Yearly Archives: 2016

Collaborative Gatekeepers

Posted by Stavros Gadinis and Colby Mangels, University of California, Berkeley Law School, on

Thursday, May 12, 2016

Accountability, Anti-corruption, Bernard Madoff, Compliance & ethics, Conflicts of interest, Dodd-Frank Act, Due diligence, Financial institutions, Financial regulation, International governance, Liability standards, Misconduct, Money laundering, SOX, Whistleblowers
More from: Colby Mangels, Stavros Gadinis

Stavros Gadinis is an Assistant Professor of Law at the University of California, Berkeley Law School. This post is based on a recent article by Professor Gadinis and Colby Mangels.

In his annual letter to shareholders for 2014, Jamie Dimon, J.P. Morgan’s CEO, made an astonishing revelation. That year alone, his firm hired 8,000 new employees just to improve its compliance with anti-money laundering laws. J.P. Morgan’s recruitment zeal stemmed from a $2.6 billion penalty for anti-money laundering violations, due to its failure to spot Madoff’s ponzi scheme. This was hardly an isolated case: anti-money laundering laws have played a central part in four out of the eight biggest fines in the wake of the financial crisis, becoming a key legal basis in the quest to hold banks accountable. The newfound prominence of the anti-money laundering framework is striking. These laws target drug cartels and terrorists, the criminal periphery of the financial system rather than its core weaknesses. But since 2007, the anti-money laundering framework has evolved into a critical detection and enforcement mechanism for regulators, and a key priority for private industry compliance. So far, there is little in the legal literature that could explain this puzzling shift towards the anti-money laundering toolkit.

Reforming the Delaware Law to Address Appraisal Arbitrage

Posted by Wei Jiang, Columbia Business School, on

Thursday, May 12, 2016

Appraisal rights, Arbitrage, Conflicts of interest, Delaware law, Hedge funds, Merger litigation, Mergers & acquisitions, Ownership, Shareholder rights, Shareholder suits, Transkaryotic
More from: Danqing Mei, Randall Thomas, Tao Li, Wei Jiang

Wei Jiang is Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School. This post is based on an article authored by Professor Jiang; Tao Li, Assistant Professor of Finance at Warwick Business School; Danqing Mei, Ph.D. candidate in Finance at Columbia Business School; and Randall S. Thomas, John S. Beasley II Professor of Law and Business at Vanderbilt Law School and Owen Graduate School of Management. This post is part of the Delaware law series; links to other posts in the series are available here.

The number of appraisal petitions has increased from a trickle of cases in early 2000s to over 20 a year in recent years, or close to one-quarter of all transactions where appraisal is possible, or appraisal eligible deals. After years of being infrequently deployed and largely overshadowed by shareholder class actions in Delaware and other states, the contours of the appraisal remedy are suddenly front page news as some Wall Street law firms seek to cut back on appraisal arbitrage filings. These firms are petitioning the Council of the Corporate Law Section of the Delaware State Bar Association (the “Council”) and the Delaware legislature to raise the bar for shareholders eligibility to file appraisal petitions and to make its terms less attractive in an effort to curb what they perceive to be a new form of strike suit. Echoing this view, Delaware Vice Chancellor Sam Glasscock III commented in Merion Capital v. BMC Software, Inc. (2015) that dissenters of valuation were “arbitrageurs who bought, not into an ongoing concern, but instead into this lawsuit.” Shareholder advocates, on the other hand, are arguing in favor of expanding the appraisal remedy in order to fill perceived gaps in investor protection that are alleged to have surfaced as Delaware and other states have cut back on judicial protections for minority shareholders in change-of-control transactions.

Disclosure in the Digital Age

Posted by Kara M Stein, U.S. Securities and Exchange Commission, on

Wednesday, May 11, 2016

Capital formation, Capital markets, Corporate Social Responsibility, Disclosure, EDGAR, Engagement, ESG, Filings, Information environment, Innovation, Investor protection, Proxy materials, Risk disclosure, SEC, Securities regulation
More from: Kara Stein, U.S. Securities and Exchange Commission

Kara M. Stein is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on Commissioner Stein’s recent remarks at the 48th Annual Rocky Mountain Securities Conference; the complete publication, including footnotes, is available here. The views expressed in the post are those of Commissioner Stein and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

I want to thank you for the opportunity to speak with you today [May 6, 2016], and I’m going to return the favor by providing you with an invitation as well. I want your input on perhaps one of the most significant undertakings the Commission has faced in decades.

I’m talking about how we can breathe new life into the critical matchmaking process between companies and investors; I’m talking about a new way of communicating; I’m talking about Disclosure in the Digital Age.

Defenses Available to Directors and Financial Advisors

Posted by Ethan A. Klingsberg & Meredith E. Kotler, Cleary Gottlieb Steen & Hamilton LLP, on

Wednesday, May 11, 2016

Ethan A. Klingsberg and Meredith E. Kotler are partners in the New York office of Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Klingsberg, Ms. Kotler, and Darryl G. Stein. This post is part of the Delaware law series; links to other posts in the series are available here.

