Monthly Archives: April 2017

Director Duties and Legal Safe Harbours: A Comparative Analysis

Jennifer G. Hill is Professor of Corporate Law at University of Sydney Law School; Matthew Conaglen is Professor of Equity and Trusts at University of Sydney Law School. This post is based on a recent paper by Professors Hill and Conaglen, forthcoming in the Research Handbook on Fiduciary Law. This post is part of the Delaware law series; links to other posts in the series are available here.

Directors’ duties are a core element of corporate governance, yet a range of legal safe harbours ultimately shape the contours and stringency of these duties in practice. Although the standards of conduct that constitute directors’ duties (so-called “conduct rules”) are often relatively strict, legal safe harbours can dilute those rules, resulting in the application of more lenient standards of judicial review (“decision rules”). The potential gap between conduct rules and decision rules, which has been labelled “acoustic separation,” is particularly striking in the context of the duty of care as it is applied to directors.

Directors’ duties and legal safe harbours can also involve complex interaction between equitable and common law (‘general law’) principles on the one hand, and statutory regimes on the other. Whereas some jurisdictions, such as Delaware, rely exclusively on general law principles in relation to directors’ duties, others, including the United Kingdom and Australia, have adopted statutory regimes, which either co-exist with, or supplant, the general law regime.


The Importance of Nonfinancial Performance to Investors

Mathew Nelson is Global Leader of Climate Change and Sustainability Services at EY. This post is based on an EY publication.

EY member firms are able to conclude from several years of research of ESG reporting that there is a global trend toward increased interest in nonfinancial information on the part of investment professionals. But the question we continue to seek to answer is whether ESG information is, ultimately, influencing investor decisions. In each of the last three years, research undertaken by EY has documented an expanding role of ESG factors in the decisionmaking of investors around the world.

Recent headlines reflect why meaningful ESG analysis is increasingly important for institutional investors and the companies they follow. “Larry Fink Wants Companies to Talk More About the Future,” declared Bloomberg Media when the head of the world’s largest investment manager wrote to the CEOs of public companies to extoll the virtues of strong ESG performance and its effect on valuation. Nearly 200 nations met in Paris to negotiate and sign a global climate agreement that will shift financial markets. And one of the world’s largest automakers was embroiled in an unprecedented emissions-testing scandal. These and other news-making events in recent months have propelled ESG to the top of the global agenda. This is despite continued uncertainty in the regulatory environment globally.

This year’s report on ESG and nonfinancial reporting, available here, provides insights into the views of more than 320 institutional investors on nonfinancial reporting by publicly traded companies and the role ESG analysis plays in their investment decision-making.


Stiffing the Creditor: The Effect of Asset Verifiability on Bankruptcy

Florencio Lopez-de-Silanes is Professor of Finance and Associate Dean for International Affairs at SKEMA Business School, and a Research Associate at NBER. This post is based on a recent paper by Professor Lopez-de-Silanes; Erasmo Giambona, Michael Falcone Chair in Real Estate, and director of the James D. Kuhn Real Estate Center at Syracuse University Whitman School of Management; and Rafael Matta, Assistant Professor of Finance at University of Amsterdam Business School.

Empirical evidence suggests that asset pledgeability, debt complexity, and valuable control rights of dispersed debt influence the resolution of financial distress. Firms that borrow from multiple uncoordinated creditors and have more tangible assets often fail to renegotiate debt out of court and inefficiently file for bankruptcy. But the current theoretical literature is at odds with the evidence. Existing models predict inefficient bankruptcy filings to be negatively associated with both asset pledgeability and the number of debtholders. In our paper, we bridge the gap between existing models and evidence on distress resolution proposing a broader financial contracting model and testing its predictions using an exogenous variation in the court’s ability to price assets. We analyze the effect on bankruptcy filings and firm debt capacity after the 1999 U.S. Supreme Court ruling that reorganization plans in which equity holders keep an interest must be exposed to a “market test.”


The Untenable Case for Perpetual Dual-Class Stock

Lucian Bebchuk is the James Barr Ames Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School. Kobi Kastiel is the Research Director of the Project on Controlling Shareholders of the Program. This post is based on their Article, The Untenable Case for Perpetual Dual-Class Stock, forthcoming in the Virginia Law Review. The Article is part of the research undertaken by the Project on Controlling Shareholders.

We recently placed on SSRN our study, The Untenable Case for Perpetual Dual-Class Stock. The study, which will be published by the Virginia Law Review in June 2017, analyzes the substantial costs and governance risks posed by companies that go public with a long-term dual-class structure.

The long-standing debate on dual-class structure has focused on whether dual-class stock is an efficient capital structure that should be permitted at the time of initial public offering (“IPO”). By contrast, we focus on how the passage of time since the IPO can be expected to affect the efficiency of such a structure.

Our analysis demonstrates that the potential advantages of dual-class structures (such as those resulting from founders’ superior leadership skills) tend to recede, and the potential costs tend to rise, as time passes from the IPO. Furthermore, we show that controllers have perverse incentives to retain dual-class structures even when those structures become inefficient over time. Accordingly, even those who believe that dual-class structures are in many cases efficient at the time of the IPO should recognize the substantial risk that their efficiency may decline and disappear over time. Going forward, the debate should focus on the permissibility of finite-term dual-class structures—that is, structures that sunset after a fixed period of time (such as ten or fifteen years) unless their extension is approved by shareholders unaffiliated with the controller.

We provide a framework for designing dual-class sunsets and address potential objections to their use. We also discuss the significant implications of our analysis for public officials, institutional investors, and researchers.

