Monthly Archives: July 2017

Have SEC ALJs Been Operating Contrary to the U.S. Constitution?

Sarah A. Good is partner and co-leader of the securities litigation and enforcement team and Laura C. Hurtado is a senior associate at Pillsbury Winthrop Shaw Pittman LLP. This post is based on a Pillsbury publication authored by Ms. Good and Ms. Hurtado.

The District of Columbia Circuit Court of Appeals’ earlier decision in Lucia v. SEC that U.S. Securities and Exchange Commission (SEC) administrative law judges (ALJs) are employees who are not subject to the Appointments Clause of the U.S. Constitution will stand after a ten-judge en banc panel of the Court deadlocked on the issue, resulting in a one-page per curiam order on June 26, 2017, denying Raymond J. Lucia’s petition for review. See Lucia v. SEC, No. 15-1345 (D.C. Cir. June 26, 2017) (noting Chief Judge Merrick Garland did not participate in this matter). It is undisputed that SEC ALJs are selected by the SEC’s Office of Administrative Law Judges and not by the President. Thus, a determination that SEC ALJs are “Officers” (as opposed to mere employees) would mean they are subject to the Appointments Clause and that their selection by someone other than the President renders their appointments unconstitutional.

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What Do Measures of Real-Time Corporate Sales Tell Us About Earnings Surprises and Post-Announcement Returns?

Namho Kang is Assistant Professor of Finance at the University of Connecticut. This post is based on a recent paper authored by Professor Kang; Kenneth A. Froot, Research Associate at the National Bureau of Economic Research; Gideon Ozik, Affiliate Professor of Finance at EDHEC Business School; and Ronnie Sadka, Professor of Finance at Boston College Carroll School of Management.

The information asymmetry around earnings announcements has long been the center of finance and accounting research. At the time of an earnings announcement, managers have information not only about their firm’s performance over the last quarter (“within quarter”) but also about performance since the quarter-end (“post quarter”). The announced numbers and the disclosures they rely on help remove within-quarter information asymmetries between managers and external market participants. But these accounting disclosures cannot eliminate any post-quarter information asymmetries that managers could possess. Additional tools—discretionary accruals, formal guidance, and informal call tone—have therefore evolved wherein managers have the opportunity to convey post-quarter information in the current quarterly announcement. Are these discretionary tools, whose transmitted content is difficult to verify, used in the interests of shareholders, or could they instead be used against shareholders, in the interests of managers?

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The Value of the Shareholder Proposal Process

Julie Gorte, Ph.D., is Senior Vice President for Sustainable Investing at Pax World Management; Tim Smith is Director of ESG Shareowner Engagement at Walden Asset Management. Additional posts on the CHOICE Act are available here.

Early in June, the House of Representatives passed a piece of legislation, dubbed the Financial CHOICE Act, which would gut much of Dodd-Frank. One of its provisions would make it impossible for all but the largest investors to file shareholder proposals by requiring that investors must hold at least one percent of the outstanding shares for three years in order to file a proposal. This would remove a key tool that investors use to communicate with corporate boards.

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U.S. Supreme Court Rules That Class Action Tolling Does Not Apply to Statutes of Repose

Brad S. Karp is chairman and partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Karp, Charles E. Davidow, Andrew J. Ehrlich, Daniel J. Kramer, Audra J. Soloway and Daniel J. Juceam.

On June 26, 2017, the U.S. Supreme Court decided in California Public Employees’ Retirement System v. ANZ Securities, Inc., No. 16-373 (U.S.), that the class action tolling doctrine established in American Pipe & Construction Co. v. Utah, 414 U.S. 538 (1974), does not extend to the three-year statute of repose under Section 13 of the Securities Act of 1933 (the “Securities Act”).

The Supreme Court has now resolved a nationwide split of authority as to whether class action tolling under American Pipe applies to statutes of repose. This ruling will preserve and enforce defendants’ right of repose in Securities Act cases. Because statutes of repose are not tolled by the filing of a class action complaint, plaintiffs who wish to file an opt-out action must do so before the statute of repose has expired or else their individual claims will be extinguished—even if the plaintiff is a putative class member in an ongoing class action. This decision is likely to limit the ability of institutional investors to employ a strategy of remaining as absent class members in securities class actions for years until a settlement is reached, only then to opt out and seek a premium for themselves by threatening defendants with a continuation of the litigation.

