Yearly Archives: 2018

The Importance of Conviction in the Face of Litigation Risk

Posted by Edward D. Herlihy and David E. Shapiro, Wachtell, Lipton, Rosen & Katz, on
Wednesday, March 14, 2018
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Edward D. Herlihy and David E. Shapiro are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell publication by Mr. Herlihy and Mr. Shapiro, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court in a two-page order summarily affirmed an important appraisal decision, upholding the Delaware Court of Chancery finding that the fair value of SWS Group, Inc. was $6.38 per share—a valuation 19% below the merger price at announcement and 7.8% below the merger price at closing (see our memo of May 31, 2017). This represents the first Delaware Supreme Court decision in the era of “appraisal arbitrage” to affirm an appraised valuation meaningfully below the deal price.

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SEC Guidance on Public Company Cybersecurity Disclosures

Posted by Lillian Brown, Meredith Cross, and Benjamin Powell, Wilmer Cutler Pickering Hale and Dorr LLP, on
Tuesday, March 13, 2018
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Lillian Brown, Meredith Cross, and Benjamin Powell are partners at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale publication by Ms. Brown, Ms. Cross, Mr. Powell, Jonathan Cedarbaum, and Alan Wilson.

On February 21, 2018, the Securities and Exchange Commission (SEC) approved an interpretive release updating guidance on public company disclosure and other obligations concerning cybersecurity matters. The interpretive release, titled “Commission Statement and Guidance on Public Company Cybersecurity Disclosures,” Release No. 33-10459 (Guidance), had been scheduled to be considered at an open meeting on February 21, which was canceled. Much of the Guidance is devoted to reiterating and expanding upon the Division of Corporation Finance’s 2011 CF Disclosure Guidance: Topic No. 2, Cybersecurity, which was issued to assist companies in assessing what disclosures might be required about cybersecurity risks or incidents. WilmerHale discussed the 2011 guidance here. Emphasizing the increasing significance of cybersecurity incidents in recent years, the new Guidance further illustrates potential disclosures that companies should consider and comments on matters beyond disclosure obligations. The Guidance stresses the importance of cybersecurity policies and procedures, and discusses the application of disclosure controls and procedures, insider trading prohibitions, and Regulation FD selective disclosure prohibitions. Recognizing that the cybersecurity landscape continues to shift, Chairman Clayton commented in a separate statement that the Commission “will continue to evaluate developments in this area and consider feedback about whether any further guidance or rules are needed.”

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The Hidden Power of Compliance

Posted by Stavros Gadinis and Amelia Miazad (Berkeley Law School), on
Tuesday, March 13, 2018
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Stavros Gadinis is professor of law and Amelia Miazad is founding Director and Senior Research Fellow of the Business in Society Institute at Berkeley Law School. This post is based on their recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Although corporate wrongdoing can reach an immense scale with disastrous ramifications, holding boards accountable has long been perceived as elusive. Under both state fiduciary duty law and federal securities doctrine, directors and officers are liable only if they were aware of corporate failures or reckless in ignoring them. Since providing evidence of awareness or recklessness is exceedingly hard, corporate law scholars have long seen these requirements as raising an almost impenetrable shield over the board.

Instead, we demonstrate that the evidentiary path to boards’ state of mind is nowadays more open than it has ever been before, due to the revolutionary growth of compliance departments in recent years. Corporate law literature has largely dismissed compliance as ineffective, fearing that in-house monitors would be too weak or too loyal to constrain corporate wrongdoing. Contrary to this conventional wisdom, we argue that legal and compliance experts’ reports and recommendations, especially if ignored at the time they were made, often expose the board to liability once misconduct is revealed.

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What a Difference a (Birth) Month Makes: The Relative Age Effect and Fund Manager Performance

Posted by Kevin Mullally (University of Alabama), on
Tuesday, March 13, 2018
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Kevin Mullally is Assistant Professor of Economics, Finance, and Legal Studies at the University of Alabama Culverhouse College of Commerce. This post is based on a recent article, forthcoming in the Journal of Financial Economics, authored by Professor Mullally; Jianqiu Bai, Assistant Professor of Finance at Northeastern University D’Amore-McKim School of Business; Linlin Ma, Assistant Professor of Finance at Northeastern University D’Amore-McKim School of Business; and David Solomon, Assistant Professor of Finance at Boston College Carroll School of Management.

The academic literature in finance has focused a lot of attention on how managerial characteristics impact firm performance. One such characteristic that has received considerable study is overconfidence. This is generally thought of as managers being overly optimistic about their own ability or their firm’s prospects. Although there is evidence that managerial overconfidence can benefit firms via higher innovation, a majority of papers find that overconfidence negatively impacts firm value. A curious aspect of this literature is that the primary object of study is “overconfidence,” rather than just “confidence.” Papers such Malmendier and Tate (2005) find that greater confidence is associated with greater mistakes. Interestingly, this notion that confidence is associated with worse performance contrasts with a large literature in psychology that finds a positive relation between confidence and performance.

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SEC and CFTC Testimony on Virtual Currencies: Is More Regulation on the Horizon?

Posted by Michael H. Krimminger, Colin D. Lloyd & Zachary Baum, Cleary, Gottlieb, Steen & Hamilton LLP, on
Monday, March 12, 2018
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Michael H. Krimminger and Colin D. Lloyd are partners and Zachary Baum is a clerk at Cleary, Gottlieb, Steen & Hamilton LLP. This post is based on a Cleary Gottlieb publication by Mr. Krimminger, Mr. Lloyd, and Mr. Baum.

