Monthly Archives: May 2018

Labor Representation in Governance as an Insurance Mechanism

E. Han Kim is Everett E. Berg Professor of Business Administration at University of Michigan Ross School of Business; Ernst Maug is Professor of Corporate Finance at University of Mannheim Business School; and Christoph Schneider is Assistant Professor of Finance at Tilburg University. This post is based on their recent article, forthcoming in the Review of Finance.

Is labor representation on the board of directors bad? Not necessarily. It can improve risk sharing between employers and employees without hurting shareholders, according to our study on the German experience. Germany requires 50% employee representation on the supervisory board when firms have more than 2,000 employees working in Germany.

We study establishment-level data on employment and wages. (An establishment is any facility having a separate physical address, such as a factory, service station, restaurant, or office building.) Our sample covers the top 100 listed German firms during the period 1990-2008. We compare establishments belonging to firms required to have parity codetermination of 50% employee representation (parity firms, in short) with those belonging to firms not required to have 50% representation (non-parity firms). Employees working for parity firms are paid, on average, 3.3% less than employees of non-parity firms. These lower wages, we argue, represent an insurance premium, because when other firms in the same industry lay off more than 5% of the work force, parity firms do not lay off workers in any significant way. That is, parity firms protect their employees when others in the same industry go through a major restructuring of their work force. As such, we interpret the lower wages as insurance premiums workers pay in return for their employment guarantees.

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Taxes and Mergers: Evidence from Banks During the Financial Crisis

Albert H. Choi is Professor and Albert C. BeVier Research Professor of Law; and Quinn Curtis and Andrew T. Hayashi are Associate Professors at University of Virginia School of Law. This post is based on their recent paper.

One of the measures taken by federal authorities to manage the financial crisis in the fall of 2008 was a remarkable piece of administrative guidance from the IRS. Issued on September 30th of that year and less than a page long, IRS Notice 2008-83, which was styled as an interpretation of existing law, had a dramatic positive effect on the value of banks’ tax assets. The Notice effectively turned off with respect to banks an aspect of Internal Revenue Code Section 382 that generally restricts the ability of a corporation to use unrecognized tax losses from underperforming loans to offset taxable income from other sources if that corporation undergoes a significant change in equity ownership, including an acquisition.

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Proposed Amendments to Delaware’s LLC and LP Acts

John D. Seraydarian and Monica M. Ayres are Directors at Richards, Layton & Finger, P.A. This post is based on their Richards Layton publication and is part of the Delaware law series; links to other posts in the series are available here.

Legislation proposing to amend the Delaware Limited Liability Company Act (LLC Act) and the Delaware Revised Uniform Limited Partnership Act (LP Act) (jointly, the LLC and LP Acts) has been introduced to the Delaware General Assembly. The following is a brief summary of some of the more significant proposed amendments that affect Delaware limited liability companies (Delaware LLCs) and Delaware limited partnerships (Delaware LPs), including amendments (i) enabling a Delaware LLC to divide into two or more Delaware LLCs as a new permitted form of Delaware LLC reorganization, (ii) providing for the formation of statutory public benefit Delaware LLCs (Statutory Public Benefit LLCs), (iii) authorizing the creation of a new type of Delaware LLC series known as a “registered series,” and (iv) providing specific statutory authority for the use of networks of electronic databases (including blockchain and distributed ledgers) by Delaware LLCs and Delaware LPs. If enacted, all of the proposed amendments will become effective on August 1, 2018, except that the proposed amendments relating to Delaware LLC series will not become effective until August 1, 2019.

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Advance Notice Bylaw Deadlines: A Warning Shot

Shaun J. Mathew and Daniel E. Wolf are partners at Kirkland & Ellis LLP. This post is based on a Kirkland & Ellis publication by Mr. Mathew and Mr. Wolf. Related research from the Program on Corporate Governance includes Dancing with Activists by Lucian Bebchuk, Alon Brav, Wei Jiang, and Thomas Keusch (discussed on the Forum here).

