Monthly Archives: March 2018

Corporate Governance: On the Front Line of America’s Cyber War

Posted by Robert J. Jackson, Jr., U.S. Securities and Exchange Commission, on
Tuesday, March 20, 2018
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Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Jackson’s recent remarks at the Tulane Corporate Law Institute, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you so much, David, for that kind introduction. [1] It’s great to be here at the Tulane Corporate Law Institute for what, I know, is one of the most highly-anticipated corporate-law conferences of the year. It also doesn’t hurt that it happens to be in New Orleans. [2]

Now, before I begin, let me just give the standard disclaimer: the views I express here are my own and do not reflect the views of the Commission, my fellow Commissioners, or the SEC’s Staff. And let me add my own standard caveat: I hope someday to persuade my colleagues of the utter, absolute, and obvious correctness of my views.

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A Regulatory Framework for Exchange-Traded Funds

Posted by Henry T. C. Hu (University of Texas Law School) and John D. Morley (Yale Law School), on
Tuesday, March 20, 2018
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Henry T. C. Hu is the Allan Shivers Chair in the Law of Banking and Finance at the University of Texas Law School and John D. Morley is Professor of Law at Yale Law School of Law. This post is based on their recent article, forthcoming in Southern California Law Review.

The “exchange-traded fund” (ETF) is one of the key financial innovations of the modern era. Our article, A Regulatory Framework for Exchange-Traded Funds (forthcoming in Southern California Law Review, vol. 91, no. 5, 2018), is the first academic work to show the need for, or to offer a regulatory framework for ETFs.

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Risk Management and the Board of Directors

Posted by Martin Lipton, Sabastian V. Niles, and Marshall L. Miller, Wachtell Lipton Rosen & Katz, on
Tuesday, March 20, 2018
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Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy; Sabastian V. Niles is a partner at Wachtell, Lipton, Rosen & Katz, focusing on rapid response shareholder activism and preparedness, takeover defense and corporate governance; and Marshall L. Miller is is of counsel in the Litigation Department at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton publication by Mr. Lipton, Mr. Niles, Mr. Marshall, Daniel A. Neff, Steven A. Rosenblum, and Andrew R. Brownstein.

I. Introduction

Overview

The past year has seen continued evolution in the political, legal and economic arenas as technological change accelerates. Innovation, new business models, dealmaking and rapidly evolving technologies are transforming competitive and industry landscapes and impacting companies’ strategic plans and prospects for sustainable, long-term value creation. Tax reform has created new opportunities and challenges for companies too. Meanwhile, the severe consequences that can flow from misconduct within an organization serve as a reminder that corporate operations are fraught with risk. Social and environmental issues, including heightened focus on income inequality and economic disparities, scrutiny of sexual misconduct issues and evolving views on climate change and natural disasters, have taken on a new salience in the public sphere, requiring companies to exercise utmost care to address legitimate issues and avoid public relations crises and liability.

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Are Buybacks Really Shortchanging Investment?

Posted by Jesse Fried (Harvard Law School) and Charles C.Y. Wang (Harvard Business School), on
Monday, March 19, 2018
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Jesse Fried is the Dane Professor of Law at Harvard Law School and Charles C.Y. Wang is the Glenn and Mary Jane Creamer Associate Professor of Business Administration. This post is based on a recent article authored by Professor Fried and Professor Wang, recently published in the Harvard Business Review.

In an article recently published in the Harvard Business Review, Are Buybacks Really Shortchanging Investment?, Charles Wang and I use data to challenge the widely-held view that U.S. firms distribute too much cash to shareholders through stock buybacks and dividends, reducing these firms’ ability to innovate and invest for the long term.

