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Author Archives: Harvard Law School Forum on Corporate Governance and Financial Regulation
Did Commissioner Gallagher Violate SEC Rules?
Editor’s Note: Professor Tamar Frankel is Professor of Law at Boston University School of Law. This post offers a critique of a paper by Commissioner Daniel Gallagher and Professor Joseph A. Grundfest, described on the Forum here. Additional critiques of the paper by Professor Jonathan Macey are available on the Forum here, here and here. A reply post to Professor Macey authored by Professor Grundfest and endorsed by Commissioner Gallagher is available on the Forum here.
Recently SEC Commissioner Daniel M. Gallagher issued a paper, titled Did Harvard Violate Federal Securities Law? (described on the Forum here and in a WSJ article here). The paper, co-authored with Professor Joseph Grundfest, expressed the Commissioner’s opinions regarding shareholder proposals and the Harvard Law School clinic that assisted public pension funds filing those proposals in the previous three years. The Commissioner did not mince his words. In his opinion, Harvard University and its clinic violated the securities laws by assisting proponents that failed to include references to academic studies contrary to the views of those proponents. The Commissioner was clearly presenting a threat to the University and its clinic. However, his statements also raise a number of questions about his own behavior.
To begin with, the Commissioner should have recognized that, as Professor Macey has shown in a series of posts (available on the Forum here, here, and here), his accusations are without merit and the proposals were entirely consistent with current SEC rules, policies and practices. Furthermore, in making his accusations, the Commissioner deviated from standard SEC procedures and practices.
I am unaware of any case in which a sitting SEC Commissioner released a paper accusing particular individuals or organizations of legal violations, and urging enforcement action and/or private suits against them, or used such public accusations as an instrument for urging other Commissioners or the SEC staff to change their policy. In a recent comment to the New York Times, Harvey Pitt brought up as a possible precedent a 1974 speech by then-Commissioner A.A. Sommer who expressed concerns about “going-private” transactions. However, Sommer’s speech (available on the SEC website here) did not mention (let alone accuse) any particular individuals or organizations (the only mention of any names in the Speech is in footnote citations to past court cases). There is a big difference between discussing general policy problems, which SEC Commissioners should be doing, and attacking or urging actions against particular individuals and organizations, which SEC Commissioners should not be doing.
The SEC Canon of Ethics (available here), which is binding on SEC Commissioners, warns SEC officials to be wary of using their “power to defame and destroy”. The Cannon of Ethics guides SEC officials to avoid defaming individuals or organizations. The Canon provides:
“§ 200.66 Investigations. The power to investigate carries with it the power to defame and destroy. In determining to exercise their investigatory power, members should concern themselves only with the facts known to them and the reasonable inferences from those facts. A member should never suggest, vote for, or participate in an investigation aimed at a particular individual for reasons of animus, prejudice or vindictiveness. The requirements of the particular case alone should induce the exercise of the investigatory power, and no public pronouncement of the pendency of such an investigation should be made in the absence of reasonable evidence that the law has been violated and that the public welfare demand it.”
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Click here to read the complete postSEC Adopts Regulation SCI to Strengthen Securities Market Infrastructure
Editor’s Note: Annette Nazareth is a partner in the Financial Institutions Group at Davis Polk & Wardwell LLP, and a former commissioner at the U.S. Securities and Exchange Commission. The following post is based on a Davis Polk client memorandum by Ms. Nazareth, Lanny A. Schwartz, Jeffrey T. Dinwoodie, and Zachary J. Zweihorn.
On November 19, 2014, the Securities and Exchange Commission unanimously voted to adopt Regulation Systems Compliance and Integrity (“Regulation SCI”), a set of rules designed to strengthen the technology infrastructure of the U.S. securities markets. Regulation SCI replaces and builds on the SEC’s voluntary Automation Review Policy, which is currently mainly applicable to national securities exchanges, expanding upon existing practices and making them mandatory. Regulation SCI will apply to operators of certain alternative trading systems (“ATSs”), market data information providers and clearing agencies, in addition to national securities exchanges, subjecting these entities and, indirectly, certain officers to extensive new compliance obligations, with the goals of reducing the occurrence of technical issues that disrupt the securities markets and improving recovery time when disruptions occur.
