Yearly Archives: 2016

Compensation Season 2016

Posted by Michael J. Segal, Wachtell, Lipton, Rosen & Katz, on

Wednesday, January 20, 2016

Michael J. Segal is senior partner in the Executive Compensation and Benefits Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Segal, Jeannemarie O’Brien, Adam J. Shapiro, Andrea K. Wahlquist, and David E. Kahan. Related research from the Program on Corporate Governance includes Paying for Long-Term Performance by Lucian Bebchuk and Jesse Fried (discussed on the Forum here).

Boards of directors and their compensation committees will soon shift attention to the 2016 compensation season. Key considerations in the year ahead include the following:

Say-on-Pay. If a company anticipates a challenging say-on-pay vote with respect to 2015 compensation, it should proactively reach out to large investors, communicate the rationale for the company’s compensation programs and give investors an opportunity to voice any concerns. Shareholder outreach efforts, and any changes made to the compensation program in response to such efforts, should be highlighted in the proxy’s Compensation Disclosure and Analysis. ISS FAQs indicate that one possible way to reverse a negative say-on-pay recommendation is to impose more onerous performance goals on existing compensation awards and to disclose publicly such changes on Form 8-K, though the FAQs further note that such action will not ensure a change in recommendation. Disclosure of prospective changes to the compensation program will demonstrate responsiveness to compensation-related concerns raised by shareholders.

The Cost of Supermajority Target Shareholder Approval

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

Wednesday, January 20, 2016

Acquisition likelihood, Acquisition premiums, Acquisitions, Delaware law, Delaware legislation, DGCL, Incentives, Management, Mergers & acquisitions, Retention, Shareholder power, Shareholder value, Shareholder voting, Short-form merger, Target firms, Tender offer
More from: Antonio Macias, Audra Boone, Brian Broughman

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, Brian Broughman, Associate Dean for Research and Professor of Law at Indiana University, and Antonio Macias, Assistant Professor of Finance at Baylor 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. This post is part of the Delaware law series; links to other posts in the series are available here.

Acquisitions via a tender offer can be significantly faster than a traditional merger, but this benefit is only available if the bidder can conduct a short-form merger following the tender, which avoids the need for a proxy statement filing and formal shareholder vote. Until recently this structure was only available if the bidder could convince a supermajority (90%) of shareholders to participate in the tender offer. In August 2013, however, Delaware’s legislature passed a new code provision, section 251(h) of the Delaware General Corporation Law (the DGCL), that allows bidders of targets incorporated in Delaware to conduct a short-form merger after achieving only 50% ownership as opposed to 90% that is required in almost all other states. We use this legal change to investigate how the required level of shareholder support affects acquisition outcomes.

Designated Lender Counsel in Private Equity Loans

Posted by Jason M. Halper, Orrick, Herrington & Sutcliffe, LLP, on

Tuesday, January 19, 2016

Bank loans, Banks, Conflicts of interest, FDIC, Federal Reserve, Fiduciary duties, Financial institutions, Financial regulation, Leverage, OCC, Private equity, Risk management, Securities regulation
More from: Jason Halper, Rob McKenna, Orrick

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 Rob McKenna.

Recent media reports have expressed alarm at the use of “designated lender counsel” in private equity-sponsored leveraged loan transactions. [1] The phrase refers to the practice of a private equity firm instructing the investment bank arranging its syndicated loan as to which law firm the private equity firm would like the investment bank to use as the bank’s counsel. According to the press reports, the practice (also known as “sponsor designated counsel”) has become prevalent in the syndicated loan market. The question raised in the press is whether this practice creates a material conflict of interest, because the law firm representing the investment bank arguably generates fees based on the strength of its relationship with the private equity firm across the table. If it does, the next question is whether that conflict could be argued to adversely affect the lending arrangement, with potential negative consequences for investors in the loan.

