Monthly Archives: April 2017

A Legal Theory of Shareholder Primacy

Robert J. Rhee is John H. and Marylou Dasburg Professor of Law at the University of Florida Levin College of Law. This post is based on his recent article, forthcoming in the Minnesota Law Review.

Shareholder primacy is a foundational concept. The principle of profit maximization goes to the most basic question: What is the purpose of the corporation and corporate law? Although normative debate has persisted over many generations of economic history and academic scholarship, we are in a shareholder-centric era as a factual matter. Yet, remarkably, the question of whether shareholder primacy is positive law remains unresolved even today.

Shareholder primacy is universally described in scholarship as a “norm” but seldom as “law.” Viewing the concept of law through the prism of fiduciary duty, managerial authority, and the business judgment rule, opponents reject the idea of law; some diminish shareholder primacy further as an “ideology” or “dogma” or “belief system.” On the other hand, proponents place undue and hackneyed reliance on a single 1919 case from Michigan, Dodge v. Ford. Essentially this is where the debate on a positive legal theory stands. It is unsatisfactory. The basic question—“what is the law?”—has not received sufficient empirical or theoretical analyses. In a forthcoming article in the Minnesota Law Review, I advance a positive legal theory. The article answers these basic questions: Is shareholder primacy law? If so, how does it work?


Dealmakers Expect a “Trump Bump” on M&A

Steven Lipin is a Senior Partner at the Brunswick Group LLP. This post is based on a Brunswick publication by Mr. Lipin. Additional posts addressing legal and financial implications of the Trump administration are available here.

After an unpredictable political cycle and an equally unpredictable M&A environment in 2016, dealmakers have refreshed their outlook for M&A activity under the Trump administration—and they like what they see. According to Brunswick Group’s 10th Annual Global M&A Survey, about 44% of respondents expect M&A activity to increase in 2017, a significant surge since last year, when only 13% of respondents were optimistic about M&A levels growing in the wake of record-breaking levels in 2015. At the same time, practitioners expect more scrutiny of cross-border deals, particularly from China, and a lighter touch with regard to antitrust obstacles. And the impact on jobs will be front and center.


Should Executive Pay Be More “Long-Term”?

Joseph E. Bachelder is special counsel in the Tax, Employee Benefits & Private Clients practice group at McCarter & English, LLP. The following post is based on a column by Mr. Bachelder which first appeared in the New York Law Journal. Andy Tsang, a senior financial analyst with the firm, assisted in the preparation of this post. 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).

Much criticism is directed at executive pay on the ground it lacks sufficient emphasis on the “long-term.” The meaning we give to “long-term” in this context is not always clear. Three years appears to be the earn-out period most frequently covered by incentive awards that are described as “long-term.” Descriptions are contained in proxy statements and surveys of incentive pay practices. [1] In particular cases, as discussed below, “long-term” can be significantly longer than three years.


Voluntary Corporate Governance, Proportionate Regulation, and Small Firms: Evidence from Venture Issuers

Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto. This post is based on a recent article by Professor Anand; Wayne Charles, Queen’s School of Business; and Lynnette Purda, Associate Professor & RBC Fellow of Finance at Smith School of Business.

Following the implementation of the Sarbanes-Oxley Act, many scholars and business leaders argued that one-size-fits-all corporate governance imposed disproportionately high compliance costs on small businesses, weakening their competitiveness vis-à-vis larger firms. [1] As an alternative, these critics contended that “proportionate regulation,” in the form of regulatory exemptions for small firms, is an appropriate means of minimizing disclosure obligations. While at first glance it may seem that small firms would seek to comply with less costly governance standards, is it possible that they would nonetheless voluntarily adhere to stricter standards?


Cayman Merger Take-Privates from NYSE and NASDAQ—2016 Year in Review

Gary Smith is a Partner and Ramona Tudorancea is a Corporate/M&A Specialist at Loeb Smith. This post is based on a Loeb Smith publication by Mr. Smith and Ms. Tudorancea.

The Cayman Islands (Cayman) has been the leading offshore jurisdiction for merger and acquisition (M&A) activity over the last two (2) years. In 2015, Cayman-incorporated companies were the target of 863 transactions worth a combined value of USD116.41bn. The value was more than twice the amount of the British Virgin Islands with USD49.62bn (with 387 M&A transactions) and well in excess of Bermuda with 498 M&A transactions with a combined value of USD67.57bn.

In 2016, Cayman-incorporated companies again led the way in terms of offshore M&A activity and were the target of transactions worth a combined USD68.85bn followed by the British Virgin Islands with USD41.65bn and Bermuda with USD41.25bn. By way of comparison, Hong Kong incorporated companies were the target of transactions worth a combined USD33.19bn in 2016.


