Monthly Archives: August 2018

The Appraisal Landscape

Gail Weinstein is senior counsel, and David L. Shaw and Scott B. Luftglass are partners at Fried, Frank, Harris, Shriver & Jacobson LLP. This post is based on a Fried Frank publication by Ms. Weinstein, Mr. Shaw, Mr. Luftglass, Robert C. SchwenkelBrian T. Mangino, and Andrea Gede-Lange, 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 Using the Deal Price for Determining “Fair Value” in Appraisal Proceedings (discussed on the Forum here) and Appraisal After Dell, both by Guhan Subramanian.

Two new Delaware appraisal decisions—Blueblade Capital Opportunities, L.P. v. Norcraft Inc. (July 27, 2018) and In re Appraisal of Solera, Inc. (July 30, 2018)—should further discourage appraisal claims in the context of arm’s-length mergers. In Norcraft, the Court of Chancery relied on a DCF analysis, while looking to the deal price as a “reality check,” and found fair value to be 2.5% above the deal price. In Solera, the Court of Chancery relied on the deal-price-less-synergies and found fair value to be 3.4% below the deal price. Notably, while the court in neither case determined fair value to be equal to the deal price (the approach strongly embraced by the Delaware Supreme Court in its seminal Dell decision issued in late 2017), in both cases the result was close to the deal price (in our view, reflecting the impact of Dell).


Weekly Roundup: August 24–30, 2018

More from:

This roundup contains a collection of the posts published on the Forum during the week of August 24–30, 2018.

Awakening Governance: ACGA China Corporate Governance Report 2018

The CFIUS Reform Bill

Does Transparency Increase Takeover Vulnerability?

Gender Quotas in California Boardrooms

Supreme Court Nominee and the Derivative Suit

Remarks on Capital Formation at the Nashville 36|86 Entrepreneurship Festival

Jay Clayton is Chairman of the U.S. Securities and Exchange Commission. This post is based on Chairman Clayton’s recent remarks at 36|86 Entrepreneurship Festival in Nashville, Tennessee, available here. The views expressed in this post are those of Mr. Clayton and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you Charlie for that kind introduction. I am delighted to participate in the 36|86 Entrepreneurship Festival here in Nashville, Tennessee. I would like to speak for about 25 minutes about key capital formation initiatives at the SEC. [1] After my remarks, I will be joined by Bill Hinman, the Director of the SEC’s Division of Corporation Finance, for a fireside chat that will be moderated by [Tennessee] Governor Bill Haslam. Thank you for joining us today [August 29, 2018], Governor Haslam.

The 36|86 Entrepreneurship Festival is a fitting place to discuss the Commission’s capital formation priorities. While many people visit Nashville because of its rich history and legendary music scene, Bill and I are here today as fans of the Music City’s vibrant ecosystem for startups. Nashville’s array of incubators, accelerators, co-working spaces, and startup competitions, in combination with active angel investor and venture capital communities, provide fertile ground for startups to get traction and then thrive. Nashville was ranked 6th out of the top 40 U.S. cities for entrepreneurs and startups in 2018, [2] and 7th among U.S. cities creating the most tech jobs in 2017. [3] Sixth and seventh are pretty darn impressive for a city with the 25th largest population.


Supreme Court Nominee and the Derivative Suit

Justin T. Kelton is a Partner at Abrams, Fensterman, Fensterman, Eisman, Formato, Ferrara, Wolf & Carone, LLP. This post is based on an Abrams Fensterman memorandum by Mr. Kelton.

In an opinion from 2008, Judge Kavanaugh, writing for the U.S. Court of Appeals for the District of Columbia, offered a rare glimpse into his views on the demand requirement in derivative litigation under Delaware law, and hinted in dicta that he may be open to reevaluating the legal standard for reviewing a dismissal of derivative claims based on a lack of demand. Given Judge Kavanaugh’s nomination to the Supreme Court, this post summarizes his analysis on this critical issue.

Judge Kavanaugh Affirms Dismissal Based on Lack of Demand, and Confirms Substantial Hurdles Faced by Plaintiffs In Derivative Actions.

In Pirelli Armstrong Tire Corp. Retiree Med. Benefits Tr. ex rel. Fed. Nat. Mortg. Ass’n v. Raines, 534 F.3d 779, 782 (D.C. Cir. 2008), abrogated by Lightfoot v. Cendant Mortg. Corp., 137 S. Ct. 553, 196 L. Ed. 2d 493 (2017), [1] plaintiffs, who were shareholders of Fannie Mae, brought a derivative action against the company’s directors arising out of the company’s misapplication of accounting standards, and the board’s approval of certain executives’ severance compensation.


The Race to the Bottom in Global Securities Regulation

Sharon Hannes is Professor of Law and Dean and Ehud Kamar is Professor of Law at Tel Aviv University Buchmann Faculty of Law. This post is based on a paper by Professor Hannes and Professor Kamar forthcoming in the Research Handbook on Representative Shareholder LitigationRelated research from the Program on Corporate Governance includes The Market for Corporate Law by Lucian Bebchuk, Oren Bar-Gill, and Michal Barzuza.

