Monthly Archives: July 2018

The Preclusive Effect of Demand Futility

Sarah Runnells Martin is counsel and Bonnie David and Juliana van Hoeven are associates at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Ms. Runnells Martin, Ms. David, and Ms. van Hoeven. This post is part of the Delaware law series; links to other posts in the series are available here.

In the recent opinion California State Teachers’ Retirement System v. Alvarez (Walmart), the Delaware Supreme Court addressed the preclusive effect of demand futility decisions rendered by one court on derivative litigation pending in another forum. After careful consideration of applicable Arkansas and federal law, the court determined that the Arkansas district court’s ruling—which failed to find that demand had been excused—would preclude plaintiffs in the Delaware Court of Chancery from relitigating demand futility, and dismissed the suit.

Issue Preclusion in Derivative Actions

Issue preclusion prohibits a party that litigated an issue in one forum from later relitigating the same issue in another forum. While the law governing issue preclusion differs somewhat by jurisdiction, the factors are similar, and a key inquiry is usually whether the prior action was between the same parties or others in “privity” with those parties.


FOIA Disclosure of Federal Compliance Documents?

Abena Mainoo, Elizabeth (Lisa) Vicens, and Jonathan S. Kolodner are partners at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary memorandum by Ms. Mainoo, Ms. Vicens, Mr. Kolodner, and Charity E. Lee.

On June 13, 2018, in its latest decision in a long-running litigation, the U.S. District Court for the District of Columbia considered the applicability of certain exemptions under the Freedom of Information Act (“FOIA”) to documents sought by journalists relating to the actions of the independent compliance monitor that Siemens AG was required to retain under the terms of its 2008 plea agreement for violations of the Foreign Corrupt Practices Act (the “FCPA”). Broadly speaking, although the court concluded that portions of the documents that related to Siemens’ business operations and the DOJ’s analysis of the monitor’s activities were exempted from disclosure, the court also required the DOJ to produce other portions of those materials and to reevaluate, based on the court’s decision, whether additional materials had to be disclosed. The decision, and the lengthy litigation over the application of FOIA to these materials, highlight the complexity of identifying the boundaries of the FOIA protection applicable to the typically sensitive and confidential information companies provide to compliance monitors and the risk that such information later will have to be disclosed once it is in the hands of the government.


M&A Litigation Developments: Where Do We Go From Here?

Edward Micheletti is partner, Jenness Parker is counsel, and Bonnie David is an associate at Skadden, Arps, Slate, Meagher & Flom LLP. This post is based on a Skadden memorandum by Mr. Micheletti, Ms. Parker, and Ms. David and is part of the Delaware law series; links to other posts in the series are available here.

Over the last few years, three notable Delaware cases—C&J Energy, Corwin and Trulia—have paved the way for a dramatic shift in the deal litigation landscape. In C&J Energy Services, Inc. v. City of Miami General Employees’ and Sanitation Employees’ Retirement Trust (2014), the Delaware Supreme Court indicated (and the Court of Chancery has generally construed the decision to hold) that an injunction should not be issued where there is no alternative bidder and stockholders therefore risk losing the current deal if enjoined. In Corwin v. KKR Financial Holdings LLC (2015), the Delaware Supreme Court clarified that, absent a conflicted controller, a fully informed vote of disinterested, uncoerced stockholders will extinguish breach of fiduciary duty claims, leaving only claims for waste. And finally, in In re Trulia, Inc. Stockholder Litigation (2016), the Court of Chancery decided that it will no longer approve disclosure-based settle­ments unless the disclosures are “plainly material,” the release is narrowly tailored to the claims brought in the litigation and the claims are sufficiently investigated.


The Effect of Institutional Ownership Types On Innovation and Competition

Paul Borochin is Assistant Professor at the University of Connecticut School of Business. This post is based on a recent paper, authored by Professor Borochin; Jie Yang, Senior Economist at the Board of Governors of the Federal Reserve System; and Rongrong Zhang, Associate Professor at Georgia Southern University College of Business.

Related research from the Program on Corporate Governance includes New Evidence, Proofs, and Legal Theories on Horizontal Shareholding by Einer Elhauge (discussed on the Forum here). The views in the post are solely those of the authors and do not necessarily reflect those of the Federal Reserve System.

