audit, compensation, nominating/governance), and many NASDAQ companies also conduct these evaluations annually as a matter of good governance. [1] With boards now firmly in the routine of doing annual evaluations, one challenge (as with any recurring activity) is to keep the process fresh and productive so that it continues to provide the board with valuable insights. In addition, companies are increasingly providing, and institutional shareholders are increasingly seeking, more information about the board’s evaluation process. Boards that have implemented a substantive, effective evaluation process will want information about their work in this area to be communicated to shareholders and potential investors. This can be done in a variety of ways, including in the annual proxy statement, in the governance or investor information section on the corporate website, and/or as part of shareholder engagement outreach.
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Shareholder Proposal Settlements, the SEC, and Campaign Finance Disclosure

Posted by Sarah Haan, University of Idaho, on
Monday, June 6, 2016
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Sarah Haan is an Associate Professor at the University of Idaho College of Law. This post is based on a recent article by Professor Haan. Related research from the Program on Corporate Governance includes Shining Light on Corporate Political Spending and Corporate Political Speech: Who Decides?, both by Lucian Bebchuk and Robert Jackson (discussed on the Forum here and here).

Reform of campaign finance disclosure has stalled in Congress and at various federal agencies, but it is steadily unfolding in a firm-by-firm program of private ordering. Today, much of what is publicly known about how individual public companies spend money to influence federal, state, and local elections—and particularly what is known about corporate “dark money”—comes from disclosures that conform to privately-negotiated contracts.

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Shareholder Proposals Contested by Firm Management

Posted by Suraj Srinivasan, Harvard Business School, on
Monday, June 6, 2016
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Suraj Srinivasan is Professor of Business Administration at Harvard Business School. This post is based on a recent paper by Professor Srinivasan; Eugene F. Soltes, Jakurski Family Associate Professor of Business Administration at Harvard Business School; and Rajesh Vijayaraghavan.

In our new paper, What Else Do Shareholders Want? Shareholder Proposals Contested by Firm Management, we explore proposals that managers seek to exclude from their firms’ proxy statements. We find that managers often seek to exclude shareholder proposals from the proxy. Over four thousand proposals, or nearly 40%, of all proposals received during 2003-2013 were contested by management. These proposals covered a wide range of issues including executive compensation, antitakeover measures, voting procedures, environmental issues, and social policy. The SEC allows firms to exclude many of the proposals that managers contest. Specifically, 72% of all proposals that managers seek to exclude from the proxy are allowed by the SEC (i.e. SEC provides firm a “no action” opinion letter).

We find that some firms are more inclined than others to seek exclusion of shareholder proposals. Firms that are larger, have worse performance, and have less institutional shareholders are more likely to contest proposals they receive. There is also the tendency for management to behave similarly over time. If a firm contests a proposal in the prior year, they are more inclined to contest a proposal in the subsequent year.

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American Pipe: Tolling and Statutes of Repose

Posted by Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Sunday, June 5, 2016
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Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss client memorandum by Mr. Karp, Walter Rieman, Audra J. Soloway, Andrew J. Ehrlich, and Susanna M. Buergel.

On Friday, in Stein v. Regions Morgan Keegan Select High Income Fund, Inc., Nos. 15-5903, 15-905, 2016 WL 2909333 (6th Cir. May 19, 2016), the Sixth Circuit ruled that the tolling doctrine established by American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), does not apply to the three-year statute of repose governing claims under Sections 11 and 12 of the Securities Act of 1933 [1] or to the five-year statute of repose governing claims under Section 10(b) of the Securities Exchange Act of 1934. [2]

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The Effect of Staggered Boards on Stock Value: New Evidence

Posted by Yakov Amihud, New York University Stern School of Business, on
Saturday, June 4, 2016
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Yakov Amihud is Ira Leon Rennert Professor of Entrepreneurial Finance at NYU Stern School of Business. This post is based on a recent paper authored by Professor Amihud and Stoyan Stoyanov of Berkeley Research Group, that responds to an article by Professors Alma Cohen and Charles C.Y. Wang.

Against the lively debate on whether a staggered board (SB) of directors hurts or benefits stockholders I present new evidence suggesting that in general, an SB has no significant effect on stock value. The evidence is based on the effects of two Delaware court rulings in 2010 in the case of Airgas on stock prices of Delaware companies that could be affected by these rulings. The October 8 ruling weakened the potency of the SB for companies that have their annual meeting late in the year and the November 23 decision restored its potency. (A detailed description of these rulings appears in a post on the Forum here.)

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Delaware Court of Chancery Appraises Fully-Shopped Company at Nearly 30% Over Merger Price

Posted by Martin Lipton and Theodore N. Mirvis, Wachtell, Lipton, Rosen & Katz, on
Friday, June 3, 2016
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. Theodore N. Mirvis is a partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Lipton, Mr. Mirvis, William Savitt, and Ryan A. McLeod. This post is part of the Delaware law series; links to other posts in the series are available here.

In an appraisal decision issued this week, the Delaware Court of Chancery held that the fair value of Dell Inc. was $17.62 per share—almost four dollars over and nearly 30% more than the price paid in the 2013 go-private merger. In re Appraisal of Dell Inc., C.A. No. 9322-VCL (Del. Ch. May 31, 2016). The result reflects the remarkable view that “fair value” in Delaware represents a price far higher than any buyer would have been willing to pay and that the merger price derived from an admirable sales process should be accorded no weight.

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Remarks on Optimizing the Equity Markets

Posted by Mary Jo White, U.S. Securities & Exchange Commission, on
Friday, June 3, 2016
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Mary Jo White is Chair of the U.S. Securities and Exchange Commission. The following post is based on Chair White’s remarks before the SEC Historical Society, available here. The views expressed in this post are those of Chair White and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you, David [Lynn], for that kind introduction and for inviting me to your annual meeting. It is truly my privilege and honor to serve as Chair of the Commission, and it is wonderful to share the room and microphone today [June 2, 2016] with my friend and former Chairman Richard Breeden along with others who, from firsthand experience, deeply appreciate the value of the SEC as a critical institution with a long heritage of protecting investors and our markets. At the Commission, our history informs who we are and the work we do, and it is our great, good fortune that we have the SEC Historical Society to preserve that rich history.

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Reassessing the Distinction Between Corporate and Securities Law

Posted by James J. Park, University of California, Los Angeles , on
Friday, June 3, 2016
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James J. Park is Professor of Law at the UCLA School of Law. This post is based on a recent article by Professor Park.

For some time, there has been a rough separation between corporate and securities law in the United States. According to the conventional account, securities law requires public companies to make disclosures to investors while corporate law sets forth substantive norms regulating the internal affairs of the corporation. This distinction provides the foundation for a dual regulatory system of federal securities law and state corporate law. My article, Reassessing the Distinction Between Corporate and Securities Law (forthcoming in the UCLA Law Review), sets forth a new way of understanding the difference between corporate and securities law.

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