Monthly Archives: January 2018

2017 Year in Review: Securities Litigation and Regulation

Jason Halper is partner and Chair of the Global Litigation Group, Kyle DeYoung is partner, and Adam Magid is Special Counsel at Cadwalader, Wickersham and Taft LLP.  This post is based on a Cadwalader publication by Mr. Halper, Mr. DeYoung, Mr. Magid, Jared Stanisci, James Orth and Aaron Buchman.

The securities litigation and regulatory landscape in 2017 defies simple categorization. Plaintiffs filed 226 new federal class actions in the first half of 2017, more than double the average rate over the last 20 years, and an additional 99 federal class actions in the third quarter of 2017. In contrast, new SEC enforcement proceedings declined. After staying on pace with the prior two years with 45 new enforcement actions against public company-related defendants in the first half of fiscal year 2017, the SEC filed only 17 new enforcement actions against public company-related defendants in the second half of the year. The apparent decrease in initiation of enforcement proceedings coincides with the arrival at the SEC of Chairman Walter J. Clayton, who has expressed the view that enforcement actions against issuers rather than individual wrongdoers too often punish the very investors they seek to protect.


How Transparent are Firms about their Corporate Venture Capital Investments?

Sophia J.W. Hamm is Assistant Professor of Accounting at The Ohio State University Fisher College of Business; Michael J. Jung is Assistant Professor of Accounting at NYU Stern School of Business; and Min Park is a PhD candidate at The Ohio State University Fisher College of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes Carrots & Sticks: How VCs Induce Entrepreneurial Teams to Sell Startups, by Jesse Fried and Brian Broughman (discussed on the Forum here).

Corporate venture capital (CVC) refers to direct minority equity investments made by established, publicly-traded firms in privately-held entrepreneurial ventures. CVC investing differs from pure venture capital investing in that financial returns are not the primary consideration, but rather, strategic gains are often the driving motivation to invest. While established firms in the technology, industrial, and healthcare sectors such as Google, General Electric, and Johnson & Johnson have set up CVC subsidiaries to invest billions of dollars in startups, younger firms such as Twitter with relatively smaller cash balances are starting to engage in venture capital investing as well. According to data from CB Insights, firms’ CVC investments in the U.S. were $17.9B in 2015 and $16.1B in 2016, involving 1,603 deals that accounted for nearly one-fifth of overall venture capital deals. CVC investments are now at the highest levels since the dot com era. The motivating research questions we are interested in examining in this setting are: 1) how transparent are firms about their CVC investments, and 2) is CVC investing a productive use of a firm’s capital resources?


What Do Investors Ask Managers Privately?

Eugene Soltes is the Jakurski Family Associate Professor of Business Administration and Jihwon Park is a doctoral candidate at the Harvard Business School. This post is based on their recent paper.

Investors and managers of publicly traded firms spend a considerable amount of time speaking privately. According to the consultancy Ipreo, the average publicly traded firm conducts more than 100 one-on-one meetings annually with investors. While growing body of research provides evidence that these offline interactions offer investors in attendance opportunities to make more informed trading decisions. what actually goes on during these interactions has largely been elusive to outsiders.

In this paper, we seek to better understand the content of private manager-investor interactions by exploring over 1,200 questions posed by investors during private meetings with firm managers from two publicly traded firms. We acquired access to this unique field data by embedding a confederate with extensive investor relations experience in two firms from 2015 to 2016.


Strict Supervision, Bank Lending and Business Activity

Joao Granja is Assistant Professor of Accounting and Christian Leuz is the Joseph Sondheimer Professor of International Economics, Finance and Accounting, at the University of Chicago Booth School of Business. This post is based on their recent paper.

A recurring theme in banking crises is the public backlash against bank supervisors for their failure to take prompt and decisive action to unearth and correct problems of weak banks. The latest crisis is no exception. A recent poll by the Initiative on Global Markets (IGM) at the Booth School of Business shows that leading economists view “flawed financial sector regulation and supervision” as the most important factor contributing to the 2008 Global Financial Crisis. Perceived regulatory failures in the past often play an important role in justifying interventions that overhaul the regulatory oversight of the banking system, including tighter rules and stricter monitoring of financial institutions (e.g., Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) of 1989; Dodd-Frank Act of 2010). Despite the importance of such interventions, we have limited evidence on the economic trade-offs associated with reforms that aim to limit regulatory forbearance and promote stricter bank supervision.


Remarks at the Inaugural Meeting of the Fixed Income Market Structure Advisory Committee

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent public statement. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I am delighted to welcome all of you to the inaugural meeting of the Fixed Income Market Structure Advisory Committee, or “FIMSAC” as many of us like to call it. This is a significant day for the Commission. There are a few matters of importance to discuss, and I will try to be efficient, as I know we are all eager to kick off today’s [January 11, 2018] discussion on bond market liquidity. [1]

To start, I would like to extend a warm welcome to our two new Commissioners, Robert Jackson and Hester Peirce. With Commissioners Stein and Piwowar, we have benefited from intellect, experience, perspective and energy, as well as ongoing commitment to our mission. My interactions with Rob and Hester have made it clear that we will have more of these important attributes.


