Monthly Archives: March 2018

Upcoming Volcker Rule Regulatory Changes

Posted by Mark V. Nuccio, Ropes & Gray LLP, on
Wednesday, March 28, 2018
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Mark V. Nuccio is a partner at Ropes & Gray LLP. This post is based on a Ropes & Gray publication by Mr. Nuccio.

Federal financial regulators responsible for enforcement of the Volcker Rule are about to embark on a process that will culminate in a significant revision to the regulations that went into effect eighteen months ago. In a March 5, 2018 speech at the Institute of International Bankers Annual Washington Conference in Washington, D.C., Randal K. Quarles, Federal Reserve Board Vice Chairman for Supervision, outlined the expected principal areas of focus. He also endorsed legislative efforts to pull community banks out from under the Volcker Rule.

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Why Senator Crapo’s Bill Will Put Our Financial System and Economy at Risk

Posted by Phil Angelides, Former Chairman of the U.S. Financial Crisis Inquiry Commission (2009-2011), on
Tuesday, March 27, 2018
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Phil Angelides served as Chairman of the U.S. Financial Crisis Inquiry Commission from 2009-2011. This post is based on his recent letter to The Honorable Sherrod Brown of the U.S. Senate Committee on Banking, Housing, and Urban Affairs.

Ten years ago, Wall Street recklessness and regulatory neglect plunged our nation into the 2008 financial crisis and the Great Recession. Millions lost their jobs and homes, the economy was ravaged, and trillions of dollars in household wealth was wiped away. Many people and regions of our country are still struggling in the aftermath of the cataclysm.

Now, under intense lobbying from the banking industry, the U.S. Senate is debating and will likely pass S. 2155 by Senator Crapo, Chairman of the Senate Committee on Banking, Housing, and Urban Affairs. This legislation will weaken the financial system safeguards and taxpayer and consumer protections put in place in the wake of the financial crisis, exposing American taxpayers, our financial system, and our economy to significant risk.

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Blockchain Technology for Corporate Governance and Shareholder Activism

Posted by Anne Lafarre (Tilburg University) and Christoph Van der Elst (Tilburg University and Ghent University), on
Tuesday, March 27, 2018
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Anne Lafarre is Assistant Professor at Tilburg Law School; Christoph Van der Elst is Professor of Business Law and Economics at Tilburg Law School and Ghent University. This post is based on their recent paper.

Although the hype around the buzzword “blockchain” is currently still largely focused on speculation with virtual currencies like bitcoins, blockchain is a state-of-the-art technology that can offer smart solutions for classical inefficiencies in the corporate governance field. In our recent paper, Blockchain Technology for Corporate Governance and Shareholder Activism, we look into the applications of blockchain technology in the field of corporate governance, paying special attention to the restructuring of the old-fashioned and rigid Annual General Meeting of Shareholders (the AGM). We explore the AGM’s (lack of) performance and make a strong plea for blockchain-based AGM.

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The First Wave of Pay Ratio Disclosures

Posted by Kyoko Takahashi Lin, Ning Chiu, and Alicyn L. Gilbert, Davis Polk & Wardwell LLP, on
Tuesday, March 27, 2018
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Kyoko Takahashi Lin is a partner, Ning Chiu is counsel, and Alicyn L. Gilbert is an associate at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Lin, Ms. Chiu, and Ms. Gilbert.

U.S. public companies recently began disclosing their CEO-to-median employee pay ratios, as required by the Dodd-Frank Act and Item 402(u) of Regulation S-K. It is still too early to draw conclusions, but we outline some preliminary observations below based on our review of the pay ratio disclosure included in 35 SEC filings through February 2018. A list of these 35 companies with links to the applicable SEC filing is included at the end of this memorandum. [1]

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The Fragmented Regulatory Landscape for Digital Tokens

Posted by Jai R. Massari, Annette L. Nazareth, and Zachary Zweihorn, Davis Polk & Wardwell LLP, on
Monday, March 26, 2018
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Jai R. Massari and Annette L. Nazareth are partners and Zachary Zweihorn is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Massari, Ms. Nazareth, Mr. Zweihorn, Jeanine P. McGuinness, and Zachary B. Shapiro.

The past few days have seen several interesting developments in the law and regulation of digital tokens. Each action reflects an intense focus by U.S. regulators to clarify the treatment of digital tokens, from those issued by startups in initial coin offerings (ICOs) to the more “traditional” cryptocurrencies such as bitcoin and litecoin, as well as the regulatory status under U.S. law of persons engaging in certain activities involving digital tokens. These actions are merely the latest—and most certainly not the last—efforts by regulators and courts to address the many policy, legal, and regulatory issues raised by digital tokens. The picture emerging from these efforts is one of a fragmented, overlapping, and complex regulatory landscape for digital tokens.

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The Buyer’s Perspective on Security Design: Hedge Funds and Convertible Bond Call Provisions

Posted by Bruce D. Grundy (University of Melbourne) and Patrick Verwijmeren (Erasmus School of Economics and University of Melbourne), on
Monday, March 26, 2018
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Bruce D. Grundy is professor of finance at the University of Melbourne and Patrick Verwijmeren is professor of corporate finance at the Erasmus School of Economics and the University of Melbourne. This post is based on their recent article, published in the Journal of Financial Economics.

