Monthly Archives: February 2017

Leveraged Buyouts: An Overview of the Literature

Luc Renneboog is Professor of Corporate Finance and Cara Vansteenkiste is a PhD student at Tilburg University. This post is based on a recent post by Professor Renneboog and Ms. Vansteenkiste.

The public corporation is often believed to have important advantages over its private counterpart. A stock market listing enables firms to raise funds in public capital markets, increases the share liquidity for investors, allows founders and entrepreneurs to diversify their wealth, and the higher degree of visibility and media exposure of public firms can be an effective tool in the marketing of the company. However, the publicly quoted company with dispersed ownership may suffer from too high a degree of managerial discretion resulting from a lack of monitoring which may lead to ‘empire building’ at the detriment of shareholder value. One way of refocusing the firm on shareholder value creation is to restructure the firm by means of a leveraged buyout (LBO), in which an acquirer takes control of the firm in a public-to-private (PTP) transaction financed largely by funds borrowed against the target’s assets and/or cash flows.

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Corporate Governance and Stewardship Principles

This post is a policy statement issued by the Investor Stewardship Group, a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts.

The Investor Stewardship Group (ISG) is a collective of some of the largest U.S.-based institutional investors and global asset managers, along with several of their international counterparts. The founding members are a group of 16 U.S. and international institutional investors that in aggregate invest over $17 trillion in the U.S. equity markets. At launch, the Investor Stewardship Group comprises BlackRock, CalSTRS, Florida State Board of Administration (SBA), GIC Private Limited (Singapore’s Sovereign Wealth Fund), Legal and General Investment Management, MFS Investment Management, MN Netherlands, PGGM, Royal Bank of Canada Global Asset Management, State Street Global Advisors, TIAA Investments, T. Rowe Price Associates, Inc., ValueAct Capital, Vanguard, Washington State Investment Board, and Wellington Management. The ISG is being led by each member’s senior corporate governance practitioners.

The ISG was formed to bring all types of investors together to establish a framework of basic standards of investment stewardship and corporate governance for U.S. institutional investor and boardroom conduct. The result is the framework for U.S. Stewardship and Governance comprising of a set of stewardship principles for institutional investors and corporate governance principles for U.S. listed companies.

The corporate governance framework articulates six principles that the ISG believes are fundamental to good corporate governance at U.S. listed companies. [1] They reflect the common corporate governance beliefs that are embedded in each member’s proxy voting and engagement guidelines, and are designed to establish a foundational set of investor expectations about corporate governance practices in U.S. publicly-listed companies.

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Reconsideration of Pay Ratio Rule Implementation

Michael S. Piwowar is Acting Chairman of the U.S. Securities and Exchange Commission. This post is based on a recent public statement issued by Mr. Piwowar.

The Commission adopted the pay ratio disclosure rule in August 2015 to implement Section 953(b) of the Dodd-Frank Wall Street Reform and Consumer Protection Act. The rule requires a public company to disclose the ratio of the median of the annual total compensation of all employees to the annual total compensation of the chief executive officer.

Based on comments received during the rulemaking process, the Commission delayed compliance for companies until their first fiscal year beginning on or after January 1, 2017. Issuers are now actively engaged in the implementation and testing of systems and controls designed to collect and process the information necessary for compliance. However, it is my understanding that some issuers have begun to encounter unanticipated compliance difficulties that may hinder them in meeting the reporting deadline.

In order to better understand the nature of these difficulties, I am seeking public input on any unexpected challenges that issuers have experienced as they prepare for compliance with the rule and whether relief is needed. I welcome and encourage the submission of detailed comments, and request that any comments be submitted within the next 45 days.

I have also directed the staff to reconsider the implementation of the rule based on any comments submitted and to determine as promptly as possible whether additional guidance or relief may be appropriate.

I understand that issuers need to be informed of any further Commission or staff action as soon as possible in order to plan and adjust their implementation processes accordingly. I encourage commenters and the staff to expedite their review in light of these unique circumstances.

