Monthly Archives: August 2017

Next Proxy Access Battlefront? SEC Rejects Attempt to Exclude Proxy Access Shareholder Proposal

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu. Related research from the Program on Corporate Governance includes Lucian Bebchuk’s The Case for Shareholder Access to the Ballot, and Private Ordering and the Proxy Access Debate by Lucian Bebchuk and Scott Hirst (discussed on the Forum here).

The 2017 season that just passed witnessed two kinds of proposals asking companies to amend existing proxy access bylaws. The first type sent to companies earlier in the season sought to amend several provisions, including requesting that the number of board seats available for nomination increase to 25% of the board instead of 20%, and also that an unlimited number of shareholders be allowed to aggregate their holdings to form a nominating group. Companies that had adopted the standard proxy access formulation of permitting a shareholder or a group of no more than 20 shareholders owning 3% or more for three years to nominate up to 20% of the board (known by the shorthand “3/3/20/20”) were denied no-action relief on the basis of substantial implementation. None of the proposals received majority support when voted on at annual meetings.

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Temporary Relief Under the Volcker Rule to Foreign Banks With Respect to Certain Foreign Private Investment Funds

Reena Sahni is a partner at Shearman & Sterling LLP. This post is based on a Shearman publication by Ms. Sahni, Nathan Greene, Bradley Sabel, Timothy Byrne, Sylvia Favretto and Christina Berlin.

The US federal banking agencies with responsibility for enforcing the Volcker Rule have issued temporary one year no-action relief with respect to certain private non-US investment funds that are not “covered funds” for purposes of the Volcker Rule, but that could be treated as “banking entities” for purposes of the Volcker Rule due to a foreign bank’s investment in or governance arrangements with the fund. [1] Such funds are referred to as “qualifying foreign excluded funds.” The relief generally provides that the US banking agencies will not take action against a foreign bank or treat a qualifying foreign excluded fund as a banking entity based on the foreign bank’s acquisition or retention of an ownership interest in, or sponsorship of, the qualifying foreign excluded fund.

The no-action relief is significant because being treated as a banking entity would cause the non-US fund itself to be subject to the Volcker Rule’s limitations on proprietary trading and other restrictions. Such limitations and restrictions could significantly impair the operations of a fund whose purpose is to engage in making proprietary investments for clients in the same manner as a covered fund.

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Weekly Roundup: August 4–10, 2017


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This roundup contains a collection of the posts published on the Forum during the week of August 4–10, 2017.


DFC Global: Delaware Supreme Court Strongly Endorses Reliance on Merger Price









How “Shareholder Value” is Killing Innovation







2017 Mid-Year Securities Enforcement Update

This post is based on a publication from Gibson, Dunn & Crutcher LLP.

The first half of 2017 was unusually quiet for the SEC’s Division of Enforcement. This undoubtedly stemmed from the change in administration following the November election. With Chair Mary Jo White and various other members of the agency’s senior leadership (including the Director of the Division of Enforcement) stepping down, and only two sitting Commissioners for much of the period, authorization of new cases slowed somewhat.

Pending the Senate’s confirmation of the new Chair in May, the SEC generally avoided novel or controversial matters. In contrast to recent years, there were no groundbreaking cases involving private investment funds (and, indeed, few investment adviser cases, period) or headline-generating sweeping enforcement initiatives. On the other hand, the trend towards a growing number of public company financial reporting cases continued unabated, though such cases remained on the smaller side. Insider trading cases likewise continued apace. But much of the action was in the realm of non-controversial retail fraud—Ponzi schemes, penny stock pump and dump schemes, and so forth.

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SEC Confirms That Some Initial Coin Offerings Are Illegal Unregistered Securities Offerings

Joseph A. Hall is a partner and Reuben Grinberg is an associate at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Mr. Hall, Mr. Grinberg, John L. Douglas, Michael Kaplan, Byron B. Rooney, and Margaret E. Tahyar.

In a much-anticipated action, on July 25 the SEC issued a Section 21(a) report of its investigation into an offering of digital tokens by “The DAO,” an unincorporated virtual organization. Though declining to take enforcement action against The DAO, the SEC used the opportunity to warn others engaged in similar activities that an unregistered sale of blockchain tokens can, depending on the circumstances, be an illegal public offering of securities. Simultaneously, the SEC issued a bulletin warning investors about such sales, often called “initial coin offerings” or ICOs. The DAO 21(a) report focused on a fact-pattern where the classic test for a “security” under federal law, announced in the Supreme Court’s 1946 case SEC v. W.J. Howey Co., was easily met: the tokens were sold for value and represented ownership interests in a common enterprise, and the purchasers had an expectation of profit from the efforts of others. And the tokens were distributed in a manner that bore the hallmarks of a traditional securities offering.

