Monthly Archives: May 2017

What’s (Still) Wrong with Credit Ratings

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 Washington Law Review.

Scholars and regulators generally agree that credit rating agency failures were at the center of the 2007-08 global financial crisis. Government investigations found that the credit rating agencies, particularly Moody’s and S&P, were central villains and that the crisis could not have happened without their misconduct. The Financial Crisis Inquiry Commission called the ratings agencies “key enablers of the financial meltdown.” The U.S. Senate Permanent Subcommittee on Investigations concluded: “Inaccurate AAA credit ratings introduced risk into the U.S. financial system and constituted a key cause of the financial crisis.” The Securities and Exchange Commission and the President’s Working Group on Financial Markets reached similar conclusions.


U.S. Proxy Season Half-Time Update

John Roe is Head of ISS Analytics at Institutional Shareholder Services, Inc. This post is based on an ISS publication by Mr. Roe.

With peak meeting day in the rear-view window and wrapping up the last of the four busiest meeting days of the year today, more and more issuers are reporting their meeting results—and it’s time to take stock of what the numbers are telling us. Through today and among Russell 3000 companies, ISS has issued recommendations on more than 22,000 ballot items at 2,244 companies. And voting results are coming in quickly—we’re calling this proxy season “half-time” because, as of today, just over half—52.4% – of the Russell 3000 has disclosed 2017 shareholder vote results.


Clarity on the “Quasi-Appraisal” Remedy and Post-Closing Claims

Ignacio E. Salceda is a partner at Wilson Sonsini Goodrich & Rosati. This post is based on a Wilson Sonsini publication by Mr. Salceda, and is part of the Delaware law series; links to other posts in the series are available here.

On May 11, 2017, Chancellor Andre G. Bouchard of the Delaware Court of Chancery issued another noteworthy opinion, dismissing with prejudice post-closing merger claims in In re Cyan, Inc. Stockholders Litigation. [1] The case arose out of the August 2015 acquisition of Cyan, Inc., a networking solutions company, by Ciena Corporation through a mostly stock-for-stock transaction, consisting of 89 percent stock and 11 percent cash. Before the deal closed, shareholder plaintiffs filed five lawsuits in the Court of Chancery, which were later consolidated. The plaintiffs did not seek expedited injunctive relief; rather, they elected to pursue damages for their process and disclosure claims post-closing. Specifically, the plaintiffs’ amended complaint asserted two counts for: (1) breach of fiduciary duty against Cyan’s seven-member board in connection with approval of the merger; and (2) equitable relief in the form of “quasi-appraisal.”


Dancing with Activists

Lucian Bebchuk is Professor of Law, Economics, and Finance, and Director of the Program on Corporate Governance, at Harvard Law School; Alon Brav is Professor of Finance at Duke University; Wei Jiang is Professor of Finance at Columbia Business School; and Thomas Keusch is Assistant Professor of Accounting and Control at INSEAD. This post is based on their study, Dancing with Activists, available here. This study is part of the research undertaken by the Project on Hedge Fund Activism of the Program on Corporate Governance. Related Program research includes The Long-Term Effects of Hedge Fund Activism by Bebchuk, Brav and Jiang (discussed on the Forum here); and The Law and Economics of Blockholder Disclosure by Lucian Bebchuk and Robert J. Jackson Jr. (discussed on the Forum here).

We recently released a study, entitled Dancing with Activists, that focuses on “settlement” agreements between activist hedge funds and target companies. Using a comprehensive hand-collected data set, we provide the first systematic analysis of the drivers, nature, and consequences of such settlement agreements.

Our study identifies the determinants of settlements, showing that settlements are more likely when the activist has a credible threat to win board seats in a proxy fight. We argue that, due to incomplete contracting, settlements can be expected to contract not directly on the operational or leadership changes that activists seek but rather on board composition changes that can facilitate operational and leadership changes down the road. Consistent with the incomplete contracting hypothesis, we document that settlements focus on boardroom changes and that such changes are subsequently followed by increases in CEO turnover, increased payout to shareholders, and higher likelihood of a sale or a going-private transaction.

We find no evidence to support concerns that settlements enable activists to extract significant rents at the expense of other investors by introducing directors not supported by other investors or by facilitating “greenmail.” Finally, we document that stock price reactions to settlement agreements are positive and that the positive reaction is higher for “high-impact” settlements. Our analysis provides a look into the “black box” of activist engagements and contributes to understanding how activism brings about changes in its targets.

Below is a more detailed account of the analysis and findings of our study.


Cybersecurity Must Be High on the Board Agenda

David A. Katz is a partner and Laura A. McIntosh is a consulting attorney at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Katz and Ms. McIntosh.

Recent global cyberattacks have rudely reminded corporate America that cybersecurity risk management must be at the top of the board of directors’ corporate governance agenda. Companies have no choice but to prepare proactively, while directors must understand the nature of cybersecurity risk and prioritize its oversight. Preparation, monitoring, emergency response, and disclosure are topics that boards should consider regularly to properly oversee cyber-risk management. Boards should receive periodic updates from management and its expert advisors on the rapidly developing regulatory cybersecurity environment and on the company’s compliance with applicable cybersecurity standards.