Payout critics focus on the high volume of dividends and repurchases, often pointing to shareholder payouts routinely exceeding 90% of net income. For example, during the decade 2007-2016, S&P 500 firms distributed $7 trillion to shareholders, mostly via repurchases, totalling 96% of net income. These figures have led Larry Fink, CEO of Blackrock, to warn corporate leaders against seeking to “deliver immediate returns to shareholders, such as buy-backs… while underinvesting in innovation, skilled workforces or essential capital expenditures necessary to sustain long-term growth.” Vice-President Joseph Biden, reportedly mulling a run at the White House in 2020, claimed that the high level of buybacks “has led to significant decline in business investment” with “most of the harm …borne by workers.” Biden’s view is widely shared by prominent politicians in Washington, D.C. Just last week, Senate Democratic Leader Chuck Schumer, who claims buybacks “crowd out investment” that would benefit workers and firms, joined Senator Tammy Baldwin in introducing an amendment to the banking deregulation bill that gives the SEC the authority to block a stock buyback it deems to harm the corporation.

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A Comparative Perspective on Regulation Versus Litigation in Corporate Law

Posted by Sean J. Griffith (Fordham Law School), Dan Awrey (University of Oxford), and Blanaid Clarke (Trinity College Dublin), on
Monday, March 19, 2018
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Sean J. Griffith is T.J. Maloney Chair and Professor of Law and Director of the Corporate Law Center at Fordham Law School; Dan Awrey is a Professor of Financial Regulation at University of Oxford Faculty of Law; and Blanaid Clarke is McCann Fitzgerald Chair in Corporate Law at Trinity College Dublin. This post is based on their recent article, published in the Yale Journal on Regulation.

Regulation by litigation has been the dominant regulatory modality in U.S. corporate law for over a century. But that model is in crisis. The shareholder suit, the trigger of the state law-dominated, fiduciary duty-based model of regulation, has been drawn into disrepute. The crisis is most apparent in merger suits, which have been brought against virtually every deal, but which invariably generate no real benefit for anyone other than the lawyers that file and defend them. Delaware, the leading regulator in U.S. corporate law, has recently taken steps to address the problem, but the immediate result seems to have been a flood of litigation out of Delaware and into other fora. Regulation by litigation thus has demonstrated a tendency to devolve into rent seeking by attorneys.

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The Appraisal of AOL, Inc.

Posted by Scott A. Barshay, Paul, Weiss, Rifkind, Wharton & Garrison LLP, on
Monday, March 19, 2018
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Scott A. Barshay is a partner at Paul, Weiss, Rifkind, Wharton & Garrison LLP. This post is based on a Paul, Weiss publication by Mr. Barshay, Matt Abbott, Ross Fieldston, and Justin Hamill, and is part of the Delaware law series; links to other posts in the series are available here.

Recently in In re Appraisal of AOL Inc., the Delaware Court of Chancery, in an opinion by Vice Chancellor Glasscock, relied solely on its own discounted cash flow (“DCF”) analysis to appraise the fair value of AOL Inc. below the deal price paid in its acquisition by Verizon Communications Inc. While reiterating that deal price is the best evidence of fair value, and must be taken into account, when appraising “Dell‑compliant” transactions (i.e., those where “(i) information was sufficiently disseminated to potential bidders, so that (ii) an informed sale could take place, (iii) without undue impediments imposed by the deal structure itself”), the court held this was not such a transaction. The court found that certain of the deal protections combined with informational disparities between potential bidders and certain actions of the parties were preclusive to other bidders, and therefore, the court assigned no weight to deal price in its fair value determination. Applying its own DCF analysis, the court ultimately determined fair value to be approximately 3% lower than the deal price (possibly due to synergies), thus continuing a string of recent appraisal decisions finding fair value at or below deal price.

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Do CEO Paycuts Really Work?

Posted by Gerald Lobo (University of Houston), Hariom Manchiraju (Indian School of Business), and Sri S. Sridharan (Northwestern University), on
Sunday, March 18, 2018
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Gerald J. Lobo is Arthur Andersen Chair in Accounting at University of Houston C. T. Bauer College of Business; Hariom Manchiraju is Assistant Professor of Accounting at Indian School of Business; and Sri S. Sridharan is John and Norma Darling Distinguished Professor in Financial Accounting at Northwestern University Kellogg School of Management. This post is based on their recent article, forthcoming in the Journal of Accounting and Public Policy. 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).

Boards of directors (boards) often cut CEO pay following poor performance. These paycuts can go beyond the general pay-for-performance relation. Agency theory suggests that such paycuts can act as a disciplining mechanism against the CEO and, therefore, can lead to better performance in subsequent periods. Consistent with this line of reasoning, there is some empirical evidence that firm performance improves following a CEO paycut.