PECO v. Walnut: Firm Valuation

Posted by Steven J. Steinman, Fried, Frank, Harris, Shriver & Jacobson LLP, on

Tuesday, January 19, 2016

Acquisition agreements, Acquisitions, Appraisal rights, Conflicts of interest, Delaware cases, Delaware law, Fair values, Firm valuation, Merger litigation, Mergers & acquisitions, Shareholder suits
More from: Aviva Diamant, Christopher Ewan, Gail Weinstein, Steven Steinman, Fried Frank

Steven J. Steinman is partner and co-head of the Private Equity Transactions Practice at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank memorandum by Mr. Steinman, Aviva F. Diamant, Christopher Ewan, and Gail Weinstein. This post is part of the Delaware law series; links to other posts in the series are available here.

In PECO v. Walnut (Dec. 30, 2015), the Delaware Court of Chancery refused to review a valuation firm’s determination of the value of an LLC’s preferred units when the LLC agreement provided that the value as determined by an independent valuation firm would be binding on the parties. While PECO related to the valuation of LLC units in connection with the exercise of a put right, the decision presumably would apply more broadly—including to post-closing adjustments and other valuations.

Proposed Rule on Registered Funds’ Use of Derivatives

Posted by David C. Sullivan, Ropes & Gray LLP, on

Sunday, January 17, 2016

David C. Sullivan is partner in the Investment Management practice at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Sullivan, Tim Diggins, George Raine and Sarah Clinton.

On December 11, 2015, the SEC issued its long-anticipated release (the “Release”) proposing Rule 18f-4 (“the “Proposed Rule”) under the 1940 Act regarding the use of derivatives and certain related instruments by registered investment companies (collectively, “funds”). The stated objective of the Release is to “address the investor protection purposes and concerns underlying section 18 [of the 1940 Act] and to provide an updated and more comprehensive approach to the regulation of funds’ use of derivatives” in light of the increased participation by funds in today’s large and complex derivatives markets.

We provide an executive summary of the Proposed Rule and other aspects of the Release below and, in the Appendix of the complete publication, we discuss the Proposed Rule in more detail.

FAST Act Amendments to the U.S. Securities Laws

Posted by Nicholas Grabar, Cleary Gottlieb Steen & Hamilton LLP, on

Saturday, January 16, 2016

Nicolas Grabar is a partner at Cleary Gottlieb Steen & Hamilton LLP focusing on international capital markets and securities regulation. This post is based on a Cleary Gottlieb publication by Mr. Grabar, Les Silverman, and Andrea M. Basham.

On December 4, 2015, President Obama signed into law the Fixing America’s Surface Transportation Act (the “FAST Act”), which, among other legislation in its 1300+ pages, includes several bills designed to facilitate the offer and sale of securities. In this post we focus on two of those bills. The first provides additional accommodations related to the SEC registration process for emerging growth companies (“EGCs”), a category of issuer established by the Jumpstart Our Business Startups Act (the “JOBS Act”) in 2012. The second creates a non-exclusive safe harbor under Section 4 of the Securities Act of 1933, as amended (the “Securities Act”) for resales of securities that meet the conditions of the safe harbor.

Failure-of-Oversight Claims Against Directors

Posted by John F. Savarese, Wachtell, Lipton, Rosen & Katz, on

Friday, January 15, 2016

John F. Savarese is a partner in the Litigation Department of Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton firm memorandum by Mr. Savarese, Emil A. Kleinhaus, C. Lee Wilson, and Noah B. Yavitz. This post is part of the Delaware law series; links to other posts in the series are available here.

Last week, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of purported shareholder derivative claims alleging that directors of JPMorgan Chase, a Delaware corporation, failed to institute internal controls sufficient to detect Bernard Madoff’s Ponzi scheme. Central Laborers v. Dimon, No. 14-4516 (2d Cir. Jan. 6, 2016) (summary order). The decision represents a forceful application of Delaware law holding that, when directors are protected by standard exculpation provisions in the corporate charter, they will not be liable for alleged oversight failures absent a particularized showing of bad-faith misconduct.