On May 6, the Delaware Supreme Court issued an Order that sets forth concisely the contours of the defendant-favorable standards for determining liability of directors and their advisors following the closing of sales of control of companies. These standards are available, however, only following an uncoerced and informed approval of the sale by the target stockholders, including a majority of the disinterested holders. Thus, while the Order clarifies a roadmap (set forth recently in Corwin v. KKR and discussed here) for obtaining easy dismissal of post-merger damages claims against directors and advisors, the need for directors and their advisors to avoid, or at least ferret out and disclose, any deficiencies in sales processes remains as strong as ever. Only if these deficiencies are avoided or uncovered and disclosed in advance of the shareholder approval will the lower courts be able to rely on these defendant-favorable standards to dismiss claims.

Responding to Shareholder Directives to Directors

Posted by Donald C. Ross, Covington & Burling LLP, on

Tuesday, May 10, 2016

Boards of Directors, Business judgment rule, Delaware law, Fiduciary duties, Gheewalla, Hedge funds, Institutional Investors, Long-Term value, Proxy contests, Shareholder activism, Shareholder value, Shareholder voting, Short-termism
More from: Donald Ross, Covington & Burling

Donald C. Ross is of counsel at Covington & Burling LLP. This post is based on a Covington publication authored by Mr. Ross. This post is part of the Delaware law series; links to other posts in the series are available here. 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), The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here), and Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law and Securing Our Nation’s Economic Future: A Sensible, Nonpartisan Agenda to Increase Long-Term Investment and Job Creation in the United States, both by Chief Justice Leo E. Strine (discussed on the Forum here and here).

Shareholder activism, that seeks short-term gain for corporate shareholders, and the response to it by some long term investors, that seek long-term growth in corporate profitability, is creating inconsistent shareholder directives to directors of public companies. At the same time under Delaware corporate law the selection of a time frame for the achievement of corporate goals is a decision of the directors which may not be delegated to the shareholders. This post addresses how directors may seek to resolve these conflicting considerations.

Corporate Governance in an Era of Compliance

Posted by Sean J. Griffith, Fordham Law School, on

Tuesday, May 10, 2016

Accountability, Accounting, Boards of Directors, Compliance & ethics, Compliance and disclosure interpretation, Compliance officer, Corporate culture, Corporate governance, Disclosure, Securities enforcement, Securities regulation
More from: Sean Griffith

Sean J. Griffith is T.J. Maloney Chair and Professor of Law at Fordham Law School. This post is based on a recent article by Professor Griffith.

Compliance is the new corporate governance.

Much of what scholars and practitioners think of as core corporate governance—the oversight and control of internal corporate affairs— is now being subsumed by “compliance.” Although compliance with law and regulation is not a new idea, the establishment of an autonomous department within firms to detect and deter violations of law and policy is. American corporations are at the dawn of a new era: the era of compliance.

Over the past decade, compliance has blossomed into a thriving industry, and the compliance department has emerged, in many firms, as the co-equal of the legal department. Compliance is commonly headed by a Chief Compliance Officer (CCO) with a staff, in large firms, of hundreds or thousands. Moreover, although the CCO reports to the board, compliance is not wholly subordinate to the board. Boards cannot neglect the compliance function or choose not to install and maintain the function on par with industry peers. Furthermore, once compliance officers generate information through monitoring and surveillance, it is beyond a reasonable board’s authority to stop them. Compliance is thus under the board, but its authority comes from somewhere else.

Redacting Proprietary Information and IPOs

Posted by Audra Boone, U.S. Securities and Exchange Commission, on

Monday, May 9, 2016

Capital formation, Confidentiality, Disclosure, Firm performance, Information asymmetries, Information environment, Investor protection, IPOs, Market reaction, Public firms, Regulation D, SEC, Securities regulation, Signaling, Underpricing
More from: Audra Boone, Ioannis Floros, Shane Johnson

Audra Boone is a senior financial economist at the U.S. Securities and Exchange Commission in the Division of Economic and Risk Analysis. This post is based on an article authored by Dr. Boone, Ioannis Floros, Assistant Professor of Finance at Iowa State University, and Shane Johnson, Professor of Finance at Texas A&M University. The views expressed in the post are those of Dr. Boone and do not necessarily reflect those of the Securities and Exchange Commission, the Commissioners, or the Staff.

