Monthly Archives: September 2017

SEC’s Latest Guidance on Pay Ratio Rule

The following post is based on a publication from Davis Polk & Wardwell LLP.

On September 21, 2017, the SEC issued guidance to assist companies in their efforts to comply with the pay ratio disclosure requirement mandated by the Dodd-Frank Act. Overall, the guidance should come as a relief to many companies. It came in three parts:

  • The Commission’s interpretative guidance that clarifies:
    • A basis for excluding independent contractors, by allowing companies to use a widely recognized test that they otherwise use under other laws and regulations to determine whether their workers are “employees;”
    • The ability to use appropriate existing internal records, such as tax or payroll records, in identifying the median employee and in determinations about the inclusion of non-U.S. employees; and
    • The significant flexibility in methodologies available to identify a company’s median employee and in calculating his or her annual compensation.
  • Staff guidance that includes detailed examples illustrating how reasonable estimates and statistical methodologies may be used; and
  • Updated Compliance and Disclosure Interpretations (C&DIs), which, among other things, withdraws the prior C&DI on independent contractors.

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Merger Negotiations in the Shadow of Judicial Appraisal

Brian Broughman is Professor of Law at Indiana University; Audra Boone is the C.R. Williams Professor in Financial Services at the Neeley School of Business at Texas Christian University; and Antonio Macias is Assistant Professor of Finance at Baylor University. This post is based on a recent paper authored by Professor Broughman, Professor Boone, and Professor Macias, and is part of the Delaware law series; links to other posts in the series are available here.

As the volume of merger appraisal litigation has exploded over the last decade, so too has the debate over the desirability of appraisal and how this remedy should be structured. Much of this debate is based on untested assertions about appraisal’s ex-ante effect on the structure and pricing of takeovers. Proponents of appraisal argue that it creates a credible reserve price that benefits target shareholders through higher upfront acquisition premiums. Critics, in contrast claim that a strong appraisal regime only benefits speculators engaged in appraisal arbitrage, which would ultimately “reduce deal flow, and lead to lower prices being paid to selling shareholders.” [1] In a new empirical study, we test these competing explanations to better understand the ex ante impact of appraisal on merger negotiations.

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Newly Adopted Fed Rules: Limiting Buy-Side Remedies in Financial Institutions

Leigh Fraser is Partner and Molly Moore is Counsel at Ropes & Gray LLP.

The Board of Governors of the Federal Reserve System (the “Board”) has adopted final rules [1] that represent a significant shift in the terms of over-the-counter derivatives, repurchase and reverse repurchase transactions and securities lending transactions. These rules will require buy-side firms to relinquish certain termination rights that have long been part of bankruptcy “safe harbors” for these types of contracts under bankruptcy and insolvency regimes in many jurisdictions in order to continue trading with large financial institutions. The new rules will impact institutional investors, hedge funds, mutual funds, sovereign wealth funds and other buy-side market participants who enter into over-the-counter derivatives, repurchase and reverse repurchase transactions and securities lending transactions with large financial institutions.

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President Trump Blocks Chinese Acquisition of Lattice Semiconductor Corporation

Michael Gershberg is a Partner and Justin Schenck is an associate at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Mr. Gershberg and Mr. Schenck. Additional posts addressing legal and financial implications of the Trump administration are available here.

On September 13, 2017, President Trump issued an Executive Order blocking the $1.3 billion acquisition of a U.S. semiconductor manufacturer, Lattice Semiconductor Corporation (“Lattice”), by a Chinese government-backed private equity fund, Canyon Bridge Capital Partners (“Canyon Bridge”). The order followed a recommendation from the Committee on Foreign Investment in the United States (“CFIUS”) that the transaction posed a risk to national security. This marks only the fourth time that a U.S. President has ordered a transaction blocked or unwound due to national security concerns, although it is the second blocked Chinese acquisition of a U.S. chipmaker within a year (President Obama blocked a Chinese acquisition of the U.S. business of German semiconductor company Aixtron SE in December 2016). This development reflects the recent enhanced scrutiny by the U.S. government of Chinese investment in U.S. business, particularly in the high-tech and semiconductor industries. More generally, it is a reminder of the uncertainty of current U.S. foreign investment policy and the regulatory risks facing certain transactions by foreign buyers.

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New Disclosure Requirements in Form ADV

This post is based on a Mayer Brown LLP publication by Stephanie M. MonacoAmy Ward PershkowLeslie S. Cruz, and Peter M. McCamman.