In common ownership, the type of the common owner institution matters. Institutional ownership of firms has seen a marked rise in the past few decades, with average institutional ownership share of a firm rising from 20% to 30% in the 1980s to over 65% of the total by the 2010s, with residual retail ownership correspondingly falling from 80% to less than 35% of the firm. (See Borochin, Paul, and Jie Yang (2017). The Effects of Institutional Investor Objectives on Firm Valuation and Governance, Journal of Financial Economics 126.) Over the same period, the fraction of the average firm held by institutions holding blocks of same-industry rivals has risen from 4.5% to 28%. (See He, Jie, J. Huang, 2017, Product Market Competition in a World of Cross Ownership: Evidence from Institutional Blockholdings, The Review of Financial Studies 30.) This not only changes the portfolio properties of the institutional investors, but also has the potential to change the corporate strategies of held firms. Recent studies find opposing effects of common institutional ownership on the competitive behavior of firms:

On the one hand, Elhauge (2016) and Azar, Schmalz, and Tecu (2018) propose an alternative benefit stemming from changes in firm competitive behavior: common ownership of same-industry firms incentivizes both investors and managers to maximize portfolio rather than firm profits leading to anti-competitive outcomes. (See Elhauge, E., 2016, Horizontal Shareholding, Harvard Law Review 129 discussed on the Forum here, and Azar, J., M. Schmalz, I. Tecu, 2018, Anti-competitive Effects of Common Ownership, Journal of Finance 74.) On the other, He and Huang (2017) argue that common institutional ownership can facilitate collaboration between firms by resolving incomplete contracting issues, and directly or indirectly facilitate information sharing between same-industry rivals. (He, Jie, J. Huang, 2017, Product Market Competition in a World of Cross Ownership: Evidence from Institutional Blockholdings, The Review of Financial Studies 30, discussed on the Forum here) In our paper, we seek to reconcile these findings by documenting countervailing effects of common ownership by institutional type.


Smaller Reporting Companies and XBRL

Steve Quinlivan and Cate Heaven Young are partners and Bryan Pitko is of counsel at Stinson Leonard Street LLP. This post is based on their Stinson Leonard memorandum.

The SEC has long recognized that smaller issuers should be subject to somewhat less stringent disclosure standards than larger companies. The SEC has referred to this as “scaled disclosure” and has embodied the idea in a series of rules for smaller reporting companies, or SRCs. The SEC has adopted final rules to expand the availability of scaled disclosure requirements for a company qualifying as an SRC by allowing companies with a public float of less than $250 million to qualify as an SRC, as compared to the $75 million threshold under the prior definition. In addition, companies that do not have a public float are now permitted to provide scaled disclosures if annual revenues are less than $100 million, as compared to the prior threshold of less than $50 million in annual revenues.


The UK Corporate Governance Code

Martin Lipton is a founding partner of Wachtell, Lipton, Rosen & Katz, specializing in mergers and acquisitions and matters affecting corporate policy and strategy. This post is based on a Wachtell Lipton memorandum by Mr. Lipton.

The Financial Reporting Council today [July 16, 2018] issued a revised corporate governance code and announced that a revised investor stewardship code will be issued before year-end. The code and related materials are available at

The revised code contains two provisions that will be of great interest. They will undoubtedly be relied upon in efforts to update the various U.S. corporate governance codes. They will also be used to further the efforts to expand the sustainability and stakeholder concerns of U.S. boards.

First, the introduction to the code makes note that shareholder primacy needs to be moderated and that the concept of the “purpose” of the corporation, as long put forth in the U.K. by Colin Mayer and recently popularized in the U.S. by Larry Fink in his 2018 letter to CEO’s, is the guiding principle for the revised code:


Do Foreign Investors Improve Market Efficiency?

Marcin T. Kacperczyk is Professor of Finance at Imperial College London; Savitar Sundaresan is Assistant Professor of Finance at Imperial College Business School; and Tianyu Wang is a PhD candidate in Finance at Imperial College Business School. This post is based on their recent paper.