Weekly Roundup: January 8–January 15

Posted by HLS Forum on Corporate Governance and Financial Regulation, on

Friday, January 15, 2016

Weekly Roundup
More from:

This roundup contains a collection of the posts published on the Forum during the week of January 8, 2016 to January 15, 2016.

Director Removal Without Cause

Posted by Daniel E. Wolf, Kirkland & Ellis LLP, on Friday, January 8, 2016

Tags: Board declassification, Charter & bylaws, Classified boards, Delaware cases, Delaware law, DGCL, DGCL s.141,Majority voting, Mergers & acquisitions, Ousting directors, Shareholder activism, Shareholder elections, Shareholder voting

OCC’s Recovery Planning Proposal

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on Saturday, January 9, 2016

Tags: Bankruptcy, Banks, Failed banks, FDIC, Federal Reserve, Financial institutions, Financial Regulation, Foreign banks,OCC, Recovery & resolution plans, Risk management, SIFIs, Stress tests

2015 FINRA Enforcement Actions

Posted by Jonathan N. Eisenberg, K&L Gates LLP, on Sunday, January 10, 2016

Reputation Concerns of Independent Directors

Posted by Wei Jiang, Columbia University, on Monday, January 11, 2016

Tags: Behavioral finance, Board dynamics, Board independence, Boards of Directors, China, Incentives, International governance, Management, Market reaction, Outside directors, Public firms, Reputation

Delaware Rules on “Without Cause” Director Removal

Posted by William Savitt, Wachtell, Lipton, Rosen & Katz, on Monday, January 11, 2016

Tags: Boards of Directors, Charter & bylaws, Classified boards, Delaware cases, Delaware law, DGCL, DGCL s.141, Ousting directors, Proxy fights, Securities litigation, Shareholder activism, Shareholder suits, Shareholder voting, Staggered boards

Economic Downsides and Antitrust Liability Risks from Horizontal Shareholding

Posted by Einer Elhauge, Harvard Law School, on Tuesday, January 12, 2016

Tags: Antitrust, Banks, Blockholders, Controlling shareholders, Exchange-traded funds, Executive Compensation, Financial institutions, Firm performance, Incentives, Institutional Investors, Management, Ownership, Peer groups, Securities Regulation, Shareholder value

Bebchuk Leads SSRN’s 2015 Citation Rankings

Posted by Kobi Kastiel, Co-Editor, HLS Forum on Corporate Governance and Financial Regulation, onTuesday, January 12, 2016

Tags: Lucian Bebchuk, Program on Corporate Governance, Rankings, SSRN

Private Equity Portfolio Company Fees

Posted by Ludovic Phalippou, Saïd Business School, University of Oxford, on Wednesday, January 13, 2016

Tags: Agency costs, Compensation disclosure, Conflicts of interest, Disclosure, Fund managers, Investment advisers,Investor protection, Leveraged acquisitions, Private Equity, SEC, Securities Regulation, Taxation, Tunneling

Board Governance: Higher Expectations, but Better Practices?

Posted by Dan Ryan, PricewaterhouseCoopers LLP, on Wednesday, January 13, 2016

Tags: Accountability, Banks, Basel Committee, Board composition, Boards of Directors, Federal Reserve, Financial Crisis,Financial institutions, Financial Regulation, OCC, Reporting regulation, Risk, Risk committee, Risk management, Risk oversight, Systemic risk

A New Measure of Disclosure Quality

Posted by Shuping Chen, University of Texas at Austin, on Thursday, January 14, 2016

Tags: Accounting, Accounting standards, Analyst forecasts, Disclosure, Equity capital, External auditors, Financial reporting,Information asymmetries, Information environment, Transparency

REIT and Real Estate M&A in 2016

Posted by Adam O. Emmerich and Robin Panovka, Wachtell, Lipton, Rosen & Katz, on Thursday, January 14, 2016

Tags: Boards of Directors, Dividends, Equity capital, Executive Compensation, Going private, Hostile takeover, Institutional Investors, International governance, Management, Mergers & acquisitions, REITs, Shareholder activism, Spinoffs,Succession, Taxation

