Monthly Archives: April 2017

Lowering the Bar on Bad Faith Claims in MLP Transactions? Brinckerhoff v. Enbridge Energy

Gail Weinstein is Senior Counsel and Warren S. de Wied is a Partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. de Wied, Philip RichterSteven EpsteinRobert C. Schwenkel, and Scott B. Luftglass. This post is part of the Delaware law series; links to other posts in the series are available here.

In Brinckerhoff v. Enbridge Energy Company, Inc., the plaintiff, an investor in the Enbridge Energy Delaware master limited partnership (the “MLP”), challenged a $1.2 billion transaction between the MLP and the controlling parent corporation (“Parent”) of the MLP’s general partner (the “GP”). The factual context was the repurchase by the MLP of an asset it had previously sold to Parent—with the repurchase at a significantly higher price, despite strong indications that the value of the asset had declined, and without the GP or its banker having considered the earlier sale as a comparable transaction. The Delaware Supreme Court, in an opinion written by Justice Seitz (March 20, 2017), reversed the Court of Chancery’s dismissal of the case.


The Conflict Minerals Rule—Litigation Is Over, But the Drama Continues

Michael R. Littenberg is a partner at Ropes & Gray LLP. This post is based on two Ropes & Gray publications by Mr. Littenberg, Julia L. Chen, and Emily K. Burke.

After 1,627 days and enough law firm memos to deforest a small country, the litigation relating to the Conflict Minerals Rule came to an end [April 3, 2017]. In this post, we discuss what this means for calendar year 2016 compliance, as well as the many other moving pieces relating to the Rule.

The Court’s Final Judgment

[April 3, 2017], Judge Ketanji Brown Jackson, a District Court Judge in the District of Columbia, entered a final judgment in the Conflict Minerals Rule case. In a short three paragraph opinion, the District Court (1) declared that Section 1502 of Dodd-Frank, Rule 13p-1 thereunder and Form SD violate the First Amendment to the extent that the statute and the rule require companies to report to the SEC and state on their websites that any of their products “have not been found to be ‘DRC conflict free,’” (2) held unlawful and set aside the Rule to the extent that it requires companies to report to the SEC and state on their websites that any of their products “have not been found to be ‘DRC conflict free’” and (3) remands to the SEC, to take action in furtherance of the Court’s decision.


The Law and Brexit XI

Thomas J. Reid is Managing Partner of Davis Polk & Wardwell LLP. This post is based on a Davis Polk memorandum. Additional posts on the legal and financial impact of Brexit are available here.

On March 29th, 2017, the UK delivered a letter from the UK Prime Minister to the President of the European Council, Donald Tusk, which gave notice of the UK’s intention to withdraw from the European Union (“EU”) in accordance with Article 50 of the Treaty on European Union. Thus the starting gun has been fired on two years of negotiation in which both sides will attempt to agree the terms of exit for the UK and a framework for a future trading relationship. The task before the two sides is complex, with sensitive discussions anticipated on a possible transition deal, obligations of the UK to contribute to the EU budget, the status of UK and EU citizens post-Brexit and the legal jurisdiction of the EU courts.


Weekly Roundup: April 7–13, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of April 7–13, 2017.

Is Executive Pay Broken?

Rupal Patel and David Ellis are partners at EY. This post is based on an EY publication by Ms. Patel and Mr. Ellis. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here) and the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, both by Lucian Bebchuk and Jesse Fried.

In recent months executive pay has received an unprecedented level of attention from a wide range of stakeholders. While Remuneration Committees, executives and investors in many businesses may feel that current pay structures are working well and fit for purpose, the intensity of noise we are experiencing tells us that it is no longer reasonable for any organisation to assume that there is nothing it needs to be concerned about.

First indications from the 2017 AGM season show that in many cases the noise in the system is now turning into real opposition. Many would seek to explain away this opposition as being specific to a business, or focussed on a discrete issue. We at EY believe that this is now wishful thinking.


Corporations and Human Life

Frank Partnoy is George E. Barrett Professor of Law and Finance and Director of the Center for Corporate and Securities Law at University of San Diego School of Law. This post is based on his recent article, forthcoming in the Seattle University Law Review.

