Monthly Archives: June 2019

Trulia’s Impact

Jason M. Halper is partner, Jared Stanisci is special counsel, and Victor Bieger is an associate at Cadwalader, Wickersham & Taft LLP. This post is based on a Cadwalader memorandum by Mr. Halper, Mr. Stanisci, Mr. Bieger, Ellen HollomanNathan M. Bull, and Zack Schrieber. This post is part of the Delaware law series; links to other posts in the series are available here.

The Delaware Court of Chancery’s 2016 decision in In re Trulia, Inc. Stockholder Litigation changed the landscape for “disclosure-only” settlements in class action suits. Recognizing a trend that had been building in the Court of Chancery, in Trulia Chancellor Bouchard declared his intent to reject disclosure-only settlements unless the resulting supplemental disclosures are “plainly material” and any releases are “narrowly circumscribed. Based on the most recent data, this has led to a spike in the number of M&A transactions that have been challenged in federal courts.

While there were only 34 cases filed in federal court in 2015 before Trulia, this number increased by fivefold in 2018 with 182 cases filed. Of these challenges, approximately one-third were brought in district courts in the Third Circuit.

Trulia appears to have inspired plaintiffs’ firms to bring challenges to merger transactions in federal and state courts outside of Delaware in the hopes of escaping its effect. But other jurisdictions are divided about whether to follow the Trulia approach. This continuing jurisdictional split is likely to encourage plaintiffs to keep forum shopping in the hopes of striking a quick disclosure-only settlement, and thereby receiving a fee from the target company as part of the settlement while expending relatively little effort.


Designing Pay Plans in the New 162(m) World

Ryan Beger is a director in the Executive Compensation practice and Steve Seelig is a senior director in the Research and Innovation Center at Willis Towers Watson. This post is based on their Willis Towers Watson memorandum. Related research from the Program on Corporate Governance includes the book Pay without Performance: The Unfulfilled Promise of Executive Compensation, and Paying for Long-Term Performance (discussed on the Forum here), both by Lucian Bebchuk and Jesse Fried.

Over a year after the “performance-based compensation” exception to Section 162(m) of the IRS Code was eliminated as part of the Tax Cuts and Jobs Act of 2017, relatively few companies have made significant changes to their pay programs to take advantage of its repeal. In part, it’s because of a short time frame for making changes and a desire to preserve the deductibility of grandfathered awards. Companies also are standing pat because they are uncertain how shareholders would react even if they recrafted their programs to preserve most performance-based design elements. However, with the recently issued frequently asked questions (FAQs) from Institutional Shareholder Services (ISS), there’s a bit more clarity about changes that are acceptable and those that are cause for shareholder concern.

We consider how the 162(m) exception has led to long settled aspects of the pay-setting process and how this might change.


Strategic Trading as a Response to Short Sellers

Francesco Franzoni is Professor of Finance at USI Lugano. This post is based on a recent paper authored by Professor Franzoni; Marco Di Maggio, Assistant Professor of Business Administration at Harvard Business School; Massimo Massa, Rothschild Chaired Professor of Banking and a Professor of Finance at INSEAD; and Roberto Tubaldi, PhD candidate at USI Lugano & the Swiss Finance Institute.

There is consensus in the theoretical and empirical literature on the fact that short sellers are informed traders. Hence, economic theory suggests that when short sellers interact in the market with uninformed investors the extent to which prices reveal fundamental information (price efficiency) increases. The favorable regulatory environment for short selling in most developed countries reflects these considerations.

However, a more realistic portrait of the market should include multiple groups of informed investors. In this context, the competition among traders affects the incentives for trading and the revelation of information in prices. Specifically, if investors with positive information face the competition of short sellers, they may delay their trades to exploit the decrease in price induced by short sellers. Therefore, when information is diverse and dispersed across different groups of traders, the presence of short sellers may lead to a slow-down of the impounding of positive information.

One may wonder how market participants can actually infer the presence of short sellers. Indeed, several channels contribute to make the market aware of the extent of short selling activity. For example, brokers that intermediate share loans can spread the word to their other clients in order to establish a reputation as valuable sources of information. In addition, data providers publish statistics on short selling activity.