Snap, Inc. Reportedly to IPO with Unprecedented Non-Voting Shares for Public

Rob Kalb is a Senior Associate and Rob Yates is Vice President at Institutional Shareholder Services, Inc. This post is based on an ISS publication.

SnapChat’s ghostly logo represents the “There, then gone” nature of the company’s photo sharing service, but it also might ominously foreshadow the soon-to-be-public parent company’s plan to offer “phantom” voting rights to its post-IPO investors. On Nov. 15, 2016, Snap filed for a confidential IPO. Filing confidentially, a process allowed under the JOBS Act, shields Snap from the public financial disclosure scrutiny a traditional S-1 filing would entail. While the company has been able to keep most of its IPO plans close to the vest, recent reporting by the Wall Street Journal indicates that the company intends to sell exclusively non-voting shares to the public. By doing so, Snap would implement a three-class share structure. Snap’s founders would retain super-voting shares, pre-IPO investors’ shares would have a lesser voting power, and no votes for IPO shareholders.

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Regulating Complacency: Human Limitations and Legal Efficacy

Steven L. Schwarcz is the Stanley A. Star Professor of Law & Business at the Duke University School of Law. This post is based on a recent article by Professor Schwarcz.

The limitations of human irrationality impose critical constraints on the efficacy of law. Recent studies have shown, however, that irrationality can be addressed and sometimes improved. This article examines how insights into human rationality can improve financial regulation.

The article identifies four categories of human limitations that can impair financial regulation: herd behavior, cognitive biases, overreliance on heuristics, and proclivity to panic. Herd behavior refers to the tendency of people to follow what others are doing. That tendency is not necessarily irrational or bad; it can improve financial markets if a firm’s managers follow the behavior of other firms whose managers have more or better information. But herd behavior becomes problematic to the extent some followers may not be acting in their self-interest or the interest of the party for whom they are serving.

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Corporate Power is Corporate Purpose II: An Encouragement for Future Consideration from Professors Johnson and Millon

Leo E. Strine, Jr. is Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance. This post is based on Chief Justice Strine’s recent essay, Corporate Power is Corporate Purpose II: An Encouragement for Future Consideration from Professors Johnson and Millon, forthcoming in the Washington and Lee Law Review. Related research from the Program on Corporate Governance includes Corporate Power is Corporate Purpose I: Evidence from My Hometown (discussed on the Forum here), Can We Do Better by Ordinary Investors? A Pragmatic Reaction to the Dueling Ideological Mythologists of Corporate Law (discussed on the Forum here), and Toward Common Sense and Common Ground? Reflections on the Shared Interests of Managers and Labor in a More Rational System of Corporate Governance, all by Chief Justice Strine.

Leo E. Strine, Jr., Chief Justice of the Delaware Supreme Court, the Austin Wakeman Scott Lecturer on Law and a Senior Fellow of the Harvard Law School Program on Corporate Governance, recently issued an article that is forthcoming in the Washington and Lee Law Review. The article, titled Corporate Power is Corporate Purpose II: An Encouragement for Future Consideration from Professors Johnson and Millon, is available here. The abstract of Chief Justice Strine’s essay summarizes it as follows:

This article is the second in a series considering the argument that corporate laws that give only rights to stockholders somehow implicitly empower directors to regard other constituencies as equal ends in governance. This piece was written as part of a symposium honoring the outstanding work of Professors Lyman Johnson and David Millon, and it seeks to encourage Professors Johnson and Millon, as proponents of the view that corporations have no duty to make stockholder welfare the end of corporate law, to focus on the reality that corporate power translates into corporate purpose.

