Monthly Archives: November 2018

Disclosing Directors

Posted by Marco Ventoruzzo (Bocconi University), on
Tuesday, November 6, 2018
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Marco Ventoruzzo is Full Professor of Business Law and Director of the Department of Law at Bocconi University. This post is based on a recent paper authored by Professor Ventoruzzo; Piergaetano Marchetti, Emeritus Professor of Law at Bocconi University; and Gianfranco Siciliano, assistant professor at Bocconi University. 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).

In a recent paper we investigate the correlation between the composition of the board of directors of listed corporations and the quantity and quality of information disclosed to the market, also with respect to the disclosure of privileged, price-sensitive information. This work is a follow up on an empirical analysis that we published last year on dissent (either in the form of negative votes or resignation) by directors of listed corporations, available here.

The question is examined with respect to the Italian Stock Exchange, a case-study that we consider particularly relevant, interesting and useful also for other jurisdictions for several reasons. First of all, while other studies exist on the possible role of outside, non-executive and independent directors on corporate transparency, this line of work has primarily considered Anglo-Saxon jurisdictions and some Asian systems. We therefore offer new insights on a continental, civil-law system, filling a gap in the debate. Additionally, Italian rules and practices on disclosure are similar—when not identical—to other EU countries, especially with respect to rules governing mandatory disclosure of corporate events, which have been strongly harmonized by the Market Abuse Regulation of 2014. In terms of board composition, in addition to rules on independent and non-executive directors, roughly ten years ago Italy adopted “list voting,” a peculiar system designed to facilitate the election of directors appointed by minority shareholders (primarily, institutional investors). Consequently, we can test the impact of minority-appointed directors on decisions to disclose information to the market.

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Cyber-Fraud Controls and the SEC

Posted by Marc J. Fagel and Alexander H. Southwell, Gibson, Dunn & Crutcher LLP, on
Tuesday, November 6, 2018
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Marc J. Fagel and Alexander H. Southwell are partners at Gibson, Dunn & Crutcher LLP. This post is based on their recent Gibson Dunn memorandum.

On October 16, 2018, the Securities and Exchange Commission issued a report warning public companies about the importance of internal controls to prevent cyber fraud. The report described the SEC Division of Enforcement’s investigation of multiple public companies which had collectively lost nearly $100 million in a range of cyber-scams typically involving phony emails requesting payments to vendors or corporate executives. [1]

Although these types of cyber-crimes are common, the Enforcement Division notably investigated whether the failure of the companies’ internal accounting controls to prevent unauthorized payments violated the federal securities laws. The SEC ultimately declined to pursue enforcement actions, but nonetheless issued a report cautioning public companies about the importance of devising and maintaining a system of internal accounting controls sufficient to protect company assets.

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Bouncing Back from a Low Say-On-Pay Vote

Posted by Edward A. Hauder, Exequity, LLP, on
Monday, November 5, 2018
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Edward A. Hauder is Lead Consultant and Senior Advisor at Exequity, LLP. This post is based on an Exequity memorandum by Mr. Hauder.

If your company’s say-on-pay (SOP) vote received less than 80% support, you will need to respond appropriately in next year’s proxy or face even lower support and, possibly, vote recommendations against directors. And if the SOP vote received less than 50% support, your response will be even more critically evaluated. The two major proxy advisory firms, Institutional Shareholder Services Inc. (ISS) and Glass Lewis & Co. (GL), expect companies to respond to a “low” SOP vote (i.e., below 70% for ISS and below 80% for GL) in a particular manner, or they could find the company was unresponsive to the shareholder vote and recommend against not only the SOP on next year’s proxy, but also directors—those on the compensation committee that approved the pay at issue and/or the full board. The disclosures the proxy advisory firms want to see are very particular, and need to follow a specific format and address several items.

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Do Insiders Time Management Buyouts and Freezeouts to Buy Undervalued Targets?

Posted by Jarrad Harford (University of Washington), Jared R. Stanfield (UNSW Business School), and Feng Zhang (University of Utah), on
Monday, November 5, 2018
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Jarrad Harford is Professor of Finance at the University of Washington Foster School of Business; Jared R. Stanfield is Senior Lecturer at UNSW Australia Business School; and Feng Zhang is Assistant Professor at the University of Utah. This post is based on their recent article, forthcoming in Journal of Financial Economics. Related research from the Program on Corporate Governance includes Adverse Selection and Gains to Controllers in Corporate Freezeouts by Lucian Bebchuk and Marcel Kahan.