2017 Venture Capital Report

Mick Bain, Peter Buckland, and David D. Gammell are partners at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication.

US Market Review and Outlook


Following record levels of financing activity and proceeds in 2014 and 2015, the venture capital market cooled in 2016, with a decrease in the number of financings and a sharp contraction in valuations. Despite the decline in deal flow, however, the $52.4 billion invested in the US venture capital ecosystem still represented the third-highest annual total since 2000. Once all 2016 deals are accounted for, the number of 2016 venture capital financings should be commensurate with the 4,039 deals in 2013. VC-backed company liquidity activity was mixed in 2016, with the M&A market producing strong levels of acquisition activity and attractive valuations, while the IPO market declined for the second consecutive year to its lowest annual level since 2009.


M&A Deal Terms in 2017: What Can Deal Teams Expect?

Robbie McLaren and Nick Cline are partners at Latham & Watkins LLP. This post is based on a Latham publication by Mr. McLaren, Mr. Cline, and Catherine Campbell. This post is based on a publication in IFLR’s Mergers and Acquisitions Report 2017.

Britain’s decision to leave the European Union in June 2016, coupled with the election of Donald Trump as US president in November 2016, gave dealmakers plenty of pause for thought last year—but ultimately did little to derail strategic M&A. Encouraged by the post-Brexit decline in the value of sterling and supported by the continuing availability of transaction financing at attractive rates, the number of acquisitions of UK companies by US acquirers reached the highest level in 10 years, with 262 deals valued at US$48 billion closing in 2016.

With attractively priced credit predicted to continue to finance M&A transactions throughout 2017 and foreign buyers continuing to regard the UK and Europe as an attractive investment opportunity, there are strong indications that inbound UK and European M&A activity from the US will continue. In our view, transatlantic deal makers will increasingly encounter the following key deal term differences between the US and UK M&A markets.


The Origins of Corporate Social Responsibility

Eric C. Chaffee is a professor of law at The University of Toledo College of Law. This post is based on Professor Chaffee’s recent article, forthcoming in the University of Cincinnati Law Review, that was presented as part of symposium hosted on Corporate Social Responsibility and the Modern Enterprise.

The area of corporate social responsibility is awash in rhetoric. Although most corporate managers and business advisors agree that engaging in socially responsible behavior is the correct thing for businesses to do, few can articulate a strong analytical foundation for this belief. The fact that engaging in this type of behavior may help to make corporations more profitable offers a partial reason for undertaking such behavior. However, profit-seeking fails to explain if or why corporations should engage in socially responsible behavior in circumstances in which no financial benefit to the corporation exists or the financial consequences are uncertain. The reason for this confusion over the metes and bounds of the obligation to engage in socially responsible behavior is that the essential nature of the corporate form is not well understood. Once the nature of the corporation comes into focus, the extent of the obligation to engage in socially responsible behavior becomes apparent as well.


Potential Regulatory Relief—Financial CHOICE Act 2.0

John R. Ellerman is a founding Partner of Pay Governance LLC. The following post is based on a Pay Governance memorandum by Mr. Ellerman.

On May 4, 2017, the U.S. House of Representatives Financial Services Committee voted to advance the Financial CHOICE (“Creating Hope and Opportunity for Investors, Consumers, and Entrepreneurs”) Act (Version 2.0) to the House of Representatives for further consideration and a vote. The CHOICE Act is designed to rewrite many of the rules and provisions contained in the Dodd-Frank Wall Street Reform and Consumer Protect Act (“Dodd-Frank”). The proposed legislation was passed on a party-line vote of 34-26 and has advanced to the full House for a vote at some future date. The legislation is expected to pass the House due to its Republican majority. However, after passage by the House, the bill will be taken up by the U.S. Senate, where a 60-vote majority will be required. To date, Senate Democratic lawmakers have voiced their objections to the CHOICE legislation and have vowed to filibuster.


Financial Scholars Oppose Eliminating “Orderly Liquidation Authority” As Crisis-Avoidance Restructuring Backstop

Mark Roe is a professor at Harvard Law School This post summarizes the text of a letter by Professor Roe and Professor Jeffrey N. Gordon of Columbia Law School to the chairs and ranking members of the Senate and House Banking and Judiciary committees and co-signed by more than 100 other academics whose work and teaching deal with bankruptcy and financial regulation. The letter explains why a bankruptcy structure should not be allowed to substitute for the Dodd-Frank Act’s regulator-driven “orderly liquidation authority. The complete letter is available here

Earlier this week, Jeff Gordon and I wrote to the chairs and ranking members of the Senate and House Banking and Judiciary committees, analyzing reasons why a bankruptcy structure should not be allowed to substitute for the Dodd-Frank Act’s regulator-driven “orderly liquidation authority.” Our letter was joined by more than 100 other academics whose work and teaching deal with bankruptcy and financial regulation.

The Financial CHOICE Act of 2017, H.R. 10, would replace the “Orderly Liquidation Authority” (“OLA”), Title II of Dodd-Frank, with a new bankruptcy procedure, the Financial Institution Bankruptcy Act (“FIBA”), as the exclusive means for addressing the failure of systemically important financial institutions (“SIFIs”). The House Banking committee reported out the bill several weeks ago. A stand-alone version of FIBA has already passed the House.


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