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Investment Banking Relationships and Analyst Affiliation Bias

Stephannie Larocque is Notre Dame Associate Professor of Accountancy at University of Notre Dame Mendoza College of Business. This post is based on a recent article, forthcoming in the Journal of Financial Economics, authored by Professor Larocque; Shane Corwin, Professor of Finance at University of Notre Dame Mendoza College of Business; and Michael Stegemoller, Associate Professor of Finance at Baylor University Hankamer School of Business.

In our study Investment Banking Relationships and Analyst Affiliation Bias: The Impact of the Global Settlement on Sanctioned and Non-Sanctioned Banks, we examine the impact of the 2003 Global Analyst Research Settlement on affiliation bias in sell-side analyst recommendations. Affiliation bias refers to the well-known finding that analysts are overly optimistic when their employers have underwriting relationships with covered firms. Using a broad measure of investment bank-firm relationships, we find a substantial reduction in analyst affiliation bias following the settlement for the 12 sanctioned banks. However, we find strong evidence of bias both before and after the settlement for affiliated analysts at non-sanctioned banks. Our results suggest that the settlement led to an increase in the expected costs of issuing biased coverage at sanctioned banks, while concurrent self-regulatory organization (SRO) rule changes were largely ineffective at reducing the influence of investment banking on analyst research at large non-sanctioned banks.

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Why Financialized Corporate Governance Works Poorly

Anat R. Admati is George G.C. Parker Professor of Finance and Economics at Stanford Graduate School of Business. This post is based on Professor Admati’s recent article, published in the Journal of Economic Perspectives.

Corporate finance textbooks describe shareholders as the owners of a corporation and teach future managers how to create “shareholder value.” Increasing shareholder value is generally seen synonymous with increasing “shareholder wealth” as measured by the market value of their shares. The academic literature views conflicts between managers and shareholders as the main challenge of corporate governance. Common practices to align managers’ interests with those of shareholders include paying managers with stocks or options and rewarding them based on financial metrics such as (accounting) profits and return on equity.

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Report Finds Shareholder Activism Evolving from Niche Strategy to Acceptance Across Investors

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu. Related research from the Program on Corporate Governance includes The Long-Term Effects of Hedge Fund Activism by Lucian Bebchuk, Alon Brav, and Wei Jiang (discussed on the Forum here); The Myth that Insulating Boards Serves Long-Term Value by Lucian Bebchuk (discussed on the Forum here); and Who Bleeds When the Wolves Bite? A Flesh-and-Blood Perspective on Hedge Fund Activism and Our Strange Corporate Governance System by Leo E. Strine, Jr. (discussed on the Forum here).

With 371 public campaigns against U.S. companies, according to a recent J.P. Morgan report on the new normal in shareholder activism, the 2017 proxy season proved to be fairly active. Although only 19 of the 54 actual contests that were completed by June went to vote, while the same number settled and the remainder were withdrawn, activists were able to obtain at least one board seat 46% of the time, compared to 41% last year.

Settlements continue to be on the rise, even though several major institutional investors have urged companies not to agree with activists so quickly and at least make public the reasons for the settlement. We previously talked about State Street’s policy here. This season, the New York City Comptroller’s office initiated a “vote no” campaign against a director who was appointed as part of the energy company’s settlement with Elliot, questioning the director’s qualifications, especially in light of his prior public positions on climate change.

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Blockchain and Initial Coin Offerings: SEC Provides First U.S. Securities Law Guidance

Gregory J. Nowak and Joseph C. Guagliardo are partners at Pepper Hamilton LLP. This post is based on a Pepper publication by Mr. Nowak, Mr. Guagliardo, Robert A. Friedel, and Todd R. Kornfeld.

Many initial coin offerings (ICOs) have recently raised large amounts of capital without the regulatory constraints of traditional initial public offerings (IPOs) and other capital-raising strategies. On July 25, the U.S. Securities and Exchange Commission (SEC) reminded the industry and so-called “disruptors” that federal securities laws may apply to some of these offerings.

ICOs have been described as a new business construct that allows an organization launching a business based on blockchain technology to raise operating funds without the regulatory constraints and requirements that are applied to a traditional underwritten IPO. Being apparently outside the regulatory framework made ICOs very attractive as a fundraising tool. The SEC has made it clear, however, that some ICOs are subject to the full panoply of the securities laws. ICO market participants must now discern between those ICOs that may continue without regulatory constraints without missing a beat and those that must conform to the U.S. securities laws. This treatment is not elective or optional—if the ICO involves the offering of a security, the ICO must be done in accordance with established securities law requirements or proceed under an exemption if available.

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How “Shareholder Value” is Killing Innovation

William Lazonick is Professor of Economics at University of Massachusetts Lowell. This post is based on his recent paper.

Conventional wisdom holds that the primary function of the stock market is to raise cash that companies use to invest in productive capabilities. The conventional wisdom is wrong. Academic research on corporate finance shows that, compared with other sources of funds, stock markets in advanced countries have in fact been insignificant suppliers of capital to corporations. What, then, is their function? If we are to understand employment opportunity, income distribution, and productivity growth, we need an accurate analysis of the role of the stock market in the corporate economy.

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