Monthly Archives: May 2017

SEC Enforcement Activity—Strong Through First Half of FY 2017

David F. Marcus is Senior Vice President and Sara E. Gilley is a Principal at Cornerstone Research. This post is based on a Cornerstone publication.

Despite the uncertainty introduced by changes in SEC leadership and the new administration, enforcement activity continued at a strong pace during the first half of FY 2017 (October 1, 2016–March 31, 2017).

Total Number of SEC Enforcement Actions Filed

  • The SEC filed 334 total enforcement actions during the first half of FY 2017, compared to 372 during the same period in the previous fiscal year.
  • Excluding actions against delinquent filers, the number of enforcement actions in the first half of FY 2017 was 299—virtually unchanged from the same period in the prior fiscal year.
  • The SEC continued to file the vast majority of its actions (80 percent) as administrative proceedings rather than civil actions.

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Board Changes and the Director Labor Market: The Case of Mergers

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 authored by Professor Walkling; David Becher, David Cohen Research Scholar and Associate Professor of Finance at Drexel University Lebow College of Business; and Jared Wilson, Assistant Professor of Finance at Indiana University Kelley School of Business.

The modern era has ushered in dramatic changes to corporate governance. While firms used to place celebrities and politicians on their boards, increased demand for specialized expertise and greater scrutiny by regulators, activists, and shareholders all likely motivated firms to alter their boards and demand more from directors. In spite of this, little is known about changes to boards or characteristics of directors selected. In an ideal world, directors should monitor and advise management in an independent manner. However, given shareholders’ limited influence over director selection, it is possible that directors cater to managerial interests in board composition decisions. Our objective is to examine board dynamics and the attributes associated with director selection.

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The Regulation of Trading Markets: A Survey and Evaluation

Paul G. Mahoney is a David and Mary Harrison Distinguished Professor at the University of Virginia School of Law, and Gabriel Rauterberg is an Assistant Professor of Law at the University of Michigan Law School. This post is based on their recent paper.

The U.S. equity markets have undergone profound changes in the past 15 years. In place of face-to-face or telephonic negotiation and execution of trades, electronic communications and information processing systems match incoming buy and sell orders automatically. Trading in listed stocks, which used to be heavily concentrated on the listing exchange, is now widely dispersed among multiple automated trading venues. Exchange specialists and over-the-counter market makers have been largely replaced by proprietary traders that offer liquidity to the automated markets by executing algorithmic trading strategies. Those strategies often rely on a menu of new and complex order types that trading venues have created to supplement the traditional market and limit orders.

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Corporate Governance in the Trump Era: A Note of Caution

William R. McLucas is a partner and Rachel Murphy is counsel at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication which originally appeared in Westlaw Journal Corporate Officers and Directors Liability. Additional posts addressing legal and financial implications of the Trump administration are available here.

The past decade or so has been a challenging time for publicly held companies, particularly those in the financial sector. Since 2008, banks and financial services firms have been the subject of an aggressive effort by the U.S. government to crack down on those seen as associated with the market crash of 2008 and the subprime mortgage crisis. Public reports suggest that, as of this time last year, America’s largest banks had paid fines totaling upward of $110 billion in connection with the mortgage crisis. [1] That staggering total includes settlements between nine of the largest global banks and the DOJ’s Residential Mortgage-Backed Securities Working Group totaling more than $43 billion in cash penalties and consumer relief. [2] Further, the number of investigations and civil and criminal prosecutions for violations of the Foreign Corrupt Practices Act (“FCPA”), and the penalties associated with those prosecutions, seem to have spiked in the wake of 2008. READ MORE »

Weekly Roundup: April 28–May 4, 2017


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This roundup contains a collection of the posts published on the Forum during the week of April 28–May 4, 2017.








The Emerging Need for Cybersecurity Diligence in M&A









Contested Visions: The Value of Systems Theory for Corporate Law

Tamara Belinfanti is a Professor of Law at New York Law School and Lynn A. Stout is The Distinguished Professor of Corporate and Business Law at Cornell Law School. This post is based on their recent article, forthcoming in the University of Pennsylvania Law Review.

Our article addresses the fundamental question: What is a corporation? Some experts say the corporation is a grantee of the state and should serve a public purpose (concession theory). Others describe the corporation as a legal entity that can hold property and enter contracts in its own name (entity theory). Still others argue the corporation is a nexus of privately-negotiated contracts (nexus of contract theory). Or perhaps a corporation is an aggregation of natural persons (aggregate theory) or an aggregation of shareholder property (property theory) or specific assets (team production)?

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Kokesh v. SEC: Supreme Court to Discuss Application of Statute of Limitations to SEC Disgorgement

Paul C. Curnin is partner and co-chair of the litigation department at Simpson Thacher and Bartlett LLP. This post is based on a Simpson Thacher publication.