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Posted in Practitioner Publications, Securities Regulation
Tagged Algorithmic trading, Capital markets, Cybersecurity, Securities regulation
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Professor Grundfest’s Latest Reply Flip-Flops Allegations and Further Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP
Editor’s Note: Jonathan R. Macey is the Sam Harris Professor of Corporate Law, Corporate Finance & Securities Law at Yale University. This post provides a detailed response to a reply post authored by Professor Joseph A. Grundfest and endorsed by Commissioner Daniel Gallagher, titled No Good Deed Goes Unpunished: A Reply to Professor Macey’s Reply, and available on the Forum here. This reply post engaged with earlier posts by Professor Macey available on the Forum here and here, which offered a critique of a paper by Commissioner Gallagher and Professor Grundfest, titled Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors (described in a post on the Forum here).
This post is my second—and I hope final—response to the unsuccessful attempts by SEC Commissioner Daniel Gallagher and Professor Joseph Grundfest to address my criticism of the paper released by them last month (hereinafter “the Paper,” described on the Forum here). In my first post, “SEC Commissioner, Law Professor Wrongfully Accuse SRP of Securities Fraud” (hereinafter “My First Post,” available on the Forum here), I analyzed the spurious claims against the Shareholder Rights Project (SRP) that Gallagher/Grundfest put forward. In this post I address the authors’ most recent reply to my latest post. This most recent reply again shifts allegations dramatically and fails to address the identified flaws in the authors’ analysis. The reply thus confirms and reinforces my original position that the authors wrongfully accused the SRP.
The analysis of My First Post showed that the proposals submitted by investors working with the SRP (SRP proposals) were consistent with the law and with the long-held policies and practices of SEC staff, and I concluded that the authors had wrongfully accused the SRP. In a subsequent post titled “A Response to Professor Macey” (hereinafter “the First Reply,” available on the Forum here), Professor Grundfest attempted to offer a “point by point” detailed response to my analysis. In a response titled Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP (“My First Response”, available on the Forum here), I showed that (i) the First Reply dramatically modifies and weakens the authors’ allegations and (ii) the First Reply itself demonstrates, in conceding some key points that I made and in failing to address some others, that Gallagher/Grundfest wrongfully accused the SRP and should withdraw their allegations.
“There you go again”: Earlier this week, the Forum published a reply to My First Response (“the Second Reply,” available on the Forum here) authored by Professor Grundfest and endorsed by Commissioner Gallagher. Like the First Reply, the Second Reply reinforces my serious concerns about the Gallagher/Grundfest attack.
Below I first discuss the dramatic shift of allegations introduced by the Second Reply as well as the authors’ announced plan to come up with new allegations against the SRP following my debunking of the allegations in the Paper. I next discuss the authors’ consistent failure to address the deficiencies I identified in their claims. I conclude that the repeated attempts to prop up spurious claims, which are admittedly at odds with the long-held policies and practices of the SEC regarding shareholder proposals, are particularly unworthy of a sitting SEC commissioner, and I urge the authors to withdraw their allegations.
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Click here to read the complete postM&A Communications Challenges Posed by Tax Inversion Deals
Editor’s Note: Charles Nathan is partner and head of the Corporate Governance Practice at RLM Finsbury. This post is based on an RLM Finsbury commentary by Mr. Nathan and Kal Goldberg.
