Yearly Archives: 2019

Institutional Trading around M&A Announcements

Posted by Eliezer Fich (Drexel University), Viktoriya Lantushenko (Saint Joseph's University), and Clemens Sialm (University of Texas at Austin), on
Wednesday, June 5, 2019
, , , , , , , , ,
More from: , ,

Eliezer Fich is Professor of Finance at Drexel University LeBow College of Business; Viktoriya Lantushenko is Assistant Professor of Finance at Saint Joseph’s University; and Clemens Sialm is a Professor of Finance and Economics at the University of Texas at Austin McCombs School of Business. This post is based on their recent paper.

Related research from the Program on Corporate Governance includes M&A Contracts: Purposes, Types, Regulation, and Patterns of Practice, by John C. Coates, IV; and Are M&A Contract Clauses Value Relevant to Target and Bidder Shareholders? (discussed on the Forum here) by John C. Coates, IV, Darius Palia, and Ge Wu.

Takeover targets often experience substantial share price appreciations around public announcements of mergers and acquisitions. Trading in anticipation of these announcements can considerably improve the performance of an investment strategy. In our paper, we analyze hedge fund and mutual fund holdings around takeover announcements to assess the differences in investment strategies across institutions in a sample of 7,184 M&A announcements during 1990-2015. We find that hedge fund ownership in impending takeover targets increases by 7.2% during the quarter prior to the merger announcement. On the other hand, mutual fund ownership in takeover targets decreases by 3.0% during the calendar quarter preceding the public merger announcement.

Our results on ownership changes are robust across transactions of different sizes, different takeover premia, and different deal characteristics. Our results also indicate qualitatively similar effects before and after Regulation Fair Disclosure.

READ MORE »

The New DOJ Compliance Guidelines and the Board’s Caremark Duties

Posted by Michael W. Peregrine, McDermott Will & Emery LLP, on
Wednesday, June 5, 2019
, , , , , , , , , ,
More from: ,

Michael W. Peregrine is a partner at McDermott Will & Emery LLP. This post is based on his McDermott Will & Emery memorandum. This post is part of the Delaware law series; links to other posts in the series are available here.

Much has been written of late about the significance of the Department of Justice’s new “Evaluation of Corporate Compliance Plan Programs” [1] guidance (“New Guidance”) and its likely impact on the “nuts and bolts” of compliance program design and operation. But the Guidance may have more far-reaching implications to the extent that it serves to revitalize the authority and engagement of the governing board’s “Caremark” compliance oversight function. For at its core, the New Guidance is a strong reminder of the critical role that corporate governance plays in assuring a compliant corporate culture.

The New Guidance

The New Guidance is the latest effort by the Department of Justice to provide clarity and direction on the government’s perspective for measuring compliance program effectiveness. Released on April 30, it updates a prior version issued by the Criminal Division’s Fraud Section in February 2017. It discusses in detail topics the Criminal Division has frequently found relevant in evaluating corporate compliance programs, and organizes the detail around three main questions that prosecutors raise when evaluating such programs: 1) whether the program is well-designed; 2) whether the program has been applied earnestly and in good faith (in other words, effectively implemented); and 3) whether the program actually works in practice. [2]

READ MORE »

Is Goldman Sachs’ Director Compensation Entirely Fair?

Posted by Audrey Fenske, Steve Quinlivan and Jaclyn Schroeder, Stinson LLP, on
Tuesday, June 4, 2019
, , , , , ,
More from: , , , , , ,

Audrey Fenske and Steve Quinlivan are partners and Jaclyn Schroeder is an associate at Stinson LLP. This post is based on a Stinson memorandum by Ms. Fenske, Mr. Quinlivan, Ms. Schroeder, Bryan Pitko, Phil McKnight, and Jack Bowling. This post is part of the Delaware law series; links to other posts in the series are available here.

Quoting both a nearly 70-year-old decision and a nearly 30-year-old SNL skit, the Delaware Court of Chancery, in Stein v. Blankfein et al, reaffirmed that in most circumstances decisions of directors awarding director compensation are subject to review under the entire fairness standard. The Court also addressed the possibility of stockholder waiver of application of that standard to future director actions, but did not conclude as to whether such a waiver was even possible. The litigation addressed compensation of Goldman Sachs’ directors—primarily the stock incentive plans, or SIPs, approved by Goldman Sachs stockholders in 2013 and 2015. Ruling on a motion to dismiss, the Court rejected director defendants’ arguments that:

  • the stockholder-approved SIPs absolved, in advance, the director’s breaches of duty in self-dealing, absent a demonstration of bad faith. Since the argument was rejected the director decisions were subject to review under the entire fairness standard because the plans provided the directors discretion to determine their own awards; and
  • the plaintiff failed to adequately allege that the self-awarded director compensation was not entirely fair.

