Monthly Archives: February 2018

Derivative Litigation and Stockholder Preclusion

David BergerAmy Simmerman, and Brad Sorrels are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Berger, Ms. Simmerman, Mr. Sorrells, Katherine Henderson, Ignacio Salceda, and Lindsay Kwoka Faccenda, and is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Supreme Court recently unanimously affirmed the Delaware Court of Chancery’s dismissal of a stockholder derivative claim against directors of Wal-Mart, holding that these claims were precluded because a federal court in Arkansas had already dismissed a derivative claim filed by different Wal-Mart stockholders. [1] The Supreme Court held that an exception to the general rule against nonparty preclusion was appropriate in derivative cases because the interests of the plaintiffs in Arkansas and Delaware were sufficiently aligned, and the Arkansas plaintiffs were adequate representatives. The Supreme Court determined the preclusive effect of the Arkansas federal court’s dismissal was governed by Arkansas state law, subject to Constitutional standards of Due Process, and that all of the requisite elements for preclusion under Arkansas law, including privity and adequacy of representation, had been satisfied. At the same time, the court also declined the Court of Chancery’s invitation to adopt a different rule that would only give preclusive effect to a judgment by a sister court in some circumstances.

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BlackRock Talks … and U.S. Companies Must Listen

Ed Batts is partner and Chair of the M&A and Private Equity groups at Orrick, Herrington & Sutcliffe LLP. This post is based on an Orrick publication by Mr. Batts. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst; and Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here).

In BlackRock CEO and Co-founder Larry Fink’s annual letter to companies on January 16, he issued a call to action for companies to have “a clear sense of purpose.” To BlackRock, having “a clear sense of purpose” means much more than simply delivering quarterly financial results—companies will be expected to have a strong commitment to evolving Environmental, Social and Governance (ESG) issues.

This letter matters both because BlackRock is an important large investor of actively managed assets and—more importantly—because we are living in a new world order of many fewer public companies with, at the same time, a continued crescendo of passive investment allocation. These changes in the U.S. equities markets have been underway for some time, but with the recent significant bull market run they are being magnified at an accelerated pace.

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High-Frequency Measures of Informed Trading and Corporate Announcements

Michael J. Brennan is Professor Emeritus of Finance at the UCLA Anderson School of Management, and Professor of Finance at the University of Manchester Business School; Sahn-Wook Huh is Associate Professor of Finance at the University (SUNY) at Buffalo School of Management; and Avanidhar Subrahmanyam is Professor of Finance at the UCLA Anderson School of Management. This post is based on their recent article, forthcoming in The Review of Financial Studies.

While the activities of privately informed traders have been studied extensively, it remains a challenge to obtain empirical evidence on trading by informed investors because of the difficulty of determining when trades result from private information. In this article, we use comprehensive transactions datasets to analyze informed trading around three unscheduled corporate announcements (M&As, SEOs, and dividend initiations), as well as around pre-scheduled earnings announcements. We also examine the links between our informed-trading measures and stock returns around the announcements.

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Picking Friends Before Picking (Proxy) Fights: How Mutual Fund Voting Shapes Proxy Contests

Alon Brav is Robert L. Dickens Professor of Finance at Duke University Fuqua School of Business; Wei Jiang is Arthur F. Burns Professor of Free and Competitive Enterprise at Columbia Business School; and Tao Li is Assistant Professor of Finance at University of Florida Warrington College of Business. This post is based on their recent paper. Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst; Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (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).

Over the past two decades the frequency of proxy contests for board representation or control has increased as shareholder activism has become both an established investment strategy and an important form of corporate governance. Since dissidents are typically minority stockholders, a successful campaign, such as Trian Partners’ intervention at Procter and Gamble Co., requires support from their fellow shareholders. The general apathy of retail investors towards voting matters implies that it is usually necessary that dissidents win the support of a majority of institutional shareholders. Hence, “picking friends”—the selection of a target with a pro-activist shareholder base—is a crucial element in an activist’s decision on whether to launch a proxy contest.

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CEO Tenure Rates

Dan Marcec is Director of Content & Communications at Equilar, Inc. This post is based on an Equilar publication by Mr. Marcec and Equilar Research Analysts Kyle Benelli and Amanda Schulhofer.

In the past five years, CEOs transitions have become more common than they had been in the preceding five years. As a result, median tenure has fallen a full year since 2013.

According to a recent Equilar study, the median tenure for CEOs at large-cap (S&P 500) companies was 5.0 years at the end of 2017. Looking back historically at the companies included in the study, that figure has fallen from 6.0 since 2013. Average tenure, which is weighted by long-standing CEOs with several decades of service, also dropped in that timeframe, but to a lesser degree—decreasing from 7.5 in 2013 to 7.2 in 2017.

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2017 Delaware Corporate Law Year in Review

David BergerAmy Simmerman, and Brad Sorrels are partners at Wilson Sonsini Goodrich & Rosati. This post is based on a WSGR publication by Mr. Berger, Ms. Simmerman, Mr. Sorrells, Katherine Henderson, Lori Will, and Shannon German, and is part of the Delaware law series; links to other posts in the series are available here.