To study empirically informed investors’ reaction to short sellers, we combine short selling information at the stock level from Markit Securities Finance with data on institutional trades from Abel Noser Solutions (ANcerno) from 2002 to 2014.


Proposed Amendments to Delaware’s LLC and Partnership Acts

John D. Seraydarian and Monica M. Ayres are Directors at Richards, Layton & Finger, P.A. This post is based on their Richards, Layton & Finger memorandum 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), the Delaware Revised Uniform Limited Partnership Act (LP Act) and the Delaware Revised Uniform Partnership Act (GP Act) (collectively, the LLC and Partnership 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), Delaware limited partnerships (Delaware LPs) and Delaware general partnerships (Delaware GPs), including amendments (i) relating to document forms, including electronic signatures and delivery, (ii) enabling a Delaware LP to divide into two or more Delaware LPs as a new permitted form of Delaware LP reorganization (LP Division), (iii) providing for the formation of statutory public benefit Delaware LPs (Statutory Public Benefit LPs), (iv) authorizing the creation of a new type of Delaware LP series known as a “registered series” (LP Series), (v) providing specific statutory authority for the use of networks of electronic databases (including blockchain and distributed ledgers) by Delaware GPs, and (vi) confirming the availability of contractual appraisal rights in connection with certain transactions involving Delaware LLCs and Delaware LPs. If enacted, all of the proposed amendments will become effective on August 1, 2019.


Better the Devil You Know? Tipping Liability, Martoma and the Rise of 18 U.S.C. § 1348

Mark D. Cahn and Elizabeth L. Mitchell are partners, and Brett Atanasio is an associate, at Wilmer Cutler Pickering Hale and Dorr LLP. This post is based on their WilmerHale memorandum. Related research from the Program on Corporate Governance includes Insider Trading Via the Corporation by Jesse Fried (discussed on the Forum here).

Insider trading has frequently been splashed across headlines in recent months, with a congressman, an NFL player, a comedy writer, and a Silicon Valley executive all facing charges. In the background of these headlines are two legal developments that give the government greater flexibility to successfully litigate future insider trading cases, particularly those involving tipping.

First, the US Court of Appeals for the Second Circuit’s revised decision in United States v. Martoma embraced a broad theory of liability under Section 10(b) of the Securities Exchange Act and Rule 10b-5 (hereinafter, collectively, “Section 10(b)”) that prohibits a party from tipping with an “intent to benefit” the recipient. Second, when prosecutors have pursued tipping cases under 18 U.S.C. § 1348, a criminal securities fraud provision adopted as part of the Sarbanes-Oxley Act of 2002, courts have interpreted this newer securities fraud statute to have less stringent requirements than Section 10(b).

These two developments could lead the government to take a more aggressive stance on tipping charges in the future, and both finance professionals and lawyers need to be aware that the ground may be shifting under them.


Legal Tools for the Active or Activist Shareholders

Christine Phillips is partner at Fieldfisher LLP. This post is based on her Fieldfisher memorandum. 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).

Boards of listed companies face increasing risk of campaigns from investors. Activist shareholders seek value creation, passive and institutional investors are encouraged to become engaged and active through the discharge of stewardship responsibilities and ESG issues are becoming increasingly important for investors.


The draft UK regulations (Companies (Directors Remuneration Policy and Directors Remuneration Report) Regulations 2019 (the “2019 Regulations”)) have now been published to implement the provisions of the Second Shareholder Rights Directive (EU Directive 2017/828 (“SRDII”) with respect to remuneration. SRDII is required to be implemented in member states on 10 June 2019 and the 2019 Regulations will come into force on this date. Most of the requirements on directors’ remuneration contained in SRDII were already provided for in the UK, including the requirement to produce a remuneration report and remuneration policy which are each subject to a shareholder vote (advisory in the case of the remuneration report and binding for the policy). The Companies Act 2006 requires a remuneration policy to be approved at least every 3 years or at the next AGM or general meeting if the remuneration report was not approved at the last AGM. The 2019 Regulations will require a new remuneration policy to be brought to a vote at the next general meeting or AGM if the company loses a vote on its remuneration policy.


Page 8 of 8
1 2 3 4 5 6 7 8