In a forthcoming article, we tell the story of our class action against Teva Pharmaceutical Industries as an illustration of the global race to laxity in the regulation of capital markets.

Teva is an Israeli company traded in Israel and the United States. It is the largest generic drug maker in the world. Its market value at the end of 2012 was 37 billion dollars—higher than, say, Deutsche Bank’s. This was the time at which we filed a shareholder class action in the Tel Aviv District Court to compel Teva to disclose executive pay on an individual basis, as required under Israeli law and US law. Teva settled the case with us by agreeing to disclose this information. To ensure other companies did the same, Israel adopted a rule affirmatively requiring this disclosure of all Israeli companies traded abroad. These companies comprise Israel’s entire technology sector and half of all public firms by market value.


Gender Quotas in California Boardrooms

Tomas Pereira is a Research Analyst at Equilar, Inc. This post is based on an Equilar memorandum by Mr. Pereira.

By August 31, 2018, California could become the first state in the nation to mandate publicly held companies that base their operations in the state to have women on their boards. The legislation—SB 826—will require public companies headquartered in California to have a minimum of one female on its board of directors by December 31, 2019. That minimum will be raised to at least two female board members for companies with five directors or at least three female board members for companies with six or more directors by December 31, 2021.

If SB 826 is passed in the Assembly and signed by Governor Jerry Brown, corporations not compliant with the new rules will be subjected to financial consequences. Strike one will be accompanied with a fine equal to the average annual cash compensation of directors. Any subsequent violation would amount to a fine equal to three times the average annual cash compensation for directors. Hence, the consequences are very real for companies that choose not to comply with the new rules.


Securing Financial Stability: Systematic Regulation of Systemic Risk

Steven L. Schwarcz is Stanley A. Star Professor of Law & Business at the Duke University School of Law. This post is based on a recent paper by Professor Schwarcz. Related research from the Program on Corporate Governance includes Containing Systemic Risk by Taxing Banks Properly by Mark J. Roe and Michael Troege (discussed on the Forum here).

Regulators worry that the “macroprudential” regulation enacted since the financial crisis to protect financial stability may be inadequate to prevent another crisis. This paper examines that regulation with a decade of hindsight.

The primary focus of that regulation has been to protect against the failure of systemically important financial institutions (“SIFIs”) or to mitigate the systemic impact of their failure. This reflects concern that SIFIs may engage in morally hazardous risk-taking because they deem themselves “too big to fail” (TBTF). For example, capital requirements are intended to protect against the failure of SIFIs by requiring them to maintain specified levels of equity and the like. Resolution is intended to mitigate the systemic impact of a SIFI’s failure by reorganizing its capital structure or liquidating it with minimal systemic impact.


Lazard’s 2Q 2018 13F Filing Analysis

Jim Rossman is head of Shareholder Advisory at Lazard. This post is based on a Lazard publication by Mr. Rossman. 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); 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).

Rule 13F-1 of the Securities Exchange Act of 1934 requires institutional investors with discretionary authority over more than $100m of public equity securities to make quarterly filings on Schedule 13F

  • Schedule 13F filings disclose an investor’s holdings as of the end of the quarter, but generally do not disclose short positions or holdings of certain debt, derivative and foreign listed securities
  • Filing deadline is 45 days after the end of each quarter; filings for the quarter ended June 30, 2018 were due on August 14, 2018


Fintech as a Systemic Phenomenon

Saule T. Omarova is Professor of Law at Cornell University. This post is based on a recent paper by Professor Omarova.

Fintech is the hottest topic in finance today. Bankers are racing to adopt it, policymakers are debating how to facilitate it, investors are pouring money into it, and academics are writing about it. Fintech is visibly “disrupting” the way we conduct financial transactions. Invisibly, it is also changing the way we think about finance. The rise of fintech is gradually recasting our shared understanding of the financial system in seemingly objective terms, as simply another sphere of targeted application of normatively neutral information technologies and computer science. Targeting solutions for concrete “frictions” in market transactions, fintech refocuses our attention on clearly functionally defined, programmable business processes and tools, rather than complex systemic dynamics and difficult policy tradeoffs. By making financial transactions faster, cheaper, and more easily accessible, new technology promises not only to eliminate all manner of market inefficiency but also to democratize finance. In short, it promises a micro-level “win-win” solution to the financial system’s many ills.


Performance Awards and Say on Pay

Elizabeth Carroll is a Senior Research Analyst at Equilar, Inc. This post is based on an Equilar memorandum by Ms. Carroll. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, by Lucian Bebchuk and Jesse Fried.

With most annual shareholder meetings concluded, a majority of shareholders have had the opportunity to vote on 2018 compensation packages. While companies are not legally bound by their Say on Pay results, there are still plenty of incentives, such as shareholder confidence in the board and management, to motivate them to work towards a passing score. However, designing a pay package that can attract and retain talented executives, while still pleasing shareholders, can prove to be a challenge for compensation committees.

A new Equilar study examined the mix of compensation provided to CEOs—cash (consisting of base salary and bonus), time-vested equity, and performance awards (consisting of both cash and equity performance targets)—broken down by shareholder approval of these compensation packages over the past three years.


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