Monthly Archives: June 2017

Below-the-Merger-Price Appraisal Results and the SWS Decision

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

In In re Appraisal of SWS Group Inc. (May 30, 2017), the Delaware Court of Chancery, relying on a discounted cash flow analysis, determined that the appraised “fair value” of SWS Group, Inc. (the “Company”) was below the merger price paid by acquiror Hilltop Holdings, Inc. The court’s determination of fair value was 7.8% below the value of the merger consideration at closing (about 19% below the value of the merger consideration at the time the merger agreement was announced and the hedge-fund petitioners decided to acquire their SWS shares).


Is Board Compensation Excessive?

Mustafa A. Dah is an Assistant Professor of Finance at the Lebanese American University and Melissa B. Frye is an Associate Professor of Finance at the University of Central Florida. This post is based on a recent article by Professor Dah and Professor Frye.

In our article, Is Board Compensation Excessive? (forthcoming in the Journal of Corporate Finance), we examine whether board members are overpaid. We also consider whether excessive compensation of directors affects their ability to monitor. We address these issues by carefully constructing a model to predict director compensation. We then identify the presence and magnitude of over- and undercompensation and examine whether superfluous director compensation affects the directors’ monitoring incentives.


Déjà Vu: Model Risks in the Financial Choice Act

Beckwith B. Miller is a Managing Member and Howard R. Sutherland is a Member of the Advisory Board at Ethics Metrics LLC. This post is based on an Ethics Metrics publication by Mr. Miller and Mr. Sutherland. Additional posts on the CHOICE Act are available here.

On June 8, 2017, the Financial Choice Act of 2017 was passed by the House of Representatives, following a CBO analysis dated May 10, 2017. But both the CBO analysis and the House bill fail to address model risks for depository institution holding companies (DIHCs) that date back to 1999 and the creation of large financial holding companies (FHCs) under the Gramm-Leach-Bliley Act.

Those unaddressed model risks reflect material information (MI) that is classified as confidential supervisory information (CSI) by federal bank regulations, and consequently is intentionally omitted from public disclosure for large DIHCs—although it is disclosed for small DIHCs. The result is a bifurcated and inefficient market for large DIHCs (total assets above $10 billion) with low default rates but a highly efficient and brutal market with high default rates for small DIHCs (total assets below $10 billion). Undisclosed MI includes formal enforcement actions (FEAs) targeting violations of safety and soundness, source of strength and the well-managed requirement.


A Modest Proposal? Treasury’s Report on Bank Regulation

Hugh C. Conroy, Jr. is Counsel and Patrick Fuller is Senior Attorney at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a recent Cleary Gottlieb publication by Mr. Conroy, Mr. Fuller, Michael Krimminger, Derek Bush, Katherine Mooney Carroll, and Allison Breault. Additional posts addressing legal and financial implications of the Trump administration are available here.

The Trump Administration’s latest substantive recommendations on modifications to the U.S. financial regulatory regime strike a modest and practical tone, rather than “doing a big number” on the current state of regulation. On June 12, 2017, the Treasury Department released the first of several reports in response to President Trump’s Executive Order 13772, which called on the Treasury Department to report on laws, regulations and other government policies that are inconsistent with enumerated core principles for regulating the U.S. financial system. The Treasury Department’s Report covers depository institutions—generally “banking.” Subsequent reports will cover capital markets, asset management and insurance industries and products and non-bank financial institutions (including fintech).


Treasury Department Issues Recommendations on Reforming the U.S. Financial System

Lee A. Meyerson is partner and head of Financial Institutions Practice and Spencer A. Sloan is an associate at Simpson, Thacher & Bartlett LLP. This post is based on a Simpson Thacher publication by Mr. Meyerson, Mr. Sloan, and Mark J. Chorazak.

On June 12, 2017, the U.S. Department of the Treasury issued recommendations for streamlining banking regulation and changing key features of the Dodd-Frank Act and other measures taken by regulators following the 2008 financial crisis. The recommendations are included in the first of a series of reports to President Trump pursuant to an Executive Order issued on February 3.


What Is the Business of Business?