In our article, Accounting and Economic Consequences of CEO Paycuts, forthcoming in the Journal of Accounting and Public Policy, we examine the possibility that cutting the pay of an incumbent CEO might also induce an adverse response. Specifically, we examine whether, in response to paycuts, CEOs actually increase their efforts to improve the underlying economic performance of the firm, or simply resort to managing measured performance through activities such as accruals manipulation and real activities management. These latter activities may be designed to boost reported earnings in the short-run at the expense of long-term shareholder value. Since CEO pay is often linked to reported earnings performance, CEOs have incentives to engage in earnings management after a paycut because such activities can lead to faster improvement in reported performance and, hence, to speedier restoration of their pay to prior levels. Thus, the efficacy of a CEO paycut as a disciplining mechanism is unclear.

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Investor Pressure on Firearms Manufacturers

Posted by Courteney Keatinge, Glass, Lewis & Co., on
Sunday, March 18, 2018
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Courteney Keatinge is Director of Environmental, Social & Governance Research at Glass, Lewis & Co. This post is based on a Glass Lewis publication by Ms. Keatinge.

The mass shooting at a high school in Parkland Florida has focused renewed attention on the issue of gun violence. While regulators debate the appropriate actions to take, a number of companies and investors have recently made moves to address the issue.

For example, both Walmart and Dicks Sporting Goods announced at the end of February that they would place new restrictions on gun sales. Specifically, Dicks Sporting Goods announced that it would immediately end the sales of military-style semi-automatic rifles and its sale of high-capacity magazines. Walmart, which does not sell bump stocks, high capacity magazines or similar accessories, stated that it was removing from its website items that resembled assault-style rifles, including nonlethal guns and toys. In addition, both retailers stated that they would not sell firearms to customers under the age of 21.

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Proposed Amendments to Public Reporting of Fund Liquidity Information

Posted by Robert J. Jackson, Jr., U.S. Securities and Exchange Commission, on
Saturday, March 17, 2018
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Robert J. Jackson, Jr. is a Commissioner at the U.S. Securities and Exchange Commission. The following post is based on Commissioner Jackson’s recent public statement, available here. The views expressed in the post are those of Commissioner Jackson and do not necessarily reflect those of the Securities and Exchange Commission, the other Commissioners, or the Staff.

Thank you, Chairman Clayton, and thank you to the extraordinary Staff in the Division of Investment Management for all of the hard work reflected in this proposal. I appreciate your and the Staff’s engagement—and your willingness to answer my questions—a great deal.

Unfortunately, I cannot join the majority in approving this proposal. The Commission today [March 14, 2018] takes the unusual step of re-proposing an already-final, unanimously-approved rule to give mutual-fund investors less, not more, information about the risks that they face. I fear that the result will be to allow large institutions to avoid the costs of a liquidity crunch, leaving Main Street investors holding the bag. For the following three reasons, I respectfully dissent.

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Proposed Amendments to Public Reporting of Fund Liquidity Information

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Saturday, March 17, 2018
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

I am honored to be here for Dalia Blass’s first open meeting as Director of Investment Management. Dalia has already shown herself to be a fantastic fit for the job. I greatly appreciate the staff’s work on this release. Having sat in your seats during my last stint at the Commission, I know how much work goes into getting a recommendation ready for an open meeting. I am particularly grateful for your efforts to keep the release short—in a relative sense anyway.

Today [March 14, 2018], we are considering a proposal to amend Forms N-PORT and N-1A to rescind the requirement that certain open-end funds disclose aggregate liquidity classification information about their portfolios. We are considering replacing that disclosure with a new requirement to disclose information about the operation and effectiveness of funds’ liquidity risk management programs in their annual report to shareholders. The proposed amendments also would allow funds to classify the liquidity of their investments pursuant to their liquidity risk management programs required by rule 22e-4 in multiple liquidity classification categories for a single position. Finally, we are considering amendments to Form N-PORT to require reporting of holdings of cash and cash equivalents.

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