Supreme Court Certiorari on Non-Disclosure of “Known Trends or Uncertainties” in SEC Filings

David M.J. Rein is a partner and Hao Tschang is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Mr. Rein and Mr. Tschang.

[On March 27, 2017], the U.S. Supreme Court granted certiorari in Leidos, Inc. v. Indiana Public Retirement System, No. 16-581. This appeal, which likely will not be decided until the first half of 2018, at the earliest, presents the question of whether non-disclosure of “known trends or uncertainties” under Item 303 of Regulation S-K may give rise to private liability for securities fraud under Section 10(b) of the Securities Exchange Act of 1934. The U.S. Supreme Court will address a split between the Second Circuit, which has held that, under some circumstances, non-disclosure under Item 303 of Regulation S-K could give rise to private securities fraud liability, and the Third and Ninth Circuits, which held that such non-disclosure does not create a private securities fraud claim. Although the Supreme Court’s decision will not affect the obligation of registrants to comply with Item 303, it may have a significant impact on their potential exposure to securities fraud claims.


Delaware Supreme Court Affirmation of Merger Termination Based on Failure to Satisfy Tax Covenant

Scott Barshay and Ross Fieldston are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Barshay, Mr. Fieldston, Justin Hamill, Patrick Karsnitz, Stephen Lamb and Jeffrey Marell. This post is part of the Delaware law series; links to other posts in the series are available here.

In a 4-1 split decision in The Williams Cos., Inc. v. Energy Transfer Equity, L.P., et al., the Delaware Supreme Court affirmed the Court of Chancery’s decision permitting termination of a merger agreement by the acquirer based on the failure of the acquirer to obtain a tax opinion from its counsel, the receipt of which was a condition precedent to the closing of the merger. The Supreme Court held that even though the Court of Chancery did not properly analyze whether the acquirer met its covenants to use “commercially reasonable efforts” to obtain the tax opinion and “reasonable best efforts” to consummate the transaction, the acquirer had met its burden of proving that any alleged breach did not materially contribute to the failure to obtain the tax opinion. In his dissent, Chief Justice Strine argued that the evidence suggested that the acquirer failed to fulfill its covenant to use commercially reasonable efforts to obtain the tax opinion.


Director Appointments—Is It “Who You Know”?

Ralph A. Walkling is Christopher and Mary Stratakis Professor in Corporate Governance and Accountability and Founder of the Center of Corporate Governance at Drexel University Lebow College of Business. This post is based on a recent paper by Professor Walkling; Tu Nguyen, Assistant Professor of Finance at University of Waterloo; and Jie Cai, Associate Professor of Finance at Drexel University Lebow College of Business.

The best way to get on a board, is to be on a board.
(Old adage)

A pillar of modern corporate governance for U.S. public firms is shareholder representation by the board of directors. Shareholders, however, are generally unable to nominate the directors who will represent them in the boardroom. Instead, the incumbent board nominates new directors, who are almost always subsequently elected. The characteristics of director additions are the foundation of a firm’s evolving governance structure, yet we know little about how boards select their new members. In contrast to most other markets where supply and demand meet in marketplaces, the director labor market typically operates in opacity. Companies never advertise vacancies and candidates do not submit their applications, while anecdotal evidence suggests that boards often recruit new members through personal connections.


Weekly Roundup: March 31–April 6, 2017

More from:

This roundup contains a collection of the posts published on the Forum during the week of March 31–April 6, 2017.

Cash Holdings and Labor Heterogeneity: The Role of Skilled Labor

Regulating Robo Advice Across the Financial Services Industry

Age Diversity Within Boards of Directors of the S&P 500 Companies

Motivation, Information, Negotiation: Why Fiduciary Accountability Cannot Be Negotiable

Amir Licht is Professor of Law at the Interdisciplinary Center Herzliya, Israel. This post is based on his recent paper, forthcoming in the Research Handbook on Fiduciary Law (Andrew Gold & D. Gordon Smith, eds.) This post is part of the Delaware law series; links to other posts in the series are available here.

While common law jurisdictions around the world exhibit substantial similarity in many basic features of fiduciary loyalty, fiduciary law is particularly diverse with regard to whether and to what extent should parties be allowed to define their relations contractually. This paper advances a theory of the extent and the limits of contractual freedom with regard to fiduciary obligations, or, put otherwise, of the irreducible core of such obligations. The key insight on which this theory hinges holds that fiduciary obligations constitute a social-institutional response to acute information asymmetries, especially of the unobservable and unverifiable kind.

It is trite law that a fiduciary and a beneficiary can agree on the former’s duties and liability. Now if the beneficiary can validly agree to a single breach she can surely agree to a handful, and if so, why not to every breach? The freedom of parties to fiduciary relations to negotiate the scope of the fiduciary’s legal responsibility thus has been hotly debated in different sub-fields of fiduciary law and in several common law jurisdictions.


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