Conflicts of interest arise in management buyouts (MBOs) and freezeouts: the acquirers (managers and controlling shareholders) have an incentive to pay the lowest price to selling shareholders, despite having a fiduciary duty to them. Such conflicts of interest could lead to unfair treatment of public shareholders. For instance, in the buyout of the Dell Inc. by its founder and CEO Michael Dell in 2013, some investors believed that “management swoops in to get a good deal right before there’s a change in the business” (Hoffman, 2016). This, and other anecdotal examples suggest that even if they plan to create value post acquisition, managers have incentives to not only negotiate lower premiums (relative to the current market price) but also to initiate deals when the firm is undervalued.

Do managers and controlling shareholders initiate MBOs and freezeouts when the target firm is undervalued? The question is difficult to answer because one cannot observe the value path of the target had it not been acquired. In our article, Do Insiders Time Management Buyouts and Freezeouts to Buy Undervalued Targets?, we circumvent this difficulty by examining the value path of the target’s industry peers following MBO and freezeout announcements.

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The DOJ’s New Corporate Monitor Policy

Posted by Ronald C. Machen, Erin G.H. Sloane and Emily Stark, Wilmer Cutler Pickering Hale and Dorr LLP, on
Monday, November 5, 2018
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Ronald C. Machen and Erin G.H. Sloane are partners and Emily Stark is counsel, at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on a WilmerHale memorandum by Mr. Machen, Ms. Sloane, Ms. Stark, Jay Holtmeier, Kimberly A. Parker, and Sharon Cohen Levin.

On October 12, 2018 in remarks made at the NYU School of Law Program on Corporate Compliance and Enforcement’s Conference on Achieving Effective Compliance, Assistant Attorney General for the U.S. Department of Justice Criminal Division Brian A. Benczkowski announced a new guidance memorandum: Selection of Monitors in Criminal Division Matters (“2018 Monitor Memorandum”). The 2018 Monitor Memorandum incorporates certain principles from prior DOJ guidance and makes explicit numerous additional considerations for assessing the need for, and potential scope of, a corporate monitor. And, importantly, unlike prior guidance that applied only to DPAs and NPAs, the new policy also extends to guilty pleas.

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Shareholder-Driven Corporate Governance

Posted by Anita Anand (University of Toronto), on
Sunday, November 4, 2018
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Anita Anand is the J.R. Kimber Chair in Investor Protection and Corporate Governance at the University of Toronto. This post is based on a forthcoming book (Oxford University Press: 2019) by Professor Anand. Related research from the Program on Corporate Governance includes The Case for Increasing Shareholder Power, by Lucian Bebchuk.

In the decade since the global financial crisis, shareholders have asserted more and more control in public corporations, no longer content to play the part of the passive owner. In response to this pressure, law makers continually confront the question of what additional rights shareholders should be afforded. This issue similarly invites us all to revisit the nature of the relationship between shareholder and corporation, and to ask what role law should play in affirming shareholders’ ability to influence corporate governance. Indeed, as shareholder activism grows, so does the need to develop a theory about the public corporation, including an acknowledgement of a new concept that I call “shareholder-driven corporate governance.”

The contractarian model maintains that shareholders’ relationships with corporations are defined by the bargain that the two parties have reached. Corporate law is a layer added onto this relationship, consisting of a set of default terms that apply in the absence of explicit contractual terms between the parties. But it is impossible to understand the public corporation through the contractarian lens alone; the enabling features of corporate law comprise only a subset of obligations to which these corporations adhere.

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The Law Office (LO) and Compliance Officer (CO): Status, Function, Liabilities, and Relationship

Posted by Tamar Frankel (Boston University), on
Saturday, November 3, 2018
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Tamar Frankel is Professor of Law Emerita at the Boston University School of Law. This post is based on a recent paper by Professor Frankel.

The emerging position of Compliance Officers (COs) poses issues concerning their status and relations to Law Officers (LOs). Both professionals deal with law, However, LO’s position is recognized and established. Compliance is a recently recognized profession. Moreover, their services differ.

LOs advise and represent their institutions in legal matters. COs monitor their institutions’ activities for violations of the law and help prevent violations. LO is telling managements what they can do. CO is telling managements what their institutions should not do. Compliance programs might reduce corporate legal risks, but, may conflict with short-term business considerations. COs cannot shelter their corporation’ information, as LOs can. Arguably, LO’s focus on clients’ legal interests; COs act to prevent client’s legal violations.