One of the key purposes of financial markets is to efficiently allocate capital to the real sector. Foreign investors have emerged as an important force in this process. As globalization has increased, financial markets have witnessed substantial inflows of capital from foreign investors. The empirical literature has studied the consequences of financial market liberalization for volatility and aggregate equity prices, but we know considerably less about the direct impact of foreign portfolio investments on market efficiency and welfare. Moreover, the evidence on aggregate efficiency and welfare in the international economics literature is either inconclusive or finds economically small gains. In this paper, we revisit efficiency and welfare gains due to foreign stock ownership using disaggregated panel data on firms and investors from 40 countries.


2018 Investor Corporate Governance Report

Viraj Patel is Head of Proxy Operations at CMi2i Proxy. This post is based on a CMi2i publication by Mr. Patel, Tony Quinn, and Mark Simms. Related research from the Program on Corporate Governance includes Social Responsibility Resolutions by Scott Hirst (discussed on the Forum here) and Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

The CMi2i 2018 Annual Investor Corporate Governance Report surveyed institutional shareholders representing $8 trillion of Assets under Management (“AUM”). The objective of the report is to find out which Environmental, Social and Governance (“ESG”) areas they believe will be key issues of focus in 2018 and beyond, and the impact of this on shareholder behaviour. Respondents comprised of individuals responsible for corporate governance, responsible investment and proxy voting from US and European institutions.

1. Increasing Shareholder Accountability Precipitates Increasing Board Accountability

Increasing engagement with non-executive board members, increasing “active” style voting, increasing integration of ESG factors into the investment process, wider issues on the ESG Agenda including Human Capital and Corporate Culture are key themes in the CMi2i 2018 Annual Investor Corporate Governance Report.


Supreme Court Ruling on SEC-Appointed Judges

Alexander Janghorbani is senior attorney and Matthew C. Solomon is a partner at Cleary Gottlieb Steen & Hamilton LLP. This post is based on a Cleary Gottlieb memorandum by Mr. Janghorbani and Mr. Solomon.

On June 21, 2018, the Supreme Court ruled in Lucia v. SEC that Securities and Exchange Commission Administrative Law Judges (ALJs) are “officers” for the purposes of the Constitution’s Appointments Clause. Because, at the time he heard the case, the ALJ’s appointment was not consistent with that clause, it was deemed unconstitutional and the administrative proceeding void. Lucia is almost certainly not the last word on the constitutionality of the SEC’s ALJs. Indeed, another trip up to the Supreme Court on a related constitutional issue involving the ALJs’ civil service protections seems likely.

In the meantime, Lucia will require the SEC to, at minimum: (1) evaluate the efficacy of the Commission’s 2017 attempt to cure the constitutional infirmity of the ALJs’ appointment, (2) chart a course forward to achieve prompt and final resolution of the remaining constitutional issue, and (3) almost certainly face a host of related challenges to past and pending cases. And, of course, there are likely to be “spill-over” effects from Lucia that will force the other agencies that use ALJs to grapple with the legitimacy of their own administrative proceedings.


Are Institutional Investors with Multiple Blockholdings Effective Monitors?

Jun-Koo Kang is Canon Professor at the Nanyang Technological University Business School; Jane Luo is Senior Lecturer at the University of Adelaide Business School; and Hyun Seung Na is Associate Professor at Korea University Business School. This post is based on their recent article, forthcoming in Journal of Financial Economics.

Related research from the Program on Corporate Governance includes The Agency Problems of Institutional Investors by Lucian Bebchuk, Alma Cohen, and Scott Hirst (discussed on the Forum here)

Previous studies show that, unlike small dispersed shareholders, large shareholders have strong incentives to monitor management and take actions that increase firm value (Shleifer and Vishny, 1986; Demsetz and Lehn, 1985). Despite extensive research on the monitoring role of large shareholders, the literature has paid little attention to the fact that institutions frequently serve as large shareholders in many firms at the same time and whether their monitoring incentives and effectiveness vary with the number of stocks they hold as large shareholders. This lack of evidence is surprising given that institutional investors in the US on average hold a significant number of block shares in different firms. According to the data from Thomson Reuters Institutional Holdings (13F) for the period 1993 to 2010, an institutional investor on average serves as a blockholder for five different firms at the same time.


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