Monthly Archives: October 2017

New Special Study of the Securities Markets: Institutional Intermediaries

Allen Ferrell is Harvey Greenfield Professor of Securities Law at Harvard Law School and John D. Morley is Professor of Law at Yale Law School. This post is based on their recent paper.

This paper, written for the Conference on the New Special Study of Securities Markets at Columbia Law School, identifies and reviews the key regulatory challenges posed by institutional intermediaries in America’s capital markets. We cover investment funds, credit-rating agencies and broker-dealers. We review existing research, identify new areas of research and suggest possibilities for legal reform.

We begin with investment funds, focusing primarily on publicly registered investment companies, such as open-end mutual funds. The first task of the regulation of these funds is to define what exactly an investment fund is. And on this score the existing regulation is doing poorly. The industry’s principal regulatory statute, the Investment Company Act of 1940, defines an “investment company” (the statute’s name for what is commonly known as an “investment fund”) as a company that holds a lot of securities, rather than a company that holds operating assets like land and intellectual property. This definition is impractical and often has the unintended effect of treating operating companies—including Microsoft and Yahoo!—as though they were the legal equivalent of mutual funds. We suggest that rather than focusing on securities ownership, the definition of an investment company should focus on organizational structure. The truly distinctive feature of an investment fund, we argue, is a fund’s unusual tendency to maintain a separate existence and a separate set of owners from the management company that operates it.

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Capable Boards and Value Creation

Edward D. HerlihyRichard K. Kim, and Matthew M. Guest are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Messrs. Herlihy, Kim, and Guest.

Directors of regulated financial institutions have exceedingly difficult jobs with many demands. The aftermath of the financial crisis led to countless new regulatory requirements and expectations, many of these unwritten and evolving based on political currents or varying views at different levels of the regulatory hierarchy. Governance processes and actions are examined and second-guessed like never before. For many companies, new and shifting compliance burdens tend to crowd out other business on board agendas.

At the same time, these boards have faced prolonged operating and economic challenges. Initially, defaults and delinquencies in loan portfolios and low interest rates choked financial performance. While these conditions have improved dramatically, many banks continue to face tepid loan growth. Others have encountered challenges in responsibly and profitably growing deposits. The best performing boards have responded throughout this period by demanding and overseeing more detailed and sophisticated strategic plans. The boards have then acted on these plans decisively, and remained committed to their plans even when confronting daunting obstacles.

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Proxy Season Legal Update

Laura D. Richman is counsel and Michael L. Hermsen is a partner at Mayer Brown LLP. This post is based on a Mayer Brown publication.

Advance planning is a key component of a successful proxy and annual reporting season. While work on proxy statements, annual reports and annual meetings typically kicks into high gear in the winter, autumn is the ideal time to begin preparations. This is especially important for the 2018 proxy season because this will be the first time that pay ratio disclosure will generally be required in proxy statements. This post provides an overview of key issues that companies should consider as they get ready for the upcoming 2018 proxy and annual reporting season.

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Cross-Border Reincorporations in the European Union: The Case for Comprehensive Harmonisation

Federico M. Mucciarelli is Reader in Financial Law at the University of London and Associate Professor at the University of Modena & Reggio Emilia. This post is based on a recent paper by Professor Mucciarelli; Carsten Gerner-Beuerle, Associate Professor of Law at the London School of Economics; Edmund‐Philipp Schuster, Associate Professor of Law at the London School of Economics; and Mathias Siems, Professor of Commercial Law at Durham University.

Can companies, incorporated under the law of an EU Member State, subject themselves to another Member State’s law without going through the process of liquidation in their original jurisdiction? Such operations are usually labelled “cross-border reincorporations”, or just “reincorporations”. Cross-border reincorporations and regulatory competition in EU company law has long been a focus of scholarly work in EU company law. The present work adds to previous studies a comparative analysis of all Member States of the European Union regarding rules on transfer of a company’s registered office and cross-border reincorporations. In particular, the question arises whether the freedom of establishment under the Treaty on the Functioning of the EU also covers the right to reincorporate in other Member States and, consequently, whether Member States should grant domestically incorporated companies the possibility of reincorporating under the law of a different jurisdiction and foreign companies the possibility of converting into domestic entities without liquidation. The answer is still unclear, despite recent decisions of the Court of Justice of the European Union. READ MORE »

Recent Cases on Lending Safeguards in Bankruptcy

Samuel A. Newman and Matthew K. Kelsey are partners at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Mr. Newman, Mr. Kelsey, Daniel B. Denny, and Brittany N. Schmeltz.

As discussed in our August 8, 2016 client alert, [1] lenders and borrowers continue to experiment with creative structures to prevent a bankruptcy filing. As discussed below, recent decisions clarify previous case law, develop the prevailing rules and highlight outstanding open issues.

I. Case Law Developments

In two recent cases, In re Lexington Hospitality Group, LLC [2] and Squire Court Partners LP v. Centerline Credit Enhanced Partners LP (In re Squire Court Partners LP)[3] bankruptcy courts continue to look past parties’ structures and have invalidated restrictions where the intent is to allow a lender to prevent or control its borrower’s ability to seek bankruptcy protection. These decisions, from Kentucky and Arkansas respectively, provide further guidance to lenders seeking to protect against the risks of bankruptcy.

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Do Clawback Adoptions Influence Capital Investments?