The following courses of action remain available to public company boards in approving director compensation:

  • have specific awards or self-executing guidelines approved by stockholders in advance; or
  • knowing that the entire fairness standard will apply, limit discretion with specific and meaningful limits on awards and approve director compensation with a fully developed record, including where appropriate, incorporating the advice of legal counsel and that of compensation consultants.

READ MORE »

Why CalPERS and Colorado PERA Moved to Intervene in the Johnson & Johnson Mandatory Arbitration Case

Posted by Matthew Jacobs (CalPERS), Adam Franklin (Colorado PERA) and Megan Peitzmeier (Colorado PERA), on
Tuesday, June 4, 2019
, , , , , , , , , ,
More from: , , , ,

Matthew Jacobs is General Counsel for CalPERS; Adam Franklin is General Counsel at Colorado PERA; and Megan Peitzmeier is Senior Staff Attorney at Colorado PERA. This post is based on their joint CalPERS and Colorado PERA memorandum.

Several commentators have pointed out that a shareholder’s lawsuit demanding that Johnson & Johnson permit a shareholder vote on a proposal to amend J&J’s bylaws to mandate arbitration of federal securities claims has come to the court in a strange posture. In Cydney Posner’s earlier article about this case, she makes note of the “odd role reversal” of “a Harvard professor and shareholder of Johnson & Johnson submitted a proposal requesting that the board adopt a mandatory arbitration bylaw”. In press coverage relating to the recent motion of CalPERS and Colorado PERA, Alison Frankel characterizes this as a case with “a weird posture”.

What’s going on in The Doris Behr 2012 Irrevocable Trust v. Johnson & Johnson that caused CalPERS and Colorado PERA to seek intervention? The case pits a small shareholder seeking a bylaw amendment that would eliminate shareholders’ right to sue against a large corporation that is defending the right of its shareholders to sue. As mentioned in Ms. Posner’s article, the plaintiff-shareholder happens to be a Harvard law professor; and this professor is a long-time opponent of securities class actions. Because neither the plaintiff nor J&J share the interests of institutional investors like CalPERS and Colorado PERA, the two funds have jointly moved to intervene in the case.

READ MORE »

The Business Case for ESG

Posted by Brandon Boze (ValueAct Capital), David F. Larcker (Stanford University), and Eva Zlotnicka (ValueAct Capital), on
Tuesday, June 4, 2019
, , , , , , ,
More from: , , , ,

Brandon B. Boze is partner at ValueAct Capital; David F. Larcker is James Irvin Miller Professor of Accounting at Stanford Graduate School of Business; and Eva T. Zlotnicka is Vice President at ValueAct Capital. This post is based on a recent paper by Mr. Boze, Professor Larcker, Ms. Zlotnicka, Margarita Krivitski, and Brian Tayan. Related research from the Program on Corporate Governance includes Socially Responsible Firms by Alan Ferrell, Hao Liang, and Luc Renneboog (discussed on the Forum here).

We recently published a paper on SSRN, The Business Case for ESG, that examines the potential for corporate managers, boards of directors, and institutional investors around how best to incorporate ESG (environmental, social, governance) factors into strategic and investment decision-making processes. Central to the topic is the premise that both companies and investors have become too short-term oriented in their investment horizon, leading to decisions that increase near-term reported profits at the expense of the long-term sustainability of those profits. The costs of those decisions are assumed to manifest themselves as externalities, borne by members of the workforce or society at large.

Prominent investors such as Larry Fink at BlackRock adopt this viewpoint:

READ MORE »

Trulia’s Impact

Posted by Jason Halper, Jared Stanisci and Victor Bieger, Cadwalader, Wickersham & Taft LLP, on
Tuesday, June 4, 2019
, , , , , , , , ,
More from: , , , , , ,

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 Holloman, Nathan 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.

READ MORE »

Designing Pay Plans in the New 162(m) World

Posted by Ryan Beger and Steven Seelig, Willis Towers Watson, on
Monday, June 3, 2019
, , , , , , ,
More from: , ,

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.

READ MORE »

Strategic Trading as a Response to Short Sellers

Posted by Francesco Franzoni (USI Lugano), on
Monday, June 3, 2019
, , ,
More from: , , ,

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.

READ MORE »

Proposed Amendments to Delaware’s LLC and Partnership Acts

Posted by John D. Seraydarian and Monica M. Ayres, Richards, Layton & Finger, P.A., on
Monday, June 3, 2019
, , , , , , , , ,
More from: , ,

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.

READ MORE »

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

Posted by Mark D. Cahn, Elizabeth L. Mitchell, and Brett Atanasio, WilmerHale, on
Sunday, June 2, 2019
, , , , ,
More from: , , ,

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.

READ MORE »

Page 55 of 95
1 … 45 46 47 48 49 50 51 52 53 54 55 56 57 58 59 60 61 62 63 64 65 … 95