Tax inversion deals are clearly the most talked about M&A deal structure we have seen for many years. Unlike other hot-topic M&A deal structures (think LBOs or activist investor campaigns), inversions involve a highly charged political controversy in the context of the global competitiveness of corporations and their home economies. Although the recent Treasury Department rules have significantly or, in some cases, fatally crimped the economics of some previously announced inversions, many tax advantages of inversions remain. As a result, the structure retains its appeal for a number of cross-border acquisitions by U.S. companies and will likely continue to create business and political headlines in the U.S. and abroad.
Depending on the friendly or hostile nature of the deal, the parties’ home countries and the constituencies being addressed, tax inversion can be a plus to be celebrated, a minus to be exploited or, all too often, a combination of both. The many facets of inversion deals and their shifting nature create far more complicated communications challenges than any other type of M&A deal structure.
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Posted in International Corporate Governance & Regulation, Mergers & Acquisitions, Practitioner Publications
Tagged Cross-border transactions, Inversions, Mergers & acquisitions, Tax avoidance, Taxation
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Delaware Court: 17.3% Stockholder/CEO may be a Controlling Stockholder
Editor’s Note: Toby Myerson is a partner in the Corporate Department at Paul, Weiss, Rifkind, Wharton & Garrison LLP and co-head of the firm’s Global Mergers and Acquisitions Group. The following post is based on a Paul Weiss memorandum. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.
In In re Zhongpin Inc. S’holders Litig., the Delaware Court of Chancery denied motions to dismiss breach of fiduciary duty claims against an alleged controlling stockholder and members of the company’s board of directors, holding that the plaintiffs had raised reasonable inferences that (i) although the stockholder held only 17.3% of the company’s outstanding common stock, as CEO and Chairman of the Board, he possessed “both latent and active control” over the company, and (ii) the sales process was not entirely fair.
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Posted in Boards of Directors, Court Cases, Practitioner Publications
Tagged Boards of Directors, Controlling shareholders, Delaware cases, Delaware law, Fairness review, Fiduciary duties, Management, Shareholder suits
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Diversity on Corporate Boards: How Much Difference Does “Difference” Make?
Editor’s Note: The following post comes to us from Deborah L. Rhode, the Ernest W. McFarland Professor of Law and Director of the Center on the Legal Profession at Stanford University, and Amanda K. Packel, the Deputy Director of the Arthur and Toni Rembe Rock Center for Corporate Governance, a joint initiative of Stanford Law School and the Stanford Graduate School of Business.
In recent years, increasing attention has focused on the influence of gender and racial diversity on boards of directors. More than a dozen countries now require some form of quotas to increase women’s representation on boards, and many more have voluntary quotas in corporate governance codes. In the United States, support for diversity has grown in principle, but progress has lagged in practice, and controversy has centered on whether and why diversity matters.
In our article, Diversity on Corporate Boards: How Much Difference Does “Difference” Make?, which was recently published in Delaware Journal of Corporate Law, 39, no. 2, Fall 2014, we evaluate the case for diversity on corporate boards of directors in light of competing research findings. An overview of recent studies reveals that the relationship between diversity and financial performance has not been convincingly established. There is, however, some theoretical and empirical basis for believing that when diversity is well managed, it can improve decision-making and enhance a corporation’s public image by conveying commitments to equal opportunity and inclusion. We believe increasing diversity should be a social priority, but not for the reasons often assumed. The “business case for diversity” is less compelling than other reasons rooted in social justice, equal opportunity, and corporate reputation. Our article explores the rationale for diversity and strategies designed to address it.
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Posted in Academic Research, Boards of Directors, Corporate Social Responsibility
Tagged Board composition, Board performance, Boards of Directors, Corporate Social Responsibility, Decision-making, Diversity, Firm performance
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No Good Deed Goes Unpunished: A Reply to Professor Macey’s Reply
Editor’s Note: The post is authored by Joseph A. Grundfest, the W. A. Franke Professor of Law and Business at Stanford University Law School, and endorsed by SEC Commissioner Daniel M. Gallagher. The post responds to a post by Yale Law School Professor Jonathan R. Macey (available on the Forum here), titled Professor Grundfest’s Reply Demonstrates that He and Commissioner Gallagher Wrongfully Accused the SRP. Professor Macey’s post, along with an earlier post by him (available on the Forum here), offered a critique of a paper by Commissioner Gallagher and Professor Grundfest, titled Did Harvard Violate Federal Securities Law? The Campaign Against Classified Boards of Directors, that is described in a post by Professor Grundfest (available on the Forum here).