In 2017, the Delaware courts once again issued many substantive corporate law decisions covering a wide range of issues critical to boards, stockholders, and officers. In addition, decisions from recent years continued to impact Delaware litigation, especially in the reduction of disclosure-based, settlement-driven M&A litigation as a result of the Court of Chancery’s Trulia decision. At the same time, the Delaware judges’ dockets remained so busy with other types of litigation that a proposal to increase the five-member Court of Chancery by two judges is currently under consideration. Alongside developments from the Delaware courts, we continue to see various trends in practice relating to Delaware law issues.

This post covers these important trends, which will shape practice in 2018.

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Second Circuit’s Application of the Halliburton Doctrine

Monica Loseman, and Jason Mendro are partners and Lissa Percopo is an associate at Gibson, Dunn & Crutcher LLP. This post is based on a Gibson Dunn publication by Ms. Loseman, Mr. Mendro, Ms. Percopo, and Christopher WhiteRelated research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

On January 12, 2018, the Second Circuit issued its second substantive opinion applying Halliburton Co. v. Erica P. John Fund, Inc., 134 S. Ct. 2398 (2014) (“Halliburton II“), only the third issued by any federal circuit court since the Supreme Court’s landmark decision in June 2014. Ark. Teachers Ret. Sys. v. Goldman Sachs, — F.3d —, Case No. 16-250, 2018 WL 385215 (S.D.N.Y. Jan. 12, 2018). The Second Circuit vacated the district court’s order certifying a class and remanded for further proceedings to determine whether the defendants had presented sufficient evidence that the alleged misstatements did not impact Goldman Sachs’ stock price. The Second Circuit encouraged the district court to hold any evidentiary hearing or oral argument it finds appropriate to address this issue on remand.

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FCPA Enforcement and Anti-Corruption Year in Review

Mark F. Mendelsohn, Alex Young K. Oh, and David W. Brown are partners at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Mendelsohn, Ms. Oh, Mr. Brown, Justin D. Lerer, Meredith A. Arfa, and Jonathan Silberstein-Loeb.

Despite significant FCPA enforcement activity in 2017, the Trump administration’s approach to enforcement remains elusive and not readily characterized.

Looking at 2017 as a whole, the number of corporate enforcement actions resolved by the DOJ and the SEC was within the range of fluctuations in such numbers in recent years, though down from 2016’s record-breaking total. Looking at the year more closely, we find that eight of the fourteen corporate resolutions by the DOJ and the SEC in 2017 were announced in January during the final weeks of the Obama administration, followed by a six-month quiet period during the beginning of the Trump administration, and culminating in six corporate resolutions in the closing months of the year. The majority of corporate resolutions announced during the Trump administration involved foreign companies, but whether the Trump administration is pursuing an “America First” policy in enforcing the FCPA remains an open question. The new administration does appear to have been more aggressive in pursuing prosecutions against individuals, with 17 of the 20 prosecutions of individuals in 2017 brought by the Trump administration. However, given the duration of FCPA investigations, most, if not all, of the corporate and individual enforcement actions announced during the Trump administration almost certainly originated from investigations that pre-dated the administration, suggesting it is too early to draw definitive conclusions.

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Second Circuit Decision on Fraud-on-the-Market

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, Susanna BuergelGeoffrey R. ChepigaAndrew Ehrlich, Jane B. O’Brien, and Audra SolowayRelated research from the Program on Corporate Governance includes Rethinking Basic by Lucian Bebchuk and Allen Ferrell (discussed on the Forum here).

In Arkansas Teacher Retirement System v. Goldman Sachs Group, Inc., No. 16-250 (2d Cir. Jan. 12, 2018), the Second Circuit vacated the certification of a securities fraud class action due to two errors by the district court in its rejection of defendants’ rebuttal of the fraud-on-the-market presumption of reliance. First, the Second Circuit held that the district court’s statement that defendants had failed to “conclusively” prove a “complete absence of price impact” created doubt as to whether the district court had correctly applied the preponderance standard. Second, the Second Circuit held that the district court should have considered defendants’ evidence that Goldman Sachs’s stock price did not drop on thirty-four dates—prior to plaintiffs’ alleged corrective disclosure dates—on which news sources reported alleged conflicts of interest in Goldman Sachs’s CDO business. [1]

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The Enduring Allure and Perennial Pitfalls of Earnouts

Gail Weinstein is senior counsel, and Robert C. Schwenkel and David L. Shaw are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Schwenkel, Mr. Shaw, Christopher Ewan, Steven J. Steinman, and Brian T. Mangino, and is part of the Delaware law series; links to other posts in the series are available here.

An “earnout” is a deal mechanism that provides for a buyer to pay additional consideration after the closing if specified post-closing performance targets are achieved by the acquired business or specified post-closing events occur. An earnout can be instrumental in bridging the gap when, based on divergent views by the buyer and the seller about the likely future operating performance or the likelihood of the occurrence of certain contingencies, the parties cannot agree upfront on a purchase price. In situations where the seller will remain involved in the post-closing operation of the business, an earnout can also be a useful mechanism to incentivize the seller to grow the business for the buyer’s benefit after the closing.

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