Yearly Archives: 2019

A Jurisdictional Hook for non-Delaware PE firms

Posted by Taylor B. Bartholomew, Matthew M. Greenberg and Christopher B. Chuff, Pepper Hamilton LLP, on
Wednesday, May 15, 2019
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Matthew M. Greenberg is a partner and Taylor B. Bartholomew, and Christopher B. Chuff are associates at Pepper Hamilton LLP. This post is based on their Pepper memorandum and is part of the Delaware law series; links to other posts in the series are available here.

In In re Pilgrim’s Pride Corporation Derivative Litigation, the Delaware Court of Chancery held that a foreign controlling stockholder impliedly consented to personal jurisdiction in Delaware because the controller’s designees (who also had ties to the controller) approved a bylaw selecting the Delaware Court of Chancery as the exclusive forum for fiduciary duty litigation concurrently with their approval of an interested transaction. While the court expressly limited its holding to the facts of the case, the opinion provides helpful guidance to non-Delaware private equity firms as it relates to the control of their Delaware-based portfolio companies.

Background

Prior to the disputed transaction, JBS S.A., an entity organized under Brazilian law, sought to quickly raise cash because of a $3.2 billion fine due to the Brazilian government. To do so, JBS orchestrated the sale of an entity it controlled—Moy Park, Ltd.—to Pilgrim’s Pride Corporation, a Delaware corporation, for $1.3 billion.

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The DOJ’s Updated Guidance on Corporate Compliance Programs

Posted by John Savarese, Ralph Levene, and David Anders, Wachtell, Lipton, Rosen & Katz, on
Tuesday, May 14, 2019
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John F. Savarese, Ralph M. Levene, and David B. Anders are partners at Wachtell, Lipton, Rosen & Katz. This post is based on a Wachtell Lipton memorandum by Mr. Savarese, Mr. Levene, Mr. Anders, Marshall Miller, and Michael Nance.

[In April 2019], Assistant Attorney General Brian Benczkowski of DOJ’s Criminal Division announced newly updated guidance for white-collar prosecutors, identifying factors to be considered in evaluating corporate compliance programs. The update both expands upon guidance first issued in February 2017 and aims to harmonize that guidance with DOJ’s principles for corporate prosecution. This guidance represents the latest development in DOJ’s broader effort—on which we previously reported in March, July, and twice in October of last year—to promote predictability and transparency in white collar enforcement and to clarify the benefits of a responsible corporate approach to misconduct, in this case through maintenance of a robust and effective corporate compliance program. All responsible companies should pay close attention to the key lessons signaled in this new DOJ guidance.

The updated guidance, a restructured and more detailed version of its predecessor, is organized into three parts, tracking the “fundamental questions” DOJ’s Justice Manual directs prosecutors to ask in assessing corporate compliance programs: (1) Is the compliance program well designed? (2) Is it implemented earnestly and in good faith? (3) Does it work in practice? The answers to these questions—as fleshed out by the many topics and subtopics identified in the guidance—will guide DOJ prosecutors as they consider whether companies under investigation will receive a declination or be prosecuted, the size of any monetary penalties that may be imposed, and whether to require a compliance monitor as part of a negotiated resolution.

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Passive in Name Only: Delegated Management and “Index” Investing

Posted by Adriana Robertson (University of Toronto), on
Tuesday, May 14, 2019
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Adriana Robertson is assistant professor at the University of Toronto Faculty of Law. This post is based on her recent article, forthcoming in the Yale Journal on Regulation. 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); and Index Funds and the Future of Corporate Governance: Theory, Evidence, and Policy by Lucian Bebchuk and Scott Hirst (discussed on the forum here).

Stock market indices are central to the modern financial system. They are used for everything from benchmarking fund performance, to compensating executives, to evaluating the general state of the market. In recent years, the rise of index—or “passive”—investing has only added to their importance.

Despite this importance, indices have received very little attention. With a few exceptions, most scholars—and even market participants—do not think too hard about where the indices actually come from. Instead, they are generally treated as passive entities, which simply are. Obviously this can’t really be true: indices do not fall from the sky. Instead, they are the product of a series of decisions made by some person or persons. But the nature and scope of these decisions has so far been overlooked.