Below is a more detailed summary of our analysis:


Assessing Financial Advisor Compensation Disclosure Following Vento v. Curry

James E. Langston is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Langston, and is part of the Delaware law series; links to other posts in the series are available here.

Last month, in Vento v. Curry, [1] the Delaware Chancery Court preliminarily enjoined the Consolidated Communication Holding (“Consolidated”) shareholder vote [2] on the company’s all-stock acquisition of FairPoint Communications (“FairPoint”) due to Consolidated’s failure to adequately disclose the compensation its financial advisor would receive for participating in the acquisition financing. The court’s ruling ultimately had very little impact on the transaction—Consolidated subsequently disclosed that its financial advisor would receive $7 million in financing fees and the Consolidated shareholders overwhelmingly approved the transaction without any delay. [3] Vento nonetheless provides important guidance for principals and financial advisors in evaluating whether disclosure of a financial advisor’s transaction-related compensation is required when seeking shareholder approval of an M&A transaction.


One Take on the Report of the Independent Directors of Wells Fargo: Vote the Bums Out

Howell E. Jackson is James S. Reid, Jr., Professor of Law at Harvard Law School. Professor Jackson is the co-author of Financial Regulation: Law and Policy (Foundation Press 2016) and has served as an expert witness for the plaintiff class in In re Wells Fargo Residential Mortgage Lending Discrimination, No. C 08-1930 MMC (JL) (N.D.Cali.).  Additional information on Professor Jackson’s outside interests and activities is available here. The views expressed in this blog posting are those of Professor Jackson and are not necessarily those of organizations, institutions or individuals with which he is associated.

Next Tuesday, the 25th of April, the shareholders of Wells Fargo will meet for the first time since the news of the massive Wells Fargo mis-selling scandal broke last September when the firm was hit with penalties of $185 million for opening 1.5 million bank accounts and issuing 565,000 credit cards for customers without their consent. [1] In recent weeks, the two leading proxy advisory firms have recommended negative votes for many of the directors serving on the Wells Fargo Board at the time the fines were announced, with Glass Lewis advocating negative votes on six of twelve continuing directors and ISS recommending the ouster of all twelve.

Just two weeks before the meeting date, the independent directors of Wells Fargo released a 110 page “Sales Practice Investigation Report,” prepared with the assistance of the law firm Shearman & Sterling under the direction of four independent trustees: Duke, Hernandez, James, and Sanger, all four of whom have received negative vote recommendations from ISS and one of whom (Hernandez) has received a negative recommendation from Glass Lewis. [2] The Shearman & Sterling Report—and I call it that because the document has all the hallmarks of a carefully and cautiously drafted legal document—is illustrative of an increasingly common practice in the aftermath of financial scandal: the preparation and distribution of a nominally “independent” but “in-house” analysis of corporate practices that have resulted in widespread violations of law.


Lessons Learned from the Wells Fargo Sales Practices Investigation Report

Brad S. Karp and Roberto J. Gonzalez are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Karp, Mr. Gonzalez, and Vikas Desai.

On April 10, 2017, a committee of independent directors of Wells Fargo released a 110-page report on the results of an investigation into the root causes of improper sales practices at Wells Fargo’s Community Bank (the “Community Bank”). [1] The report will likely be studied by regulators, congressional committees, financial institutions, and other companies for insights into the causes of problematic sales practices and, more broadly, insights into how boards and senior management can improve their identification of and response to red flags. The report’s findings can be expected to inform regulators’ expanding expectations around corporate governance and compliance.

We summarize below some of the key lessons that regulators and other parties may glean from the report.


Corporate Governance

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton. Additional posts by Martin Lipton on short-termism and corporate governance are available here.

In a brilliant must-read article in the May-June 2017 issue of the Harvard Business Review, Joseph L. Bower and Lynn S. Paine show the fallacies of the economic theories and statistical studies that have been used since 1970 to justify shareholder-centric corporate governance, short-termism and activist attacks on corporations. They demonstrate the pernicious effect of the agency theory promoted by Milton Friedman (1970) and Michael Jensen and William Meckling (1976), a theory still endorsed today by a majority of academic economists and lawyers who write about and teach corporate governance. The Bower and Paine rejection of hedge fund activism is telling.


Principles for Financial Regulatory Reform

William C. Dudley is President and Chief Executive Officer of the Federal Reserve Bank of New York. This post is based on Mr. Dudley’s recent remarks at the Princeton Club of New York. The views expressed in this post are those of Mr. Dudley and do not necessarily reflect those of the Federal Open Market Committee or the Federal Reserve System. Additional posts addressing legal and financial implications of the Trump administration are available here.

It is a pleasure to have the opportunity to speak here today [April 7, 2017] on the important topic of financial regulatory reform. As always, what I have to say reflects my views and not necessarily those of the Federal Open Market Committee or the Federal Reserve System. [1]

A robust financial system is central to our economic well-being. The financial crisis and the Great Recession wreaked havoc on millions of American households and businesses, and much of this damage was due to a flawed regulatory framework. In particular, many large banks and securities firms had inadequate capital and liquidity buffers, and the financial system had a number of important structural weaknesses that made it vulnerable to stress. In response, legislators and regulators made significant changes to strengthen our regulatory framework. Importantly, as we consider further changes, we must avoid throwing the baby out with the bathwater.


Weekly Roundup: April 14–April 20, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 14–April 20, 2017.

Page 2 of 7
1 2 3 4 5 6 7