The U.S. Securities and Exchange Commission (SEC) mandates that publicly-traded firms disclose a large array of information to investors. Because certain disclosures could cause competitive harm, the SEC allows firms to request confidential treatment of competitively sensitive information contained in material agreements that it would otherwise be required to disclose to the public. If the SEC grants the request, the firm receives a Confidential Treatment Order (CTO), enabling them to redact specific content from their material, such as pricing terms, specifications, deadlines, and milestone payments. For the duration of time that the confidential treatment is awarded, which coincides with the length of the agreement, the redacted details are not subject to Freedom of Information Act (FOIA) requests. While a CTO shields proprietary information from competitors, it also prevents investors from obtaining potentially value-relevant information from SEC disclosures, which can be even more critical at the initial public offering (IPO) stage when it is often the first opportunity for the public to learn details about the firm.

Information-Dissemination Law: The Regulation of How Market-Moving Information Is Revealed

Posted by Kevin S. Haeberle, University of South Carolina School of Law and M. Todd Henderson, University of Chicago Law School, on

Monday, May 9, 2016

Disclosure, High-frequency trading, Information asymmetries, Information environment, Inside information, Insider trading, Investor protection, Market reaction, Regulation FD, SEC, Securities regulation
More from: Kevin Haeberle, M. Todd Henderson

Kevin S. Haeberle is Assistant Professor of Law at University of South Carolina School of Law and M. Todd Henderson is Professor of Law and Aaron Director Teaching Scholar at the University of Chicago Law School. This post is based on an article authored by Professor Haeberle and Professor Henderson.

Over the past few years, regulators have repeatedly decreed that they would end what was quickly becoming a routine practice: the release of market-moving information to high-speed traders just prior to the time at which it was being made available to the entire public. The most prominent examples of regulatory efforts in the area during this period involved New York State Attorney General Eric Schneiderman. He termed these types of practices “Insider Trading 2.0” and vowed to end them.

The question of how to regulate how and when market-moving information is disseminated to the investing public is not just political fodder. In 2000, the SEC promulgated Regulation Fair Disclosure (Reg FD), which requires public companies to make material information available to all investors at the same exact time when first disseminating it beyond the firm. Indeed, the agency’s parity-of-information approach in this context has been explicit since at least as early as the seminal Dirks insider-trading case in the early 1980s.

DOL Final “Investment Advice” Regulation

Posted by Jeffrey D. Hochberg, Sullivan & Cromwell LLP, on

Sunday, May 8, 2016

Conflicts of interest, Consumer protection, DOL, ERISA, Fiduciary duties, Financial regulation, Internal Revenue Code, Investment advisers, Investor protection, Retirement plans
More from: Dana Brodsky, David Passey, Jeffrey Hochberg, Sullivan & Cromwell

Jeffrey D. Hochberg is a partner in the Tax and Alternative Investment Management practices at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Hochberg, David J. Passey, and Dana E. Brodsky.

On April 6, 2016, the Department of Labor (the “DOL”) promulgated final regulations (the “Final Regulations”) defining the circumstances in which a person will be treated as a fiduciary under both the Employee Retirement Income Security Act of 1974 (“ERISA”) and Section 4975 of the Internal Revenue Code (the “Code”) by reason of providing investment advice to retirement plans and individual retirement accounts (“IRAs”). As part of the regulatory package, the DOL also released final versions of prohibited transaction class exemptions (“PTEs”) intended to minimize the industry disruptions that might otherwise result from the Final Regulations, most notably, the so-called “Best Interest Contract Exemption” (the “BIC Exemption”) and the “Principal Transaction Exemption.”

In re Kenneth Cole: Business Judgment Review of Controlling Stockholder Mergers

Posted by William Savitt, Wachtell, Lipton, Rosen & Katz, on

Saturday, May 7, 2016

Business judgment rule, Buyouts, Controlling shareholders, Delaware law, Fairness review, Going private, Merger litigation, Mergers & acquisitions, Minority shareholders, New York, Shareholder suits, Special committees, State law
More from: Ryan McLeod, William Savitt, Wachtell Lipton

William Savitt is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savitt and Ryan A. McLeod.

[On May 5, 2016,] the New York Court of Appeals held that business judgment review is available in the context of going-private mergers of controlled companies. In re Kenneth Cole Prods., Inc. S’holder Litig. , No. 54 (N.Y. May 5, 2016). The decision adopts the same standards set forth by the Delaware Supreme Court in its MFW opinion and affirms dismissal of a stockholder suit.

The case concerned a merger transaction between Kenneth Cole Productions, Inc. and its controlling stockholder, Kenneth Cole. In February 2012, Cole informed the board of directors that he wished to take the company private. The board appointed a special committee of independent directors. Cole thereafter made an offer conditioned on the approval of both that independent committee and the vote of the majority of the minority stockholders. Following months of negotiation, the special committee approved the merger and some 99% of the minority stockholders voted in favor of it. Multiple stockholder class action lawsuits challenging the transaction were nevertheless filed. The trial court dismissed these actions, reasoning that the complaints failed to impugn the independence of the special committee, and the appellate division affirmed. On appeal to New York’s highest court, plaintiffs argued that all controlled company go-private mergers should be subject to “entire fairness” review.

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