In a forthcoming article, I provide the first detailed empirical analysis of the landscape of domestic equity indices.

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Goldman Sachs and the 1MDB Scandal

Posted by Dennis M. Kelleher, Better Markets, on
Tuesday, May 14, 2019
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Dennis M. Kelleher is President and CEO at Better Markets. This post is based on a report prepared by Better Markets.

1Malaysia Development Berhad (1MDB) was a Malaysian government owned and controlled investment fund created in 2009 by former Prime Minister Najib Razak. The professed purpose of 1MDB was to attract foreign investment and development in Malaysia to benefit all the people of Malaysia. Instead, it has been referred to as “kleptocracy at its worst” and potentially “one of the greatest financial heists in history,” with possibly more than $10 billion looted. Worst of all, hundreds of millions of those looted dollars were allegedly used to steal an election and keep the corrupt prime minister in power for five additional years, when his opponents were crushed and at least one prosecutor was brutally murdered, suffering “a horrific death.”

Goldman’s position is that a “rogue” banker lied and fooled all of the smartest, highest paid bankers in the world, all of Goldman’s risk, compliance, legal and audit systems and controls, and all of Goldman’s management.

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How We Howey

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Monday, May 13, 2019
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent speech at the Securities Enforcement Forum in East Palo Alto, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

One year ago, I gave a speech—appropriately in Southern California—called “Beaches and Bitcoin.” [1] At that time—not so long ago in analog time but eons ago in digital time—the burning question was how to decide when issuing tokens constituted an offering of securities. The industry was rapidly developing and I worried that the SEC, as one of its potential regulators, would stifle its growth. I will admit today that I was very wrong, not about whether the SEC would stifle the industry’s growth—it has—but in how it would do it. Given that opening, I better give my disclaimer that my remarks represent my own views and not necessarily those of the Commission or my fellow Commissioners.

In last year’s remarks, I contrasted regulatory sandboxes with regulatory beaches. A beach has the necessary oversight, but offers a lot of freedom. I worried that, by contrast, a regulatory sandbox, something the SEC had been urged to establish, would tempt the Commission to “grab hold of the shovels and buckets” and meddle in the building of sandcastles. It is not the regulator’s job to get involved in the creative process, and, in any case, creativity is not the regulator’s strong suit.

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Declining Corporate Prosecutions

Posted by Brandon L. Garrett (Duke University), on
Monday, May 13, 2019
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Brandon L. Garrett is the L. Neil Williams Professor of Law at the Duke University School of Law. This post is based on his recent article, forthcoming in the American Criminal Law Review.

A new article, titled Declining Corporate Prosecutions, forthcoming in the American Criminal Law Review, describes the results of a series of empirical analyses of corporate prosecutions, focusing on what has changed under the new Trump Administration. Two years into the Trump Administration, newly collected data available on the Duke / UVA Corporate Prosecution Registry, allows one to assess what impact a series of new policies have had on corporate enforcement. To provide a snapshot comparison, in its last 20 months, the Obama Administration levied $14.15 billion in total corporate penalties—with 71 financial institutions and 34 public companies prosecuted. During the Trump Administration, corporate penalties declined. During its first 20 months, there were $3.4 billion in total penalties, with 17 financial institutions and 13 public companies prosecuted. Consistent with these data, this Article describes changes in written policy, practice, and informal statements from the Department of Justice that have cumulatively softened the federal approach to corporate criminals. This Article also describes continuity between administrations. A rise in corporate declinations, for example, represents a continuation of Obama Administration policy. A decline in use of corporate monitors similarly reflects prior policy.

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CEO Ownership, Corporate Governance, and Company Performance

Posted by Kosmas Papadopoulos, Institutional Shareholder Services, Inc., on
Monday, May 13, 2019
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Kosmas Papadopoulos is Managing Editor at ISS Analytics. This post is based on an ISS Analytics memorandum by Mr. Papadopoulos. Related research from the Program on Corporate Governance includes Lucky CEOs and Lucky Directors by Lucian Bebchuk, Yaniv Grinstein and Urs Peyer (discussed on the Forum here).

