Delaware Court Declines to Dismiss Claims Against Disinterested Directors

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 30, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication authored by Alexandra D. Korry, Melissa Sawyer, and William J. Magnuson. 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 an opinion [1] issued on September 9, 2014, the Delaware Court of Chancery (VC Glasscock) held that in a controlling stockholder freeze-out merger subject to entire fairness review at the outset, disinterested directors entitled under a company’s charter to exculpation for duty of care violations cannot prevail in a motion to dismiss even though the claims against them for breach of fiduciary duty are not pled with particularity; instead, the issue of whether they will be entitled to exculpation must await a developed record, post-trial. The decision once again highlights the litigation cost that will be imposed on companies engaged in controlling stockholder freeze-out mergers for failing to employ both of the safeguards that Delaware has endorsed to ensure business judgment, instead of entire fairness, review—(1) an up-front non-waivable commitment by the controller to condition the transaction on an informed vote of a majority of the minority stockholders and (2) approval of the transaction by a well-functioning and broadly empowered special committee of disinterested directors. At the motion to dismiss stage, disinterested directors effectively will be treated in the same manner as controllers and their affiliated directors.

…continue reading: Delaware Court Declines to Dismiss Claims Against Disinterested Directors

Executive Gatekeepers: Useful and Divertible Governance?

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Tuesday September 30, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Adair Morse of the Finance Group at the University of California, Berkeley; and Wei Wang and Serena Wu, both of Queen’s School of Business, Canada.

In our paper, Executive Gatekeepers: Useful and Divertible Governance?, which was recently made publicly available on SSRN, we study the role of executive gatekeepers in preventing governance failures, and the counter-incentive effects created by equity compensation. Specifically, we examine the following two questions. First, do executive gatekeepers actually improve governance in the average firm? Second, does the effectiveness of gatekeepers in ensuring compliance and/or reducing corporate misconduct depend on their incentive contracts?

…continue reading: Executive Gatekeepers: Useful and Divertible Governance?

Important Proxy Advisor Developments

Posted by David A. Katz, Wachtell, Lipton, Rosen & Katz, on Monday September 29, 2014 at 9:08 am
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Editor’s Note: David A. Katz is a partner at Wachtell, Lipton, Rosen & Katz specializing in the areas of mergers and acquisitions and complex securities transactions. The following post is based on an article by Mr. Katz and Laura A. McIntosh that first appeared in the New York Law Journal; the full article, including footnotes, is available here.

As 2014 winds down and 2015 approaches, proxy advisory firms—and the investment managers who hire them—are finding themselves under increased scrutiny. Staff guidance issued by the Securities and Exchange Commission at the end of June and a working paper published in August by SEC Commissioner Daniel M. Gallagher both indicate that oversight of proxy advisory services will be a significant focus for the SEC during next year’s proxy season. Under the rubric of corporate governance, annual proxy solicitations have become referenda on an ever-widening assortment of corporate, social, and political issues, and, as a result, the influence and power of proxy advisors—and their relative lack of accountability—have become increasingly problematic. The SEC’s recent actions and statements suggest that the tide may be turning. Proxy advisory firms appear to be entering a new era of increasing accountability and potentially decreasing influence, possibly with further, more significant, SEC action to come.

…continue reading: Important Proxy Advisor Developments

Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Monday September 29, 2014 at 9:08 am
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Editor’s Note: The following post comes to us from John Core and Rodrigo Verdi of the Accounting Group at MIT, and Luzi Hail of the Department of Accounting at the University of Pennsylvania.

Whether mandatory disclosure regulation and insider ownership affect a firm’s cost of capital is an important question in financial economics. In our paper, Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital, which was recently made publicly available on SSRN, we examine this question on a large global sample of more than 10,000 firms across 35 countries.

Theory predict that disclosure regulation is negatively related to the cost of capital due to two separate effects: (i) an information effect in which better disclosure improves investors’ prediction of future cash flows, or (ii) a stewardship effect in which better disclosure improves managerial alignment with shareholders and therefore increases expected cash flows. The stewardship effect is not unique to disclosure, but is also present in other governance mechanisms that increase managerial alignment such as inside ownership. As a result, these alternative alignment mechanisms potentially reinforce or substitute for the stewardship effect of disclosure. We test this argument by examining whether inside ownership is negatively associated with the cost of capital and how inside ownership affects the relation between disclosure and the cost of capital.

…continue reading: Mandatory Disclosure Quality, Inside Ownership, and Cost of Capital

Regulators Re-Propose Uncleared Swap Margin, Capital and Segregation Rules

Posted by Annette L. Nazareth, Davis Polk & Wardwell LLP, on Sunday September 28, 2014 at 8:04 am
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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; the complete publication, including sidebars and appendix, is available here.