Here is a surprisingly difficult yet largely unexamined capital budgeting problem: imagine a corporate decision that will generate $5 million of profit today but result in the loss of one human life in ten years. This example is not abstract: corporations in a range of businesses engage in decisions and oversight that affect risk to human life: consider autonomous cars, airbags, pharmaceuticals, medical devices, and many categories of consumer products. Historically, regulation and tort liability have addressed corporate liability for the loss of human life, but the corporate governance literature, and corporate law, have had little to say.


Tread Lightly When Tweaking Sarbanes-Oxley

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on an article by Mr. Peregrine; his views do not necessarily reflect the views of McDermott Will & Emery or its clients. Thomas J. Murphy assisted in the preparation of this post.

Nascent discussions about repealing discrete sections of the Sarbanes Oxley Act should be monitored closely by proponents of effective corporate governance. As the federal regulatory pendulum swings hard to an extreme, even the most limited proposals to amend the Act could conceivably invite unintended consequences. This is particularly the case if caught in the tailwind of efforts to amend or repeal Dodd-Frank and other financial regulations. If unchecked, such actions could severely undermine the culture of corporate responsibility that has been a crucial legacy of Sarbanes.


Equity Suppliers in Bank Regulation

Yesha Yadav is Professor of Law at Vanderbilt Law School. This post is based on a recent paper by Professor Yadav.

Post-Financial Crisis regulatory reform requires banks to fund themselves more fully through common equity. By maintaining deeper equity buffers, banks are better positioned to absorb losses and to prevent the spread of contagion through the financial sector. [1] Under the Dodd-Frank Act’s Orderly Liquidation Authority, shareholders of a failing bank must pay for its risk-taking by seeing the value of their equity be extinguished to meet the bank’s obligations to short-term and secured creditors. [2] In this way, equity reserves can help stem the spread of losses.

My paper shows that the practical realization of this policy objective faces serious challenges when viewed from the standpoint of who actually supplies equity capital to banks. Surveying the 2016 proxy statements of the 25 publicly traded, U.S. bank and financial holding companies subject to the Federal Reserve’s stress tests, [3] I find that a handful of top asset managers—the Vanguard Group, BlackRock, Fidelity Investments, State Street Global Advisors and T. Rowe Price—are blockholders at multiple banks, meaning that each owns more than 5% of common equity across different firms. In 2015/6, for example, Vanguard and BlackRock were both blockholders at 22 out of these 25 banks, with BlackRock funds holding blockholder positions at 23 of these 25 banks and Vanguard funds at 22 of these 25 banks. This pattern of ownership showcases a marked percentage increase over the last five years. According to the 2011 proxy statements of these same banks, BlackRock was a blockholder at 10 out of (then) 24 banks; [4] and Vanguard was a blockholder at a single bank out of these 24 firms in 2010/11.


On Regulatory Reform, Better Process Means Better Progress

Mark J. Costa is Chairman and Chief Executive Officer of Eastman Chemical Co., and Chair of the Business Roundtable Smart Regulation Committee. This post is based on a February letter from Business Roundtable. Additional posts addressing legal and financial implications of the Trump administration are available here.

In a February letter asking the White House to act on regulatory issues “of top concern” to our CEO members, Business Roundtable made another important but little-noticed request: Reform the federal regulatory process.

“While addressing existing regulations that are unduly burdensome is vitally important to help jump-start American business investment and job creation, Business Roundtable believes that fundamental regulatory process reforms are key to ensuring long-term success,” I wrote as the Chairman of the Roundtable’s Smart Regulation Committee.


Earnouts: Devil in the Details

Daniel E. Wolf is a partner at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis publication by Mr. Wolf and David B. Feirstein, and is part of the Delaware law series; links to other posts in the series are available here.

In an earlier post, we discussed the attraction of using earnouts to bridge valuation gaps but quoted VC Laster’s astute description of earnouts as “often convert[ing] today’s disagreement over price into tomorrow’s litigation over outcome.” Since then, we have seen a continued steady pace of lawsuits brought by disappointed sellers asserting that an earnout milestone in fact has been satisfied or that the buyer’s failure to use the requisite efforts caused the failure to hit the milestone or maximize the earnout.

Two recent Delaware Chancery Court decisions highlight some of the recurring issues that characterize earnout litigation and offer guidance to parties negotiating earnouts and milestones in acquisition agreements.


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