“Chief Justice Marshall said it was utterly repugnant to the genius of our laws to have a penalty remedy without limit … the concern, it sees seems to me, is multiplied when it’s not only no limitation, but it’s something that the government kind of devised on its own.”
—Chief Justice Roberts

The Supreme Court heard oral arguments on April 18, 2017 in Kokesh v. SEC, No. 16-529, a case requiring the Court to decide a question with major implications for the remedies the SEC may seek in court: whether civil disgorgement is a “fine, penalty, or forfeiture” governed by a five-year statute of limitations under 28 U.S.C § 2462 or is remedial in nature and therefore not subject to any statute of limitations.

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Independent Directors: New Class of 2016

This post is based on a publication from the EY Center for Board Matters.

Today’s boards are navigating disruptive changes, a dynamic geopolitical and regulatory environment, shifting consumer and workforce demographics, and shareholder activist activity amid a push by leading investors for a more long-term strategic focus. These demands highlight the critical role boards play in helping companies manage risk and seize strategic opportunities.

To see how boards are keeping current and strategically aligning board composition to company needs, we reviewed the qualifications and characteristics of independent directors who were elected to Fortune 100 boards for the first time in 2016 (Fortune 100 Class of 2016). We also looked at some of the same data for the Russell 3000, and we highlight those findings at the end of this post.

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Independent Directors and Controlling Shareholders

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. Assaf Hamdani is the Wachtell, Lipton, Rosen & Katz Professor of Corporate Law at Hebrew University of Jerusalem. This post is based on their Article, Independent Directors and Controlling Shareholders, forthcoming in the University of Pennsylvania Law Review. The Article is part of the research undertaken by the Controlling Shareholders Project of the Program on Corporate Governance.

Independent directors are an important feature of modern corporate law and courts and lawmakers around the world increasingly rely on these directors to protect investors from controlling shareholder opportunism. In our Article, Independent Directors and Controlling Shareholders, forthcoming in the University of Pennsylvania Law Review, we examine this reliance. We show that the existing director-election regime significantly undermines the ability of independent directors to effectively perform their oversight role.

Both the election and retention of independent directors normally depend on the controlling shareholders. As a result, these directors have incentives to go along with controllers’ wishes, or, at least, inadequate incentives to protect public investors.

To induce independent directors to perform their oversight role, we argue, some independent directors should be accountable to public investors. This can be achieved by empowering investors to determine or at least substantially influence the election or retention of these directors. These “enhanced-independence” directors should play a key role in vetting “conflicted decisions,” where the interests of the controller and public investors substantially diverge, but not have a special role with respect to other corporate issues. Enhancing the independence of some directors would substantially improve the protection of public investors without undermining the ability of the controller to set the firm’s strategy.

We explain how the Delaware courts, as well as other lawmakers in the United States and around the world, can introduce or encourage enhanced-independence arrangements. Our analysis offers a framework of director election rules that allows policymakers to produce the precise balance of power between controlling shareholders and public investors that they find appropriate. We also analyze the proper role of enhanced-independence directors as well as respond to objections to their use. Overall, we show that relying on enhanced-independence directors, rather than independent directors whose election fully depend on the controller, can provide a better foundation for investor protection in controlled companies.

We do not argue that independent directors should play a key role in protecting public investors at controlled companies. Some may believe that market forces can discourage controller opportunism. Others may find other measures—such as public enforcement or approval by minority shareholders—to be necessary or effective in enhancing investor protection. We take as a given that corporate law has long substantially relied on independent directors in controlled companies to protect public investors in cases of controller conflicts. Given this pervasive reliance on independent directors, our contribution is twofold. First, we show that, by itself, approval by independent directors who serve at the pleasure of the controller cannot serve as an effective device for vetting conflicted decisions. Second, we analyze how to turn independent directors into more effective guardians of the interests of public investors in conflicted decisions.

Below we outline in more detail the analysis of the Article:

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Uncertainty on the Application of Unocal to Corwin Transactions: Paramount Gold & Silver

Gail Weinstein is special counsel and Steven Epstein is a partner at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Epstein, Warren S. de Wied, Scott B. LuftglassPhilip Richter, and Robert C. Schwenkel. This post is part of the Delaware law series; links to other posts in the series are available here.

In Paramount Gold and Silver Stockholders Litigation (April 13, 2017), the shareholder-plaintiffs claimed that the directors of Paramount Gold and Silver Corporation had breached their fiduciary duties by agreeing to an unreasonable “deal protection device” in connection with the merger pursuant to which Paramount was being acquired by Coeur Mining, Inc. Specifically, the plaintiffs contended that a royalty payment to be paid by Coeur was effectively a “second termination fee” that, when combined with the termination fee included in the merger agreement, was an unreasonably high fee that could deter a potential topping bid. The plaintiffs also argued that the Paramount directors had breached their fiduciary duties by “rushing” the sale process and not negotiating for a pre-signing auction of the company or a post-signing go-shop, and had acted in bad faith in agreeing to the unreasonable deal protection provisions and in providing stockholders with inadequate disclosure.

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