According to the Guinness World Book of Records, the longest game of correspondence chess spanned 53 years and ended only with the death of one of the participants. Professor Macey and I have a good start at challenging this record, but with any luck, we will reach closure without either of us having to expire. And, if you are keeping score, this post is my reply to Professor Macey’s reply (here) to my response (here) to Professor Macey’s reaction (here) to a paper posted by Commissioner Gallagher and me asserting that the Harvard Shareholder Rights Project has violated federal securities law (here). Whew.
As an initial matter, I would like to thank Professor Macey for the time and effort he has devoted to commenting on our article. While Professor Macey and I seem destined to disagree on significant points, Professor Macey’s most recent post suggests strategies to strengthen the coming revision of our article, and we are grateful for those observations.
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Posted in Academic Research, Corporate Elections & Voting
Tagged Corporate governance, Daniel Gallagher, Jonathan Macey, Shareholder proposals, Shareholder Rights Project, Staggered boards
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ABI Commission to Study the Reform of Chapter 11 Report
Editor’s Note: The following post comes to us from Donald S. Bernstein, Partner and head of the Insolvency and Restructuring Practice at Davis Polk & Wardwell LLP, and is based on a Davis Polk memorandum authored by Mr. Bernstein, Marshall S. Huebner, Damian S. Schaible, and Kevin J. Coco. The complete publication is available here.
On December 8, the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 released its Final Report and Recommendations. The American Bankruptcy Institute organized the 23-member Commission in 2011 to study and address how financial markets, products and participants have evolved and, in some respects, outgrown the current chapter 11 framework, enacted in 1978. Since the 19th century, Congress has overhauled the corporate reorganization provisions of the federal bankruptcy law approximately every 40 years, and the 40th anniversary of the enactment of the 1978 Bankruptcy Code is just four years away. The Commission Report, which spans nearly 400 pages, recommends significant changes that seek to reconfigure our corporate insolvency system.
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Posted in Bankruptcy & Financial Distress, Financial Regulation, Practitioner Publications
Tagged Bankruptcy, Bankruptcy Code, Debtor-creditor law, Financial regulation
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Using Spin-offs to Raise Cash, Reduce Debt and Recapitalize
Editor’s Note: The following post comes to us from Stephen I. Glover, Partner and Co-Chair of the Mergers & Acquisitions practice at Gibson, Dunn & Crutcher LLP, and is based on a Gibson Dunn M&A Report.
Spin-offs continue to be a prominent feature of the deal landscape; new transactions are announced on an almost weekly basis. For example, Barnes & Noble recently said that it plans to spin off its Nook business, eBay said that it would spin off PayPal, and Hewlett Packard announced that it would spin off its printer and computer business. A total of approximately 51 separation transactions have been announced so far this year. The tally was not quite as high in 2013, but still robust; approximately 42 transactions were announced.
When market analysts seek to explain this apparently never-ending stream of separation transactions, they reason that the stock market rewards pure-play companies focused on a single line of business with higher stock prices than conglomerates. They also observe that activists have added momentum to the transaction flow by encouraging companies that operate several lines of business to consider separation opportunities. In addition, they observe that separation transactions can result in improved management focus, enable the implementation of more efficient capital structures and compensation programs, and result in the creation of a new equity currency.
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Posted in Mergers & Acquisitions, Practitioner Publications
Tagged IPO Spinning, Mergers & acquisitions, Recapitalization, Restructurings, Spinoffs
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