Drawing on examples of controlled companies that pursue goals other than shareholder wealth maximization, which Professors Johnson and Millon, among others, often reference to support the proposition that there is no duty under corporate law to put stockholders first, this article makes the point that those with power, controlling stockholders in this case, dictate corporate purpose. In widely-held public companies, the power dynamics are identical, and in these companies too, boards tend to maximize the preferences of those with power, the equity holders. This article also points to the phenomenon of corporate inversions to highlight the fact that corporate boards are so responsive to shareholder interests that they will in fact undermine the tax base of the corporation’s home and chartering nation by redomiciling, solely to benefit the corporation’s equity holders. It is these equity holders who are the only “citizens” of the corporate republic and they have no ties of national allegiance or any shared interest other than in the return on their invested equity. If in reality corporate boards could consider other corporate constituencies as equal—such as the corporation’s workers or communities—why would so many corporations choose to redomicile to lower their tax bills, and in the process, divert funds away from the human beings who would ultimately benefit from their tax dollars, especially in states that permit boards to consider non-shareholder constituencies? It is not likely because these boards are comprised of unusually callous managers and directors. Rather, it is more likely the reality that corporate power matters and dictates corporate purpose. If we want a world where stockholders are not the sole end of corporate governance, then we cannot have a system where they are the only constituency with any power.

The complete article is available for download here.

President Trump Begins Efforts to Roll Back Financial Regulations

John C. Dugan and Michael Nonaka are partners at Covington & Burling LLP. This post is based on a Covington publication by Mr. Dugan, Mr. Nonaka, Dwight Smith, and Jason Grimes. Additional posts addressing legal and financial implications of the Trump administration are available here.

Throughout his campaign, President Donald Trump promised to curtail financial regulations, particularly those promulgated under the Dodd-Frank Act. [1] President Trump argued frequently that the regulations issued under the act have proven overly burdensome and, among other things, limited job growth. This afternoon, the President took his first formal step in implementing his deregulatory agenda. He signed an executive order that will set in motion a comprehensive review of all financial regulatory requirements—including but not limited to those resulting from Dodd-Frank—and he issued a memorandum to the U.S. Department of Labor (DOL) directing an analysis of whether the rule should be rescinded or revised.

In a press briefing shortly before the signing, White House Press Secretary Sean Spicer described Dodd-Frank as a “disastrous” law that had not addressed the causes of the financial crisis. He also referred to the fiduciary rule as “a solution in search of a problem” that limited the financial services available to consumers.

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2016 Developments in Securities and M&A Litigation

The following post is based on a publication from Cleary Gottlieb Steen & Hamilton LLP.

Federal securities class action filings rose by over 40 percent in 2016.

A surge in federal court filings of class actions related to merger and acquisition (M&A) transactions contributed to the increase, as discussed below. Federal securities class actions against foreign issuers also continued to be prominent, with frequent targets of such actions including companies headquartered in Israel, Ireland, Canada, China, and Brazil.

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Financial Statement Requirements in US Securities Offerings

Alexander F. Cohen is partner and co-chair of the national office of Latham & Watkins LLP. This post is based on a Latham publication, in collaboration with KPMG LLP, by Mr. Cohen, Paul M. DudekJoel H. Trotter, and Melanie F. Dolan; a related guide for non-US issuers is available here.

The most frequently asked question at all-hands meetings for a securities offering is “What financial statements will be needed?” The question seems simple enough. But the answer is rarely straightforward.

This post is designed to provide a roadmap to help navigate the financial statement requirements of the federal securities laws. We focus principally on the requirements for new registration statements in public offerings, including initial public offerings by emerging growth companies (EGCs) under the JOBS Act. We also summarize briefly the practices in the Rule 144A market, as well as the special rules applicable to “foreign private issuers.”

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CFTC Year in Review and a Look Forward

Paul M. Architzel and Dan M. Berkovitz are partners at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication by Mr. Architzel, Mr. Berkovitz, Anjan Sahni, Gail C. Bernstein, Matthew Beville, and Daniel J. Martin.

In 2016, the Commodity Futures Trading Commission (CFTC or Commission) continued to pursue high-profile enforcement cases and to test its new enforcement authority under the Dodd-Frank Wall Street Reform and Consumer Protection Act (Dodd-Frank Act). On the regulatory front, the Commission issued several major final rules (margin for uncleared swaps, cross-border requirements for the margin rules, aggregation of positions and cybersecurity) and several important proposals which remain pending (position limits, Regulation AT, cross-border application of the registration thresholds and external business conduct standards, and swap dealer and major swap participant capital requirements).

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