Failure-of-Oversight Claims Against Directors

Posted by John F. Savarese, Wachtell, Lipton, Rosen & Katz, on Friday, January 15, 2016

Tags: Bernard Madoff, Boards of Directors, Caremark, Charter & bylaws, Delaware cases, Delaware law, Derivative suits,Director liability, Duty of good faith, Fiduciary duties, Liability standards, Misconduct, Oversight, Shareholder suits, U.S. federal courts

REIT and Real Estate M&A in 2016

Posted by Adam O. Emmerich and Robin Panovka, Wachtell, Lipton, Rosen & Katz, on

Thursday, January 14, 2016

Boards of Directors, Dividends, Equity capital, Executive Compensation, Going private, Hostile takeover, Institutional Investors, International governance, Management, Mergers & acquisitions, REITs, Shareholder activism, Spinoffs, Succession, Taxation
More from: Adam Emmerich, Robin Panovka, Wachtell Lipton

Adam O. Emmerich is a partner in the corporate department at Wachtell, Lipton, Rosen & Katz, focusing primarily on mergers and acquisitions, corporate governance and securities law matters. Robin Panovka is a partner at Wachtell Lipton and co-heads the Real Estate and REIT M&A Groups. This post is based on a Wachtell Lipton publication authored by Messrs. Emmerich and Panovka.

Following are some of the key trends we are following as we enter 2016, while keeping a weather eye on macro market turmoil:

M&A activity should continue at a steady pace, with a number of public-to-private and public-to-public REIT mergers already in the works.
We are not expecting an avalanche of REIT buyouts a la 2006-7, but many of the same drivers are apparent, as we noted last October in Taking REITs Private, and a number of significant transactions are likely.
READ MORE »

A New Measure of Disclosure Quality

Posted by Shuping Chen, University of Texas at Austin, on

Thursday, January 14, 2016

Accounting, Accounting standards, Analyst forecasts, Disclosure, Equity capital, External auditors, Financial reporting, Information asymmetries, Information environment, Transparency
More from: Bin Miao, Shuping Chen, Terry Shevlin

Shuping Chen is Professor of Accounting at the University of Texas at Austin. This post is based on an article authored by Professor Chen; Bin Miao, Assistant Professor of Accounting at the National Singapore University; and Terry Shevlin, Professor of Accounting at UC Irvine.

In our paper, A New Measure of Disclosure Quality: The Level of Disaggregation of Accounting Data in Annual Reports, recently featured in the Journal of Accounting Research, we develop a new measure of disclosure quality (DQ), which captures the level of disaggregation of accounting line items in firms’ annual reports, with greater disaggregation indicating higher disclosure quality. This measure is based on the premise that more detailed disclosure gives investors and lenders more information for valuation (Fairfield et al., 1996; Jegadeesh and Livnat 2006) and a higher level of disaggregation enhances the credibility of firms’ financial reports (Hirst et al. 2007; D’Souza et al. 2010).

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Yearly Archives: 2016

Compensation Season 2016

The Cost of Supermajority Target Shareholder Approval

Designated Lender Counsel in Private Equity Loans

PECO v. Walnut: Firm Valuation

Proposed Rule on Registered Funds’ Use of Derivatives

FAST Act Amendments to the U.S. Securities Laws

Failure-of-Oversight Claims Against Directors

Weekly Roundup: January 8–January 15

Director Removal Without Cause

OCC’s Recovery Planning Proposal

2015 FINRA Enforcement Actions

Reputation Concerns of Independent Directors

Delaware Rules on “Without Cause” Director Removal

Economic Downsides and Antitrust Liability Risks from Horizontal Shareholding

Bebchuk Leads SSRN’s 2015 Citation Rankings

Private Equity Portfolio Company Fees

Board Governance: Higher Expectations, but Better Practices?

A New Measure of Disclosure Quality

REIT and Real Estate M&A in 2016

Failure-of-Oversight Claims Against Directors

REIT and Real Estate M&A in 2016

A New Measure of Disclosure Quality

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