Ownership structure is perhaps among the most significant corporate governance factors, as it determines the balance of power within a corporation and can directly affect governance practices and company behavior. In our review of CEO ownership, we focus on corporate governance characteristics of companies with CEO ownership concentration, and we examine the effect of CEO ownership on company performance.

  • We draw a distinction between CEO ownership concentration in terms of voting power and CEO ownership in terms of a dollar value in the company’s stock. Significant ownership in value does not necessitate significant voting power.
  • CEO voting power concentration is more common at smaller firms, while CEO ownership value at large firms is much higher despite lower voting power.
  • Controlling for size, we find that higher levels of CEO voting power concentration correlate with several negative governance indicators, including dual class share structures, diminished board leadership independence, classified boards, lower levels of gender diversity in the boardroom and in the C-Suite, and lower levels of board refreshment.
  • CEOs with significant voting power at their firms do not necessarily lead to superior economic performance. However, high levels of CEO economic ownership appear to directly correlate with better company performance. The desired effect of interest alignment between executives and shareholders is thus achieved via economic ownership but without the need for significant control by the executive team.

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Statement on Proposed Amendments to Sarbanes Oxley 404(b) Accelerated Filer Definition

Posted by Hester M. Peirce, U.S. Securities and Exchange Commission, on
Sunday, May 12, 2019
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Hester M. Peirce is a Commissioner at the U.S. Securities and Exchange Commission. This post is based on her recent public statement, available here. The views expressed in this post are those of Ms. Peirce and do not necessarily reflect those of the Securities and Exchange Commission or its staff.

Thank you to the staff of the Divisions of Corporation Finance, Investment Management, and Economic and Risk Analysis and the Offices of General Counsel and Chief Accountant for your hard work on this proposal. It has been a long road for you, but I am happy to see the proposal before us today.

Almost one year ago, we adopted amendments to our definition of smaller reporting companies, or SRCs. [1] I voted in favor of those amendments, but with reservations about their scope. [2] Today, we will vote to propose further, related amendments, this time to our definition of accelerated filers, and again I will support the proposed amendments but with reservations about their scope.

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Corporate Reporting

Posted by John Wilcox, Morrow Sodali, on
Sunday, May 12, 2019
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John C. Wilcox is Chairman of Morrow Sodali. This post is based on a Morrow Sodali memorandum by Mr. Wilcox.

Corporate reporting in today’s environment is like a puzzle whose pieces are spread across the table waiting to be fitted together to form a clear picture. While disclosure rules and audit standards still dictate strict and relatively uniform financial reporting requirements, expectations for big-picture corporate reporting have become more complex and open-ended. This results primarily from the introduction into the company narrative of factors referred to collectively as “ESG” (environmental, social and governance practices) or “sustainability” (the ability to create value over the long term). Corporate reporting about these topics (which are sometimes characterized as “non-financial” or “extra-financial”) is now deemed by institutional investors—and increasingly by issuers—to be essential for an accurate picture of a company’s culture, risk profile, financial health and long-term outlook. While financial reporting at many companies is still largely a compliance exercise, how a company should “tell its story” now opens the door to nearly unlimited possibilities.

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The New Paradigm and the EU Shareholder Rights Directive II

Posted by Martin Lipton, Wachtell, Lipton, Rosen & Katz, on
Saturday, May 11, 2019
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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, Steven A. Rosenblum, Karessa L. Cain, and Sabastian V. Niles.

As was noted in The New Paradigm: A Roadmap for an Implicit Corporate Governance Partnership Between Corporations and Investors to Achieve Sustainable Long-Term Investment and Growth, the then draft of the EU Shareholder Rights Directive II (SRDII) was one of the many corporate governance laws, regulations, guidelines and principles that were considered in creating The New Paradigm. SRDII was adopted in 2017, and this year Luxembourg is considering legislation to implement SRDII.

One provision of the legislation is very similar to a key aspect of stewardship in the 2019 version of The New Paradigm. See It’s Time To Adopt The New Paradigm. It provides that institutional investors publicly disclose how their equity investment strategy is consistent with long-term objectives. In addition, it provides for annual disclosure by asset managers of how their investment strategy relates to the long-term performance of the assets being managed by the managers for their underlying investors.

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