Andreas Nilsson is Founder and CEO of Sonanz GmbH and David T. Robinson is J. Rex Fuqua Distinguished Professor of International Management at The Fuqua School of Business at Duke University. This post is based on a recent paper by Mr. Nilsson and Professor Robinson.

In 1970, Milton Friedman famously argued that the only social responsibility of business was to maximize profits. These profits, if only returned to the firm’s owners (the shareholders, on whose behalf the management should rightfully act), could be put to charitable purposes as shareholders saw fit. By essentially delegating the task of collecting and disbursing taxes to corporate managers, in Friedman’s analysis, shareholders allowed themselves to unwittingly become pawns in a larger battle to derail the capitalist system. Levitt (1958) captured this perspective succinctly when he wrote, “the business of business is profits.”


Weekly Roundup: June 16–June 22, 2017

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This roundup contains a collection of the posts published on the Forum during the week of June 16–June 22, 2017.

Skin or Skim? Inside Investment and Hedge Fund Performance

House Approves Financial CHOICE Act

This post is based on a Paul, Weiss, Rifkind, Wharton & Garrison LLP publication by Mark S. Bergman, Roberto J. Gonzalez, David Huntington, Raphael M. Russo, and Hank Michael.

On June 8, the House of Representatives passed a revised version of the Financial CHOICE Act (the “Act,” available here) in a 233-186 vote. The Act would repeal or modify significant portions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and addresses a wide range of other financial regulations. This bill is the second version of a reform bill that was introduced last year by committee Chairman Jeb Hensarling (R-Texas). In many respects, the Act echoes priorities raised in President Trump’s executive order signed on February 3 (see our client alert here) setting forth “Core Principles” intended to guide the regulation of the U.S. financial system and in his presidential memoranda calling for review of certain features of the Dodd-Frank Act (see our client alert here).

A variety of interest groups, including the Council of Institutional Investors, have expressed strong opposition to the bill, and the chances of the Senate passing the bill in its current form appear low. Nevertheless, the bill will serve as an important reference point in the negotiation of legislation able to attract both House and Senate support. Any final legislation would likely include provisions designed to encourage capital markets activities in the United States and could also address certain provisions of the Dodd-Frank Act, such as those relating to pay ratio and conflict mineral disclosure, that have been the subject of substantial controversy and litigation.

Key provisions of the Act are summarized below. READ MORE »

Balancing the Tension: Current Topics in Executive Compensation

Ira Kay is a Managing Partner at Pay Governance LLC. This post is based on a Pay Governance publication by Mr. Kay, Steve Pakela and Lane Ringlee. 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).

Executive compensation programs at major U.S. companies are crucial for economic success—both for the companies and the economy at large. The topic is complex and controversial, however, with criticisms aimed at the magnitude of pay packages and purported misalignment of compensation with corporate performance and shareholder returns. This contentious environment has been exacerbated by a confluence of proxy advisor influence, regulatory oversight, union criticism, and media scrutiny. The broader income inequality narrative has drawn attention to the compensation provided to U.S. company leadership, exposing companies, boards, and executives to reputational risk. As a result, compensation committees are increasingly struggling to “balance the tension,” motivating executives to increase shareholder value in this regulatory and economic environment.


Delaware Court of Chancery Finds Vote Coercive and Insufficient to Cleanse Board Action

Scott A. Barshay is partner and Global Head of the Mergers & Acquisitions Practice at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul Weiss memorandum by Mr. Barshay, Ariel J. DeckelbaumRoss A. FieldstonJustin G. HamillStephen P. Lamb, and Jeffrey D. Marell. This post is part of the Delaware law series; links to other posts in the series are available here.

In a recent decision in Sciabacucchi v. Liberty Broadband Corporation, Vice Chancellor Glasscock of the Delaware Court of Chancery held that a stockholder vote approving both stock issuances and the grant of a voting proxy to the company’s largest stockholder was “structurally coerced” and therefore insufficient to cleanse board action and invoke business judgment review under Corwin v. KKR Financial Holdings LLC. The court determined that while “inherent coercion” did not exist because the large stockholder did not control the company, the vote was nevertheless structurally coerced as the stockholders were essentially forced to approve those transactions to avoid a detriment, and not due to the transactions themselves being beneficial to the corporation.


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