Monthly Archives: January 2017

NYDFS’ Revision of Proposed Cybersecurity Regulation for Financial Services Companies

Joseph P. Vitale is a partner at Schulte Roth & Zabel LLP. This post is based on a Schulte Roth publication by Mr. Vitale, Michael L. Yaeger, and Noah N. Gillespie.

On Dec. 28, 2016, the New York State Department of Financial Services (“NYDFS”) issued revisions to its proposed regulation that would impose new, rigorous cybersecurity requirements on banks, consumer lenders, money transmitters, insurance companies and certain other financial service providers (each a “Covered Entity”) regulated by the NYDFS (the “Proposed Regulation”). The Proposed Regulation’s effective date was delayed two months, from Jan. 1, 2017 to March 1, 2017. In the meantime, a new 30-day public comment period will run until Jan. 27, 2017.

Even as revised, the Proposed Regulation still exceeds what other regulators have suggested, much less required, and given the scope and footprint of many New York financial institutions, the impact of the Proposed Regulation will likely far exceed the state of New York. However, the NYDFS did make several significant modifications, mostly in response to industry concerns. This post focuses on those changes. For more information on the aspects of the Proposed Regulation that remain unchanged, please refer to our Sept. 15, 2016 post on the original version.


Legal Institutions and IPO Puzzles

Ruoying Chen is Associate Professor at Peking University Law School and Visiting Associate Professor at the University of Chicago Law School; Saul Levmore is the William B. Graham Distinguished Service Professor at the University of Chicago Law School. This post is based on their recent article.

Initial public offerings (IPOs) are often underpriced, so that an investor in a portfolio of new equity issues can expect a substantial above-market rate of return; in the long term, prices adjust and if anything there is overpricing. The puzzling and well-known phenomenon is international in scope, and even more pronounced in Asian capital markets than in the U.S. or in Europe. An associated puzzle is the failure of auctions to displace more conventional methods of marketing new issues of equity through underwriters. Auctions of different kinds have been tried in Taiwan and in the United States, among other places, as to be expected because firms will try to avoid the implicit losses they suffer from underpricing of their new issues. In our article, published in Peking University Law Journal, we argue, first, that underpricing might serve the interests of politicians or regulators, and more importantly, that while underpricing might reflect non-transparency, it is not best solved with more regulation of IPO pricing. READ MORE »

Moving Beyond Shareholder Primacy: Can Mammoth Corporations Like ExxonMobil Benefit Everyone?

Frederick Alexander is Head of Legal Policy at B Lab. This post is based on a B Lab publication authored by Mr. Alexander.

The New York Times recently took issue with Rex Tillerson, the President-elect’s nominee for Secretary of State, and the current CEO of ExxonMobil. Why? “Tillerson Put Company’s Needs Over U.S. Interests,” accused the front page headline. The article details how the company puts shareholders’ interests before the interests of the United States and of impoverished citizens of countries around the world.

In response, a company spokesman insisted that all laws were followed, and that “‘[a]bsent a law prohibiting something, we evaluate it on a business case basis.’” As one oil business journalist puts it in the article: “‘They are really all about business and doing what is best for shareholders.’” Thus, as long as a decision improves return to shareholders, its effect on citizens, workers, communities or the environment just doesn’t rank.


Constitutionality of SEC’s Administrative Law Judges Headed to Supreme Court?

Sarah A. Good is partner and co-leader of the securities litigation and enforcement team at Pillsbury Winthrop Shaw Pittman LLP. Laura C. Hurtado is a senior associate at Pillsbury. This post is based on a Pillsbury publication authored by Ms. Good and Ms. Hurtado.

On December 27, 2016, the Tenth Circuit Court of Appeals found that the appointment of administrative law judges by the Office of Administrative Law Judges of the U.S. Securities & Exchange Commission violated the Appointments Clause of the U.S. Constitution. This holding is in direct conflict with an August 9, 2016 decision by the District of Columbia Court of Appeals. The table is set for a showdown at the U.S. Supreme Court.

Over the past few years the U.S. Securities and Exchange Commission (SEC) has increasingly chosen to file administrative proceedings adjudicated by its very own administrative law judges (ALJs) instead of bringing federal actions. A study by The Wall Street Journal measured the SEC’s success rate before ALJs as 90 percent from 2010-2015 compared to 69 percent in federal actions. See Jean Eaglesham, “SEC Wins With In-House Judges,” Wall St. J., May 6, 2015. The results of that study have fueled a discussion about whether it is fair to defendants to have their lives and careers judged by ALJs appointed by the SEC, which also makes all prosecutorial decisions and decides appeals from such ALJ proceedings, as opposed to an independent federal judiciary and juries.


The Ivory Tower on Corporate Governance

Lawrence A. Cunningham is the Henry St. George Tucker III Research Professor at George Washington University Law School. This post is based on an article by Professor Cunningham which originally appeared in Directors & Boards.