Many studies consider optimal security design from the viewpoint of the issuer. Our article investigates the importance of the views of suppliers of capital in the design of securities. We do so by examining a market that has witnessed a major shift in the identity of the suppliers of capital, namely, the market for convertible securities. The convertible market is especially interesting as the shift in the supply side is both observable and towards a supplier with particular design preferences, that supplier being the set of convertible arbitrage hedge funds.

The issuer and the hedge fund perspectives can differ substantially on the question of whether or not to include a call provision in the terms of a convertible bond. A call provision allows the issuer to redeem the convertible before its maturity date. Upon calling, the holder of the convertible is forced to choose between the call price and converting the bond into a specified number of shares. Traditional rationales for why firms issue convertibles take the issuer’s perspective and assign substantial importance to call provisions. For example, call provisions are important in the “backdoor equity” rationale for convertible issuance since they allow a firm to force conversion once the share price has risen.

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Senate Rollback of Dodd-Frank

Posted by Lee Meyerson, Keith Noreika, and Mark Chorazak, Simpson Thacher & Bartlett LLP, on
Monday, March 26, 2018
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Lee Meyerson and Keith Noreika are partners and Mark Chorazak is counsel at Simpson Thacher & Bartlett LLP. This post is based on a Simpson Thacher publication by Mr. Meyerson, Mr. Noreika, and Mr. Chorazak.

On March 14, 2018, the U.S. Senate passed the Economic Growth, Regulatory Relief, and Consumer Protection Act (S. 2155), a financial reform bill also known as the “Crapo Bill” for its primary sponsor, Senator Mike Crapo (R-ID). Although not as sweeping in scope as the Financial CHOICE Act—the financial reform bill passed by the House of Representatives in June 2017—the Crapo Bill would make targeted changes to several major provisions of the landmark Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010.

The Crapo Bill is primarily focused on providing regulatory relief for smaller banks, including an exemption from the Volcker Rule for smaller banks with limited trading operations, and “off-ramp” relief from capital and leverage requirements as well as an exemption from “qualifying mortgage” rules for certain banking organizations with under $10 billion in total assets. For the larger banking organizations, the Crapo Bill would increase the asset threshold for a bank holding company to be considered a “systemically important financial institution” (“SIFI”)—and therefore subject to certain enhanced prudential regulation by the Federal Reserve—from $50 billion to $250 billion.

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Lessons Learned from Trian’s Campaign at Procter & Gamble

Posted by Aneliya S. Crawford, Brandon S. Gold and Daniel A. Goldstein, Schulte Roth & Zabel LLP, on
Sunday, March 25, 2018
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Aneliya S. Crawford is a partner, and Brandon S. Gold and Daniel A. Goldstein are associates at Schulte Roth & Zabel LLP. This post is based on a Schulte Roth publication authored by Ms. Crawford, Mr. Gold and Mr. Goldstein. 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 The Uneasy Case for Favoring Long-Term Shareholders, by Jesse Fried (discussed on the Forum here).

On Dec. 15, 2017, sixty-six days after holding its annual meeting, The Procter & Gamble Company announced that Nelson Peltz, founding partner and chief executive officer of Trian Fund Management, L.P., would join Procter & Gamble’s board in March 2018, marking a dramatic conclusion to the so-called “largest proxy fight in history” and the “the largest boardroom battle in the history of director insurgencies.” [1]

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Judicial Deference, Procedural Protections, and Deal Outcomes in Freezeout Transactions: Evidence from the Effect of MFW

Posted by Fernan Restrepo (Stanford Law School), on
Sunday, March 25, 2018
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Fernan Restrepo is Research Fellow at the Rock Center for Corporate Governance at Stanford Law School. This post is based on his recent paper, and is part of the Delaware law series; links to other posts in the series are available here.

Prior to 2013, merger freezeouts were invariably subject to entire fairness review, a demanding standard of judicial review that permits a judicial revision of the price paid to the target shareholders when the price is challenged. Even approval of the deal by a special committee of independent directors (“SC”) or by the majority-of-the-minority shareholders (“MOM”) would only serve to shift the burden of proof on entire fairness to the plaintiff.

This situation changed in 2013. In an attempt to incentivize the simultaneous use of independent director approval and MOM conditions, the Delaware Chancery Court held in In re MFW Shareholders Litigation, 67 A.3d 496 (Del. Ch. May 29, 2013) that when a merger freezeout is subject to those procedural protections, the transaction would be reviewed under the deferential business judgment rule and not under entire fairness. This paper examines the impact of MFW on transactional practice and deal outcomes.

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The SEC and Virtual Currency Markets

Posted by Richard M. Rosenfeld, Matthew Rossi, and Alex C. Lakatos, Mayer Brown LLP, on
Saturday, March 24, 2018
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Richard M. Rosenfeld, Matthew Rossi, and Alex C. Lakatos are partners at Mayer Brown LLP. This post is based on a Mayer Brown publication by Mr. Rosenfeld, Mr. Rossi, Mr. Lakatos, Philip J. Niehoff, Nina L. Flax, and Matthew Bisanz.

“For any normal person trying to respond, it would be hellish.” [1]

Major media sources reported last week that the US Securities and Exchange Commission (“SEC”) has intensified its ongoing probe of the virtual currency markets. [2] This probe builds on a recent disclosure by the head of the SEC’s Cyber Unit that more than a dozen issuers have voluntarily halted their initial coin offerings (“ICOs”) after receiving calls from the SEC and continues the months-old Cyber Unit’s focus on misconduct involving distributed ledger technology and ICOs. [3]

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