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Lawyer CEOs

Irena Hutton is Associate Professor of Finance at Florida State University. This post is based on a recent paper authored by Professor Hutton; M. Todd Henderson, Professor of Law at the University of Chicago; Danling Jiang, Associate Professor of Finance at SUNY Stony Brook; and Matthew Pierson, Florida State University.

We contribute to the literature on the value of CEOs with specialized professional skills by examining the effect of CEOs with law degrees on corporate litigation. We hypothesized that the combination of legal training and acquired risk aversion makes lawyer CEOs effective at managing corporate litigation risk.

We identify the educational background of about 3,500 CEOs paired to nearly 2,400 publicly-traded firms in the S&P 1500. In this sample about 9 percent of CEOs have law degrees. This non-trivial number of lawyers in top executive positions that are customarily held by individuals with business degrees suggests that legal training has value in the executive labor market.

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Appraisal Practice Points Post-SWS

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, Brian T. ManginoRobert C. Schwenkel, Andrea Gede-Lange, and David L. Shaw. This post is part of the Delaware law series; links to other posts in the series are available here.

As we discussed in our post last week, the Delaware Court of Chancery, in its SWS decision issued May 30, 2017, relying on a discounted cash flow analysis, determined that the appraised “fair value” of SWS Group, Inc. (the “Company”) was 7.8% below the merger price paid by the acquiror, Hilltop Holdings, Inc. In our study of appraisal decisions since 2010, there have been only two other cases in which the court found fair value to be below the merger price—both of which involved unusual facts and, in one, the fair value determination was only nominally below the merger price.

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Second Circuit Rejects Shaw‘s “Extreme Departure Test”

Robert Loeb and Robert Stern are partners at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Loeb, Mr. Stern, and Jeremy Peterman.

[On June 21] in Stadnick v. Vivint Solarthe Second Circuit provided important guidance for determining when an omission in a registration statement is material for purposes of a Section 11 claim. The decision holds that the materiality of an omission is not determined by asking whether the omitted information constitutes an “extreme departure from the range of results which could be anticipated,” as the First Circuit did in Shaw v. Digital Equipment Corp., 82 F.3d 1194, 1210 (1st Cir. 1996) (emphasis added), but rather by asking whether the reasonable investor would view the omission as “significantly alter[ing] the ‘total mix’ of information made available.” DeMaria v. Anderson, 318 F.3d 170, 180 (2d Cir. 2003) (quoting TSC Indus., Inc. v. Northway, Inc., 426 U.S. 428, 449 (1976)).

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2017 Proxy Season Review

Mark Manoff is Americas Vice Chair and Stephen W. Klemash is a Partner with the EY Center for Board Matters. This post is based on a publication from the EY Center for Board Matters by Mr. Manoff and Mr. Klemash.

Amid regulatory and legislative uncertainty, investors remain committed to holding boards, and themselves, to higher levels of accountability, transparency and engagement. The 2017 proxy season is marked by the launch of a historic US stewardship code and the emergence of proxy access as standard practice across large companies.

These developments unite many leading investors behind common governance and stewardship principles and encourage other investors to take a more active approach to stewardship responsibilities. They also grant investors more influence over the companies they own.

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British Prosecutors Criminally Charge Global Bank and Former Top Executives

John F. Savarese is a partner and Noah B. Yavitz is an associate at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Savarese and Mr. Yavitz.

Earlier this week, the United Kingdom’s Serious Fraud Office (“SFO”) charged Barclays, its former CEO, and three other former top executives with criminal fraud. The prosecution stems from a long-running inquiry into whether Barclays failed to adequately disclose £322 million paid to Qatari investors in late 2008, during a period when the bank received billions in funding from affiliates of the Qatari government. Investigators reportedly examined whether Barclays and its former executives arranged for portions of the payments to be funneled into the Qatari bailout, in violation of British law. Despite this novel action, market reaction was muted, with Barclays’ shares trading in line with other U.K. banks.

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How Your Board Can Be Ready for Crisis

Paula Loop is Leader of the Governance Insights Center at PricewaterhouseCoopers LLP. This post is based on a PwC publication by Ms. Loop.

Most companies experience at least one crisis every four or five years. Regularly discussing the crisis plan with management and the results from testing it lets the board understand where there might be gaps in readiness. And it’s always better to know about those gaps before a crisis hits. Directors themselves might even need to take a more active role if a crisis spins out of control. Is your board prepared?

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