We recently noted a Washington state case that upheld the validity of advance notice bylaws as “common” and supported a company’s close review of a stockholder’s director nominations for compliance with bylaw requirements. And as we have noted in the past, advance notice bylaws are a near-universal feature of the organizational documents of public companies that Delaware courts have repeatedly upheld as “useful in permitting orderly shareholder meetings.”

However, a recent decision from a New York state court highlights for public company boards, particularly in the context of transaction planning, potential challenges to the enforcement of nomination deadlines under certain circumstances.

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An Introduction to Smart Contracts and Their Potential and Inherent Limitations

Stuart D. Levi is a partner and Alex B. Lipton is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on their Skadden publication.

“Smart contracts” are a critical component of many platforms and applications being built using blockchain or distributed ledger technology. Below, we outline the background and functions of smart contracts, discuss whether they can be deemed enforceable legal agreements under contract law in the United States, and highlight certain legal and practical considerations that will need to be resolved before they can be broadly used in commercial contexts.

An Introduction to Smart Contracts

How Smart Contracts Function

“Smart contracts” is a term used to describe computer code that automatically executes all or parts of an agreement and is stored on a blockchain-based platform. As discussed further below, the code can either be the sole manifestation of the agreement between the parties or might complement a traditional text-based contract and execute certain provisions, such as transferring funds from Party A to Party B. The code itself is replicated across multiple nodes of a blockchain and, therefore, benefits from the security, permanence and immutability that a blockchain offers. That replication also means that as each new block is added to the blockchain, the code is, in effect, executed. If the parties have indicated, by initiating a transaction, that certain parameters have been met, the code will execute the step triggered by those parameters. If no such transaction has been initiated, the code will not take any steps. Most smart contracts are written in one of the programming languages directly suited for such computer programs, such as Solidity.
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Expanding the On-Ramp: Recommendations to Help More Companies Go and Stay Public

Brian P. O’Shea is Senior Director at the U.S. Chamber of Commerce Center for Capital Markets Competitiveness. This post is based on a publication released by the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet, and the U.S. Chamber of Commerce.

In April, eight organizations—the American Securities Association, Biotechnology Innovation Organization, Equity Dealers of America, Nasdaq, National Venture Capital Association, Securities Industry and Financial Markets Association, TechNet, and U.S. Chamber of Commerce—released a report that included 22 recommendations for how to help more companies in the United States go and stay public. This report and recommendations stem from the shared concern of these organizations that the public company model has failed to keep up with the times, constituting a significant threat to long term economic growth and job creation.

In recent years, the steady decline in the number of U.S.-listed public companies has garnered the attention and concern of both market participants and policymakers. The United States is now home to roughly half the number of public companies that existed twenty years ago, while the overall number of public companies is little changed from 1982. [1] While the initial public offering (IPO) market has rebounded in recent years from its depths around the financial crisis, annual IPOs are still a fraction of what they were in the 1980s or 1990s.

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Continued Compensation to Incapacitated Controllers

Ning Chiu is counsel at Davis Polk & Wardwell LLP. This post is based on a Davis Polk publication by Ms. Chiu, and is part of the Delaware law series; links to other posts in the series are available here.

Related research from the Program on Corporate Governance includes Independent Directors and Controlling Shareholders by Lucian Bebchuk and Assaf Hamdani (discussed on the Forum here), and The Untenable Case for Perpetual Dual-Class Stock by Lucian Bebchuk and Kobi Kastiel (discussed on the Forum here).

In an unusual finding, the Delaware Court of Chancery held that demand was partly excused and claims for corporate waste, bad faith and unjust enrichment could proceed against CBS Corporation for compensation paid to its former Executive Chairman, Sumner Redstone, who later became Chairman Emeritus. The plaintiff alleged that Mr. Redstone became incapacitated yet continued to receive compensation for work he did not perform.