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Clarifying MFW’s ab initio Condition

Posted by Roger Cooper, Rishi Zutshi and Vanessa Richardson, Cleary Gottlieb Steen & Hamilton LLP, on
Saturday, November 3, 2018
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Roger Cooper and Rishi Zutshi are partners and Vanessa Richardson is an associate at Cleary Gottlieb Steen & Hamilton LLP. This post is based on their Cleary memorandum 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); Adverse Selection and Gains to Controllers in Corporate Freezeouts by Lucian Bebchuk and Marcel Kahan; and The Effect of Delaware Doctrine on Freezeout Structure and Outcomes: Evidence on the Unified Approach by Fernan Restrepo and Guhan Subramanian (discussed on the Forum here).

The Delaware Supreme Court has clarified that controlling stockholder take-private transactions will be reviewed under the business judgment rule, rather than the less deferential entire fairness standard, if the controlling stockholder self-disables by committing to special committee and majority-of-the-minority approval before “economic negotiations” take place, even if the controlling stockholder fails to do so in its initial written offer. See Flood v. Synutra Int’l, Inc., No. 101, 2018 (Del. Oct. 9, 2018). [1]

The Delaware Supreme Court first announced in Kahn v. M&F Worldwide Corp., 88 A.3d 635 (Del. 2014) (“MFW”) that business judgment review applies to a merger proposed by a controlling stockholder conditioned “ab initio” on two procedural protections: (1) the approval of an independent, adequately empowered Special Committee that fulfills its duty of care; and (2) the uncoerced, informed vote of a majority of the minority stockholders. [2] Since then, several Delaware cases have involved questions about whether the MFW conditions were in place “ab initio.” [3] In Synutra, the Delaware Supreme Court provided further significant guidance on the meaning of the “ab initio” requirement.

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Petition to NYSE on Multiclass Sunset Provisions

Posted by Ken Bertsch, Amy Borrus, and Jeff Mahoney, Council of Institutional Investors, on
Friday, November 2, 2018
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Ken Bertsch is Executive Director, Amy Borrus is Deputy Director, and Jeff Mahoney is General Counsel at the Council of Institutional Investors (CII). This post is based on a petition from CII to the New York Stock Exchange (NYSE) by Mr. Bertsch, Ms. Borrus, Mr. Mahoney, and Glenn Davis. A similar petition was also submitted to Nasdaq. Related research from the Program on Corporate Governance includes The Untenable Case for Perpetual Dual-Class Stock (discussed on the Forum here), and The Perils of Small-Minority Controllers (discussed on the Forum here), both by Lucian Bebchuk and Kobi Kastiel.

We are writing on behalf of the Council of Institutional Investors (CII) to petition the New York Stock Exchange to amend its listing standards to require the following on a forward-looking basis for companies going public that seek to list with multi-class common stock structures with differential voting rights: [1]

The company’s certificate of incorporation or equivalent document must specify provisions requiring the share structure to convert automatically to one-share, one-vote no more than seven years after IPO date, subject to extension by additional terms of no more than seven years each, by vote of a majority of outstanding shares of each share class, voting separately, on a one-share, one-vote basis.

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Comment Letter in Advance of SEC Staff Roundtable on the Proxy Process

Posted by Bernard S. Sharfman, Main Street Investors Coalition Advisory Council, on
Friday, November 2, 2018
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Bernard S. Sharfman is the Chairman of the Main Street Investors Coalition Advisory Council. This post is based on a recent letter from Mr. Sharfman to the the U.S. Securities and Exchange Commission. The opinions expressed here are the author’s and do not represent the official position of the Coalition or any other organization that he is affiliated with.

This submission is in response to Chairman Clayton’s July 30 press release announcing a staff roundtable on the proxy process and calling for submissions from interested parties. It refers in particular to proxy advisory firms and is distinguished from my October 8, 2018 comment letter that focused on additional disclosures by investment advisers to mutual funds. Specifically, this submission requests the Securities and Exchange Commission (“SEC” or “Commission”) to modify its rules, policies and guidelines to the extent that:

  • When making a voting recommendation, the proxy advisor should be held to the standard of an information trader. If a proxy advisor cannot attest to the use of that standard when generating a voting recommendation, then the proxy advisor must abstain from making that recommendation to its clients. Making a recommendation that does not meet this standard would be a breach of a proxy advisor’s fiduciary duty under the Advisers Act.
  • The SEC, as well as the Department of Labor (“DOL”), should clarify that an institutional investor, as an alternative to using the voting recommendations of a proxy advisor, can meet its fiduciary voting duties by utilizing the voting recommendations provided by the board of directors.
  • Consistent with the prior recommendation and assuming that technical issues can be overcome, retail investors who invest in voting stock indirectly through the use of investment advisers and beneficiaries of public pension funds should have the option of transmitting voting instructions to their institutional investor informing it that their pro rata investment in voting stock must be voted in conformity with the voting recommendations of the board of directors of each company held in portfolio.

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