Paying for Performance in Private Equity: Evidence from VC Partnerships

David T. Robinson is the J. Rex Distinguished Professor at Duke University Fuqua School of Business. This post is based on a recent paper by Professor Robinson; Niklas Hüther, Assistant Professor at Indiana University Kelley School of Business; Thomas Hartmann-Wendels, Professor at the University of Cologne; and Soenke Sievers, Professor at Paderborn University. Related research from the Program on Corporate Governance about CEO pay includes Paying for Long-Term Performance (discussed on the Forum here).

Limited partner agreements in private equity typically focus on three elements of compensation: Management fees, carried interest, and the timing provisions that govern when general partners receive carried interest. By now, the standard conventions in most Limited Partnership Agreements (LPAs) are well understood by most observers and students of the industry—most investment managers (general partners, or GPs) charge 1.5% to 2.5% management fees to their investors (the limited partners, or LPs), and take a 20% carried interest in the net return in the exited investments, resulting in the “2 and 20” compensation structure that is commonplace in private equity.


What the New Tax Rules Mean for M&A

Deborah L. Paul, T. Eiko Stange, and Joshua M. Holmes are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Ms. Paul, Mr. Stange, and Mr. Holmes.

President Trump has signed into law the most sweeping changes to business-related federal income tax in over three decades. The new law, referred to as the Tax Cuts and Jobs Act (the “Act”), is expected to have far-reaching implications for domestic and multinational businesses as well as domestic and cross-border transactions, impacting the structure, pricing and, in some cases, viability of broad categories of deals. Among other things, the Act lowers tax rates on corporations and income from pass-through entities, permits full expensing of certain property, imposes additional limits on the deduction of business interest and adopts certain features of a “territorial” tax regime. By lowering tax rates, the new law makes conducting business in the United States more attractive. But, to pay for the reduced rates, the Act includes numerous revenue-raising provisions as well. The changes will shift transaction dynamics in complex and potentially unanticipated ways that will unfold over time, raising challenging interpretive questions that taxpayers and advisors will be grappling with for years to come. By vastly reducing the incentive for U.S.-parented multinationals to hold cash offshore, the new law is expected to free up cash for M&A activity, capital expenditures, debt repayment or stock buybacks.


Busy Directors and Shareholder Satisfaction

Wayne R. Guay is the Yageo Professor of Accounting and Kevin D. Chen is a doctoral candidate at The Wharton School of the University of Pennsylvania. This post is based on their recent paper.

The job of a corporate director has become increasingly time consuming. The Wall Street Journal recently reported that the director of a public firm spends an average of 248 hours a year on each board, up from 191 hours in 2005. In light of this growing time demand, corporate directors face increasing investor scrutiny regarding the number of boards on which a given director sits. Prior research has examined the firm-level performance implications of corporate boards that have a large proportion of “busy” directors. However, there are several difficulties in these studies. In particular, firm-level analysis masks important heterogeneity in the time constraints and the expertise benefits of busy directors. For example, sitting on three boards might be excessive for a director with a full-time job, but it might be reasonable, or even optimal, for an individual who is retired. Also, certain firms (e.g., less experienced firms) may benefit more from the expertise and advising of a busy director. Furthermore, there may be omitted firm-level characteristics that are driving both director busyness and firm performance, which suggests that an observed positive (negative) association between director busyness and good (poor) firm performance does not necessarily imply that busy directors are beneficial (detrimental) to shareholders.


Weekly Roundup: January 5–11, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of January 5–11, 2018.

Non-rating Revenue and Conflicts of Interest

Tax Reform Implications for U.S. Businesses and Foreign Investments

Industry Tournament Incentives and the Product Market Benefits of Corporate Liquidity

Ineffective Stockholder Approval for Director Equity Awards

Does Size Matter? Bailouts with Large and Small Banks

Analysis of SEC Ruling on Apple Shareholder Proposal

Compensation Season 2018

Pay-for-Performance Mechanics

CEO Gender and Corporate Board Structures

Activist Investing in Europe—2017 Edition

Political Uncertainty and Cross-Border Acquisitions

SEC Guidance on Tax Reform Reporting

SEC Guidance on Tax Reform Reporting

Catherine M. Clarkin and Robert W. Downes are partners and Brian D. Farber is an associate at Sullivan & Cromwell LLP. This post is based on a Sullivan & Cromwell publication by Ms. Clarkin, Mr. Downes, Mr. Farber, Scott D. Miller, and Benjamin H. Weiner.

On December 22, 2017, the Securities and Exchange Commission’s Division of Corporation Finance released Form 8-K Compliance and Disclosure Interpretation 110.02 and its Office of the Chief Accountant published Staff Accounting Bulletin No. 118, which provide guidance on reporting accounting impacts of the recently enacted tax reform legislation. The new C&DI clarifies that disclosure under Item 2.06 of Form 8-K (Material Impairments) is not triggered by the re-measurement of deferred tax assets due to a change in tax rates or tax laws. New SAB 118 provides guidance on reporting the income tax effects of U.S. tax reform for issuers that are not able to complete the accounting for certain tax effects by the time financial statements are issued covering the reporting period that includes the date of the enactment of the Tax Cuts and Jobs Act (December 22, 2017). [1]


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