Gary C. Biddle is Professor of Financial Accounting at the University of Melbourne; Lilian H. Chan is Associate Professor of Accounting at the University of Hong Kong; and Jeong Hwan Joo is Assistant Professor of Accounting at the University of Hong Kong. This post is based on a recent paper by Professors Biddle, Chan, and Joo. Related research from the Program on Corporate Governance includes Rationalizing the DoddFrank Clawback by Jesse Fried (discussed on the Forum here).

This study presents evidence that capital investment choices are influenced by voluntary adoptions of clawback provisions that authorize boards of directors to recoup executive compensation based on financial results that are later restated. Restitutive clawbacks were sanctioned by Sarbanes-Oxley Act Section 304 in response to allegations in the early 2000s that executive compensation was boosted by financial misreporting. Despite lax enforcement by the U.S. Securities and Exchange Commission (SEC), U.S. listed firms voluntarily adopting clawback clauses rose from 19 in 2005 to 1,032 in 2012. Similar allegations arising during the 2008-2009 financial crisis motivated Dodd-Frank Act Section 954 to bar U.S. exchange listings by companies lacking clawback policies. A pending SEC rule to implement DFA 954 observes that “while these incentives could result in high-quality financial reporting that would benefit investors, they may also alter operating decisions of executive officers.” It also requests “comment on any effect the proposed requirements may have on efficiency, competition and capital formation (SEC 2015, 103-104).”

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Weekly Roundup: October 6–12, 2017


More from:

This roundup contains a collection of the posts published on the Forum during the week of October 6–12, 2017




Ambiguity and the Corporation: Group Disagreement and Underinvestment



Preventing the Next Data Breach



Telia’s $965 Million Global Bribery Settlement



So You Want to Buy a Stake in a Private Equity Manager?


2017 CPA-Zicklin Index



Fiduciary Principles and Delaware Corporation Law

Further Lessons From the P&G/Trian Proxy Fight

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. 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).

While the final results have not been announced and P&G has claimed victory (being disputed by Trian), both sides acknowledge that the vote was extremely close. This post assumes that P&G achieved a narrow victory. Key lessons are:

  • Confirms what has been assumed since Icahn/Apple and Trian/DuPont, no company is too big or too prominent to avoid activist attention.
  • Big company proxy fights are very expensive and put considerable pressure on major institutional investors and proxy advisors.
  • A board of directors of CEOs of major companies does not weigh heavily with major institutional investors and proxy advisors.
  • A large retail shareholder base does not guarantee company success in a proxy fight.
  • An activist with a track record of success in urging change in long-term strategy rather than financial engineering can gain support from proxy advisors and major institutional investors.
  • An activist with a multi-billion dollar investment is unlikely to sell the position after a close proxy fight and will continue to pressure the company on the issues it raised in the fight. Recognizing this, the P&G CEO, David Taylor, was quoted as saying, “We will continue to respectfully engage with Nelson Peltz, whose input we value.”
  • The company will be under increased pressure from shareholders to justify the strategy it defended in its proxy material. CalSTRS was quoted as saying, “Nearly 50 percent of shareholders—including large traditional passive asset managers—made it clear that they are looking for the company to change direction.”

Fiduciary Principles and Delaware Corporation Law

Lawrence A. Hamermesh is Executive Director of the University of Pennsylvania Law School Institute for Law and Economics and Professor Emeritus at Widener University Delaware Law School. Leo E. Strine, Jr. is Chief Justice, Delaware Supreme Court; Adjunct Professor of Law, University of Pennsylvania Law School; Austin Wakeman Scott Lecturer in Law, Harvard Law School; Senior Fellow, Harvard Program on Corporate Governance; and Henry Crown Fellow, Aspen Institute. This post describes a chapter, entitled Fiduciary Principles and Delaware Corporation Law: Searching for the Optimal Balance by Understanding That the World Is Not, prepared for inclusion in the forthcoming Oxford Handbook of Fiduciary Law. This post is part of the Delaware law series; links to other posts in the series are available here.

This Chapter, forthcoming in the Oxford Handbook of Fiduciary Law, examines the principles that animate Delaware’s regulation of corporate fiduciaries. Distilled to their core, these principles are to: give fiduciaries the authority to be creative, take chances, and make mistakes so long as their interests are aligned with those who elect them; but, when there is a suspicion that there might be a conflict of interest, use a variety of accountability tools that draw on our traditions of republican democracy and equity to ensure that the stockholder electorate is protected from unfair exploitation.

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Ask Me No Questions and I Will Tell You No Lies: The Insignificance of Leidos Before the United States Supreme Court

Joseph A. Grundfest is William A. Franke Professor of Law and Business at Stanford Law School, as well as Senior Faculty at Stanford University Rock Center on Corporate Governance. This post is based on his recent paper.

What if the Supreme Court issued an opinion and no one cared? No one cared who won or lost. No one cared how the question presented was resolved. The prevailing party wouldn’t gain a cent from its victory and the losing party wouldn’t suffer one whit from its loss. Leidos, Inc. v. Indiana Public Retirement System, now pending before the Supreme Court, could be just that sort of case.

On its surface, Leidos poses a fundamental doctrinal challenge to the interpretation of Rule 10b-5, the most important anti-fraud provisions in all of the federal securities laws. Thousands of lawsuits have been filed and billions of dollars have passed hands litigating Rule 10b-5, and Supreme Court opinions interpreting Rule 10b-5 are often a big deal.

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