In 1976, [Directors & Boards]’s founding year, two influential academic works in corporate governance appeared: Berkeley law professor Melvin Eisenberg urged transforming the board from an advisory role to a monitoring model and mandating significant internal control systems, while University of Rochester economists Michael Jensen and William Meckling portrayed the firm as a nexus of contracts whose optimal design is for participants to choose.

These contrasting visions—obligatory uniformity versus free tailoring—have defined the field since, setting the boundaries of debate and helping participants think through positions. Into the early 1980s, the Eisenberg view dominated, with Columbia University law professor William Cary urging preemptive federal oversight of the field, traditionally handled by state law, and a generally pro-regulatory atmosphere imposing fiduciary mandates on independent directors and board committees.


Sustainability Practices: 2016 Edition

Matteo Tonello is Managing Director at The Conference Board, Inc. This post relates to Sustainability Practices: 2016 Edition, an annual benchmarking report authored by Thomas Singer of The Conference Board and the result of a partnership among The Conference Board, Bloomberg, and Global Reporting Initiative (GRI). For details regarding how to obtain a copy of the report or access the online benchmarking Dashboard that accompanies the report, contact [email protected]

The Conference Board recently released the 2016 edition of Sustainability Practices, a comprehensive dataset and analysis capturing the most recent disclosure of environmental and social practices of business corporations. The study reviews a total of 75 environmental and social practices of publicly traded corporations included in the S&P Global 1200 index. For benchmarking purposes, data are historically compared with the S&P 500 and the Russell 1000, and further analyzed across 10 business sectors, four revenue groups, and four regions (encompassing North America, Latin America, Europe, and Asia-Pacific).

The following are some of the Key Findings from this year’s edition:


Compensation Season 2017

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 publication by Mr. Segal, Jeannemarie O’BrienAdam J. ShapiroAndrea K. Wahlquist, and David E. Kahan.

Boards of directors and their compensation committees will soon shift attention to the 2017 compensation season. Key considerations in the year ahead include the following:

Regulatory Rollback and Tax Law Changes

Companies should closely monitor statutory and regulatory developments in the new year. The president-elect and Congressional leaders have articulated an ambitious agenda to reduce business regulations, simplify the tax code and lower tax rates. Any of these changes could have a significant impact on compensation design. Stay tuned.


Global and Regional Trends in Corporate Governance for 2017

Rusty O’Kelley is a member of the CEO and Board Services Practice; and Anthony Goodman is a member of the Board Effectiveness Practice at Russell Reynolds Associates. This post is based on a Russell Reynolds publication by Mr. O’Kelley, Mr. Goodman, and Emily Meneer.

Russell Reynolds Associates recently interviewed numerous institutional and activist investors, pension fund managers, public company directors and other governance professionals about the trends and challenges that public company boards will face in 2017. Our conversations yielded a wide array of perspectives about the forces that are driving change in the corporate governance landscape.

The changing pressures and dynamics that boards will face in the coming year are diverse and significant in their impact. Institutional investors will continue their push for more uniform standards of corporate governance globally, while also increasing their expectations of the role that boards should play in responsibly representing shareholders. Political uncertainty and the surprise results of the US Presidential and “Brexit” votes may require that boards take a more active role in scenario planning and helping management to navigate increasingly costly risks. The movement for companies and investors to adopt a more long-term orientation has gained momentum, with several large institutional investors now pressuring boards to demonstrate that they are actively involved in guiding a company’s strategy for long-term value creation.


Appraising the “Merger Price” Appraisal Rule

Albert Choi is the Albert C. BeVier Research Professor of Law at the University of Virginia Law School; Eric Talley is the Isidor and Seville Sulzbacher Professor of Law at Columbia Law School. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.

In a new working paper, we consider the question of how best to measure “fair value” in a post-merger appraisal proceeding. Our inquiry spotlights an approach recently embraced by Delaware courts, which pegs fair value at the merger price itself (at least in certain situations). Using an economic framework that combines auction design, agency costs and shareholder voting, we assess how this “Merger Price” (MP) rule stacks up against alternative approaches (such as DCF) that are not benchmarked against the merger price.

Our analysis shows that as a general matter, the MP rule tends to depress both acquisition prices and target shareholders’ expected welfare relative to both an optimal appraisal rule and several other plausible alternatives. In fact, we demonstrate that the MP rule is strategically equivalent to nullifying the appraisal right altogether. Although the MP rule may be warranted in certain circumstances, our analysis suggests that such conditions are unlikely to be widespread, and—consequently—the rule should be employed with caution. Our framework also helps explain why a majority of litigated appraisal cases using conventional fair-value measures result in valuation assessments exceeding the deal price—an equilibrium phenomenon that stems from rational, strategic behavior (and not from an institutional deficiency, as some commentators have suggested). Finally, our analysis illuminates the strategic and efficiency implications of a variety of appraisal-related related phenomena, such as Delaware’s new “medium-form” merger statute, blow provisions, drag-alongs, and “naked no-vote” fees.


Weekly Roundup: December 30, 2016–January 5, 2017

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This roundup contains a collection of the posts published on the Forum during the week of December 30, 2016–January 5, 2017.

The Delaware General Corporation Law, Simplified

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