The compliance date is fast approaching for the US Securities and Exchange Commission’s (“SEC”) recently adopted amendments to Part 1A of Form ADV. Initial or amended Form ADVs filed on or after October 1, 2017 (with limited exception, as discussed below) must comply with the amendments. The Part 1A amendments require advisers to provide additional information about their business, including information about their separately managed accounts (“SMAs”), social media activity, branch offices, source of chief compliance officer (“CCO”) compensation, and participation in wrap fee programs. The amendments also codify the “relying adviser” method by which private fund advisers operating as a single advisory business can register using a single Form ADV, referred to as “umbrella” registration.

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Activism: The State of Play

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton publication by Mr. Lipton. Additional posts by Martin Lipton on short-termism and corporate governance are available here. 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).

As we approach the start of the 2018 proxy season, developments since January 2015 prompt a brief review of the state of play.

  • There has been no slowdown in the U.S.; there has been a significant increase in other countries.
  • Perhaps the most cogent description of what can be expected is contained in a must-read Bloomberg article, “The World’s Most Feared Investor“. “Aggressive, tenacious and litigious to a fault, Paul Singer may be the most feared activist investor in the world—by hedge fund rivals, companies and even countries. Singer’s Elliott Management Corp., which manages $34 billion of assets, has rarely been out of the headlines in the past 18 months. There’s little indication that will change soon.”

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Forging Ahead with “Entire Fairness,” or Playing it Safer (Procedurally Speaking)

Paul S. Scrivano and Jane D. Goldstein are partners and Sarah H. Young is an associate at Ropes & Gray LLP. This post is based on two Ropes & Gray publications by Mr. Scrivano, Ms. Goldstein, and Ms. Young. This post is part of the Delaware law series; links to other posts in the series are available here. Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders, by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here).

Controlling stockholder buyouts of Delaware corporations are generally scrutinized under the lens of “entire fairness” to determine whether the transaction was the product of fair dealing and fair price. Notably, however, under M&F Worldwide[1] the Delaware Supreme Court confirmed that a target corporation’s use at the outset of a transaction of a special committee of disinterested directors and an informed vote of a majority of the minority of the target’s stockholders, among other factors, will result in a transaction that would be reviewed under the deferential business judgment rule instead of the stringent entire fairness test. The burden of proving entire fairness and the perception of a significant risk of a negative outcome under an entire fairness review frequently results in deal participants allowing the fate of the transaction to be determined not only by a special committee, but, even more critically, by the majority of the minority stockholder vote. However, the recent Delaware Chancery Court decision in ACP Master, Ltd. v. Sprint Corp. / ACP Master, Ltd. v. Clearwire Corp. highlights that entire fairness may not be fatal, and that a finding of entire fairness may overcome earlier instances of conduct or process that may fall short or that otherwise had “flaws” and “blemishes.”

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Weekly Roundup: September 15–21, 2017


More from:

This roundup contains a collection of the posts published on the Forum during the week of September 15–21, 2017.


Better Directors or Distracted Directors? An International Analysis of Busy Boards







Reforms to UK Corporate Governance


Sharing the Lead: Examining the Causes and Consequences of Lead Independent Director Appointment



Delaware Blockchain Initiative: Revitalizing European Companies’ Funding Efforts

André Eggert is a partner and Yamila Eraso is a principal associate at Lacore Rechtsanwälte LLP. This post is based on a Lacore publication by Mr. Eggert and Ms. Eraso, and is part of the Delaware law series; links to other posts in the series are available here.

The amendments passed by the State of Delaware to the General Corporation Law (known as the DGCL) are the first tangible product of the well-known Delaware Blockchain Initiative (DBI or Initiative). This is just one step in a multi-milestone project engaged by the State of Delaware through the Delaware Secretary of State’s Global Delaware arm, in order to maintain Delaware’s leadership in the corporate world. [1]

Much has been written about the DBI and the impact it may have on U.S. corporate law. We agree that the Initiative is fundamentally changing the corporate panorama with its forward-thinking approach toward distributed ledger technology’s benefits and real-life uses. [2] So far, most of the discussion has focused primarily on the significant benefits that the DBI offers Delaware corporations in terms of corporate records, capitalization table maintenance, proxy voting and transactions settlement. These undoubtedly could prove transformative.

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Vanguard’s Investor Stewardship

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 Agency Problems of Institutional Investors, by Lucian Bebchuk, Alma Cohen, and Scott Hirst.

Vanguard cast more than 171,000 individual votes at nearly 13,000 companies in 68 countries for the 12-month period ending June 30th, making the firm one of the most influential investors in public companies. Its recent Investor Stewardship Report and letter to CEOs highlights two key governance priorities.

Engagement is a vital component of Vanguard’s approach, as it held 954 engagements with 680 companies. Companies should be aware when talking with Vanguard that the topics discussed more than half of those times include the composition of boards, governance structures and executive compensation. While board diversity has long been an important focus, the report states that companies should be prepared to discuss, in their public disclosure as well, their plans to incorporate diversity over time into their board composition.

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