On September 3, 2014, U.S. banking regulators re-proposed margin, capital and segregation requirements applicable to swap entities [1] for uncleared swaps. [2] The new proposed rules modify significantly the regulators’ original 2011 proposal in light of the Basel Committee on Banking Supervision’s and the International Organization of Securities Commissions’ (“BCBS/IOSCO”) issuance of their 2013 final policy framework on margin requirements for uncleared derivatives and the comments received on the original proposal. The revised proposal:

…continue reading: Regulators Re-Propose Uncleared Swap Margin, Capital and Segregation Rules

Volcker Rule: Agencies Release New FAQ

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday September 27, 2014 at 6:22 am
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Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication by Eric M. Diamond, Joseph A. Hearn, and Ken Li. The complete publication, including appendix, is available here.

[On September 10, 2014], the Board of Governors of the Federal Reserve System (the “Federal Reserve”), the Office of the Comptroller of the Currency, the Federal Deposit Insurance Corporation, the Securities and Exchange Commission and the Commodity Futures Trading Commission (collectively, the “Agencies”) provided an addition to their existing list of Frequently Asked Questions (“FAQs”) addressing the implementation of section 13 of the Bank Holding Company Act of 1956, as amended, commonly known as the “Volcker Rule.”

…continue reading: Volcker Rule: Agencies Release New FAQ

Preparing for the 2015 Proxy Season

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday September 26, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Lawrence R. Hamilton, partner in the Corporate & Securities practice at Mayer Brown LLP, and is based on a Mayer Brown Legal Update. The complete publication, including footnotes, is available here.

It is time for calendar year-end public companies to focus on the upcoming 2015 proxy and annual reporting season. This post discusses the following key issues for companies to consider in their preparations:

  • Pending Dodd-Frank Regulation
  • Say-on-Pay and Compensation Disclosure Considerations
  • Shareholder Proposals
  • Proxy Access
  • Compensation Committee Independence Determinations
  • Compensation Adviser Independence Assessment
  • Compensation Consultant Conflict of Interest Disclosure
  • NYSE Quorum Requirement Change
  • Director and Officer Questionnaires
  • Proxy Advisory Firm and Investment Adviser Matters
  • Conflict Minerals
  • Cybersecurity
  • Management’s Discussion and Analysis
  • XBRL
  • Proxy Bundling
  • Foreign Issuer Preliminary Proxy Statement Relief
  • Technology and the Proxy Season

…continue reading: Preparing for the 2015 Proxy Season

Audit Committee Reporting To Shareholders: 2014 Proxy Season Update

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday September 25, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Ernst & Young, and is based on an Ernst & Young study by Allie M. Rutherford and Ruby Sharma. The complete publication is available here.

The 2014 proxy season saw significant growth in audit committee transparency. Continuing the trend of the past several years, an increased number of Fortune 100 companies are going beyond the minimum disclosures required.

These disclosures are also more robust—providing valuable perspectives on the activities of audit committees, including their oversight of external auditors.

The recent movement toward increased audit committee transparency has been encouraged by a variety of factors and entities. In addition to the ongoing disclosure effectiveness review by the US Securities and Exchange Commission (SEC) involving a holistic review of the US corporate disclosure regime, audit committee disclosures are receiving significant attention from a variety of stakeholders. These stakeholders include US and non-US regulators, investors, and policy organizations.

…continue reading: Audit Committee Reporting To Shareholders: 2014 Proxy Season Update

Influence of Public Opinion on Investor Voting and Proxy Advisors

Posted by R. Christopher Small, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday September 25, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Reena Aggarwal, Professor of Finance at Georgetown University; Isil Erel of the Department of Finance at Ohio State University; and Laura Starks, Professor of Finance at the University of Texas at Austin.

In our paper, Influence of Public Opinion on Investor Voting and Proxy Advisors, which was recently made publicly available on SSRN, we address the question of how public opinion influences the proxy voting process. We find strong influence of public opinion on the evolution in both investor voting behavior and proxy advisor recommendations. Therefore, our results suggest that an additional channel through which the public can communicate with corporate management (and potentially influence corporate behavior) is the proxy voting process. We provide new evidence that media coverage can also influence firm behavior through the voting channel. This channel is important because media coverage captures the attention of proxy advisors, institutional investors and individual investors, and is thus reflected in recommendations and votes.

…continue reading: Influence of Public Opinion on Investor Voting and Proxy Advisors

Update on Directors’ and Officers’ Insurance in Bankruptcy

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 24, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Douglas K. Mayer, Of Counsel in the Restructuring and Finance Department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Mayer, Martin J.E. Arms, and Emil A. Kleinhaus.

Directors’ and officers’ (“D&O”) insurance coverage continues to represent a key element of corporate risk management. See memo of July 28 2009. A decision in the bankruptcy of commodities brokerage MF Global, In re MF Global Holdings Ltd., No. 11-15059 (S.D.N.Y. Sept. 4, 2014), provides a recent illustration of how D&O insurance may be treated upon the bankruptcy of the insured company, depending on the specific structure and terms of the insurance at issue.

…continue reading: Update on Directors’ and Officers’ Insurance in Bankruptcy

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