On February 6, 2018, Chairman Clayton of the Securities and Exchange Commission (SEC) and Chairman Giancarlo of the Commodity Futures Trading Commission (CFTC) testified before the Senate Banking Committee (the Committee) on their agencies’ oversight role for virtual currencies. Consistent with his prior statements, Clayton took a strong stance on SEC regulation of Initial Coin Offerings (ICOs). But, when it came to cryptocurrencies themselves, he and Giancarlo struck a somewhat more circumspect tone. In particular, despite acknowledging that their existing jurisdiction does not extend to spot transactions in cryptocurrencies, the Chairmen did not yet seek additional regulatory authority.

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An Identity Theory of the Short- and Long-Term Investor Debate

Posted by Claire A. Hill (University of Minnesota Law School), on
Monday, March 12, 2018
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Claire A. Hill is Professor and James L. Krusemark Chair in Law at the University of Minnesota Law School. This post is based on her recent article, published in the Seattle University Law Review.

The debate as to whether staggered boards are value-reducing has been quite active, with strong arguments made for “yes,” “no” and “sometimes.” The argument that they are value-reducing has, it seems fair to say, its origins in a more basic belief that managers may be apt to entrench themselves, and that yearly election of directors is an important counterweight or preventive step. Given the extent to which much of corporate law scholarship has been focused on the ever-present specter of managerial agency costs, the “yes” position had seemed like the default, the position to be rebutted, until the last few years, when a prominent “no” finding came to be followed by more “yes,” “no” and “sometimes” findings. At this juncture, extremely sophisticated empirical work squares off against other extremely sophisticated work, and the debate continues. Maybe the data will never confess—the issue is simply “too” difficult. But another possibility is that prior beliefs, including, most importantly, those about the extent to which managerial agency costs are in need of constraint, affect the debate, making the threshold for resolution—a data “confession” that must be accepted—impossibly high.

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Taxation and Executive Compensation: Evidence from Stock Options

Posted by Andrew Bird (Carnegie Mellon University), on
Monday, March 12, 2018
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Andrew Bird is Assistant Professor of Accounting at Carnegie Mellon University Tepper School of Business. This post is based on a recent paper by Professor Bird. 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).

In light of rising income inequality and concern over government budget deficits, policymakers and the general public have become increasingly interested in increasing the progressivity of the tax system. The possibility and desirability of such a policy hinges critically on how high incomes, such as those of corporate executives, respond to changes in taxes at both the individual and corporate level. Further, a clear understanding of how taxes affect executive compensation can provide valuable insight into fundamental questions in both corporate and public finance. For example, the nature of the process determining executive pay is an area of much debate in the literature on corporate governance. Proponents of the board capture theory, such as Bebchuk and Fried (2003), argue that managers wield substantial influence in bargaining with boards of directors over their own pay. The magnitude of the compensation response to a change in tax rates yields useful information about the extent of this bargaining power.

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Dunkin’ Brands and SEC Economic Relevance Exclusion of Shareholder Proposal

Posted by Keith F. Higgins and Craig E. Marcus, Ropes & Gray LLP, on
Sunday, March 11, 2018
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Keith F. Higgins is chair of the securities & governance practice and Craig E. Marcus is partner at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Higgins and Mr. Marcus.

On February 22, 2018, the staff of the SEC’s Division of Corporation Finance (the Division) issued a favorable no-action response to Dunkin’ Brands Group, Inc. under Rule 14a-8(i)(5) (the economic relevance exception) representing the first successful use of the economic relevance exception following the issuance of Staff Legal Bulletin No. 14I (the SLB). The Ropes & Gray client alert discussing the SLB may be accessed here.

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Delaware Appraisal Litigation: Non-Arm’s-Length Transactions, Arm’s-Length Transactions and the Anna Karenina Principle

Posted by Arthur H. Rosenbloom (Consilium ADR) and Gilbert E. Matthews (Sutter Securities), on
Sunday, March 11, 2018
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Arthur H. Rosenbloom is Managing Director of Consilium ADR LLC, and Gilbert E. Matthews is Senior Managing Director and Chairman of the Board of Sutter Securities, Inc. This post is based on their recent paper and is part of the Delaware law series; links to other posts in the series are available here.

In this paper, we explore a variety of issues related to statutory rights of appraisal in Delaware, and the search by which to determine the sometimes elusive concept of fair value. In the course of so doing, we: (i) discuss the statutory definition of fair value and some of the case law doctrines surrounding its application in appraisal litigation; (ii) observe and comment on the fact that, in transactions where independent fairness opinions or valuations are provided, the median premium over the transaction price in appraisals in non-arm’s-length transactions is materially greater than is the case with arm’s-length transactions; (iii) describe how the Delaware Court of Chancery picks and chooses among the methodologies selected by the parties’ experts to arrive at its fair value conclusions and; (iv) conclude with observations concerning what the case law tells us are the principle do’s and don’ts in the preparation of financial analyses and testimony by which to determine fair value.

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The Narrowing Scope of Whistleblower Anti-Retaliation Protections

Posted by Brad S. Karp, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Saturday, March 10, 2018
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Brad S. Karp is partner and chairman at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Karp, Andrew Ehrlich, Gregory Laufer, Lorin Reisner, Audra Soloway and Richard Tarlowe.

On February 21, 2018, in Digital Realty Trust Inc. v. Somers, the Supreme Court resolved a circuit split on the question of whether the anti-retaliation protections for whistleblowers under the Dodd-Frank Act extend to individuals who report allegations of misconduct internally or only to those who report such allegations directly to the Securities and Exchange Commission (the “SEC” or the “Commission”). The Court held that individuals who have reported alleged misconduct internally, but not to the SEC, are not covered by the anti-retaliation provisions of the Dodd-Frank Act, 15 U.S.C. § 78u-6(h).

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