The court noted that claims of corporate waste and bad faith require a plaintiff to show that the board’s decision was “so egregious or irrational” that it could not be based on a valid assessment of a company’s best interest, and amount to an “extreme factual scenario.” In making its determination, the court reviewed the salary payments made to Mr. Redstone as Executive Chairman pursuant to an employment agreement. Under the agreement, the compensation committee could only increase, but not decrease, Mr. Redstone’s salary. Either party could also terminate the agreement. The agreement required Mr. Redstone to be “actively engaged” in working with the board and management, including providing overall leadership and strategic direction, offering guidance and support, coordinating board activities and communicating with shareholders.

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Weekly Roundup: May 18-24, 2018


More from:

This roundup contains a collection of the posts published on the Forum during the week of May 18-24, 2018.

Board Performance Evaluations that Add Value


Cryptocurrency Compensation: A Primer on Token-Based Awards


Does it Pay to Pay Attention?


Cash Windfalls and Acquisitions


Non-Delaware Decisions on Director Nominations



How Valuable are Independent Directors? Evidence from External Distractions


Elon Musk’s Compensation






The DOJ’s New “Piling On” Policy

The DOJ’s New “Piling On” Policy

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 Buergel, Roberto Finzi, Mark Mendelsohn, Alex Oh, and Lorin Reisner.

[May 9, 2018], Rod Rosenstein, Deputy Attorney General of the U.S. Department of Justice, announced a new policy, in the form of an addition to the United States Attorneys’ Manual (“USAM”), concerning the coordination of corporate resolution penalties in cases involving penalties imposed by more than one regulator or law enforcement authority. The new policy represents a promising development that has the potential to address a serious issue that has resulted in unfair outcomes due to the lack of coordination among enforcement authorities and the imposition of redundant fines and penalties.

In a speech announcing the new policy, DAG Rosenstein referred to the “piling on” of fines and penalties by multiple regulators and law enforcement agencies “in relation to investigations of the same misconduct.” [1] DAG Rosenstein noted that the “aim” of the new policy “is to enhance relationships with our law enforcement partners in the United States and abroad, while avoiding unfair duplicative penalties.” [2] Specifically, the new policy requires DOJ attorneys to “coordinate with one another to avoid the unnecessary imposition of duplicative fines, penalties and/or forfeiture against [a] company,” and further instructs DOJ personnel to “endeavor, as appropriate, to … consider the amount of fines, penalties and/or forfeiture paid to federal, state, local or foreign law enforcement authorities that are seeking to resolve a case with a company for the same misconduct.” [3]

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Bank Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment

Thomas C. Mosk is Assistant Professor of Finance at the Center of Excellence SAFE of the Goethe University Frankfurt. This post is based on an article forthcoming in the Review of Financial Studies by Professor Mosk; Reint Gropp, Professor of Economics at the Halle Institute for Economic Research; Steven Ongena, Professor of Banking at the University of Zurich; and Carlo Wix, Ph.D. candidate in Finance at Goethe University Frankfurt.

Basel III, which will become fully effective in 2019, significantly increases capital requirements for banks. However, at this point, the economic implications of such higher capital requirements are still unclear. Banks can increase their regulatory capital ratios by either increasing their levels of regulatory capital (the numerator of the capital ratio) or by decreasing their levels of risk-weighted assets (the denominator of the capital ratio). While raising capital is generally considered “good deleveraging” by regulators, shrinking assets has potentially adverse effects if many banks simultaneously engage in cutting lending. In Banks Response to Higher Capital Requirements: Evidence from a Quasi-Natural Experiment, we study the impact of the 2011 European Banking Authority (EBA) capital exercise—which required a subset of European banks to increase their regulatory capital ratios—on banks’ balance sheets and the transmission of this regulatory intervention to the real economy.

We find that capital exercise banks increased their capital ratios by reducing their risk-weighted assets and not by raising their levels of equity. Banks reduced lending to corporate and retail customers, resulting in lower asset, investment, and sales growth for firms obtaining a larger share of their bank credit from capital exercise banks.

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